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, 2020. Further information is included in Item 8. Financial Statements And Supplementary Data — Note 14. Financial Instruments and Note 15. Derivative Instruments.
Commodity Price Risk
Waste Price Risk
We have some protection against fluctuations in fuel (municipal waste) price risk because approximately 77% of our municipal waste is provided under multi-year contracts where we are paid for our fuel at fixed rates. At our tip fee WtE 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 WtE facilities are mitigated through internalizing waste disposal by utilizing our network of transfer stations located throughout the northeast U.S. 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 prices linked to related commodity indices. A majority of our metals revenue is exposed to market price fluctuations. A 10% change in the current market rates would impact recycled metals revenue by approximately $5 million and $3 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 in part 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 15. 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 USD LIBOR, or a comparable or alternate 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 USD 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 USD 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 16. Consolidated Debt.
As of December 31, 2020, the outstanding balances under Covanta Energy's Term Loan and the Revolving Credit Facilities were $374 million and $222 million, respectively. A hypothetical increase of 1% in the underlying December 31, 2020 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, 2020.
London Interbank Offered Rate ("LIBOR") Transition
All tenors of USD LIBOR are expected to be permanently discontinued by June 2023. Certain tenors of USD LIBOR are currently used as reference rates in our Credit Facilities and our interest rate swaps. Our Credit Facilities mature in August 2023. We intend to refinance the Credit Facilities prior to this stated maturity and expect future credit facilities, if any, to reference a new Alternative Reference Rate rather than USD LIBOR, likely the Secured Overnight Financing Rate ("SOFR"). Our existing interest rate swaps terminate in 2024 and we plan to negotiate with our bi-lateral counterparties to agree on replacement rates, as necessary. We do not expect the transition to have a material impact on our business.
Foreign Currency Exchange Rate Risk
We have operations and investments in various foreign markets, including Canada, Ireland, the UK, China and Italy. Currency volatility in those markets, as well as the effectiveness of any currency hedging strategies we may implement, may impact both the amount we are required to invest in new projects as well as our financial returns on these projects and our reported results. See Item 8. Financial Statements And Supplementary Data — Note 13. Equity Method Investments for further discussion.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Covanta Holding Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Covanta Holding Corporation and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive (loss) income, equity and cash flow for each of the three years in the period ended December 31, 2020, 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 financial position of the Company at December 31, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, 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, 2020, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 19, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
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.
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Equity Method Investments - Variable Interest Model
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Description of the Matter
|
As disclosed in Note 3 to the consolidated financial statements, during the year ended December 31, 2020, the Company entered into two agreements with Green Investment Group to develop and co-invest in two waste-to-energy facilities (the “Facilities”) in the U.K through 50/50 jointly owned and governed entities. The Company will be the service provider for the Facilities. The Company accounts for its 50% equity interest in the jointly owned and governed entities under the equity method of accounting. For the year December 31, 2020, the Company recorded a $26 million gain which is included in the “Net gain on sale of business and investments” in the consolidated statement of operations.
Auditing the assessment of whether the Company has a controlling financial interest in the jointly owned and governed entities, which were determined to be variable interest entities, 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 accounting for the Company’s 50% equity interest in the jointly owned and governed entities and the gain recorded in the consolidated statement of operations.
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How We Addressed the Matter in Our Audit
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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 the jointly owned and governed entities. 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 the jointly owned and governed entities. We made inquiries of management, obtained an understanding of and evaluated the business purpose of the jointly owned and governed entities 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 Facilities resulted in Covanta’s power to direct the activities that most significantly impact performance or the obligation to absorb expected losses.
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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 $35 million related to uncertain tax positions as of December 31, 2020. 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 and changes in global, including US federal and state, income tax laws and regulations there is complexity in the accounting for and monitoring of 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, and changes in income tax law and regulations in various jurisdictions, which is often subject to interpretation.
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How We Addressed the Matter in Our Audit
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We tested the controls over the Company’s process to account for uncertain tax positions, including management’s identification and assessment of changes to tax laws and significant transactions and management’s review of the related tax technical analyses.
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 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 8 of the consolidated financial statements, goodwill is not amortized but rather is tested for impairment at least annually at the reporting unit level or more frequently if indicators of potential impairment exist. The Company’s goodwill is assigned to its reporting units as of the initial acquisition date. During the first quarter of 2020, as a result of a triggering event due to the economic impact of the coronavirus pandemic and decline in commercial and industrial waste volumes, the Company determined it was more likely than not that an impairment existed within the CES reporting unit. As a result, the Company performed an interim quantitative assessment and recorded an impairment of $19 million. 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.
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How We Addressed the Matter in Our Audit
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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 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 19, 2021
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
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|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
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|
(In millions, except per share amounts)
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OPERATING REVENUE:
|
|
|
|
|
|
|
Waste and service revenue
|
|
$
|
1,412
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|
|
$
|
1,393
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|
|
$
|
1,327
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|
Energy revenue
|
|
357
|
|
|
329
|
|
|
343
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|
Recycled metals revenue
|
|
81
|
|
|
86
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|
|
95
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|
Other operating revenue
|
|
54
|
|
|
62
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|
|
103
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|
Total operating revenue
|
|
1,904
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|
|
1,870
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|
|
1,868
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OPERATING EXPENSE:
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|
|
|
|
|
|
Plant operating expense
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|
1,420
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|
|
1,371
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|
|
1,321
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|
Other operating expense, net
|
|
52
|
|
|
64
|
|
|
65
|
|
General and administrative expense
|
|
120
|
|
|
122
|
|
|
115
|
|
Depreciation and amortization expense
|
|
224
|
|
|
221
|
|
|
218
|
|
Impairment charges
|
|
19
|
|
|
2
|
|
|
86
|
|
Total operating expense
|
|
1,835
|
|
|
1,780
|
|
|
1,805
|
|
Operating income
|
|
69
|
|
|
90
|
|
|
63
|
|
OTHER (EXPENSE) INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
(133)
|
|
|
(143)
|
|
|
(145)
|
|
Net gain on sale of business and investments
|
|
26
|
|
|
49
|
|
|
217
|
|
Loss on extinguishment of debt
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|
(12)
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|
|
—
|
|
|
(15)
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|
Other income (expense), net
|
|
—
|
|
|
1
|
|
|
(3)
|
|
Total other (expense) income
|
|
(119)
|
|
|
(93)
|
|
|
54
|
|
(Loss) income before income tax benefit and equity in net income from unconsolidated investments
|
|
(50)
|
|
|
(3)
|
|
|
117
|
|
Income tax benefit
|
|
18
|
|
|
7
|
|
|
29
|
|
Equity in net income from unconsolidated investments
|
|
4
|
|
|
6
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|
|
6
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
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(28)
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|
|
$
|
10
|
|
|
$
|
152
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding:
|
|
|
|
|
|
|
Basic
|
|
132
|
|
|
131
|
|
|
130
|
|
Diluted
|
|
132
|
|
|
133
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|
|
132
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|
|
|
|
|
|
|
|
(Loss) Earnings Per Share:
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.21)
|
|
|
$
|
0.07
|
|
|
$
|
1.17
|
|
Diluted
|
|
$
|
(0.21)
|
|
|
$
|
0.07
|
|
|
$
|
1.15
|
|
|
|
|
|
|
|
|
Cash Dividend Declared Per Share:
|
|
$
|
0.49
|
|
|
$
|
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 (LOSS) INCOME
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Net (loss) income
|
|
$
|
(28)
|
|
|
$
|
10
|
|
|
$
|
152
|
|
Foreign currency translation
|
|
22
|
|
|
(7)
|
|
|
1
|
|
Pension and postretirement plan unrecognized benefits
|
|
—
|
|
|
—
|
|
|
—
|
|
Net unrealized (loss) gain on derivative instruments, net of tax benefit (expense) of $2, ($6) and ($2), respectively
|
|
(19)
|
|
|
4
|
|
|
21
|
|
Other comprehensive income (loss)
|
|
3
|
|
|
(3)
|
|
|
22
|
|
Comprehensive (loss) income
|
|
$
|
(25)
|
|
|
$
|
7
|
|
|
$
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2020
|
|
2019
|
|
|
|
|
|
(In millions, except per
share amounts)
|
ASSETS
|
|
|
|
Current:
|
|
|
|
Cash and cash equivalents
|
$
|
55
|
|
|
$
|
37
|
|
Restricted funds held in trust
|
11
|
|
|
18
|
|
Receivables (less allowances of $8 and $9, respectively)
|
260
|
|
|
240
|
|
|
|
|
|
Prepaid expenses and other current assets
|
117
|
|
|
105
|
|
|
|
|
|
Total Current Assets
|
443
|
|
|
400
|
|
Property, plant and equipment, net
|
2,421
|
|
|
2,451
|
|
Restricted funds held in trust
|
6
|
|
|
8
|
|
Intangible assets, net
|
237
|
|
|
258
|
|
Goodwill
|
302
|
|
|
321
|
|
|
|
|
|
Other assets
|
297
|
|
|
277
|
|
Total Assets
|
$
|
3,706
|
|
|
$
|
3,715
|
|
LIABILITIES AND EQUITY
|
|
|
|
Current:
|
|
|
|
Current portion of long-term debt
|
$
|
18
|
|
|
$
|
17
|
|
Current portion of project debt
|
9
|
|
|
8
|
|
Accounts payable
|
75
|
|
|
36
|
|
Accrued expenses and other current liabilities
|
303
|
|
|
292
|
|
|
|
|
|
Total Current Liabilities
|
405
|
|
|
353
|
|
Long-term debt
|
2,396
|
|
|
2,366
|
|
Project debt
|
116
|
|
|
125
|
|
Deferred income taxes
|
362
|
|
|
372
|
|
Other liabilities
|
117
|
|
|
123
|
|
Total Liabilities
|
3,396
|
|
|
3,339
|
|
Commitments and Contingencies (Note 18)
|
|
|
|
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 132 shares)
|
14
|
|
|
14
|
|
Additional paid-in capital
|
882
|
|
|
857
|
|
Accumulated other comprehensive loss
|
(32)
|
|
|
(35)
|
|
Accumulated deficit
|
(554)
|
|
|
(460)
|
|
Treasury stock, at par
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total Equity
|
310
|
|
|
376
|
|
Total Liabilities and Equity
|
$
|
3,706
|
|
|
$
|
3,715
|
|
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,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
OPERATING ACTIVITIES:
|
|
(In millions)
|
Net (loss) income
|
|
$
|
(28)
|
|
|
$
|
10
|
|
|
$
|
152
|
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
224
|
|
|
221
|
|
|
218
|
|
Amortization of long-term debt deferred financing costs
|
|
4
|
|
|
5
|
|
|
5
|
|
Net gain on sale of business and investments
|
|
(26)
|
|
|
(49)
|
|
|
(217)
|
|
Impairment charges
|
|
19
|
|
|
2
|
|
|
86
|
|
|
|
|
|
|
|
|
Loss on extinguishment of debt
|
|
12
|
|
|
—
|
|
|
15
|
|
|
|
|
|
|
|
|
Provision for expected credit losses
|
|
1
|
|
|
2
|
|
|
2
|
|
Stock-based compensation expense
|
|
29
|
|
|
25
|
|
|
24
|
|
Equity in net income from unconsolidated investments
|
|
(4)
|
|
|
(6)
|
|
|
(6)
|
|
Deferred income taxes
|
|
(10)
|
|
|
(9)
|
|
|
(31)
|
|
|
|
|
|
|
|
|
Dividends from unconsolidated investments
|
|
9
|
|
|
9
|
|
|
13
|
|
Other, net
|
|
(6)
|
|
|
3
|
|
|
(10)
|
|
Change in working capital, net of effects of acquisitions and dispositions:
|
|
|
|
|
|
|
Receivables
|
|
(21)
|
|
|
94
|
|
|
7
|
|
Prepaid and other current assets
|
|
(2)
|
|
|
(5)
|
|
|
(3)
|
|
Accounts payable and accrued expenses
|
|
47
|
|
|
(77)
|
|
|
(16)
|
|
Changes in noncurrent assets and liabilities, net
|
|
6
|
|
|
1
|
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
254
|
|
|
226
|
|
|
238
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
Purchase of property, plant and equipment
|
|
(162)
|
|
|
(158)
|
|
|
(206)
|
|
Acquisition of businesses, net of cash acquired
|
|
—
|
|
|
2
|
|
|
(50)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from asset sales
|
|
15
|
|
|
27
|
|
|
128
|
|
Property insurance proceeds
|
|
1
|
|
|
—
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of indemnification claim related to sale of asset
|
|
—
|
|
|
—
|
|
|
(7)
|
|
Investment in equity affiliates
|
|
(15)
|
|
|
(14)
|
|
|
(16)
|
|
Other, net
|
|
(15)
|
|
|
(2)
|
|
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
(176)
|
|
|
(145)
|
|
|
(139)
|
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW – (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
(In millions)
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
Proceeds from borrowings on long-term debt
|
|
$
|
538
|
|
|
$
|
80
|
|
|
$
|
1,165
|
|
Proceeds from borrowings on revolving credit facility
|
|
724
|
|
|
536
|
|
|
740
|
|
Proceeds from insurance premium financing
|
|
37
|
|
|
29
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments on long-term debt
|
|
(555)
|
|
|
(16)
|
|
|
(944)
|
|
Payments on revolving credit facility
|
|
(685)
|
|
|
(565)
|
|
|
(973)
|
|
|
|
|
|
|
|
|
Payments on project debt
|
|
(8)
|
|
|
(18)
|
|
|
(23)
|
|
Payments of deferred financing costs
|
|
(8)
|
|
|
(1)
|
|
|
(16)
|
|
Cash dividends paid to stockholders
|
|
(89)
|
|
|
(133)
|
|
|
(134)
|
|
|
|
|
|
|
|
|
Payment of insurance premium financing
|
|
(33)
|
|
|
(26)
|
|
|
(24)
|
|
Proceeds from related party note
|
|
9
|
|
|
—
|
|
|
—
|
|
Other, net
|
|
(1)
|
|
|
(8)
|
|
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
(71)
|
|
|
(122)
|
|
|
(189)
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
2
|
|
|
(1)
|
|
|
1
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
|
9
|
|
|
(42)
|
|
|
(89)
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
|
63
|
|
|
105
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and restricted cash at end of period
|
|
$
|
72
|
|
|
$
|
63
|
|
|
$
|
105
|
|
|
|
|
|
|
|
|
Reconciliation of cash, cash equivalents and restricted cash:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
55
|
|
|
$
|
37
|
|
|
$
|
58
|
|
Restricted funds held in trust - short term
|
|
11
|
|
|
18
|
|
|
39
|
|
Restricted funds held in trust - long term
|
|
6
|
|
|
8
|
|
|
8
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
72
|
|
|
$
|
63
|
|
|
$
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (Received) Paid for Interest and Income Taxes:
|
|
|
|
|
|
|
Interest
|
|
$
|
112
|
|
|
$
|
152
|
|
|
$
|
136
|
|
Income taxes, net of refunds
|
|
$
|
(4)
|
|
|
$
|
5
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Accumulated (Deficit)
Earnings
|
|
Treasury Stock
|
|
Total
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
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
|
|
—
|
|
|
—
|
|
|
—
|
|
|
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 (loss) income, net of income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3)
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
7
|
|
Balance as of December 31, 2019
|
|
136
|
|
|
$
|
14
|
|
|
$
|
857
|
|
|
$
|
(35)
|
|
|
$
|
(460)
|
|
|
5
|
|
|
$
|
—
|
|
|
$
|
376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
—
|
|
|
—
|
|
|
29
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
29
|
|
Dividend declared
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(66)
|
|
|
—
|
|
|
—
|
|
|
(66)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased for tax withholdings for vested stock awards
|
|
—
|
|
|
—
|
|
|
(5)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5)
|
|
Shares issued in non-vested stock award
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Comprehensive income (loss), net of income taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
(28)
|
|
|
—
|
|
|
—
|
|
|
(25)
|
|
Balance as of December 31, 2020
|
|
136
|
|
|
$
|
14
|
|
|
$
|
882
|
|
|
$
|
(32)
|
|
|
$
|
(554)
|
|
|
4
|
|
|
$
|
—
|
|
|
$
|
310
|
|
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 (“WtE”), and also owns and operates related waste transport, processing and disposal assets. WtE serves 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 WtE facilities earn revenue from the disposal of waste, generally under long-term contracts, the generation of electricity, and from the sale of metals recovered during the WtE process. We operate and/or have ownership positions in 41 WtE facilities currently in commercial operation, 39 of which are in North America. In total, these facilities process approximately 21 million tons of solid waste annually, equivalent to 8% of the post-recycled MSW generated in the United States ("U.S."). Our facilities produce approximately 10 million megawatt hours (“MWh”) of baseload electricity annually. We also operate waste management infrastructure, including 13 waste transfer stations, 20 material processing facilities, four landfills (primarily for ash disposal), one metals processing facility, and one ash processing facility (currently in start-up and testing phase), all of which are complementary to our core WtE business. We also have ownership positions in several projects currently in development and/or under construction in the United Kingdom ("UK").
In addition, we offer a variety of sustainable waste management solutions, including industrial, consumer products and healthcare waste handling, treatment and assured destruction, industrial wastewater treatment and disposal, product depackaging and recycling, on-site cleaning services, and transportation services. Together with our processing of non-hazardous "profiled waste" for purposes of assured destruction or sustainability goals in our WtE facilities, we offer these services under our Covanta Environmental Solutions ("CES") brand.
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, 2020, 2019 and 2018. 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, 2020 and 2019.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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, 2020 and 2019.
Revenue Recognition
Our WtE projects generate revenue from three primary sources: 1) fees charged for operating facilities or for receiving waste for disposal (waste and service revenue); 2) the sale of electricity and/or steam (energy revenue); and 3) the sale of ferrous and non-ferrous metals that are recovered from the waste stream as part of the WtE 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 WtE 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 WtE 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 WtE 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
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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.
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 WtE 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,
|
|
2020
|
|
2019
|
|
2018
|
Pass through costs
|
$
|
58
|
|
|
$
|
57
|
|
|
$
|
57
|
|
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 U.S. 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.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 U.S. treasury bills.
Restricted fund balances are as follows (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2020
|
|
2019
|
|
|
Current
|
|
Noncurrent
|
|
Current
|
|
Noncurrent
|
Debt service funds - principal
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue funds
|
|
3
|
|
|
—
|
|
|
3
|
|
|
—
|
|
Other funds
|
|
6
|
|
|
6
|
|
|
13
|
|
|
8
|
|
Total
|
|
$
|
11
|
|
|
$
|
6
|
|
|
$
|
18
|
|
|
$
|
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.
For our trade receivables, we assess each counterparty’s ability to pay for service by conducting a credit review. The credit review considers the counterparty’s established credit rating or our assessment of the counterparty’s creditworthiness based on our analysis of their financial statements when a credit rating is not available.
We monitor our ongoing credit exposure through active review of counterparty balances against contract terms and due dates. Our activities include timely account reconciliation, dispute resolution, payment confirmation and monitoring current economic conditions and future forecast of economic conditions, to the extent that they impact the credit loss determination and can be reasonably estimated.
We regularly sell certain receivables on a revolving basis to third-party financial institutions up to an aggregate purchase limit (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 Financial Accounting Standards Board (“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 WtE 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.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Property, plant and equipment, net consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2020
|
|
2019
|
Land
|
|
$
|
20
|
|
|
$
|
20
|
|
Facilities and equipment
|
|
4,558
|
|
|
4,463
|
|
Landfills (primarily for ash disposal)
|
|
80
|
|
|
78
|
|
Construction in progress
|
|
90
|
|
|
58
|
|
Total
|
|
4,748
|
|
|
4,619
|
|
Less: accumulated depreciation and amortization
|
|
(2,327)
|
|
|
(2,168)
|
|
Property, plant, and equipment — net
|
|
$
|
2,421
|
|
|
$
|
2,451
|
|
Depreciation and amortization expense related to property, plant and equipment was $204 million, $201 million, and $199 million, for the years ended December 31, 2020, 2019 and 2018, respectively. Non-cash investing activities related to capital expenditures totaled $13 million, $6 million and $37 million as of December 31, 2020, 2019 and 2018, respectively, and were recorded in Accrued expenses and other current liabilities on our consolidated balance sheets.
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, 2020, 2019 and 2018, we recognized an impairment on our property, plant and equipment of zero, $2 million and $63 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 WtE 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 sheets. Our asset retirement obligation is presented as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2020
|
|
2019
|
Beginning of period asset retirement obligation
|
|
$
|
26
|
|
|
$
|
29
|
|
Accretion expense (1)
|
|
2
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
Liabilities settled
|
|
(3)
|
|
|
(3)
|
|
Revisions in estimated cash flows
|
|
2
|
|
|
—
|
|
|
|
|
|
|
Reclassification to assets held for sale
|
|
—
|
|
|
(2)
|
|
End of period asset retirement obligation
|
|
27
|
|
|
26
|
|
Less: current portion
|
|
(3)
|
|
|
(4)
|
|
Noncurrent asset retirement obligation
|
|
$
|
24
|
|
|
$
|
22
|
|
(1) Accretion expense was included in Plant operating expense in the consolidated statements of operations.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 years ended December 31, 2020, 2019 and 2018, we recognized an impairment on our intangible assets of zero, zero and $22 million, respectively. For additional information, see Note 8. Supplementary Information - Impairment Charges and Note 12. Intangible Assets and Goodwill.
Goodwill
Goodwill is the excess of our purchase price over the fair value of the net assets of acquired businesses. We do not amortize goodwill, but we assess our goodwill for impairment at least annually. The evaluation of goodwill requires the use of estimates of future cash flows to determine the estimated fair value of the reporting unit. All goodwill is related to our one reportable segment, which is comprised of two reporting units, North America WtE 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, 2020. We performed a qualitative assessment and concluded that the fair value of the reporting units exceed the carrying value as of the testing date.
For additional information, see Note 12. Intangible Assets and Goodwill and Note 8. Supplementary Information - Impairment Charges.
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) Gain on Derivatives
|
|
Total
|
Balance at December 31, 2018
|
$
|
(23)
|
|
|
$
|
2
|
|
|
$
|
(12)
|
|
|
$
|
(33)
|
|
Cumulative effect change in accounting for ASU 2018-02
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Balance at January 1, 2019
|
(23)
|
|
|
3
|
|
|
(12)
|
|
|
(32)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
(7)
|
|
|
—
|
|
|
4
|
|
|
(3)
|
|
Balance at December 31, 2019
|
$
|
(30)
|
|
|
$
|
3
|
|
|
$
|
(8)
|
|
|
$
|
(35)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
22
|
|
|
—
|
|
|
(19)
|
|
|
3
|
|
Balance at December 31, 2020
|
$
|
(8)
|
|
|
$
|
3
|
|
|
$
|
(27)
|
|
|
$
|
(32)
|
|
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 15. 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.
Defined Contribution Plans
Substantially all of our employees in the U.S. 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, $20 million and $18 million for the years ended December 31, 2020, 2019 and 2018, 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, 2020, 2019 and 2018.
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,
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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, 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 and certain litigation.
Accounting Pronouncements Recently Adopted
In August 2019, the FASB issued Accounting Standards Update (“ASU”) 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. We adopted this guidance on January 1, 2020 on a prospective basis. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which amends the impairment model to utilize an expected loss methodology in place of the incurred loss methodology for financial instruments and off balance sheet credit exposures. The amendment requires entities to consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of losses. We adopted this guidance on January 1, 2020 using a modified retrospective approach. The adoption of this guidance did not have a material impact on our consolidated financial statements.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
The following table summarizes recent ASU's issued by the FASB that could have a material impact on our consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
Standard
|
Description
|
Effective Date
|
Effect on the financial statements
or other significant matters
|
ASU 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting as amended by ASU 2021-01
|
This standard provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting due to the cessation of the London Interbank Offered Rate (LIBOR). The amendments are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued.
The amendment in ASU 2021-01 clarifies that all derivative instruments affected by changes to interest rates used for discounting, margining or contract price alignment are in the scope of Accounting Standards Codification ("ASC") 848.
|
First quarter of 2020 through December 31, 2022.
|
Generally, our debt agreements and interest rate derivatives 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 consolidated financial statements.
During the second quarter of 2020, we elected to adopt the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. In addition, we elected to adopt the expedient to not reassess the conclusions reached on embedded derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. We continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
|
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.
|
The guidance removes exceptions to the general principles in Topic 740 for allocating tax expense between financial statement components, accounting basis differences stemming from an ownership change in foreign investments and interim period income tax accounting for year-to-date losses that exceed projected losses. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
|
NOTE 3. NEW BUSINESS AND ASSET MANAGEMENT
Zhao County, China Venture
On December 31, 2019, we made an equity investment in a venture that signed a concession agreement with Zhao County, China for the construction and operation of a new 396,000 metric ton-per-year WtE facility located approximately 200 miles from Beijing ("Zhao County"). The project is being developed jointly by Covanta and a strategic local partner, Longking Energy Development Co. Ltd. Construction began in April 2020, with completion expected in 2021.
As of December 31, 2020 and 2019, our equity investment in the venture totaled $7 million and $5 million, respectively, and was included in Other assets on our consolidated balance sheets, which represented a 26% ownership interest. We are required to contribute an additional RMB 61 million ($9 million) by the end of 2021, at which point our eventual ownership interest in the venture is expected to increase to 49%.
In January 2020, in connection with our Zhao County agreement, we obtained local equity financing in the amount of RMB 61 million ($9 million), the proceeds of which we provided to the project in the form of a shareholder loan. The loan is due in January 2022 and is collateralized through a pledge of our equity in the project. As of December 31, 2020, the shareholder loan balance was $9 million and was included in Other assets on our consolidated balance sheets. The total estimated project cost is RMB 650 million ($93 million), of which RMB 488 million ($75 million) will be financed through non-recourse project debt.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Covanta Energy Asia Pacific Holdings Ltd., a wholly owned Covanta entity, issued a parent guarantee for $15 million of the total debt. The fair market value of the guarantee liability is deemed to be immaterial.
Green Investment Group Limited ("GIG") Joint Ventures
In December 2017, we entered into a strategic partnership with GIG, a subsidiary of Macquarie Group Limited, to develop WtE projects in the UK and Ireland.
Protos
In December 2020, we reached financial close on the Protos Energy Recovery Facility (“Protos”), a 400,000 metric ton-per-year, 49 megawatt WtE facility under construction in Cheshire, England. Through a 50/50 jointly-owned and governed entity Covanta Green Protos Holding Ltd., we and GIG own a 75% interest in Protos with Biffa plc, a UK waste services provider, holding the remaining 25% interest. Biffa will provide approximately 60% of the waste supply to the project, and we will provide operations and maintenance ("O&M") services, in each case under a 20-year arrangement. Protos is expected to commence commercial operations in 2024.
In connection with the transaction, we received $19 million (£14 million) of total consideration for the value of our development costs incurred to date and related fees and for GIG’s right to invest 37.5% in the project (50% investment in Covanta Green Protos Holding Ltd.). For the year ended December 31, 2020, as a result of this consideration and a step-up in the fair value of our retained equity investment, we recorded a gain of $17 million (£13 million) in Net gain on sale of business and investments in our condensed consolidated statement of operations. As of December 31, 2020, $6 million of the consideration received remains in Covanta Green Protos Holding Ltd. and is expected to be utilized for future equity contributions in projects in the UK.
As of December 31, 2020, our equity method investment of $6 million and a shareholder loan of $1 million related to this project were included in Other assets on our consolidated balance sheets. The fair value of our retained equity investment in Covanta Green Protos Holding Ltd. was determined by the fair value of the consideration received from GIG for the right to invest in 37.5% in the project.
Newhurst
In February 2020, we reached financial close on the Newhurst Energy Recovery Facility (“Newhurst”), a 350,000 metric ton-per-year, 42 megawatt WtE facility under construction in Leicestershire, England. Through a 50/50 jointly-owned and governed entity Covanta Green UK Ltd. ("Covanta Green"), we and GIG own a 50% interest in Newhurst with Biffa plc, holding the remaining 50% interest. Biffa will provide approximately 70% of the waste supply to the project, and we will provide O&M services, in each case under a 20-year arrangement. Newhurst is expected to commence commercial operations in 2023.
In connection with the transaction, we received $8 million (£5 million) of total consideration for the value of our development costs incurred to date and related fees and for GIG’s right to invest 25% in the project (50% investment in Covanta Green). For the year ended December 31, 2020, as a result of this consideration and a step-up in the fair value of our retained equity investment, we recorded a gain of $9 million (£7 million) in Net gain on sale of business and investments in our condensed consolidated statement of operations. As of December 31, 2020, $4 million of the consideration received remains in Covanta Green and is expected to be utilized for future equity contributions in projects in the UK.
As of December 31, 2020, our equity method investment of $9 million and a shareholder loan of $3 million related to this project were included in Other assets on our consolidated balance sheets. 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 in 25% in the project.
Rookery
In March 2019, we reached financial close on the Rookery South Energy Recovery Facility (“Rookery”), a 545,000 metric ton-per-year, 60 megawatt WtE facility under construction in Bedfordshire, England. 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 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 the first half of 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 $57 million in Net gain on sale of business and investments in our consolidated statement of operations. As of December 31, 2020 and 2019, $17 million and $22 million, respectively, of the consideration received remains in Covanta Green and is expected to be utilized for future equity contributions in projects in the UK.
As of December 31, 2020 and 2019, our equity method investment of $4 million and $9 million, respectively, was included in Other assets on our condensed consolidated balance sheets. 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 in 40% in the project.
Earls Gate
In December of 2018, we reached financial close on the Earls Gate Energy Centre project ("Earls Gate"), a 215,000 metric ton-per-year, 21.5 megawatt equivalent generation capacity WtE facility to be built in Grangemouth, Scotland. GIG and Covanta together 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 2023.
As of December 31, 2020 and 2019, our equity investment of $9 million, for each of the years, and a shareholder loan of $16 million and $15 million, respectively, related to this project were included in Other assets on our consolidated balance sheets. For further information, see Note 13. Equity Method Investments.
Dublin WtE
During 2017, we completed construction of the Dublin WtE facility ("Dublin WtE"), a 600,000 metric ton-per-year, 58 megawatt facility in Dublin, Ireland. Operational commencement began in October 2017.
Covanta Europe Assets, Ltd. ("CEAL"), is structured as a 50/50 joint venture. As an initial step, we contributed 100% of Dublin WtE 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 O&M service provider for the Dublin WtE.
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 WtE, 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 was included in Net gain 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 WtE over our carrying value. 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.
As of December 31, 2020 and 2019, our equity investment of $153 million and $143 million, respectively, was included in Other assets on our consolidated balance sheets. For further information, see Note 13. Equity Method Investments.
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 O&M services of two WtE facilities located in Palm Beach County, Florida.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 4. DISPOSITIONS AND ASSETS HELD FOR SALE
Divestiture of Springfield and Pittsfield WtE facilities
During the second quarter of 2019, as part of our ongoing asset rationalization and portfolio optimization efforts, we divested our Pittsfield and Springfield WtE facilities. During the first quarter of 2019, 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 was included in Net gain 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 was included in Net gain on sale of business and investments on our consolidated statement of operations.
China Investments
In February 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 was included in Net gain 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, 2020, there were 136 million shares of common stock issued of which 132 million shares were outstanding; the remaining 4 million shares of common stock issued but not outstanding were held as treasury stock.
As of December 31, 2020, 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 (the “Plan”). In May 2019, the stockholders of the Company approved amendments to the Plan, including the authorization of additional shares of the Company’s common stock issuable under the Plan. For additional information, see Note 7. Stock-Based Award Plans.
EPS
We calculate basic EPS using net earnings for the period and the weighted average number of outstanding shares of our common stock, par value $0.10 per share, during the period. Diluted earnings per share computations, as calculated under the treasury stock method, include the weighted average number of shares of additional outstanding common stock issuable for stock options, restricted stock awards and restricted stock units whether or not currently exercisable. Diluted earnings per share does not include securities if their effect was anti-dilutive.
Basic and diluted weighted average shares outstanding were as follows (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Basic weighted average common shares outstanding
|
132
|
|
|
131
|
|
|
130
|
|
Dilutive effect of stock options, restricted stock and restricted stock units
|
—
|
|
|
2
|
|
|
2
|
|
Diluted weighted average common shares outstanding
|
132
|
|
|
133
|
|
|
132
|
|
Anti-dilutive stock options, restricted stock and restricted stock units excluded from the calculation of EPS
|
3
|
|
|
—
|
|
|
—
|
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 6. REVENUES
Disaggregation of revenue
A disaggregation of revenue from contracts with customers is presented on our consolidated statements of operations for the years ended December 31, 2020, 2019 and 2018. 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:
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|
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|
|
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
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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
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|
(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, 2020. 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”).
Our remaining performance obligation primarily consists of the fixed consideration contained in our contracts. As of December 31, 2020, our total remaining performance obligation was $6.0 billion, of which we expect to recognize 11% and 10% in 2021 and 2022, respectively.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Contract Balances
The following table reflects the balance in our contract assets, which we classify as accounts receivable - unbilled and present net in Receivables, and our contract liabilities, which we classify as deferred revenue and present in Accrued expenses and other current liabilities in our condensed consolidated balance sheets (in millions):
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|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
Unbilled receivables
|
|
$
|
23
|
|
|
$
|
16
|
|
Deferred revenue
|
|
$
|
17
|
|
|
$
|
18
|
|
For the year ended December 31, 2020, revenue recognized that was included in deferred revenue on our consolidated balance sheet at the beginning of the period totaled $6 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 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. In May 2019, the Company’s stockholders authorized and approved amendments to the Plan, including the authority to issue an additional 6.0 million shares of the Company’s common stock.
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):
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|
|
|
|
|
|
|
|
|
|
|
|
Total Stock-Based Compensation Expense
|
|
Unrecognized
stock-based
compensation expense
|
|
Weighted-average years to be recognized
|
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
2019
|
|
2018
|
As of December 31, 2020
|
Restricted Stock Units
|
|
$
|
19
|
|
|
$
|
17
|
|
|
$
|
14
|
|
|
$
|
9
|
|
|
1.5
|
Performance Awards
|
|
$
|
9
|
|
|
$
|
6
|
|
|
$
|
5
|
|
|
$
|
4
|
|
|
1.7
|
Restricted Stock Awards
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
0.2
|
Stock Options
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
1.7
|
Tax benefit related to compensation expense
|
|
$
|
3
|
|
|
$
|
5
|
|
|
$
|
5
|
|
|
|
|
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
During the year ended December 31, 2020, we withheld 432,967 shares of our common stock in connection with tax withholdings for vested stock awards. As of December 31, 2020, there were approximately 4 million shares of common stock available for future issuance under our equity plans.
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, 2020, 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 2021, 2022, and 2023.
During the year ended December 31, 2020, 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, 2020 were as follows (in thousands, except per share amounts):
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted-Average
Grant Date Fair Value
|
Nonvested at the beginning of the year
|
|
2,272
|
|
|
$
|
15.86
|
|
Granted
|
|
2,075
|
|
|
$
|
10.75
|
|
Vested
|
|
(686)
|
|
|
$
|
15.80
|
|
Forfeited
|
|
(178)
|
|
|
$
|
13.58
|
|
Nonvested at the end of the year
|
|
3,483
|
|
|
$
|
12.84
|
|
The weighted-average grant-date fair value of RSUs granted during the years ended December 31, 2020, 2019, and 2018 was $10.75, $16.70, and $14.87, respectively. The total fair value of shares vested during the years ended December 31, 2020, 2019, and 2018, was $11 million, $10 million, and $8 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, cumulative 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.
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.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Monte Carlo valuation assumptions utilized for the TSR awards were:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Expected life (1)
|
2.81 years
|
|
2.82 years
|
|
2.82 years
|
Expected stock price volatility (2)
|
28.06
|
%
|
|
3.28
|
%
|
|
2.63
|
%
|
Risk-free interest rate (3)
|
0.56
|
%
|
|
2.48
|
%
|
|
2.38
|
%
|
Stock price (4)
|
$
|
10.95
|
|
|
$
|
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 U.S. 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, 2020 were as follows (in thousands, except per share amounts):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted-Average
Grant Date Fair Value
|
Nonvested at the beginning of the year
|
|
1,193
|
|
|
$
|
16.57
|
|
Granted
|
|
629
|
|
|
$
|
10.89
|
|
Vested
|
|
(410)
|
|
|
$
|
16.30
|
|
Forfeited
|
|
(22)
|
|
|
$
|
13.15
|
|
Nonvested at the end of the year
|
|
1,390
|
|
|
$
|
14.13
|
|
The weighted-average grant-date fair value of performance awards granted during the years ended December 31, 2020, 2019, and 2018 was $10.89, $17.90, and $15.50, respectively. The total fair value of shares vested during the years ended December 31, 2020, 2019, and 2018, was $7 million, $6 million 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, 2020, 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.
Changes in nonvested restricted stock awards as of December 31, 2020 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
|
|
242
|
|
|
$
|
16.26
|
|
Granted
|
|
26
|
|
|
$
|
8.41
|
|
Vested
|
|
(235)
|
|
|
$
|
16.30
|
|
Forfeited
|
|
(3)
|
|
|
$
|
15.90
|
|
Nonvested at the end of the year
|
|
30
|
|
|
$
|
9.12
|
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The weighted-average grant-date fair value of RSAs granted during the years ended December 31, 2020, 2019, and 2018 was $8.41, $17.64, and $15.20 respectively. The total fair value of shares vested during the years ended December 31, 2020, 2019, and 2018, was $4 million, $7 million, and $11 million, respectively.
Stock Options
We have awarded stock options to certain employees and directors. Stock options awarded to directors vest immediately and expire over 10 years. Stock options awarded to employees typically vest annually over 3 years and expire over 6 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. We use the Black-Scholes option pricing model for determining the estimated fair value for stock options.
The weighted-average assumptions used in the Black-Scholes option pricing model were as follows:
|
|
|
|
|
|
|
|
|
2020 Grants
|
|
|
Expected stock price volatility
|
36.1
|
%
|
|
|
Risk-free interest rate
|
0.4
|
%
|
|
|
Expected life of options (in years)
|
5
|
|
|
Expected dividend yield
|
4.2
|
%
|
|
|
Weighted-average grant date fair value of the options
|
$
|
1.54
|
|
|
|
The following table summarizes activity and balance information of the options under the Plan as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Remaining Contractual Term (Years)
|
|
Aggregate Intrinsic
Value (1)
|
|
|
(in thousands, except per share amounts)
|
Outstanding at the beginning of the year
|
|
25
|
|
|
$
|
20.58
|
|
|
|
|
|
Granted
|
|
2,250
|
|
|
$
|
7.62
|
|
|
|
|
|
Exercised
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Expired
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Forfeited
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Outstanding at the end of the year
|
|
2,275
|
|
|
$
|
7.76
|
|
|
5.8
|
|
$
|
12,398
|
|
Options exercisable at year end
|
|
25
|
|
|
$
|
20.58
|
|
|
3.5
|
|
$
|
—
|
|
(1)The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the closing stock price on the last trading day of 2020 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 2020. 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 WtE Facility
In February 2017, our Fairfax County WtE 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.
The cost of repair or replacement of assets and business interruption losses for the above matter was insured under the terms of applicable insurance policies, subject to deductibles.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
We recorded insurance gains, as a reduction to Other operating expense, net in our consolidated statement of operations as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Insurance gains for property and clean-up costs, net of impairment charges
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
18
|
|
Insurance gains for business interruption costs, net of costs incurred
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
19
|
|
Impairment Charges
Impairment charges were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Impairment charges
|
$
|
19
|
|
|
$
|
2
|
|
|
$
|
86
|
|
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, which includes waste from the commercial sector. We performed the required annual impairment review of our recorded goodwill as of October 1, 2019. 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.
Due to the marginal outcome of our review of goodwill recorded for our CES reporting unit as of October 1, 2019, we continued to monitor the CES reporting unit for impairment through the end of the first quarter of 2020. We considered the economic impacts of the novel coronavirus ("COVID-19") pandemic and the decline in waste volumes from the commercial and industrial sectors to be a triggering event and reviewed the goodwill held at the CES reporting unit. We performed an interim impairment test via a quantitative valuation as of March 31, 2020. As a result, in the first quarter of 2020, we recorded an impairment of $16 million, net of tax benefit of $3 million, which represents the carrying amount of our CES reporting unit in excess of its estimated fair value as of the testing date.
For our CES reporting unit, 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 12% 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.
We continued to monitor the CES reporting unit for impairment through the end of 2020, and believe the assumptions utilized were reasonable and commensurate with the views of a market participant. As part of the qualitative assessment, we updated key assumptions, including lowering the discount rate, increasing forecasts for revenue, and the operating margin. The results of the qualitative assessment indicated that it is not more likely than not the fair value of CES reporting unit is less than its carrying amount. For additional information, see Note 1. Organization and Summary of Significant Accounting Policies - Goodwill and Note 12. Intangible Assets and Goodwill.
During the year ended December 31, 2018, we identified an indicator of impairment associated with certain of our WtE 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 14. 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,
|
|
2020
|
|
2019
|
Prepaid expenses
|
$
|
32
|
|
|
$
|
27
|
|
Other receivable
|
26
|
|
|
22
|
|
Spare parts
|
23
|
|
|
20
|
|
Other
|
36
|
|
|
36
|
|
Total prepaid expenses and other current assets
|
$
|
117
|
|
|
$
|
105
|
|
|
|
|
|
Operating expenses, payroll and related expenses
|
$
|
137
|
|
|
$
|
139
|
|
Deferred revenue
|
10
|
|
|
12
|
|
Accrued liabilities to client communities
|
26
|
|
|
16
|
|
Interest payable
|
46
|
|
|
27
|
|
Dividends payable
|
15
|
|
|
38
|
|
Insurance premium financing
|
28
|
|
|
24
|
|
Other
|
41
|
|
|
36
|
|
Total accrued expenses and other current liabilities
|
$
|
303
|
|
|
$
|
292
|
|
Geographic Information
Our operations are principally located in the U.S. The summary of our operating revenues and total assets by geographic region was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
Other
|
|
Total
|
Operating Revenue:
|
|
|
|
|
|
Year Ended December 31, 2020
|
$
|
1,832
|
|
|
$
|
72
|
|
|
$
|
1,904
|
|
Year Ended December 31, 2019
|
$
|
1,800
|
|
|
$
|
70
|
|
|
$
|
1,870
|
|
Year Ended December 31, 2018
|
$
|
1,785
|
|
|
$
|
83
|
|
|
$
|
1,868
|
|
|
|
|
U.S.
|
|
Other
|
|
Total
|
Total Assets:
|
|
|
|
|
|
|
As of December 31, 2020
|
|
$
|
3,305
|
|
|
$
|
401
|
|
|
$
|
3,706
|
|
As of December 31, 2019
|
|
$
|
3,466
|
|
|
$
|
249
|
|
|
$
|
3,715
|
|
As of December 31, 2018
|
|
$
|
3,635
|
|
|
$
|
208
|
|
|
$
|
3,843
|
|
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 (benefit) expense were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
(10)
|
|
|
2
|
|
|
1
|
|
Foreign
|
|
—
|
|
|
—
|
|
|
1
|
|
Total current
|
|
(8)
|
|
|
2
|
|
|
2
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
(7)
|
|
|
(4)
|
|
|
(1)
|
|
State
|
|
(3)
|
|
|
(4)
|
|
|
(25)
|
|
Foreign
|
|
—
|
|
|
(1)
|
|
|
(5)
|
|
Total deferred
|
|
(10)
|
|
|
(9)
|
|
|
(31)
|
|
Total income tax benefit
|
|
$
|
(18)
|
|
|
$
|
(7)
|
|
|
$
|
(29)
|
|
Domestic and foreign pre-tax (loss) income was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Domestic
|
|
$
|
(55)
|
|
|
$
|
(25)
|
|
|
$
|
(43)
|
|
Foreign
|
|
5
|
|
|
22
|
|
|
160
|
|
Total
|
|
$
|
(50)
|
|
|
$
|
(3)
|
|
|
$
|
117
|
|
The effective income tax rate was 37%, 264%, and (25)% for the years ended December 31, 2020, 2019 and 2018, respectively.
The decrease in the effective tax rate for the year ended December 31, 2020, compared to the year ended December 31, 2019 is primarily due to the to the combined effects of (i) the impact of a smaller gain on the Newhurst and Protos transaction in 2020 compared to gain on the Rookery transaction in 2019, (ii) a discrete tax benefit adjustment in 2020 related to tax carryforwards and (iii) the discrete tax benefit related to the release of State FIN 48 reserve for uncertain tax position.
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,
|
|
|
2020
|
|
2019
|
|
2018
|
Income tax (benefit) expense at the federal statutory rate
|
|
$
|
(10)
|
|
|
$
|
(1)
|
|
|
$
|
25
|
|
State and other tax benefit
|
|
(2)
|
|
|
(1)
|
|
|
(1)
|
|
Tax rate differential on foreign earnings
|
|
(1)
|
|
|
(2)
|
|
|
(3)
|
|
|
|
|
|
|
|
|
Gain on sale of business
|
|
(4)
|
|
|
(9)
|
|
|
(44)
|
|
Permanent differences
|
|
2
|
|
|
4
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of state apportionment & tax rate
|
|
1
|
|
|
(2)
|
|
|
(13)
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
2
|
|
|
1
|
|
|
3
|
|
Liability for uncertain tax positions
|
|
(9)
|
|
|
(1)
|
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax reform transition tax
|
|
—
|
|
|
—
|
|
|
1
|
|
|
|
|
|
|
|
|
Other
|
|
3
|
|
|
4
|
|
|
2
|
|
Total income tax benefit
|
|
$
|
(18)
|
|
|
$
|
(7)
|
|
|
$
|
(29)
|
|
We had consolidated federal net operating loss carryforwards (“NOLs”) estimated to be approximately $239 million for federal income tax purposes as of December 31, 2020. The majority of these NOLs will expire in 2033 and beyond, if not used.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In addition to the consolidated federal NOLs, as of December 31, 2020, we had state NOL carryforwards of approximately $508 million, which expire between 2030 and 2039, net foreign NOL carryforwards of approximately $181 million with some expiring between 2021 and 2039. The federal tax credit carryforwards include production tax credits of $60 million expiring between 2024 and 2040, 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,
|
|
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOLs
|
|
$
|
106
|
|
|
$
|
90
|
|
Accrued and prepaid expenses
|
|
67
|
|
|
63
|
|
Tax credits
|
|
49
|
|
|
49
|
|
Interest expense
|
|
14
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
12
|
|
|
8
|
|
|
|
|
|
|
Total gross deferred tax asset
|
|
248
|
|
|
236
|
|
Less: valuation allowance
|
|
(72)
|
|
|
(65)
|
|
Total deferred tax asset
|
|
176
|
|
|
171
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
496
|
|
|
517
|
|
Intangible assets
|
|
29
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net
|
|
13
|
|
|
9
|
|
Total gross deferred tax liability
|
|
538
|
|
|
543
|
|
Net deferred tax liability
|
|
$
|
362
|
|
|
$
|
372
|
|
U.S. income taxes were not provided on cumulative undistributed foreign earnings as of December 31, 2020 and 2019. Foreign undistributed earnings were considered permanently invested, therefore no provision for U.S. income taxes was accrued as of December 31, 2020 and 2019.
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".
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):
|
|
|
|
|
|
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
|
|
Additions based on tax positions related to the current year
|
2
|
|
|
|
Reductions for lapse in applicable statute of limitations
|
(7)
|
|
|
|
|
|
Balance at December 31, 2020
|
$
|
35
|
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The uncertain tax positions, exclusive of interest and penalties, were $35 million and $40 million as of December 31, 2020 and 2019, 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, 2020 and 2019, we had accrued interest and penalties associated with liabilities for uncertain tax positions of $1 million and $6 million, respectively.
Audits for federal income tax returns are closed for the years through 2010. However, the Internal Revenue Service ("IRS") can audit the NOLs generated during those years in the years that the NOLs 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.
NOTE 10. ACCOUNTS RECEIVABLE SECURITIZATION
In December 2020, we amended our existing agreement whereby we regularly sell certain receivables on a revolving basis to third-party financial institutions (the “Purchasers”) from $100 million up to an increased aggregate purchase limit of $120 million. 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 1.28% for the year ended December 31, 2020.
Amounts recognized in connection with the RPA were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
December 31,
|
|
2020
|
|
2019
|
Accounts receivable sold and derecognized
|
$
|
789
|
|
|
$
|
224
|
|
Cash proceeds received (1)
|
$
|
788
|
|
|
$
|
223
|
|
Loss on accounts receivable sold (2)
|
$
|
—
|
|
|
$
|
2
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Pledged receivables (3)
|
$
|
128
|
|
|
$
|
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 for the year ended December 31, 2019. Furthermore, the additional $20 million, net of transaction fees and the structuring discount, represented incremental transfer upon commencement of the amended RPA for the year ended December 31, 2020. The remainder represented proceeds from collections reinvested in revolving-period transfers. This amount was 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 included initial transaction costs of $1 million and a guarantee expense of less than $1 million related to the pledged receivables for the year ended December 31, 2019.
(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 3, 2021 or such later date as agreed in writing with the Purchasers. 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, 2020, we were in compliance with the covenants and no termination events had occurred. As of December 31, 2020, the maximum amount available under the RPA was utilized.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 11. CREDIT LOSSES
We are exposed to credit losses primarily from our trade receivables from waste disposal services, sale of electricity and/or steam and the sale of ferrous and non-ferrous metals.
Changes in the allowance for credit losses of our trade receivables for the year ended December 31, 2020 were as follows (in millions):
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2019
|
|
$
|
9
|
|
Provision for expected credit losses
|
|
1
|
|
Write-offs charged against the allowance
|
|
(2)
|
|
|
|
|
Balance as of December 31, 2020
|
|
$
|
8
|
|
The Company held the following shareholder loans in connection with our equity method investments (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2020
|
|
2019
|
Included in prepaid expenses and other assets
|
|
$
|
27
|
|
|
$
|
22
|
|
Included in other assets - long-term
|
|
29
|
|
|
15
|
|
|
|
$
|
56
|
|
|
$
|
37
|
|
We assess the collectability of the shareholder loans each reporting period through the impairment analysis procedures of our equity method investments which considers the loss history of the investments and the viability of the associated development projects. As of December 31, 2020, there were no expected credit losses associated with our shareholder loans.
NOTE 12. 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, were included as a component of Other liabilities on our consolidated balance sheets.
Intangible assets consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
As of December 31, 2019
|
|
|
Remaining Weighted Average Useful Life (in years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
Waste, service and energy contracts
|
|
18
|
|
$
|
447
|
|
|
$
|
227
|
|
|
$
|
220
|
|
|
$
|
447
|
|
|
$
|
211
|
|
|
$
|
236
|
|
Customer relationships, permits and other
|
|
5
|
|
53
|
|
|
36
|
|
|
17
|
|
|
52
|
|
|
30
|
|
|
22
|
|
Intangible assets, net
|
|
|
|
$
|
500
|
|
|
$
|
263
|
|
|
$
|
237
|
|
|
$
|
499
|
|
|
$
|
241
|
|
|
$
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Waste and service contracts (liability)
|
|
16
|
|
$
|
(67)
|
|
|
$
|
(62)
|
|
|
$
|
(5)
|
|
|
$
|
(72)
|
|
|
$
|
(66)
|
|
|
$
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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,
|
|
|
2020
|
|
2019
|
|
2018
|
Intangible assets
|
|
$
|
21
|
|
|
$
|
22
|
|
|
$
|
20
|
|
Waste and service contracts (contra-expense)
|
|
$
|
(1)
|
|
|
$
|
(2)
|
|
|
$
|
(2)
|
|
The following table details the amount of estimated amortization 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, 2020 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
Intangible assets
|
|
$
|
20
|
|
|
$
|
20
|
|
|
$
|
18
|
|
|
$
|
15
|
|
|
$
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
The future contra-expense associated with our intangible assets and liabilities expected to be included in our consolidated statements of operations through December 31, 2025 is not material.
The weighted average number of years prior to the next renewal period for contracts that we have an intangible recorded is 7 years.
Goodwill
The following table details the changes in carrying value of goodwill (in millions):
|
|
|
|
|
|
|
Total
|
Balance at December 31, 2018
|
$
|
321
|
|
Goodwill related to acquisitions
|
—
|
|
Balance at December 31, 2019
|
321
|
|
|
|
Impairment charges (1)
|
(19)
|
|
Balance at December 31, 2020
|
$
|
302
|
|
(1)For additional information, see Note 1. Organization and Summary of Significant Accounting Policies - Goodwill and Note 8. Supplementary Information - Impairment Charges.
As of December 31, 2020, goodwill of approximately $39 million was deductible for federal income tax purposes.
NOTE 13. EQUITY METHOD INVESTMENTS
Investments accounted for under the equity method of $188 million and $167 million were included in Other assets in our consolidated balance sheets as of December 31, 2020 and 2019, respectively. Shareholder loans of $29 million and $15 million, respectively, related to our UK and China projects were included in Other assets in our consolidated balance sheets. For additional information on our equity investments in Ireland, the UK and China, see Note 3. New Business and Asset Management.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Our ownership percentages in our equity method investments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
Ownership interest:
|
|
2020
|
|
2019
|
Dublin WtE (Ireland) (1)
|
|
50
|
%
|
|
50
|
%
|
Ambiente 2000 S.r.l. (Italy)
|
|
40
|
%
|
|
40
|
%
|
Earls Gate (UK) (2)
|
|
25
|
%
|
|
25
|
%
|
Rookery WtE (UK) (3)
|
|
40
|
%
|
|
40
|
%
|
Newhurst (UK) (4)
|
|
25
|
%
|
|
—
|
%
|
Protos (UK) (5)
|
|
37.5
|
%
|
|
—
|
%
|
Zhao County WtE (China) (6)
|
|
26
|
%
|
|
26
|
%
|
(1)We have a 50% indirect ownership of Dublin WtE, 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.
(4)We have a 25% indirect ownership of Newhurst through our 50/50 joint venture with GIG, Covanta Green.
(5)We have a 37.5% indirect ownership of Protos through our 50/50 joint venture with GIG, Covanta Green Protos Holding Ltd.
(6)We have a 26% interest in Zhao County through our venture with Longking Energy Development Co. Ltd.
Summarized financial information of our equity method investments is presented as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Statement of Operations:
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
119
|
|
|
$
|
120
|
|
|
$
|
112
|
|
Operating income
|
|
$
|
26
|
|
|
$
|
28
|
|
|
$
|
31
|
|
Net income
|
|
$
|
8
|
|
|
$
|
11
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2020
|
|
2019
|
Balance Sheet:
|
|
|
|
|
|
|
Current assets
|
|
$
|
235
|
|
|
$
|
180
|
|
Long-term assets
|
|
$
|
1,518
|
|
|
$
|
1,008
|
|
Current liabilities
|
|
$
|
127
|
|
|
$
|
104
|
|
Long-term liabilities
|
|
$
|
1,212
|
|
|
$
|
735
|
|
We serve as the O&M service provider for the Dublin WtE facility which is owned by CEAL, our joint venture with GIG. For the years ended December 31, 2020 and 2019, we recognized $31 million and $30 million, respectively, in revenues related to this agreement.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 14. 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, 2020. 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, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
Financial Instruments Recorded at Fair Value on a Recurring Basis:
|
|
Fair Value Measurement Level
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
Assets:
|
|
|
|
|
|
|
Investments — mutual and bond funds (1)
|
|
1
|
|
$
|
2
|
|
|
$
|
2
|
|
Derivative asset — energy hedges (2)
|
|
2
|
|
11
|
|
|
12
|
|
Total assets:
|
|
|
|
$
|
13
|
|
|
$
|
14
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability — interest rate swaps (3)
|
|
2
|
|
$
|
10
|
|
|
$
|
2
|
|
Total liabilities:
|
|
|
|
$
|
10
|
|
|
$
|
2
|
|
(1)Included in Other assets in the consolidated balance sheets.
(2)The short-term balance was included in Prepaid expenses and other current assets and the long-term balance was included in Other assets in the consolidated balance sheets.
(3)The short-term balance was included in Accrued expenses and other current liabilities and the long-term balance was included in Other liabilities in the consolidated balance sheets.
The following financial instruments were recorded at their carrying amount (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
As of December 31, 2019
|
Financial Instruments Recorded at Carrying Amount:
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
Liabilities:
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
2,414
|
|
|
$
|
2,492
|
|
|
$
|
2,383
|
|
|
$
|
2,459
|
|
Project debt
|
|
$
|
125
|
|
|
$
|
130
|
|
|
$
|
133
|
|
|
$
|
138
|
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 condensed 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 fair value of assets as compared to their carrying value. Fair value is generally determined using an income approach, which requires discounting the estimated future cash flows associated with the asset. If the asset carrying amount exceeds its fair value, an impairment charge is recognized in the amount by which the carrying amount exceeds the fair value of the asset.
NOTE 15. 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 which we have hedged on a forward basis under agreements with various financial institutions as of December 31, 2020 is indicated in the following table (in millions):
|
|
|
|
|
|
|
|
|
Calendar Year
|
|
Hedged MWh
|
2021
|
|
2.1
|
2022
|
|
0.2
|
|
|
|
Total
|
|
2.3
|
As of December 31, 2020 and December 31, 2019, the fair value of the energy derivative asset was $11 million and $12 million, respectively. The change in fair value was recorded as a component of AOCI.
During the year ended December 31, 2020, cash provided by energy derivative settlements of $36 million 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, 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.
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, we entered into pay-fixed, receive-variable swap agreements on $200 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. For further information on our Credit Facilities, see Note 16. Consolidated Debt.
As of December 31, 2020, the fair value of the interest rate swap derivative liability of $10 million was recorded in short-term and long-term liabilities on our condensed consolidated balance sheets.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 16. CONSOLIDATED DEBT
Consolidated debt is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Rate (1)
|
|
December 31, 2020
|
|
December 31, 2019
|
LONG-TERM DEBT:
|
|
|
|
Revolving credit facility expiring 2023
|
2.55
|
%
|
|
$
|
222
|
|
|
$
|
183
|
|
Term loan, net due 2023
|
3.15
|
%
|
|
374
|
|
|
384
|
|
Credit Facilities Sub-total
|
|
|
$
|
596
|
|
|
$
|
567
|
|
Senior Notes due 2025-2030
|
|
|
1,200
|
|
|
1,200
|
|
Less: deferred financing costs related to senior notes
|
|
|
(16)
|
|
|
(14)
|
|
Senior Notes Sub-total
|
|
|
$
|
1,184
|
|
|
$
|
1,186
|
|
Tax-exempt bonds due 2024-2045
|
|
|
$
|
544
|
|
|
$
|
544
|
|
Less: deferred financing costs related to tax-exempt bonds
|
|
|
(4)
|
|
|
(5)
|
|
Tax-Exempt Bonds Sub-total
|
|
|
$
|
540
|
|
|
$
|
539
|
|
Equipment financing arrangements due 2021 through 2031
|
|
|
78
|
|
|
85
|
|
Finance leases (2)
|
|
|
7
|
|
|
6
|
|
China venture loan due 2022 (see Note 3)
|
|
|
9
|
|
|
—
|
|
Total long-term debt
|
|
|
$
|
2,414
|
|
|
$
|
2,383
|
|
Less: current portion
|
|
|
(18)
|
|
|
(17)
|
|
Noncurrent long-term debt
|
|
|
$
|
2,396
|
|
|
$
|
2,366
|
|
PROJECT DEBT:
|
|
|
|
|
|
Project debt related to service fee structures
|
|
|
$
|
45
|
|
|
$
|
47
|
|
Union County WtE facility finance lease (tip fee structure)
|
|
|
78
|
|
|
84
|
|
|
|
|
|
|
|
Unamortized debt premium, net
|
|
|
2
|
|
|
2
|
|
|
|
|
|
|
|
Total project debt
|
|
|
$
|
125
|
|
|
$
|
133
|
|
Less: Current portion
|
|
|
(9)
|
|
|
(8)
|
|
Noncurrent project debt
|
|
|
$
|
116
|
|
|
$
|
125
|
|
TOTAL CONSOLIDATED DEBT
|
|
|
$
|
2,539
|
|
|
$
|
2,516
|
|
Less: Current debt
|
|
|
(27)
|
|
|
(25)
|
|
TOTAL NONCURRENT CONSOLIDATED DEBT
|
|
|
$
|
2,512
|
|
|
$
|
2,491
|
|
(1)During the years ended December 31, 2020 and 2019, we entered into interest rate swap agreements to swap to a fixed rate the variable portion of our interest rate expense on $200 million of notional amount of debt under the Credit Facilities. See Note 15. Derivative Instruments for further information.
(2)Excludes Union County WtE 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 U.S. Dollars on a same day basis for a short drawing period); and is available in U.S. Dollars, Euros, Pounds Sterling, Canadian Dollars and certain other currencies to
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
be agreed upon, in each case for either borrowings or for the issuance of letters of credit. The proceeds under the Revolving Credit Facility are available for working capital and general corporate purposes of Covanta Energy and its subsidiaries. We have the option to establish additional term loan commitments and/or increase the size of the Revolving Credit Facility (collectively, the “Incremental Facilities”), subject to the satisfaction of certain conditions and obtaining sufficient lender commitments, in an amount up to the greater of $500 million and the amount that, after giving effect to the incurrence of such Incremental Facilities, would not result in a leverage ratio, as defined in the credit agreement governing our Credit Facilities (the “Credit Agreement”), exceeding 2.75:1.00.
Unutilized Capacity under Revolving Credit Facility
As of December 31, 2020, 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
|
|
$
|
222
|
|
|
$
|
235
|
|
|
$
|
443
|
|
Repayment Terms
As of December 31, 2020, 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) U.S. Dollar London Interbank Offered Rate (“USD LIBOR”), or a comparable replacement 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 USD 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) USD 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, 2020.
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;
•make investments;
•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, 2020
|
|
December 31, 2019
|
|
|
|
|
(In millions)
|
2030
|
|
5.000%
|
|
$
|
400
|
|
|
$
|
—
|
|
2027
|
|
6.000%
|
|
400
|
|
|
400
|
|
2025
|
|
5.875%
|
|
400
|
|
|
400
|
|
2024
|
|
5.875%
|
|
—
|
|
|
400
|
|
|
|
|
|
$
|
1,200
|
|
|
$
|
1,200
|
|
Senior Notes due 2030 (the "2030 Senior Notes")
In August 2020, we issued $400 million aggregate principal amount of Senior Notes due 2030. The 2030 Senior Notes bear interest at 5.00% per annum, payable semi-annually on March 1 and September 1 of each year commencing on March 1, 2021, and will mature on September 1, 2030. Net proceeds from the sale of the 2030 Senior Notes were approximately $393 million and were used, along with cash on hand and direct borrowings under our Revolving Credit Facility, to fund the optional redemption of all of our 5.875% Senior Notes due 2024 ("2024 Senior Notes") and to pay transaction fees and expenses and accrued interest. The 2030 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 Seventh Supplemental Indenture dated as of August 25, 2020. In connection with this issuance, we recognized $7 million of deferred financing costs which will be amortized over the term of the 2030 Senior Notes.
During the year ended December 31, 2020, in connection with the redemption of the 2024 Senior Notes, we recorded a Loss on extinguishment of debt of $10 million in our condensed consolidated statements of operations consisting of $8 million of redemption premium and a $2 million write-off of remaining deferred financing costs.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 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. 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 were redeemed in August 2020.
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; and
•are redeemable at our option using the proceeds of certain equity offerings subject to the terms of their respective supplemental indentures.
The indentures for our Senior Notes further may limit our ability and the ability of certain of our subsidiaries to:
•incur additional indebtedness;
•pay dividends or make other distributions or repurchase or redeem their capital stock;
•prepay, redeem or repurchase certain debt;
•make loans and investments;
•sell restricted assets;
•incur liens;
•enter into transactions with affiliates;
•alter the businesses they conduct;
•enter into agreements restricting our subsidiaries’ ability to pay dividends; and
•consolidate, merge or sell all or substantially all of their assets.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Tax-Exempt Bonds
Our Tax-Exempt Bonds are summarized in the table below:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
|
|
Maturity
|
|
Coupon
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
New Hampshire Series 2020A
|
|
2043
|
|
3.625%
|
|
$
|
40
|
|
|
$
|
—
|
|
New Hampshire Series 2020B
|
|
2045
|
|
3.750%
|
|
90
|
|
|
—
|
|
Pennsylvania Series 2019A
|
|
2039
|
|
3.250%
|
|
50
|
|
|
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
|
|
Pennsylvania Series 2015A
|
|
2043
|
|
5.000%
|
|
—
|
|
|
40
|
|
|
|
|
|
|
|
$
|
544
|
|
|
$
|
544
|
|
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.
New Hampshire 2020 Tax-Exempt Bonds
In August 2020, we entered into a loan agreement with the National Finance Authority ("NFA"), a component unit of the Business Finance Authority of New Hampshire, under which they agreed to issue $39.4 million 3.625% Resource Recovery Refunding Revenue Bonds Series 2020A, maturing on July 1, 2043, and $90 million 3.750% Resource Recovery Refunding Revenue Bonds Series 2020B, maturing on July 1, 2045 (collectively the "New Hampshire 2020 Bonds").
The net proceeds of the New Hampshire 2020 Bonds were used to redeem at par the outstanding principal balance of our previously outstanding New Jersey Series 2015A and Pennsylvania Series 2015A bonds.
In connection with the refinancing transaction, we recorded deferred financing costs of $1 million, which are being amortized through July 2, 2040, the mandatory tender date. In addition, during the year ended December 31, 2020, we recorded a $1 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. The New Hampshire 2020 Bonds are our senior unsecured obligations and are not guaranteed by any of our subsidiaries.
Pennsylvania Tax-Exempt Bonds
In August 2019, we entered into a loan agreement with the Pennsylvania Economic Development Financing Authority ("PEDFA") 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.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
New Hampshire and New York 2018 Tax Exempt Bonds
In September 2018, we completed a refinancing transaction involving the issuance by the NFA, 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 and New York Series 2018 bonds are our senior unsecured obligations and are not guaranteed by any of our subsidiaries.
Virginia Tax-Exempt Bonds
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.
Union County WtE Facility Finance Lease Arrangement
In June 2016, we extended the lease term related to the Union County WtE 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 was 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 17. 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, 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 year 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 $78 million as of December 31, 2020, and have mandatory payments remaining as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
Thereafter
|
Future minimum payments
|
|
$
|
7
|
|
|
$
|
7
|
|
|
$
|
8
|
|
|
$
|
7
|
|
|
$
|
5
|
|
|
$
|
44
|
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Depreciation associated with these assets was 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, 2020 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025
|
|
Thereafter
|
Project debt (1)
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
34
|
|
(1) Amounts exclude the Union County WtE facility finance lease discussed above.
Project debt associated with the financing of North American WtE 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 sheets. 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 WtE 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 WtE facility and related assets. As of December 31, 2020, such revenue bonds were collateralized by property, plant and equipment with a net carrying value of $494 million and restricted funds held in trust of approximately $7 million.
Rates on our project debt as of December 31, 2020 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
|
%
|
|
5.00
|
%
|
(1) Union County WtE 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, 2020, 2019 and 2018, amortization of deferred financing costs included as a component of interest expense totaled $4 million, $5 million and $5 million, respectively.
NOTE 17. LEASES
On January 1, 2019, we adopted ASU 2016-02 Leases (Topic 842), also referred to as ASC 842, using the modified retrospective method and recognized a right of use ("ROU") asset and liability in our condensed consolidated balance sheets. 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. We determine if an arrangement contains a lease at inception.
Our leases consist of leaseholds on WtE 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.
ASC 842 provides that leases with a term of 12 months or less are not recorded on the balance sheet. The guidance also provides practical expedients whereby we have elected to not record a right of use asset or right of use liability for leases with an asset balance that would be considered immaterial. Furthermore, non-lease components are not separated from lease components and instead we account for each separate lease component and non-lease component associated with that lease as a single lease component.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
We recognize lease expense for these leases on a straight-line basis over the lease term. Our lease term includes options to extend the lease when it is reasonably certain that we will exercise that option. 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2020
|
|
2019
|
Finance leases:
|
|
|
|
|
|
Amortization of assets, included in Depreciation and amortization expense
|
|
|
$
|
8
|
|
|
$
|
7
|
|
Interest on lease liabilities, included in Interest expense
|
|
|
4
|
|
|
4
|
|
Operating leases:
|
|
|
|
|
|
Amortization of assets, included in Total operating expense
|
|
|
7
|
|
|
8
|
|
Interest on lease liabilities, included in Total operating expense
|
|
|
2
|
|
|
2
|
|
Total net lease cost
|
|
|
$
|
21
|
|
|
$
|
21
|
|
Supplemental balance sheet information related to leases was as follows (in millions, except lease term and discount rate):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
Operating leases:
|
|
|
|
|
Operating lease ROU assets, included in Other assets
|
|
$
|
43
|
|
|
$
|
46
|
|
|
|
|
|
|
Current operating lease liabilities, included in Accrued expenses and other current liabilities
|
|
$
|
6
|
|
|
$
|
6
|
|
Noncurrent operating lease liabilities, included in Other liabilities
|
|
43
|
|
|
46
|
|
Total operating lease liabilities
|
|
$
|
49
|
|
|
$
|
52
|
|
|
|
|
|
|
Finance leases:
|
|
|
|
|
Property and equipment, at cost
|
|
$
|
170
|
|
|
$
|
168
|
|
Accumulated amortization
|
|
(33)
|
|
|
(25)
|
|
Property and equipment, net
|
|
$
|
137
|
|
|
$
|
143
|
|
|
|
|
|
|
Current obligations of finance leases, included in Current portion of project debt
|
|
$
|
6
|
|
|
$
|
6
|
|
Finance leases, net of current obligations, included in Project debt
|
|
72
|
|
|
78
|
|
Current obligations of finance leases, included in Current portion of long-term debt
|
|
1
|
|
|
—
|
|
Finance leases, net of current obligations, included in Long-term debt
|
|
6
|
|
|
6
|
|
Total finance lease liabilities
|
|
$
|
85
|
|
|
$
|
90
|
|
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Supplemental cash flow and other information related to leases was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows related to operating leases
|
|
$
|
9
|
|
|
$
|
10
|
|
|
|
|
|
|
Financing cash flows related to finance leases
|
|
$
|
7
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term (in years):
|
|
|
|
|
Operating leases
|
|
11.4
|
|
11.9
|
Finance leases
|
|
31.1
|
|
32.3
|
|
|
|
|
|
Weighted average discount rate:
|
|
|
|
|
Operating leases
|
|
4.58
|
%
|
|
4.64
|
%
|
Finance leases
|
|
5.06
|
%
|
|
5.05
|
%
|
Maturities of lease liabilities were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Operating Leases
|
|
Finance
Leases
|
2021
|
$
|
9
|
|
|
$
|
12
|
|
2022
|
8
|
|
|
12
|
|
2023
|
7
|
|
|
12
|
|
2024
|
7
|
|
|
11
|
|
2025
|
6
|
|
|
13
|
|
2026 and thereafter
|
27
|
|
|
92
|
|
Total lease payments
|
64
|
|
|
152
|
|
Less: Amounts representing interest
|
(15)
|
|
|
(67)
|
|
Total lease obligations
|
$
|
49
|
|
|
$
|
85
|
|
Disclosures related to periods prior to the adoption of ASC 842
Rental expense was $23 million for the year ended December 31, 2018.
NOTE 18. COMMITMENTS AND CONTINGENCIES
We and/or our subsidiaries are party to a number of claims, lawsuits and pending actions, most of which are routine and all of which are incidental to our business. We assess the likelihood of potential losses on an ongoing basis 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, 2020 and 2019, accruals for our loss contingencies approximated $4 million and $3 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
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 U.S. 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.
Other Commitments
Other commitments as of December 31, 2020 were as follows (in millions):
|
|
|
|
|
|
|
|
|
Letters of credit issued under the Revolving Credit Facility
|
|
$
|
235
|
|
Letters of credit — other
|
|
79
|
|
Surety bonds
|
|
142
|
|
Total other commitments — net
|
|
$
|
456
|
|
We issue letters of credit to secure our performance under various contractual undertakings related to our domestic and international projects and to secure obligations under our insurance programs. We believe that we will be able to fully perform under our contracts to which these existing letters of credit relate, and that it is unlikely that letters of credit would be drawn because of a default of our performance obligations. If any of these letters of credit were to be drawn by the beneficiary, the amount drawn would be immediately repayable by us to the issuing bank. If we do not immediately repay such amounts drawn under letters of credit issued under the Revolving Credit Facility, unreimbursed amounts would be treated under the Credit Facilities as either additional term loans or as revolving loans.
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The surety bonds listed in the table above relate primarily to construction and performance obligations and support for other obligations, including closure requirements of various energy projects when such projects cease operating. Were these bonds to be drawn upon, we would have a contractual obligation to indemnify the surety company. 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 16. Consolidated Debt.
We have issued or are party to guarantees and related contractual support obligations undertaken pursuant to agreements to construct and operate waste and energy facilities. For some projects, such performance guarantees include obligations to repay certain financial obligations if the project revenue is insufficient to do so, or to obtain or guarantee financing for a project. With respect to our businesses, we have issued guarantees to municipal clients and other parties that our subsidiaries will perform in accordance with contractual terms, including, where required, the payment of damages or other obligations. Additionally, damages payable under such guarantees for our WtE 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.