2016 ANNUAL REPORT
Dear Fellow Shareholder,
2016 was a year of substantial progress in positioning Covanta for meaningful long-term growth. We are the
market leader in Energy from Waste (EfW) with an unmatched operational team and a fleet of critical
infrastructure assets. This exceptional platform enables us to provide sustainable waste solutions to our
customers and to generate value for our shareholders.
Driving Shareholder Value
Our goal as Covanta’s managers is to drive shareholder value by optimizing the earnings of our existing fleet
while investing capital at attractive returns. In this time of muted commodity prices, we are focused on
identifying opportunities within each of our revenue streams and cost areas. We continue our commitment to
grow the company organically with a target of three to five percent annual Adjusted EBITDA growth inclusive of
inflation. Any market price changes for metals and power would be supplemental to our target.
Waste Markets
Waste supply is the backbone of EfW plant operations, and our long-term client contracts are critical in assuring
consistent operations. During 2016, we extended waste contracts with two key clients at our Indianapolis and
Huntsville facilities, respectively, and in February 2017 we extended the contract at our SECONN facility. We
will continue to foster strong client relationships and work toward mutually attractive client renewals in 2017.
Our plants represent irreplaceable waste infrastructure and are strategically located to provide waste disposal
options for major urban areas. They are among the closest disposal options for major metro markets like: Boston;
New York City; Philadelphia; and Washington, DC. As we see improvements in the economy coupled with
constraints in new landfill capacity near these major markets, we anticipate a stronger pricing environment.
While our near-term exposure to this opportunity is modest, these variables drive profitability over the long-term.
Covanta Environmental Solutions
Nevertheless, we are not content to rely on the market to drive realized prices; our team is focused on growing
volumes of higher-value profiled waste processed in our EfW facilities, and we achieved another year of record
revenues in this arena in 2016. We expect to grow this revenue stream by an additional 10 percent in 2017
through geographic expansion and by identifying new sources of waste. Originally this business provided assured
destruction of confidential documents and processing of expired and other goods. The breadth of services has
expanded dramatically and we are now a key partner to many companies that maintain zero landfill goals.
Another initiative in high-value profiled waste is to increase the volume of regulated medical waste destruction at
two of our facilities. There are limited alternative disposal options for regulated medical waste and we hope to
extend this capability to more of our portfolio.
A core component of our Covanta Environmental Solutions business strategy has been to expand our platform
through a series of acquisitions to provide additional waste processing, recycling, transportation alternatives,
along with on-site environmental services, in order to grow profitable revenue and drive internalization of
additional profiled waste to our EfW facilities. We added two new material processing facilities in 2016, and
another in early 2017. Growth in this business is focused on organic sales, as well as on service line
diversification, as we leverage our talented sales team.
Metals Recovery Developments
While ostensibly a byproduct of the EfW process, metals recovery has become an increasingly attractive revenue
center. Historically we focused on investments to increase ferrous and non-ferrous recovery, while our more
recent efforts target profit maximization. In 2016, we completed our first full-year of ferrous processing at our
centralized processing facility in Eastern Pennsylvania, and we are very pleased with its performance. The facility,
which processed upwards of 30 percent of our fleetwide recovered ferrous, enabled us to opportunistically bulk
ship higher-quality product domestically and overseas, and allowed greater flexibility in the timing of sales. We
are looking to duplicate this effort in other regions and, building on this, we are adding centralized processing
capabilities to this site for non-ferrous metals in early 2017. Nearly 70 percent of fleetwide non-ferrous metal will
be processed here and we anticipate realized pricing nearly double that of unprocessed material. On both the
ferrous and non-ferrous sides these investments provide attractive financial returns and highlight the creativity of
our team in finding opportunities to drive growth.
Ash Processing Technology Development
Another organic growth initiative on the horizon is our total ash processing program. Our EfW process reduces
waste volume by nearly 90 percent, but we still have residual ash disposal costs of approximately $90 million
annually. We have identified a technology that we believe can process as much as 70 percent of this ash for
beneficial reuse, as well as recover additional high-value metals. The net benefit of our investment in deploying
this technology would be an attractive return based on reduced disposal costs, modest incremental revenues and a
further improvement to our already strong environmental profile. We plan to develop the first of these units later
this year, and estimate it will handle nearly 10 percent of the ash produced by our fleet. If we meet expectations,
we may build several more units over time.
Continuous Improvement
Supplementing our efforts on the top line, we also made substantial progress on our Continuous Improvement
program utilizing Lean and Six Sigma methodologies. Investors often perceive Continuous Improvement
primarily as a cost reduction tool, but our broad-based program focuses on areas like stable operations, outage
optimization and reagent reduction, all of which impact revenues, plant operations and costs. In 2016, the
program’s first full year, we recognized our targeted $10 million of savings, with benefits evident throughout the
income statement. Going forward, we anticipate incremental investments in key personnel to support these
initiatives.
Power Markets
The power markets remain challenging in the near-term, with an abundance of low-priced natural gas near the
heart of our fleet weighing on power markets. Between 2017 and 2018 we have various legacy contracts that
move to market, creating headwinds for the business. We have discussed these contract expirations in the past
and continue to actively hedge our exposure to mitigate short-term volatility. We can’t control the price of
power, but we can and will look for ways to increase the net realized prices. We have several initiatives
underway to either sell steam, rather than power, or sell locally, rather than wholesale, in order to drive better net
pricing.
New Project Development
Large-scale new investment opportunities are limited in the U.S., but we see fertile markets overseas. The Dublin
project is now over 90 percent complete and scheduled for full operations by the beginning of the fourth quarter
of 2017. Aggregate spend on the project remains in the original budget range and we look forward to strong
financial returns, and a long and valuable relationship with an important new client community.
We will look to build on our success in Dublin, and have an active effort to develop new facilities in the United
Kingdom. Like Ireland, the United Kingdom adheres to the European Union’s Landfill Directive, which
prioritizes waste recycling and EfW ahead of landfills. This results in substantially higher tip fees compared to
what we can garner domestically. Our current market strategy envisions partnering with local waste companies
that would provide waste to our facilities. The initial response has been strong and developments will build on
previous efforts to permit new facilities and make the best use of our world-class operating capabilities. While
we seek to grow our capacity, any project commitments will be subject to rigorous return analysis.
Capital Allocation
In 2014, we increased our annual dividend to $1.00 per share, after our team extensively analyzed our Free Cash
Flow to ensure that we could maintain the dividend at this rate irrespective of commodity market prices. Nothing
has changed in that regard, and this past December we recommitted to the dividend at its current level. As our
growth initiatives drive incremental Free Cash Flow, we will prudently allocate this capital to both reduce debt,
which will also accrue value to shareholders, and to enable dividend increases over time. We remain focused on
the areas of the business that are in our control and view any commodity tailwinds as opportunities to decrease
leverage and potentially invest in accretive projects.
Conclusion
We are pleased with our performance in 2016 and excited about our opportunities in the future. This success
could not have been achieved without our dedicated employees who continue to impress us with their innovation,
dedication and hard work.
Sincerely,
Samuel Zell
Chairman of the Board of Directors
Stephen J. Jones
President & Chief Executive Officer
Board of Directors
Samuel Zell
Chairman of the Board
Covanta Holding Corporation
Founder and Chairman
Equity Group Investments
David M. Barse
Founder and Chief Investment
Officer
DMB Holdings
Ronald J. Broglio
President
RJB Associates
Peter C.B. Bynoe
Managing Director
Equity Group Investments
Executive Officers
CORPORATE INFORMATION
Linda J. Fisher
Former Vice President and
Chief Sustainability Officer
E.I. Du Pont de Nemours and
Company
Joseph M. Holsten
Chairman of the Board
LKQ Corporation
Stephen J. Jones
President and Chief Executive
Officer
Covanta Holding Corporation
Anthony J. Orlando
Former President and
Chief Executive Officer
Covanta Holding Corporation
Danielle Pletka
Senior Vice President,
Foreign and Defense Policy
American Enterprise Institute
Michael W. Ranger
Co-founder and
Senior Managing Director
Diamond Castle Holdings, LLC
Robert S. Silberman
Executive Chairman of the
Board
Strayer Education, Inc.
Managing Director
Equity Group Investments
Jean Smith
Chief Executive Officer
West Knoll Collection, LLC
Stephen J. Jones
President and Chief Executive
Officer
Timothy J. Simpson
Executive Vice President,
General Counsel Secretary
Michael A. Wright
Senior Vice President and
Chief Human Resources Officer
Bradford J. Helgeson
Executive Vice President and
Chief Financial Officer
Matthew Mulcahy
Executive Vice President, Head of
Corporate Development
Paul Gilman, Ph.D.
Senior Vice President and
Chief Sustainability Officer
Derek W. Veenhof
Executive Vice President,
Sustainable Solutions
Michael J. de Castro
Executive Vice President,
Supply Chain
Other Information
Corporate Office
445 South Street
Morristown, NJ 07960
862.345.5000
www.covanta.com
Email: ir@covanta.com
Paul Stauder
President,
Covanta Environmental Solutions
Manpreet S. Grewal
Vice President and
Chief Accounting Officer
Independent Auditor
Ernst & Young, LLP
Metropark, NJ
Transfer Agent
AST Financial
6201 15th Avenue
Brooklyn, NY 11219
800.937.5449
Email: info@astfinancial.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to
Commission file number 1-06732
COVANTA HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
445 South Street, Morristown, NJ
(Address of Principal Executive Office)
95-6021257
(I.R.S. Employer
Identification Number)
07960
(Zip Code)
Registrant’s telephone number, including area code: (862) 345-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.10 par value per share
Name of Each Exchange on Which Registered
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
No
Securities registered pursuant to Section 12(g) of the Act: None
Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of June 30, 2016, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $1.9
billion. The aggregate market value was computed by using the closing price of the common stock as of that date on the New York
Stock Exchange. (For purposes of calculating this amount only, all directors and executive officers of the registrant have been treated
as affiliates.)
No
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
Class
Common Stock, $0.10 par value
Outstanding at February 17, 2017
130,401,036
Documents Incorporated By Reference:
Part of Form 10-K of Covanta Holding Corporation
Part III
Documents Incorporated by Reference
Portions of the Proxy Statement to be filed with the
Securities and Exchange Commission in connection with
the 2017 Annual Meeting of Stockholders.
TABLE OF CONTENTS
Cautionary Note Regarding Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Availability of Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART I
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Markets, Competition And Business Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulation Of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of
Equity Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations . . . . .
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Results Of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31, 2016 vs. Year Ended December 31, 2015 . . . . . . . . . . . . . . . . . . . .
Year Ended December 31, 2015 vs. Year Ended December 31, 2014 . . . . . . . . . . . . . . . . . . . .
Adjusted EPS (Non-GAAP). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted EBITDA (Non-GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liquidity And Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Free Cash Flow (Non-GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discussion Of Critical Accounting Policies And Estimates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quantitative And Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements And Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes In And Disagreements With Accountants On Accounting And Financial Disclosure. . . . .
Controls And Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers And Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships And Related Transactions, And Director Independence . . . . . . . . . . . . . . . . .
Principal Accountant Fees And Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
3
4
5
12
15
19
20
21
30
30
30
30
31
33
34
34
34
35
38
43
45
47
49
57
59
62
111
111
115
115
115
115
116
116
Item 15.
Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
116
PART IV
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
121
OTHER
2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K may constitute “forward-looking” statements as defined in Section 27A
of the Securities Act of 1933 (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”),
the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) or in releases made by the Securities and Exchange Commission
(“SEC”), all as may be amended from time to time. Such forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause the actual results, performance or achievements of Covanta Holding
Corporation and its subsidiaries (“Covanta”) or industry results, to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements. Statements that are not historical fact are forward-looking
statements. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as
the words “plan,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “may,” “will,” “would,” “could,” “should,”
“seeks,” or “scheduled to,” or other similar words, or the negative of these terms or other variations of these terms or comparable
language, or by discussion of strategy or intentions. These cautionary statements are being made pursuant to the Securities Act,
the Exchange Act and the PSLRA with the intention of obtaining the benefits of the “safe harbor” provisions of such laws. Covanta
cautions investors that any forward-looking statements made by us are not guarantees or indicative of future performance. Important
factors, risks and uncertainties that could cause actual results to differ materially from those forward-looking statements include,
but are not limited to:
• seasonal or long-term fluctuations in the prices of energy, waste disposal, scrap metal and commodities;
• our ability to renew or replace expiring contracts at comparable prices and with other acceptable terms;
• adoption of new laws and regulations in the United States and abroad, including energy laws, environmental laws, tax laws,
labor laws and healthcare laws;
• failure to maintain historical performance levels at our facilities and our ability to retain the rights to operate facilities we
do not own;
• our ability to avoid adverse publicity or reputational damage relating to our business;
• advances in technology;
• difficulties in the operation of our facilities, including fuel supply and energy delivery interruptions, failure to obtain
regulatory approvals, equipment failures, labor disputes and work stoppages, and weather interference and catastrophic
events;
• difficulties in the financing, development and construction of new projects and expansions, including increased construction
costs and delays;
• limits of insurance coverage;
• our ability to avoid defaults under our long-term contracts;
• performance of third parties under our contracts and such third parties' observance of laws and regulations;
• concentration of suppliers and customers;
• geographic concentration of facilities;
• increased competitiveness in the energy and waste industries;
• changes in foreign currency exchange rates;
• limitations imposed by our existing indebtedness and our ability to perform our financial obligations and guarantees and
to refinance our existing indebtedness;
• exposure to counterparty credit risk and instability of financial institutions in connection with financing transactions;
• the scalability of our business;
• our ability to attract and retain talented people;
• failures of disclosure controls and procedures and internal controls over financial reporting;
• our ability to utilize net operating loss carryforwards;
• general economic conditions in the United States and abroad, including the availability of credit and debt financing;
• restrictions in our certificate of incorporation and debt documents regarding strategic alternatives; and
• other risks and uncertainties affecting our businesses described in Item 1A. Risk Factors of this Annual Report on Form 10-
K and in other filings by Covanta with the SEC.
Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements
are reasonable, actual results could differ materially from a projection or assumption in any of our forward-looking statements.
Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and
inherent risks and uncertainties. The forward-looking statements contained in this Annual Report on Form 10-K are made only as
of the date hereof and we do not have, or undertake, any obligation to update or revise any forward-looking statements whether
as a result of new information, subsequent events or otherwise, unless otherwise required by law.
3
AVAILABILITY OF INFORMATION
You may read and copy any materials Covanta files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549. Copies of such materials also can be obtained free of charge at the SEC’s website,
www.sec.gov, or by mail from the Public Reference Room of the SEC, at prescribed rates. Please call the SEC at 1-800-SEC-0330
for further information on the operation of the Public Reference Room. Covanta’s SEC filings are also available to the public, free
of charge, on its corporate website, www.covanta.com as soon as reasonably practicable after Covanta electronically files such
material with, or furnishes it to, the SEC. Covanta’s common stock is traded on the New York Stock Exchange. Material filed by
Covanta can be inspected at the offices of the New York Stock Exchange at 20 Broad Street, New York, N.Y. 10005.
4
Item 1. BUSINESS
PART I
The terms “we,” “our,” “ours,” “us,” “Covanta” and “Company” refer to Covanta Holding Corporation and its subsidiaries and
the term “Covanta Energy” refers to our subsidiary Covanta Energy, LLC and its subsidiaries.
About Covanta Holding Corporation
We are organized as a holding company, which was incorporated in Delaware on April 16, 1992. We conduct all of our operations
through subsidiaries, which are engaged predominantly in the businesses of waste and energy services. We have one reportable
segment, North America, which is comprised of waste and energy services operations located primarily in the United States and
Canada. Outside of North America, we are currently constructing an energy-from-waste facility in Dublin, Ireland, which we own
and will operate upon completion. We hold interests in an energy-from-waste facility in Italy and an infrastructure business in
China which is engaged in energy-from-waste operations. Additional information about our reportable segment and our operations
by geographic area is contained in Item 8. Financial Statements And Supplementary Data — Note 6. Financial Information by
Business Segments.
During 2016, we divested the majority of our investments in China. For additional information see Item 8. Financial Statements
And Supplementary Data — Note 4. Dispositions, Assets Held for Sale and Discontinued Operations.
Our Energy-from-Waste Business
Our mission is to provide sustainable waste and energy solutions. We seek to do this through a variety of service offerings,
including our core business of owning and operating infrastructure for the conversion of waste to energy (known as “energy-from-
waste” or “EfW”).
Our EfW facilities earn revenue from both the disposal of waste and the generation of electricity, generally under long-term
contracts, as well as from the sale of metals recovered during the EfW process. Our facilities process approximately 20 million
tons of solid waste annually, equivalent to 8% of post-recycled municipal solid waste (“MSW”) generated in the United States.
We operate and/or have ownership positions in 42 EfW facilities, which are primarily located in North America, and 5 additional
energy generation facilities, including other renewable energy production facilities in North America (wood biomass and
hydroelectric). In total, these assets produce approximately 10 million megawatt hours (“MWh”) of baseload electricity annually.
We also operate waste management infrastructure, including 17 waste transfer stations, 15 environmental services facilities, 4
landfills (primarily for ash disposal) and one metals processing facility, all of which are complementary to our core EfW business.
Energy-from-waste serves two key markets as both a sustainable waste management solution that is environmentally superior
to landfilling and as a source of clean energy that reduces overall greenhouse gas emissions. Energy-from-waste 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 through sustainable practices.
Energy-from-waste facilities produce energy through the combustion of non-hazardous MSW in specially-designed power plants.
Most of our facilities are “mass-burn” facilities, which combust the MSW on an as-received basis without any pre-processing such
as shredding, sorting or sizing. The process reduces the waste to an inert ash while extracting ferrous and non-ferrous metals for
recycling. In addition to our mass-burn facilities, we own and/or operate additional facilities that use other processes or technologies,
such as refuse-derived fuel facilities which process waste prior to combustion and a gasification technology, in which waste is
heated to create gases that are then combusted.
Environmental Benefits of Energy-from-Waste
We believe that EfW offers solutions to public sector leaders around the world for addressing two key issues: sustainable
management of waste and renewable energy generation. We believe that the environmental benefits of EfW, as an alternative to
landfilling, are clear and compelling: by processing municipal solid waste in EfW facilities, we reduce greenhouse gas (“GHG”)
emissions, lower the risk of groundwater contamination, and conserve land. Increased use of EfW facilities can reduce GHG
emissions, as the methane emitted by landfills is over 80 times more potent than carbon dioxide (“CO2”) over a 20-year period.
At the same time, EfW generates clean, reliable energy from a renewable fuel source, thus reducing dependence on fossil fuels,
the combustion of which is itself a major contributor of GHG emissions. The United States Environmental Protection Agency
(“EPA”), using lifecycle tools such as its own Municipal Solid Waste Decision Support Tool, has found that, on average,
approximately one ton of CO2-equivalent is reduced relative to landfilling for every ton of waste processed. Compared with fossil
fuel based generation, each ton of waste processed eliminates the need to consume approximately one barrel of oil or one-quarter
ton of coal, in order to generate the equivalent amount of electricity. We believe EfW is also an important component of business
and community efforts to divert post-recycled waste from landfills as part of their zero-waste and zero-waste-to-landfill initiatives.
As public planners and commercial and industrial companies address their needs for more environmentally sustainable waste
management and energy generation in the years ahead, we believe that EfW will be an increasingly attractive alternative.
5
Other Environmental Services Offerings
In addition to our core EfW business, we offer a variety of sustainable waste management solutions in response to customer
demand, including onsite clean-up services, wastewater treatment, transportation and logistics, recycling and depackaging. Together
with our processing of non-hazardous "profiled waste" for purposes of assured destruction or sustainability goals in our EfW
facilities, we offer these services under our Covanta Environmental Solutions brand. Through acquisitions, we have expanded our
network of facilities to enable us to provide a range of services to industrial customers for the treatment, recycling and/or disposal
of their non-hazardous materials. These businesses are highly synergistic with our existing profiled waste business, offer us the
opportunity to expand the geographical sourcing of our waste streams and expand our presence in the environmental services
sector, allowing us to drive higher margin profiled waste volumes into our EfW facilities and access additional revenue growth
opportunities.
STRATEGY
Each of our service offerings responds to customer demand for sustainable waste management services that are superior to
landfilling according to the “waste hierarchy" and assists our customers in meeting their own zero-waste, zero-waste-to-landfill
and other sustainability goals. As indicated above, each of our service offerings is focused on providing cost effective and sustainable
solutions that leverage our extensive network of EfW facilities and transfer stations in North America.
We intend to pursue our mission through the following key strategies:
• Preserve and grow the value of our existing portfolio. We intend to maximize the long-term value of our existing portfolio of
facilities by continuously improving safety, health and environmental performance, working to provide superior customer
service, continuing to operate at our historic production levels, maintaining our facilities in optimal condition, extending waste
and service contracts, and conducting our business more efficiently. We intend to achieve organic growth by expanding our
customer base, service offerings and metal recovery, adding waste, service or energy contracts, investing in and enhancing
the capabilities of our existing assets, and deploying new or improved technologies, systems, processes and controls, all
targeted at increasing revenue or reducing costs.
• Expand through acquisitions and/or development in selected attractive markets. We seek to grow our portfolio primarily
through acquisitions, competitive bids for new contracts, and development of new facilities or businesses where we believe
that market and regulatory conditions will enable us to utilize our skills and/or invest our capital at attractive risk-adjusted
rates of return. We focus these efforts in markets where we currently have projects in operation or under construction, and in
other markets with strong economic fundamentals and predictable legal and policy support. In addition to our focus on EfW
and related waste sourcing activities, we are seeking to expand our environmental service offerings through both organic
growth and acquisitions.
We believe that our approach to these opportunities is highly-disciplined, both with regard to our required rates of return on
invested capital and the manner in which potential acquired businesses or new projects will be structured and financed.
• Develop and commercialize new technology. We believe that our efforts to protect and expand our business will be enhanced
by the development of additional technologies in such fields as recycling, alternative waste treatment processes, gasification,
combustion controls, emission controls and residue recovery, reuse or disposal. We have advanced our research and
development efforts in some of these areas relevant to our EfW business, and have patents and patents pending for advances
in controlling emissions.
• Advocate for public policy favorable to EfW and other sustainable waste solutions. We seek to educate policymakers and
regulators about the environmental and economic benefits of energy-from-waste and advocate for policies and regulations
that appropriately reflect these benefits. Our business is highly regulated, and as such we believe that it is critically important
for us, as an industry leader, to play an active role in the debates surrounding potential policy developments that could impact
our business.
• Maintain a focus on sustainability. Providing sustainable waste, materials, and energy services to our customers is the
cornerstone of our business. Our corporate culture is focused on the triple bottom line of sustainability (people, planet,
prosperity) in support of our mission. In addition to robust financial reporting, we are committed to transparently reporting
our environmental, social and governance standards, policies, and performance, including through our corporate sustainability
report. We seek to continuously improve our performance across these aspects to remain an industry leader.
• Allocate capital efficiently for long-term shareholder value. We plan to allocate capital to maximize shareholder value by:
investing in our existing businesses to maintain and enhance assets; investing in strategic acquisitions or development projects
that offer attractive returns on invested capital and further our strategic goals; maintaining a strong balance sheet; and
consistently returning capital to our shareholders.
6
EXECUTION ON STRATEGY
Consistent with our strategy, we have executed on the following during 2016:
New Business Development
• We acquired two environmental services businesses which will further expand our presence in this sector and allow us to
direct additional non-hazardous profiled waste volumes into our EfW facilities.
• Construction is progressing on the Dublin EfW facility, a 600,000 metric ton-per-year, 58 megawatt facility in Dublin, Ireland.
During 2016, 90% of the facility’s waste processing capacity was secured under long-term contracts with leading waste and
recycling collection companies in Ireland. We expect the facility to begin commercial operations in late 2017. For information
on the funding of project construction, see Item 8. Financial Statements And Supplementary Data — Note 11. Consolidated
Debt
• The Durham York facility commenced commercial operations in January 2016 under a 20-year service fee contract.
Construction of the municipally-owned 140,000 tonne-per-year EfW facility located in the Durham Region of Canada was
completed in 2015.
Existing Business
• We extended our waste services agreement with the City of Huntsville to September 2020, and our waste disposal agreement
with the City of Indianapolis to December 2025. Both were extended under terms similar to the existing agreements.
• Construction of a state-of-the-art particulate emissions control system at our Essex County EfW facility was completed. The
total cost of the project totaled approximately $90 million, of which $33 million was incurred in 2016.
Asset Reallocation
We completed the exchange of our project ownership interests in China for a 15% ownership interest in Chongqing Sanfeng
Environmental Industrial Group, Co., Ltd ("Sanfeng Environment") and subsequently sold approximately 90% of our ownership
interest in Sanfeng Environment to a third-party, a subsidiary of CITIC Limited, a leading Chinese industrial conglomerate and
investment company. As a result, during the year ended December 31, 2016, we received pre-tax proceeds of $105 million and
recorded a pre-tax gain of $41 million. For additional information on these activities, see Item 8. Financial Statements And
Supplementary Data — Note 4. Dispositions, Assets Held for Sale and Discontinued Operations.
Continuous Improvement
In 2016, we advanced our continuous improvement initiative utilizing Lean Six Sigma methodologies. The focus of this data-
driven effort is on achieving stable operations at high performance levels, improved process efficiency and standardization across
all of our facilities. We have established a team that includes external experts and internal top performers. This effort advances
beyond previous efficiency initiatives, and enhances and complements the outage optimization efforts that we have undertaken
over the past several years.
Sustainability Goals
In our corporate Sustainability Report we outlined a series of sustainability goals that are aligned with our business goals and
mission. Set in the areas of safety and health, environment, materials management, human resources, finance, governance, and
community affairs, each goal has an assigned champion on our senior leadership team to ensure their full integration into our
business. We believe attaining these goals help us respond to our customers’ increasing interest in sustainability and the sustainable
solutions we provide, mitigate certain risks, and gain a competitive advantage in business development opportunities.
Capital Allocation
Our key capital allocation activities in 2016 included the following:
• $150 million capital returned to shareholders, including $132 million declared in dividends and $18 million for common share
repurchases;
• $162 million towards construction of the Dublin EfW facility, of which $155 million was funded by limited recourse project
subsidiary financing; and
• $91 million for other growth investments, including $33 million towards the Essex County facility emissions control system
upgrade, $9 million to acquire environmental services businesses, $3 million related to our New York City transportation and
disposal contract, and $46 million for various organic growth investments, including metals recovery projects, investments
related to our profiled waste and environmental services businesses, and continuous improvement projects.
7
NORTH AMERICA SEGMENT
Energy-from-Waste Projects
Our EfW projects generate revenue from three main sources: (1) fees charged for operating projects or processing waste received;
(2) the sale of electricity and/or steam; and (3) the sale of ferrous and non-ferrous metals that are recovered from the waste stream
as part of the EfW process. We may also generate additional revenue from the construction, expansion or upgrade of a facility,
when a municipal client owns the facility. Our customers for waste services or facility operations are principally municipal entities,
though we also market disposal capacity at certain facilities to commercial customers. Our facilities primarily sell electricity, either
to utilities at contracted rates or, in situations where a contract is not in place, at prevailing market rates in regional markets
(primarily PJM, NEPOOL and NYISO in the Northeastern United States), and in some cases sell steam directly to industrial users.
We also operate and/or have ownership positions in environmental services businesses, transfer stations and landfills (primarily
for ash disposal) that are ancillary and complementary to our EfW projects and generate additional revenue from disposal or service
fees.
EfW Contract Structures
Most of our EfW projects were developed and structured contractually as part of competitive procurement processes conducted
by municipal entities. As a result, many of these projects have common features. However, each contractual agreement is different,
reflecting the specific needs and concerns of a client community, applicable regulatory requirements and/or other factors.
Our EfW projects can generally be divided into three categories, based on the applicable contract structure at a project: (1) “Tip
Fee” projects; (2) “Service Fee” projects that we own; and (3) “Service Fee” projects that we do not own but operate on behalf of
a municipal owner. Notwithstanding distinctions among these general classifications in contract structures, in all cases we focus
on a consistent set of performance indicators to optimize service to customers and operating results:(i) boiler availability; (ii)
turbine availability; (iii) safety and environmental performance measures; (iv) tons processed; (v) steam sold; (vi) megawatt hours
sold; and (vii) recycled metal tons sold.
The following summarizes the typical contractual and economic characteristics of the three project structures in the North
America segment:
Number of facilities:
Client(s):
Waste or service
revenue:
Energy revenue:
Tip Fee
Service Fee
(Owned)
Service Fee
(Operated)
20
Host community and municipal
and commercial waste customers
4
Host community, with limited merchant
capacity in some cases
17
Dedicated to host community
exclusively
Per ton “tipping fee”
Fixed fee, with performance incentives and inflation escalation
Covanta retains 100%
Metals revenue:
Covanta retains 100%
Operating costs:
Project debt service:
After service contract
expiration:
Covanta responsible for all
operating costs
Covanta project subsidiary
responsible
N/A
Share with client
(Covanta retains approximately 20% on average)
Share with client
(Covanta typically retains approximately 50%)
Pass through certain costs to municipal client
(e.g. ash disposal)
Paid by client explicitly as part of
service fee
Client responsible for debt
service
Covanta owns the facility; clients have
certain rights set forth in contracts;
facility converts to Tip Fee or remains
Service Fee with new terms
Client owns the facility; extend
with Covanta or tender for new
contract
We are principally responsible for capital costs in facilities that we own; however, client communities may have a contractual
obligation to fund a portion of certain capital costs, particularly if required by a change in law. We also may be required to participate
in capital improvements for non-owned facilities that we operate, which would be accounted for as operating expense. In contracts
with our client communities, we agree to operate the facility and meet minimum performance standards. Typically, these include
waste processing, energy efficiency standards, energy production and environmental standards. Unexcused failure to meet these
requirements or satisfy the other material terms of our agreement, may result in damages charged to us or, if the breach is substantial,
continuing and unremedied, termination of the applicable agreement. If one or more contracts were terminated for our default,
these contractual damages may be material to our cash flow and financial condition. To date, we have not incurred material liabilities
under such performance guarantees.
8
Contracted and Merchant Revenue
We generated 78% of our waste and service revenue in the North America segment in 2016 under contracts at set rates, while
22% was generated at prevailing market prices. Our waste disposal / service and energy contracts expire at various times between
2017 and 2038. As our contracts expire, we become subject to greater market risk in maintaining and enhancing our revenue. To
date, we have been successful in extending the substantial majority of our existing contracts to operate EfW facilities owned by
municipal clients. We project 2017 contracted waste and service revenue in North America segment to approximate 2016 levels.
As our waste service agreements at facilities that we own or lease expire, we intend to seek replacement or additional contracts,
and because project debt on these facilities will be paid off at such time, we expect to be able to offer rates that will attract sufficient
quantities of waste while providing acceptable revenue to us. The expiration of existing energy contracts at these facilities will
require us to sell our output either into the local electricity grid at prevailing rates or pursuant to new contracts. We expect that
multi-year contracts for waste supply at these facilities 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. 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 prices upon expiration. As our existing contracts
have expired and our exposure to market energy prices has increased, we entered into hedging arrangements in order to mitigate
our exposure to near-term (one to three years) revenue fluctuations in energy markets, and we expect to continue to do so in the
future. Our efforts in this regard will involve only mitigation of price volatility for the energy we produce in order to limit our
energy revenue "at risk", and will not involve speculative energy trading.
See Item 1A. Risk Factors — Our results of operations may be adversely affected by market conditions existing at the time our
contracts expire.
Over time, we will seek to renew, extend or sign new waste and service contracts and pursue opportunities with commercial
customers and municipalities that are not necessarily stakeholders in our facilities in order to maintain a significant majority of
our waste and service revenue (and EfW fuel supply) under multi-year contracts.
In addition, we are currently focused on expanding our environmental service offerings through both organic growth and
acquisitions. The acquisitions will allow us to establish a presence in the environmental services sector, expand the geographical
sourcing of our waste streams and drive non-hazardous profiled waste volumes into our EfW facilities. These acquired businesses
typically accept waste under short-term contractual arrangements.
We currently operate EfW projects in 16 states and two Canadian provinces. The following map illustrates our EfW,
environmental services, and metals processing facility locations in North America:
9
Summary information regarding our North America segment energy-from-waste assets is provided in the following table:
Design Capacity
Waste
Processing
(TPD)
Gross
Electric
(MW)
Location
Contract
Expiration Dates (1)
Nature of Interest
Waste
Service
Energy
1.
2.
3.
4.
5.
6.
7.
8.
TIP FEE STRUCTURES
Southeast Connecticut (2) . . . . . . Connecticut
Fairfax County (5). . . . . . . . . . . . Virginia
Southeast Massachusetts (3) . . . . Massachusetts
Delaware Valley (5). . . . . . . . . . . Pennsylvania
Hempstead . . . . . . . . . . . . . . . . . New York
Indianapolis (4) . . . . . . . . . . . . . .
Niagara (4) . . . . . . . . . . . . . . . . . New York
Essex County (5) . . . . . . . . . . . . . New Jersey
Haverhill (5) . . . . . . . . . . . . . . . . Massachusetts
Indiana
12.
9.
10. Union County (5) . . . . . . . . . . . . New Jersey
11.
Plymouth (5) . . . . . . . . . . . . . . . . Pennsylvania
Tulsa (4)(5) . . . . . . . . . . . . . . . . . . Oklahoma
Camden (5) . . . . . . . . . . . . . . . . . New Jersey
13.
14. Alexandria/Arlington (5). . . . . . . Virginia
15.
Stanislaus County . . . . . . . . . . . California
Bristol (5) . . . . . . . . . . . . . . . . . . Connecticut
17.
Lake County . . . . . . . . . . . . . . . Florida
18. Warren County (5). . . . . . . . . . . . New Jersey
19.
Springfield (5) . . . . . . . . . . . . . . . Massachusetts
Pittsfield (4). . . . . . . . . . . . . . . . . Massachusetts
SERVICE FEE (OWNED) STRUCTURES
21. Onondaga County . . . . . . . . . . . New York
16.
20.
22. Huntington. . . . . . . . . . . . . . . . . New York
23.
Babylon . . . . . . . . . . . . . . . . . . . New York
24. Marion County. . . . . . . . . . . . . . Oregon
SERVICE FEE (OPERATED) STRUCTURES
25.
Pinellas County . . . . . . . . . . . . . Florida
26. Miami-Dade County (3)(5). . . . . . Florida
27. Honolulu (3)(6). . . . . . . . . . . . . . . Hawaii
Lee County (6) . . . . . . . . . . . . . . Florida
28.
29. Montgomery County (5)(6) . . . . . Maryland
30. Hillsborough County . . . . . . . . . Florida
Long Beach . . . . . . . . . . . . . . . . California
31.
32. York County (5). . . . . . . . . . . . . . Pennsylvania
33. Hennepin County . . . . . . . . . . . . Minnesota
34.
Lancaster County (5) . . . . . . . . . . Pennsylvania
35.
Pasco County . . . . . . . . . . . . . . . Florida
36. Harrisburg (5) . . . . . . . . . . . . . . . Pennsylvania
37.
38. Huntsville (4) . . . . . . . . . . . . . . . Alabama
39. Kent County. . . . . . . . . . . . . . . . Michigan
Burnaby . . . . . . . . . . . . . . . . . . . British Columbia
40. MacArthur . . . . . . . . . . . . . . . . . New York
41. Durham-York. . . . . . . . . . . . . . .
Canada
Durham Region,
689
3,000
2,700
2,688
2,505
2,362
2,250
2,277
1,650
1,440
1,216
1,125
1,050
975
800
650
528
450
400
240
990
750
750
550
3,150
3,000
2,950
1,836
1,800
1,800
1,380
1,344
1,212
1,200
1,050
800
800
690
625
486
480
17.0 Owner/Operator
93.0 Owner/Operator
78.0 Owner/Operator
87.0 Owner/Operator
72.0 Owner/Operator
6.5 Owner/Operator
50.0 Owner/Operator
66.0 Owner/Operator
44.6 Owner/Operator
42.1
Lessee/Operator
32.0 Owner/Operator
16.8 Owner/Operator
21.0 Owner/Operator
22.0 Owner/Operator
22.4 Owner/Operator
16.3 Owner/Operator
14.5 Owner/Operator
13.5 Owner/Operator
9.4 Owner/Operator
0.9 Owner/Operator
39.2 Owner/Operator
24.3 Owner/Operator
16.8 Owner/Operator
13.1 Owner/Operator
75.0 Operator
77.0 Operator
90.0 Operator
57.3 Operator
63.4 Operator
46.5 Operator
36.0 Operator
42.0 Operator
38.7 Operator
33.1 Operator
29.7 Operator
20.8 Operator
23.9 Operator
— Operator
16.8 Operator
12.0 Operator
17.4 Operator
2017
2021
N/A
2035
2034
2025
2035
2032
N/A
2031
N/A
2022
N/A
N/A
2027
2034
N/A
N/A
2024
N/A
2035
2019
2019
2019
2024
2023
2032
2024
2021
2029
2024
2035
2018
2017
2024
2017
2025
2020
2023
2030
2036
2017
N/A
2017
N/A
2027
2028
2017-2024
N/A
N/A
N/A
N/A
2019
N/A
2023
N/A
N/A
2024
N/A
N/A
2020
2025
2027
2027
2017
2024
N/A
2033
N/A
N/A
2025
2018
N/A
2018
N/A
2024
2033
2025
N/A
2023
2027
N/A
SUBTOTAL
55,949
1,481.0
10
(1) Expiration dates are for significant contracts; expiration dates refer to contracts with the host client communities (if any) or other contracts
representing at least 40% of facility waste capacity. "N/A" denotes that no contract represents greater than 40% of facility capacity.
(2) This facility transitioned from a service fee (owned) to a tip fee contract effective February 2017.
(3) These facilities use a refuse-derived fuel technology.
(4) These facilities have been designed to export steam for sale. See table below for the equivalent electric output. The equivalent electric output
is part of, not in addition to, the design capacity megawatts ("MW") listed in the table above.
Facility
Equivalent Electric Output (MW)
Niagara . . . . . . . . . . . . . . . . . . . . . . .
Indianapolis . . . . . . . . . . . . . . . . . . .
Tulsa. . . . . . . . . . . . . . . . . . . . . . . . .
Huntsville . . . . . . . . . . . . . . . . . . . . .
Pittsfield . . . . . . . . . . . . . . . . . . . . . .
66
52
25
15
5
At our Niagara EfW Facility, we export steam to local customers under various agreements which expire between 2017 and 2024.
(5) These facilities either sell electricity into the regional power pool at prevailing market rates or have contractual arrangements to sell electricity
at prevailing market rates.
(6) The client has a termination option under the service agreement.
Other Waste Management Infrastructure and Operations
In conjunction with our EfW business, we also own and/or operate 17 transfer stations, 15 environmental services facilities, one
regional metals recycling facility, and 4 landfills (primarily utilized for ash disposal). We utilize these assets to supplement and
more efficiently manage the waste supply, ash disposal requirements, and metals processing activities at our EfW operations, and
in some cases to expand our environmental solutions service offerings. Recent acquisitions will expand our presence in the
environmental services sector and allow us to direct additional non-hazardous waste volumes into our EfW facilities. These
businesses are highly synergistic with our existing profiled waste business and offer us the opportunity to expand the geographical
sourcing of our waste streams and to provide additional environmental solutions and services to our clients.
Biomass Projects
Currently, our two California biomass facilities are in economic dispatch. If market conditions improve, we may re-start one or
both these facilities. In each of the years ending December 31, 2016, 2015, and 2014, revenue from our biomass projects represented
less than 1%, 3% and 4%, respectively, of our North America segment revenue.
OTHER PROJECTS
Outside the North America segment, we currently own one EfW project under construction in Ireland and have an equity interest
in an EfW project in Italy. We intend to pursue additional international EfW projects where the regulatory and market environments
are attractive. Ownership and operation of facilities in foreign countries potentially involves greater political and financial
uncertainties than we experience in the United States, as described below and discussed in Item 1A. Risk Factors.
Summary information regarding our other EfW projects is provided in the following table:
Design Capacity
Waste
Processing
(Metric
TPD)
Gross
Electric
(MW)
Location
Nature of Interest
Contract
Expiration Dates
Waste
Service
Energy
ENERGY-FROM-WASTE
TIP FEE STRUCTURES
1.
2.
Dublin (1) . . . . . . . . . . . . . . . . . .
Trezzo . . . . . . . . . . . . . . . . . . . .
Ireland
Italy
SUBTOTAL
1,800
500
2,300
58
18
76
100% Owner/Operator (Under
Construction)
13% Owner/JV Operator
2062
2023
N/A
2023
(1) We expect operations to commence in late 2017. We will operate the facility under a 45-year public-private-partnership agreement, after
which ownership of the facility will transfer to City of Dublin. Waste supply contracts have been entered into with private waste haulers.
11
Waste Services
MARKETS, COMPETITION AND BUSINESS CONDITIONS
Post-recycled municipal solid waste generation in the United States is approximately 250 million tons per year, of which the
EfW industry processes approximately 12% (of which we process approximately two-thirds).
EfW is an important part of the waste management infrastructure of the United States, particularly in regions with high population
density but limited availability of land for landfilling, with nearly 80 facilities currently in operation that collectively process
approximately 30 million tons of post-recycled solid waste and serve the needs of over 30 million people and produce enough
electricity for the equivalent of 1.3 million homes. The use of EfW is even more prevalent in Western Europe and many countries
in Asia, such as Japan. Nearly 1,600 EfW facilities are in use today around the world, with a capacity to process approximately
230 million tons of waste per year. In the waste management hierarchies of the United States EPA and the European Union, EfW
is designated as a superior solution to landfilling.
Renewable Energy
Public policy in the United States, at both the state and national levels, has developed over the past several years in support of
increased generation of renewable energy as a means of combating the potential effects of climate change, as well as increasing
domestic energy security. Today in the United States, approximately 13% of electricity is generated from renewable sources,
approximately half of which is hydroelectric power.
EfW contributes approximately 5% of the nation’s non-hydroelectric renewable power. EfW is designated as renewable energy
in 31 states, the District of Columbia, and Puerto Rico, as well as in several federal statutes and policies. Unlike most other
renewable resources, EfW generation can serve base-load demand and is more often located near population centers where demand
is greatest, minimizing the need for expensive incremental transmission infrastructure.
General Business Conditions
Economic - Changes in the economy affect the demand for goods and services generally, which affects overall volumes of waste
requiring management and the pricing at which we can attract waste to fill available capacity. We receive the majority of our
revenue under short- and long-term contracts, which limits our exposure to price volatility, but with adjustments intended to reflect
changes in our costs. Where our revenue is received under other arrangements and depending upon the revenue source, we have
varying amounts of exposure to price volatility.
The largest component of our revenue is waste revenue, which has generally been subject to less price volatility than our revenue
derived from the sale of energy and metals. Waste markets tend to be affected, both with respect to volume and price, by local and
regional economic activity, as well as state and local waste management policies.
At the same time, United States natural gas market prices influence electricity and steam pricing in regions where we operate,
and thus affect our revenue for the portion of the energy we sell that is not under fixed-price contracts. Energy markets tend to be
affected by regional supply and demand, as well as national economic activity and regulations.
At our biomass facilities, lower energy prices combined with higher fuel prices have caused us to economically dispatch
operations, pending improved market conditions.
12
The following are various published pricing indices relating to the U.S. economic drivers that are relevant to those aspects of
our business where we have market exposure; however, there is not a precise correlation between our results and changes in these
metrics.
As of December 31,
2016
2015
2014
2013
Consumer Price Index (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PJM Pricing (Electricity) (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
NE ISO Pricing (Electricity) (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Henry Hub Pricing (Natural Gas) (4) . . . . . . . . . . . . . . . . . . . . . . . . .
#1 HMS Pricing (Ferrous Metals) (5) . . . . . . . . . . . . . . . . . . . . . . . . .
Scrap Metals - Old Cast Aluminum Scrap (6). . . . . . . . . . . . . . . . . . .
(1) Represents the year-over-year percent change in the Headline CPI number. The Consumer Price Index (CPI-U) data is provided by the U.S.
41.93
56.43
24.85
29.74
36.00
42.93
56.99
64.58
1.5%
2.1%
0.7%
0.8%
3.72
0.73
2.52
2.60
4.33
0.57
0.63
0.75
344
197
217
355
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Department of Labor Bureau of Labor Statistics.
(2) Average price per MWh for full year. Pricing for the PJM PSEG Zone is provided by the PJM ISO.
(3) Average price per MWh for full year. Pricing for the Mass Hub Zone is provided by the NE ISO.
(4) Average price per MMBtu for full year. The Henry Hub Pricing data is provided by the Natural Gas Weekly Update, Energy Information
Administration, Washington, DC.
(5) Average price per gross ton for full year. The #1 Heavy Melt Steel ("HMS") composite index ($/gross ton) price is published by American
Metal Market.
(6) Average price per pound for full year. Calculated using the high price of Old Cast Aluminum Scrap ($/lb) published by American Metal
Market.
Seasonal - Our quarterly operating income within the same fiscal year typically differs substantially due to seasonal factors,
primarily as a result of the timing of scheduled plant maintenance. We conduct scheduled maintenance periodically each year,
which requires that individual boiler and/or turbine units temporarily cease operations. During these scheduled maintenance periods,
we incur material repair and maintenance expense and receive less revenue until the boiler and/or turbine units resume operations.
This scheduled maintenance usually occurs during periods of off-peak electric demand and/or lower waste volumes, which can
vary regionally. The scheduled maintenance period in the first half of the year (primarily first quarter and early second quarter) is
typically the most extensive, while the third quarter scheduled maintenance period is the least extensive. Given these factors, we
normally experience our lowest operating income from our projects during the first half of each year.
Our operating income may also be affected by seasonal weather extremes during summers and winters. Increased demand for
electricity and natural gas during unusually hot or cold periods may affect certain operating expense and may trigger material price
increases for a portion of the electricity and steam we sell.
Performance - Our EfW facilities have historically demonstrated consistent reliability; our average boiler availability was 91%
in 2016. We have historically met our operating obligations without experiencing material unexpected service interruptions or
incurring material increases in costs. In addition, with respect to many of our contracts, we generally have limited our exposure
for risks not within our control. Across our fleet of facilities, we operate and maintain a large number of combustion units, turbine
generators, and air-cooled condensers, among other systems. On an ongoing basis, we assess the effectiveness of our preventative
maintenance programs, and implement adjustments to those programs in order to improve facility safety, reliability and performance.
These assessments are tailored to each facility's particular technologies, age, historical performance and other factors. As our
facilities age, we expect that the scope of work required to maintain our portfolio of facilities will increase in order to replace or
extend the useful life of facility components and to ensure that historical levels of safe, reliable performance continue. For additional
information about such risks and damages that we may owe for unexcused operating performance failures, see Item 1A. Risk
Factors - Operation of our businesses involves significant risks, which could have an adverse effect on our cash flows and results
of operations. In monitoring and assessing the ongoing operating and financial performance of our businesses, we focus on certain
key factors: tons of waste processed, electricity and steam sold, boiler availability, plant operating expense and safety and
environmental performance.
Waste, Energy and Metals Markets - We compete in waste markets that are highly competitive. In the United States, the market
for waste management is almost entirely price-driven and is greatly influenced by economic factors within regional waste markets.
These factors include:
• regional population and overall waste production rates;
• the number of waste disposal sites (including principally landfills, other EfW facilities and transfer stations) in existence or
in the planning or permitting process;
• the available disposal capacity (in terms of tons of waste per day) that can be offered by other regional disposal sites;
• the extent to which local governments seek to control transportation and/or disposal of waste within their jurisdictions;
13
• the extent to which local governments and businesses continue to value sustainable approaches to handling of wastes; and
• the availability and cost of transportation options (e.g., rail, inter-modal, trucking) to provide access to more distant disposal
sites, thereby affecting the size of the waste market itself.
In the waste market of our North America segment, waste service providers seek to obtain waste supplies for their facilities by
competing on price (usually on a per-ton basis) with other service providers. At our service fee EfW facilities, we typically do not
compete in this market because we do not have the contractual right to solicit merchant waste. At these facilities, the client
community is responsible for obtaining the waste, if necessary by competing on price to obtain the tons of waste it has contractually
promised to deliver to us. At our EfW facilities governed by tip fee contracts and our waste procurement services businesses, we
are responsible for obtaining waste supply, and therefore, actively compete in these markets to enter into spot, medium- and long-
term contracts. These EfW projects are generally in densely-populated areas, with high waste generation rates and numerous large
and small participants in the regional market. Our waste operations are largely concentrated in the northeastern United States. See
Item 1A. Risk Factors — Our waste operations are concentrated in one region and expose us to regional economic or market
declines for additional information concerning this geographic concentration. Certain of our competitors in these markets are
vertically-integrated waste companies, which include waste collection operations, and thus have the ability to control supplies of
waste, which may restrict our ability to offer services at attractive prices. Our business does not include traditional waste collection
operations.
If a long-term contract expires and is not renewed or extended by a client community, our percentage of contracted processing
capacity will decrease and we will need to compete in the regional market for waste supply at the facilities we own, from both
municipal and commercial services. At that point, we will compete on price with landfills, transfer stations, other EfW facilities
and other waste technologies that are then offering disposal or other services in the region.
Our sustainable service offerings seek to respond to increasing customer demand for environmentally preferred waste handling
and disposal, as well as specific business risk mitigation requirements for certain materials. For these services, we compete with
many large and small companies offering these services, in local and regional waste markets that are similarly influenced by the
factors noted above which affect the broader waste markets.
We currently sell the majority of our electricity and other energy product output pursuant to contracts, and for this portion of
our energy output we do not compete on price. As these contracts expire, we will sell an increasing portion of our energy output
into competitive energy markets or pursuant to short-term contracts and, as such, generally expect to have a growing exposure to
energy market price volatility.
We have entered into hedging arrangements in order to mitigate our exposure to this volatility, and we expect to continue to do
so in the future. Our efforts in this regard will involve only mitigation of price volatility for the energy we produce, and will not
involve speculative energy trading.
For the portion of our portfolio that is exposed to electricity markets, we expect prices will be driven by several factors including
natural gas supply/demand conditions, regional electricity supply/demand factors, regional transmission and natural gas supply
capacity and system conditions, weather conditions, and emerging environmental regulations. All of these factors will have national
and regional impacts that affect electricity and steam prices.
Electricity and steam prices in the markets where the majority of our facilities are located are heavily impacted by movements
in natural gas prices. The substantial increase in unconventional or shale gas supply has created downward pressure on gas prices
relative to historical levels and therefore prices for the electricity we sell that is not under contract. However, when demand for
gas is high during certain seasons or weather conditions, the gas pipeline system has been limited in its ability to transport enough
gas to certain regions, such as New England and California. As result, gas prices can experience short-term spikes, and electricity
prices follow.
Several long-term trends are expected to affect U.S. natural gas prices; including shale gas production, storage capacity, liquefied
natural gas ("LNG") exports, regulation, coal plant retirements, as well as industrial, transportation and residential demand.
Furthermore, regional natural gas prices, especially in the Northeast are expected to be affected by changes in regional production
and transportation capacity.
We generally enter into short-term contracts for sales of recovered ferrous and non-ferrous metals with processors and end-users
(i.e., mills). We compete with other suppliers who are generally not in the EfW industry and whose product may be less costly to
process than metals from EfW sources. In addition, third parties to whom we sell our metals are often not well-capitalized, which
creates greater credit and performance risk to us than we typically experience in our other lines of business. Because of these and
other factors, and because we expect to continue to enhance our metals recovery activities, we generally expect to have a growing
exposure to metals market volatility. We also have enhanced our focus on mitigating commercial risks associated with metals
recovery and revenue generation.
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Technology, Research and Development
In our EfW business, we own and/or operate EfW facilities that utilize various technologies from several different vendors,
including mass-burn combustion technologies and refuse-derived fuel technologies which include pre-combustion waste processing
not required with a mass-burn design. As we continue our efforts to develop and/or acquire additional EfW projects internationally,
we will consider mass-burn combustion and other technologies that best fit the needs of the local environment of a particular
project.
In addition, we will continue to consider technologies better suited than mass-burn combustion for smaller scale applications,
including gasification technologies.
We believe that all forms of EfW technologies offer an environmentally superior solution to post-recycled waste management
and energy challenges faced by leaders around the world, and that our efforts to expand our business will be enhanced by the
development of additional technologies in such fields as emission controls, residue disposal, alternative waste treatment processes,
gasification, and combustion controls. We have advanced our research and development efforts in these areas, and have developed
new and cost-effective technologies that represented major advances in controlling NOx emissions. These technologies, for which
patents have been granted, have been tested at existing facilities and we are now operating and/or installing such systems at a
number of our facilities. We intend to maintain a focus on research and development of technologies in these and other areas that
we believe will enhance our competitive position, and offer new technical solutions to waste and energy problems that augment
and complement our business.
A number of other companies are similarly engaged in new technology development focused on extracting energy from waste
materials through a variety of technical approaches, including: gasification, pyrolysis or other combustion designs; converting
waste to fuels or other commodities; or processing waste to enable co-firing in larger power plants or industrial boilers. Firms
engaged in these activities generally are less well-capitalized than Covanta, although some engage in joint ventures with larger
and more well-capitalized companies. To date, we believe such efforts have not produced technologies that offer economically
attractive alternatives in the absence of policy support.
Regulations Affecting Our North America Segment
Environmental Regulations — General
REGULATION OF BUSINESS
Our business activities in the United States are extensively regulated pursuant to federal, state and local environmental laws.
Federal laws, such as the Clean Air Act and Clean Water Act, and their state counterparts, govern discharges of pollutants to air
and water. Other federal, state and local laws comprehensively govern the generation, transportation, storage, treatment and disposal
of solid and hazardous waste and also regulate the storage and handling of chemicals and petroleum products (such laws and
regulations are referred to collectively as the “Environmental Regulatory Laws”).
Other federal, state and local laws, such as the Comprehensive Environmental Response Compensation and Liability Act
(commonly known as “CERCLA” and collectively referred to with such other laws as the “Environmental Remediation Laws”)
make us potentially liable on a joint and several basis for any onsite or offsite environmental contamination which may be associated
with our activities and the activities at our sites. These include landfills we have owned, operated or leased, or at which there has
been disposal of residue or other waste generated, handled or processed by our facilities. Some state and local laws also impose
liabilities for injury to persons or property caused by site contamination. Some service agreements provide us with indemnification
from certain liabilities.
The Environmental Regulatory Laws prohibit disposal of regulated hazardous waste at our municipal solid waste facilities. The
service agreements recognize the potential for inadvertent and improper deliveries of hazardous waste and specify procedures for
dealing with hazardous waste that is delivered to a facility. Under some service agreements, we are responsible for some costs
related to hazardous waste deliveries. We have not incurred material hazardous waste disposal costs to date.
The Environmental Regulatory Laws also require that many permits be obtained before the commencement of construction and
operation of any waste or renewable energy project, and further require that permits be maintained throughout the operating life
of the facility. We can provide no assurance that all required permits will be issued or re-issued, and the process of obtaining such
permits can often cause lengthy delays, including delays caused by third-party appeals challenging permit issuance. Our failure
to meet conditions of these permits or of the Environmental Regulatory Laws can subject us to regulatory enforcement actions by
the appropriate governmental authority, which could include fines, penalties, damages or other sanctions, such as orders requiring
certain remedial actions or limiting or prohibiting operation. See Item 1A. Risk Factors — Compliance with environmental laws,
including changes to such laws, could adversely affect our results of operations. To date, we have not incurred material penalties,
been required to incur material capital costs or additional expense, or been subjected to material restrictions on our operations as
a result of violations of Environmental Regulatory Laws or permit requirements.
15
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 compliance
with existing Environmental Regulatory and Remediation Laws. 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 CERCLA and/or analogous state Environmental Remediation Laws. Our ultimate liability in connection
with such environmental claims will depend on many factors, including our volumetric share of waste, the total cost of remediation,
and the financial viability of other companies that have also sent waste to a given site and, in the case of divested operations, our
contractual arrangement with the purchaser of such operations.
The Environmental Regulatory Laws may change. New technology may be required or stricter standards may be established
for the control of discharges of air or water pollutants, for storage and handling of petroleum products or chemicals, or for solid
or hazardous waste or ash handling and disposal. Thus, as new technology is developed and proven, we may be required to
incorporate it into new facilities or make major modifications to existing facilities. This new technology may be more expensive
than the technology we use currently.
Environmental Regulations — Recent Developments
Maximum Achievable Control Technology ("MACT") Rules — EPA is authorized under the Clean Air Act to issue rules
periodically which tighten air emission requirements to achievable standards, as determined under a specified regulatory framework.
EPA is required to establish these MACT rules for a variety of industries, including new and existing municipal waste combustion
(“MWC”) units, industrial boilers and solid waste incinerators. All of our facilities comply with all applicable MACT rules currently
in effect.
EPA is currently conducting a combined Risk and Technology Review for the large MWC source category and will subsequently
propose revised MWC MACT rules. While the scope of and timing for implementation of these rules is uncertain, the revised
MWC MACT rules are expected to lower existing MWC MACT emission limits for most, if not all, regulated air pollutants emitted
by our facilities, and may require capital improvements and/or increased operating costs. We are unable at this time, to estimate
the magnitude of such costs, which may be material, or to determine the potential impact on the profitability of our MWC facilities.
In some cases, the costs incurred to meet the revised MACT rules at facilities may be recovered from municipal clients and other
users of our facilities through increased fees permitted to be charged under applicable contracts; however, to the extent we incur
costs at other of our facilities to meet the applicable MACT rules, such costs are not subject to contractual recovery and instead
will be borne directly by the affected facilities.
Revised Ground Level Ozone Standards — On October 26, 2015, EPA published a final rule to revise and strengthen the National
Ambient Air Quality Standards for ground-level ozone or “smog”. Once implemented by EPA and affected states, this rule could
impact changes to our existing air permits that we may pursue in the future.
Energy Regulations
Our businesses are subject to the provisions of federal, state and local energy laws applicable to the development, ownership
and operation of facilities located in the United States. The Federal Energy Regulatory Commission (“FERC”), among other things,
regulates the transmission and the wholesale sale of electricity in interstate commerce under the authority of the Federal Power
Act (“FPA”). In addition, under existing regulations, FERC determines whether an entity owning a generation facility is an Exempt
Wholesale Generator (“EWG”), as defined in the Public Utility Holding Company Act of 2005 (“PUHCA 2005”). FERC also
determines whether a generation facility meets the ownership and technical criteria of a Qualifying Facility (cogeneration facilities
and other facilities making use of non-fossil fuel power sources, such as waste, which meet certain size and other applicable
requirements, referred to as “QFs”), under the Public Utility Regulatory Policies Act of 1978, as amended (“PURPA”). Each of
our United States generating facilities has either been determined by FERC to qualify as a QF or is otherwise exempt, or the
subsidiary owning the facility has been determined to be an EWG.
Federal Power Act — The FPA gives FERC exclusive rate-making jurisdiction over the wholesale sale of electricity and
transmission of electricity in interstate commerce. Under the FPA, FERC, with certain exceptions, regulates the owners of facilities
used for the wholesale sale of electricity or transmission of electricity in interstate commerce as public utilities. The FPA also gives
FERC jurisdiction to review certain transactions and numerous other activities of public utilities. Most of our QFs are currently
exempt from FERC’s rate regulation under the FPA because (i) the QF is 20 MW or smaller; (ii) its sales are made pursuant to a
state regulatory authority’s implementation of PURPA; (iii) the QF is owned by a municipality or subdivision thereof; or (iv) its
sales are made pursuant to a contract executed on or before March 17, 2006. Our QFs that are not exempt, or that lose these
exemptions from rate regulation, are or would be required to obtain market-based rate authority from FERC or otherwise make
sales pursuant to rates on file with FERC.
Under the FPA, public utilities are required to obtain FERC’s acceptance of their rate schedules for the wholesale sale of electricity.
Our generating companies in the United States that are not otherwise exempt from FERC’s rate regulation have sales of electricity
pursuant to market-based rates or other rates authorized by FERC. With respect to our generating companies with market-based
16
rate authorization, FERC has the right to suspend, revoke or revise that authority and require our sales of energy to be made on a
cost-of-service basis if FERC subsequently determines that we can exercise market power, create barriers to entry, or engage in
abusive affiliate transactions. In addition, amongst other requirements, our market-based rate sellers are subject to certain market
behavior and market manipulation rules and, if any of our subsidiaries were deemed to have violated any one of those rules, such
subsidiary could be subject to potential disgorgement of profits associated with the violation and/or suspension or revocation of
market-based rate authority, as well as criminal and civil penalties. If the market-based rate authority for one (or more) of our
subsidiaries was revoked or it was not able to obtain market-based rate authority when necessary, and it was required to sell energy
on a cost-of-service basis, it could become subject to the full accounting, record keeping and reporting requirements of FERC.
Even where FERC has granted market-based rate authority, FERC may impose various market mitigation measures, including
price caps, bidding rules and operating restrictions where it determines that potential market power might exist and that the public
interest requires such potential market power to be mitigated. A loss of, or an inability to obtain, market-based rate authority could
have a material adverse impact on our business. We can offer no assurance that FERC will not revisit its policies at some future
time with the effect of limiting market-based rate authority, regulatory waivers, and blanket authorizations.
Under the Energy Policy Act of 2005 (“EPAct 2005”), FERC has approved the North American Electric Reliability Corporation,
or “NERC,” to address the development and enforcement of mandatory reliability standards for the wholesale electric power
system. Certain of our subsidiaries are responsible for complying with the standards in the regions in which we operate. NERC
also has the ability to assess financial penalties for non-compliance. In addition to complying with NERC requirements, certain
of our subsidiaries must comply with the requirements of the regional reliability council for the region in which that entity is
located. Compliance with these reliability standards may require significant additional costs, and noncompliance could subject us
to regulatory enforcement actions, fines, and increased compliance costs.
Public Utility Holding Company Act of 2005 — PUHCA 2005 provides FERC with certain authority over and access to books
and records of public utility holding companies not otherwise exempt by virtue of their ownership of EWGs, QFs, and Foreign
Utility Companies, as defined in PUHCA 2005. We are a public utility holding company, but because all of our generating facilities
have QF status, are otherwise exempt, or are owned through EWGs, we are exempt from the accounting, record retention, and
reporting requirements of PUHCA 2005.
Public Utility Regulatory Policies Act — PURPA was passed in 1978 in large part to promote increased energy efficiency and
development of independent power producers. PURPA created QFs to further both goals, and FERC is primarily charged with
administering PURPA as it applies to QFs. FERC has promulgated regulations that exempt QFs from compliance with certain
provisions of the FPA, PUHCA 2005, and certain state laws regulating the rates charged by, or the financial and organizational
activities of, electric utilities. The exemptions afforded by PURPA to QFs from regulation under the FPA and most aspects of state
electric utility regulation are of great importance to us and our competitors in the EfW and independent power industries.
PURPA also initially included a requirement that utilities must buy and sell power to QFs. Among other things, EPAct 2005
eliminated the obligation imposed on utilities to purchase power from QFs at an avoided cost rate where the QF has non-
discriminatory access to wholesale energy markets having certain characteristics, including nondiscriminatory transmission and
interconnection services. In addition, FERC has established a regulatory presumption that QFs with a capacity greater than 20 MW
have non-discriminatory access to wholesale energy markets in most geographic regions in which we operate. As a result, many
of our expansion, renewal and development projects must rely on competitive energy markets rather than PURPA’s historic avoided
cost rates in establishing and maintaining their viability.
Recent Policy Debate Regarding Climate Change and Renewable Energy
The public and political debate over GHG emissions (principally CO2 and methane) and their contribution to climate change
continues both internationally and domestically. Any resulting regulations could in the future affect our business. As is the case
with all combustion, our facilities emit CO2, however EfW is recognized as creating net reductions in GHG emissions and is
otherwise environmentally beneficial, because it:
• avoids CO2 emissions from fossil fuel power plants;
• avoids methane emissions from landfills; and
• avoids GHG emissions from mining and processing metal because it recovers and recycles metals from waste.
In addition, EfW facilities are a domestic source of energy, preserve land, and are typically located close to the source of the
waste and thus typically reduce fossil fuel consumption and air emissions associated with long-haul transportation of waste to
landfills.
For policy makers at the local level who make decisions on sustainable waste management alternatives, we believe that using
EfW instead of landfilling will result in significantly lower net GHG emissions, while also introducing more control over the cost
of waste management and supply of local electrical power. We are actively engaged in encouraging policy makers at state and
federal levels to enact legislation that supports EfW as a superior choice for communities to avoid both the environmental harm
caused by landfilling waste, and reduce local reliance on fossil fuels as a source of energy.
17
Many of these same policy considerations apply equally to other renewable technologies. The extent to which such potential
legislation and policy initiatives will affect our business will depend in part on whether EfW and our other renewable technologies
are included within the range of clean technologies that could benefit from such legislation.
In October 2015, EPA published two new rules regulating greenhouse gas emissions. The first rule, the Clean Power Plan,
regulates existing fossil fuel fired electric generating units. The second regulation sets greenhouse gas emissions standards for
new power plants. While it is not clear whether these rules will be implemented by the Trump administration, our facilities are not
regulated entities under either of these rules. Under the rules, states are required to develop plans for implementing the requirements;
however, in February 2016, the Supreme Court stayed implementation of the Clean Power Plan pending judicial review. Depending
on the outcome of the judicial review, decisions by the Trump administration and the specific details of the state plans,
implementation of the Clean Power Plan may create additional demand for our power and new MWC capacity may benefit from
certain credits; implementation scope and schedule is uncertain as a result of court challenges. We cannot predict at this time the
magnitude of the potential impact to our business of these rules, if any. We continue to closely follow developments in this area.
In addition to the new EPA rules, several initiatives have been developed at the state or regional levels, and some initiatives exist
in regions where we have projects. For example:
• The Regional Greenhouse Gas Initiative (“RGGI”) is an operating regional “cap-and-trade” program focused on fossil fuel-
fired electric generators which does not directly affect EfW facilities. We operate one fossil-fuel fired boiler at our Niagara
facility included in the RGGI program.
• California's Global Warming Solutions Act of 2006 ("AB 32"), seeks to reduce GHG emissions in California to 1990 levels
by 2020. AB 32 includes an economy-wide “cap-and-trade” program, which could impact our California EfW facilities, but
not our biomass facilities. Regulatory amendments in 2013 and 2014 excluded EfW facilities from the cap-and-trade program
through the end of 2015 and proposed amendments to the program would exclude EfW through the end of 2017. The future
treatment of EfW facilities under this program is uncertain at this time.
• The province of Ontario, Canada has developed a greenhouse gas cap and trade program under which EfW facilities, including
the Durham-York facility, do not incur a compliance obligation under the program through the end of 2020. We cannot predict
at this time the treatment of EfW facilities after 2020.
International Climate Change Policies
Certain international markets in which we compete have recently adopted regulatory or policy frameworks that encourage EfW
projects as important components of GHG emission reduction strategies, as well as waste management planning and practice.
The European Union
The European Union has adopted legislation which requires member states to reduce the utilization of and reliance upon landfill
disposal. The legislation emanating from the European Union is primarily in the form of “Directives,” which are binding on the
member states but must be transposed through national enabling legislation to implement their practical requirements, a process
which can result in significant variance between the legislative schemes introduced by member states. Certain Directives notably
affect the regulation of EfW facilities across the European Union. These include (1) Directive 2010/75/EU on industrial emissions
(the "Industrial Emissions Directive") which consolidated and replaced seven existing Directives, including Directive 96/61/EC
concerning integrated pollution prevention and control (known as the “IPPC Directive”) which governed emissions to air, land
and water from certain large industrial installations, and Directive 2000/76/EC concerning the incineration of waste (known as
the Waste Incineration Directive), which imposed limits on emissions to air or water from the incineration and co-incineration of
waste; (2) Directive 1999/31/EC concerning the landfill of waste (known as the “Landfill Directive”) which imposes operational
and technical controls on landfills and restricts, on a reducing scale, the amount of biodegradable municipal waste which member
states may dispose of to landfill; and (3) Directive 2008/98/EC on waste (known as the revised “Waste Framework Directive”)
which enshrines the waste hierarchy to divert waste from landfill and underpins a preference for efficient energy-from-waste for
the recovery of value from residual wastes.
In December 2015, the European Commission adopted the Circular Economy Package which sets targets for waste reduction,
further restrictions on landfilling, and increased recycling. To implement these targets and other measures, the Circular Economy
Package contains proposals to amend several of the Directives described above. We cannot predict at this time the final outcome
of this process.
18
China
China currently has a favorable regulatory environment for the development of EfW projects. The Ministry of Housing and
Urban-Rural Development of the People’s Republic of China has set a goal to increase the volume of waste disposed of by EfW
facilities from 1% (2005 estimate) to 30% by 2030. The Chinese central government has further called for an increase in EfW
output generation from 200 MW (2005 estimate) to three gigawatts by 2020. Energy-from-waste and municipal waste disposal
services are designated by the Chinese central government as “encouraged industries” for foreign investment. According to the
latest Catalogue of Industries for Guiding Foreign Investment, the EfW industry remains within the “encouraged industries” for
foreign investment. China also has various promotional laws and policies in place to promote EfW and municipal waste disposal
projects including exemptions and reductions of corporate income tax, value added tax refunds, prioritized commercial bank loans,
state subsidies for loan interest, and a guaranteed subsidized price at RMB 0.65/KWh for the sale of electricity, as long as certain
statutory conditions are met.
Employee Health and Welfare
We are subject to numerous regulations enacted to protect and promote worker health and welfare through the implementation
and enforcement of standards designed to prevent illness, injury and death in the workplace. The primary law relating to employee
health and welfare applicable to our business in the United States is the Occupational Safety and Health Act of 1970 ("OSHA"),
which establishes certain employer responsibilities including maintenance of a workplace free of recognized hazards likely to
cause illness, death or serious injury, compliance with standards promulgated by OSHA, and assorted reporting and record keeping
obligations, as well as disclosure and procedural requirements. Various OSHA standards apply to certain aspects of our operations.
Employee health and welfare laws governing our business in foreign jurisdictions include the Workplace Health and Safety
Directive and the Directive concerning ionizing radiation in the European Union, and various provisions of the Canada Labour
Code and related regulations in Canada.
As of December 31, 2016, we employed approximately 3,600 full-time employees worldwide, the majority of which were
employed in the United States. Of our employees in the United States and Canada, approximately 7% are represented by organized
labor. Currently, we are party to 10 collective bargaining agreements: three expire in 2017; one expires in 2018, two expire in
2019 and four are currently in negotiations. We consider relations with our employees to be good.
EMPLOYEES
19
EXECUTIVE OFFICERS OF THE REGISTRANT
A list of our executive officers and their business experience follows. Ages shown are as of February 1, 2017.
Name and Title
Age
Experience
Stephen J. Jones
President and Chief Executive Officer . .
55
Michael J. de Castro
Executive Vice President, Supply Chain .
54
Bradford J. Helgeson
Executive Vice President and Chief
Financial Officer . . . . . . . . . . . . . . . . .
40
President and Chief Executive Officer since 2015. Prior to joining Covanta, Mr. Jones
was employed by Air Products and Chemicals, Inc. (“Air Products”), a global supplier
of industrial gases, equipment and services from 1992 through 2014. Mr. Jones served
as Senior Vice President and General Manager, Tonnage Gases, Equipment and
Energy, from 2009 through 2014. Mr. Jones also served as Air Products’ China
President from 2011 through 2014 at Air Products’ office in Shanghai. He was also
a member of Air Products’ Corporate Executive Committee from 2007 through 2014.
Mr. Jones joined Air Products in 1992 as an attorney in the Law Group representing
various business areas and functions and in 2007 he was appointed Senior Vice
President, General Counsel and Secretary.
Executive Vice President, Supply Chain since 2015. Prior to joining Covanta, Mr.
de Castro was employed by Air Products beginning in 2006, serving in various
operational capacities including Director, Global Operations Americas. Mr. de Castro
left Air Products in 2010 to become Chief Executive Officer of Interstate Waste
Services ("IWS"). In 2013, he returned to Air Products, serving as Director, Global
Operations Strategic Development and most recently as Fulfillment Director in the
Performance Materials Division. Prior to his tenure at IWS and Air Products, Mr. de
Castro held a variety of positions at American Ref-Fuel Company for 16 years,
culminating with the role of Vice President, Operations.
Executive Vice President and Chief Financial Officer since 2013. Mr. Helgeson
served as Vice President and Treasurer from 2007 to 2013. Prior to joining Covanta
in 2007, Mr. Helgeson was Vice President, Finance and Treasurer at Waste Services,
Inc., a publicly-traded environmental services company with operations in the United
States and Canada, from 2004 to 2007. Prior to these roles, Mr. Helgeson held
positions in the investment banking departments at Lehman Brothers from 2000 to
2004 and at Donaldson, Lufkin & Jenrette from 1998 to 2000, where he worked on
a wide range of capital markets and merger and acquisition transactions for industrial
companies, with a particular focus in the environmental services sector.
Matthew R. Mulcahy
Executive Vice President and Head of
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Corporate Development . . . . . . . . . . .
Executive Vice President and Head of Corporate Development since 2017. Mr.
Mulcahy served as Senior Vice President and Head of Corporate Development for
Covanta from 2012 to 2016 and Senior Vice President of Business Development
from 2007 through 2011. From 2003 to 2007, Mr. Mulcahy served as Vice
President of Covanta Secure Service and TransRiver Marketing, a Covanta
subsidiary. From 2000 to 2003, Mr. Mulcahy was Covanta’s Vice President,
Project Implementation. Mr. Mulcahy joined Covanta in 1990.
Timothy J. Simpson
Executive Vice President, General
Counsel and Secretary . . . . . . . . . . . . . .
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Executive Vice President, General Counsel and Secretary since 2007. Mr. Simpson
served as Senior Vice President, General Counsel and Secretary from 2004 to 2007.
Previously, he served as Senior Vice President, General Counsel and Secretary of
Covanta Energy from March 2004 to October 2004. From 2001 to March 2004,
Mr. Simpson served as Vice President, Associate General Counsel and Assistant
Secretary. Mr. Simpson joined Covanta in 1992.
Paul E. Stauder
President, Covanta Environmental
Solutions . . . . . . . . . . . . . . . . . . . . . . .
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President of Covanta Environmental Solutions, a subsidiary of Covanta Energy,
since 2015. Mr. Stauder served as Senior Vice President of Business Management
for Covanta Energy from 2008 to 2014, with primary responsibility for all
commercial and client aspects of Covanta’s EFW facilities. Prior to that role, Mr.
Stauder served in a number of positions with Covanta Energy, including Regional
Vice President, overseeing EfW plants and independent power plants. Mr. Stauder
joined Covanta in 1997.
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Derek W. Veenhof
Executive Vice President, Sustainable
Solutions . . . . . . . . . . . . . . . . . . . . . . .
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Michael A. Wright
Senior Vice President and Chief Human
Resources Officer . . . . . . . . . . . . . . . .
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Item 1A. RISK FACTORS
Executive Vice President - Sustainable Solutions since 2013. Mr. Veenhof served
as Senior Vice President of Covanta 4Recovery L.P., from 2011 to 2013. From
2007 to 2011, Mr. Veenhof served as Vice President of TransRiver Marketing, a
Covanta Energy subsidiary, and managed contract efforts in recycling and
waste. From 2002 to 2006, Mr. Veenhof was Covanta Energy’s New York Metro
Area Manager responsible for waste contract negotiations, business operations and
business marketing and development for the Metro NY, NJ and Philadelphia
market areas.
Senior Vice President and Chief Human Resources Officer since 2009. Mr. Wright
served as President of The Wright Group, Inc., a boutique human capital
consulting firm from 2008 to 2009, prior to which Mr. Wright spent 25 years
serving in a variety of positions at the Altria family of companies (Kraft and Philip
Morris), including Vice President-Human Resources & Technology for Altria
Corporate Services, Inc. from 2006 to 2008.
The following risk factors could have a material adverse effect on our business, financial condition and results of operations.
Exposure to energy, waste disposal, recycled metal and commodity prices may affect our results of operations.
Some of the electricity and steam we sell and all of the recycled metals we sell, are subject to market price volatility. Changes
in the market prices for electricity and steam in particular can be affected by changes in natural gas prices, weather conditions and
other market variables, while recycled metals prices are affected by general economic conditions and global demand for
construction, goods and services. Similarly, the portion of waste processing capacity which is not under contract may be subject
to volatility, principally as a result of general economic activity and waste generation rates, as well as the availability of alternative
disposal sites and the cost to transport waste to alternative disposal. Volatility with respect to these all of these revenue categories
could adversely impact our businesses’ profitability and financial performance. We may not be successful in our efforts to mitigate
our exposure to price swings relating to these revenue streams.
We may experience volatility in the market prices and availability of commodities we purchase, such as reagents, chemicals
and fuel. Any price increase, delivery disruption or reduction in the availability of such supplies could affect our ability to operate
the facilities and impair our cash flow and profitability. We may not be successful in our efforts to mitigate our exposure to supply
and price swings for these commodities.
Weakness in the economy may have an adverse effect on our revenue, cash flow and our ability to grow our business.
Our business is directly affected by economic slowdowns and general reduction in demand for goods and services. A weak
economy generally results in reduced overall demand for waste disposal, recycled metal and energy production. Under such
conditions, the pricing we are able to charge for our waste management services, and for our energy and recycled metals, may
decline and/or experience increased volatility. In addition, many of our customers are municipalities and public authorities which
may be adversely affected in an economic downturn due to reduced tax revenue. Consequently, some of these entities could be
unable to pay amounts owed to us or renew contracts with us for similar volumes or at previous or increased rates.
Furthermore, lower prices for waste disposal and energy production, particularly in the absence of energy policies which
encourage renewable technologies such as EfW, may also make it more difficult for us to sell waste and energy services at prices
sufficient to allow us to grow our business through developing and building new projects. These factors could have a material
adverse effect on our profitability and cash flow.
Compliance with environmental laws, including changes to such laws, could adversely affect our results of operations.
Our waste and energy services businesses are subject to extensive environmental laws and regulations by federal, state, local
and foreign authorities, primarily relating to air, waste (including residual ash from combustion) and water. Costs relating to
compliance with these laws and regulations are material to our business. If our businesses fail to comply with these regulations,
our cash flow and profitability could be adversely affected, and we could be subject to civil or criminal liability, damages and
fines.
In addition, lawsuits or enforcement actions by federal, state, local and/or foreign regulatory agencies may materially increase
our costs. Stricter environmental regulation of air emissions, solid waste handling or combustion, residual ash handling and disposal,
and waste water discharge could materially affect our cash flow and profitability. Certain environmental laws make us potentially
liable on a joint and several basis for the remediation of contamination at or emanating from properties or facilities we currently
or formerly owned or operated or properties to which we arranged for the disposal of hazardous substances. Such liability is not
limited to the cleanup of contamination we actually caused. We cannot provide any assurance that we will not incur liability relating
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to the remediation of contamination, including contamination we did not cause. For additional information on environmental
regulation, see Item 1. Business — Regulation of Business.
Existing environmental laws and regulations have been and could be revised or reinterpreted, and future changes in environmental
laws and regulations are expected to occur. This may materially increase the amount we must invest to bring our facilities into
compliance, impose additional expense on our operations, limit our ability to operate at capacity, or at all, or otherwise impose
structural changes to markets which would adversely affect our competitive positioning in those markets.
Significant developments stemming from the recent U.S. presidential election could have a material adverse effect on us.
The Trump Administration has called for substantial change to fiscal and tax policies, regulatory oversight of businesses, and
greater restrictions on free trade including significant increases on tariffs on goods imported into the United States, including from
China. Proposals espoused by President Trump may result in changes to social, political, regulatory and economic conditions in
the United States or in laws and policies affecting the development and investment in countries where we currently conduct
business. In addition, these changes could result in negative sentiments towards the United States among non-U.S. customers and
among non-U.S. employees or prospective employees. We cannot predict the impact, if any, of these changes to our business.
However, it is possible that these changes could adversely affect our business. It is likely that some policies adopted by the new
administration will benefit us and others will negatively affect us. Until we know what changes are enacted, we will not know
whether in total we benefit from, or are negatively affected by, the changes.
Contracts to provide new services or services through new or different methods involves significant risks, which could have
an adverse effect on our cash flows and results of operations.
As we enter into contracts to provide new services or services through new or different methods, such as our waste transportation
and disposal contract with New York City or our acquired environmental services businesses, we may face additional operating
risks. These may include:
• performance by multiple contractors critical to our ability to perform under our new customer agreements;
• logistics associated with transportation of waste via barge, rail or other methods with which we have limited experience;
• reliance on joint venture parties or technology providers with whom we have limited experience; and
• risks associated with providing new materials handling or treatment services.
Operation of our businesses involves significant risks, which could have an adverse effect on our cash flows and results of
operations.
The operation of our businesses involves many risks, including:
• supply or transportation interruptions;
• the breakdown, failure or unplanned maintenance or repair of equipment or processes;
• difficulty or inability to find suitable replacement parts for equipment;
• the unavailability of sufficient quantities of waste or fuel;
• fluctuations in the heating value of the waste we use for fuel at our EfW facilities;
• failure or inadequate performance by subcontractors;
• disruption in the transmission of electricity generated;
• labor disputes and work stoppages;
• unforeseen engineering and environmental problems;
• unanticipated cost overruns;
• weather interferences and catastrophic events including fires, explosions, earthquakes, droughts, pandemics and acts of
terrorism; and
• the exercise of the power of eminent domain.
We cannot predict the impact of these risks on our business or operations. One or more of these risks, if they were to occur,
could prevent us from meeting our obligations under our operating contracts and have an adverse effect on our cash flows and
results of operations.
Our results of operations may be adversely affected by market conditions existing at the time our contracts expire.
For the EfW facilities that we own or lease, the contracts pursuant to which we provide waste services and sell energy output
expire on various dates between 2017 and 2038. Expiration of these contracts subjects us to greater market risk in entering into
new or replacement contracts at pricing levels that may not generate comparable revenue. We cannot assure you that we will be
able to enter into renewal or replacement contracts on favorable terms, or at all. We also expect that medium- and long-term
contracts for sales of energy may be less available than in the past, and so after expiration of existing contracts we expect to sell
our energy output either in short-term transactions or on a spot basis or pursuant to new contracts which may subject us to greater
market risk in maintaining and enhancing revenue. As a result, following the expiration of our existing long-term contracts, we
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may have more exposure on a relative basis to market risk, and therefore revenue fluctuations, in energy markets than in waste
markets.
Where we have leasehold interests, we cannot assure you that market conditions prevailing when such interests expire will allow
us to enter into an extension or that the terms available in the market at the time will be favorable to us.
Changes in public policies and legislative initiatives could materially affect our business and prospects.
There has been substantial debate recently in the United States and abroad in the context of environmental and energy policies
affecting climate change, the outcome of which could have a positive or negative influence on our existing business and our
prospects for growing our business. Congress has considered proposed legislation which is designed to increase the proportion of
the nation’s electricity that is generated from technologies considered “clean” or “renewable”, through mandatory generation
levels, tax incentives, and other means. Congress has also considered enacting legislation which sets declining limits on greenhouse
gas emissions, and requires generators to purchase rights to emit in excess of such limits, and allows such rights to be traded. For
those sources of greenhouse gas emissions that are unable to meet the required limitations, such legislation could impose substantial
financial burdens. The EPA has proposed rules which require states to develop plans to reduce carbon emissions from the energy
sector, through a variety of methods generally subject to state discretion. While it is unclear if the Trump administration will
proceed with any of these Federal initiatives, our business and future prospects could be adversely affected if renewable technologies
we use were either (i) disfavored in any new laws or regulations pursued by the Trump administration, or (ii) not included among
those technologies identified in any final laws or regulations as favoring renewable technologies, or not included in the state plans
to reduce carbon emissions, and therefore not entitled to the benefits of such laws, regulations, or plans.
Our revenue and cash flows may decline if we are not successful in retaining rights or such rights terminate to operate
facilities after our contracts expire.
We operate some facilities owned by municipal clients, under long-term contracts. If, when existing contracts expire, we are
unable to reach agreement with our municipal clients on the terms under which they would extend our operating contracts, this
may adversely affect our revenue, cash flow and profitability. We cannot assure that we will be able to enter into such contracts
or that the terms available in the market at the time will be favorable to us.
At a limited number of facilities we operate that are owned by municipal clients, our clients have certain rights to terminate
such contracts without cause. If any such terminations were to occur, this may adversely affect our revenue, cash flow and
profitability. We cannot assure that such contract terminations will not occur in the future.
Our revenue and cash flows may be subject to greater volatility if we extend or renew our contracts under tip fee structures
more often than service fee structures.
Our revenue and cash flows may be subject to greater volatility if we extend or renew our contracts under tip fee structures
more often than under service fee structures. Due to the nature of tip fee structures, if that were to occur, we may be exposed to
greater performance and price risk on the energy we sell.
Some of our EfW projects involve greater risk of exposure to performance levels which, if not satisfied, could result in
materially lower revenue.
At our EfW facilities where tip fee structures exist, we receive 100% of the energy revenue they generate. As a result, if we are
unable to operate these facilities at their historical performance levels for any reason, our revenue from energy sales could materially
decrease.
Our substantial indebtedness could adversely affect our business, financial condition and results of operations and our ability
to meet our payment obligations under our indebtedness.
The level of our consolidated indebtedness could have significant consequences on our future operations, including:
• making it difficult for us to meet our payment and other obligations under our outstanding indebtedness;
• limiting our ability to obtain additional financing to fund working capital, capital expenditures, new projects, acquisitions
and other general corporate purposes;
• subjecting us to the risk of increased sensitivity to interest rate increases on indebtedness under our credit facilities;
• limiting our flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the
industries in which we operate and the general economy; and
• placing us at a competitive disadvantage compared to our competitors that have less debt or are less leveraged.
Any of the above-listed factors could have an adverse effect on our business, financial condition and results of operations and
our ability to meet our payment obligations under our consolidated debt, and the price of our common stock.
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We cannot assure you that our cash flow from operations will be sufficient to service our indebtedness, which could have a
material adverse effect on our financial condition.
Our ability to meet our obligations under our indebtedness depends on our ability to receive dividends and distributions from
our subsidiaries in the future. This, in turn, is subject to many factors, some of which are beyond our control, including the following:
• the continued operation and maintenance of our facilities, consistent with historical performance levels;
• maintenance or enhancement of revenue from renewals or replacement of existing contracts and from new contracts to expand
existing facilities or operate additional facilities;
• market conditions affecting waste disposal and energy pricing, as well as competition from other companies for contract
renewals, expansions and additional contracts, particularly after our existing contracts expire;
• the continued availability of the benefits of our net operating loss carryforwards; and
• general economic, financial, competitive, legislative, regulatory and other factors.
We cannot assure you that our business will generate cash flow from operations, or that future borrowings will be available to
us under our credit facilities or otherwise, in an amount sufficient to enable us to meet our payment obligations under our outstanding
indebtedness and to fund other liquidity needs. If we are not able to generate sufficient cash flow to service our debt obligations,
we may need to refinance or restructure our debt, sell assets, reduce or delay capital investments, or seek to raise additional capital.
If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under our
outstanding indebtedness, which could have a material and adverse effect on our financial condition.
Our credit facilities and the indentures for our other corporate debt contain covenant restrictions that may limit our ability
to operate our business.
Our credit facilities and the indentures for our other corporate debt contain operating and financial restrictions and covenants
that impose operating and financial restrictions on us and require us to meet certain financial tests. Complying with these covenant
restrictions may limit our ability to engage in certain transactions or activities, including incurring additional indebtedness, making
certain investments, and distributions, and selling certain assets.
As a result of these covenant restrictions, our ability to respond to changes in business and economic conditions and to obtain
additional financing, if needed, may be restricted, and we may be prevented from engaging in transactions that might otherwise
be beneficial to us.
Our ability to comply with these covenants is dependent on our future performance, which will be subject to many factors, some
of which are beyond our control, including prevailing economic conditions. In addition, the failure to comply with these covenants
may result in a default under our credit facilities and other corporate debt. Upon the occurrence of such an event of default, the
lenders under our credit facilities could elect to declare all amounts outstanding under such credit facilities, together with accrued
interest, to be immediately due and payable. If the lenders accelerate the payment of the indebtedness under our credit facilities,
we cannot assure you that the assets securing such indebtedness would be sufficient to repay in full that indebtedness and our
other indebtedness, which could have a material and adverse effect on our financial condition.
Development and construction of new projects and expansions may not commence as anticipated, or at all.
Development and construction involves many risks including:
• difficulties in identifying, obtaining and permitting suitable sites for new projects;
• the inaccuracy of our assumptions with respect to the cost of and schedule for completing construction;
• difficulty, delays or inability to obtain financing for a project on acceptable terms;
• delays in deliveries of, or increases in the prices of, equipment sourced from other countries;
• the unavailability of sufficient quantities of waste or other fuels for startup;
• permitting and other regulatory issues, license revocation and changes in legal requirements;
• labor disputes and work stoppages;
• unforeseen engineering and environmental problems;
• interruption of existing operations;
• unanticipated cost overruns or delays; and
• weather interferences and catastrophic events including fires, explosions, earthquakes, droughts, pandemics and acts of
terrorism.
In addition, new facilities have no operating history and may employ recently developed technology and equipment. A new
facility may be unable to fund principal and interest payments under its debt service obligations or may operate at a loss. In certain
situations, if a facility fails to achieve commercial operation, at certain levels or at all, termination rights in the agreements governing
the facilities financing may be triggered, rendering all of the facility’s debt immediately due and payable. As a result, the facility
may be rendered insolvent and we may lose our interest in the facility.
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Construction activities may cost more and take longer than we estimate.
The design and construction of new projects or expansions requires us to contract for services from engineering and construction
firms, and make substantial purchases of equipment such as boilers, turbine generators and other components that require large
quantities of steel to fabricate. These are complex projects that include many factors and conditions which may adversely affect
our ability to successfully compete for new projects, or construct and complete such projects on time and within budget.
Changes in climate conditions could materially affect our business and prospects.
Significant changes in weather patterns and volatility could have a negative influence on our existing business and our prospects
for growing our business. Such changes may cause episodic events (such as floods or storms) that are difficult to predict or prepare
for, or longer-term trends (such as droughts or sea-level rise). These or other meteorological changes could lead to increased
operating costs, capital expense, disruptions in facility operations or supply chains, changes in waste generation and interruptions
in waste deliveries, limited availability of water for plant cooling operations, and changes in energy pricing, among other effects.
Dislocations in credit and capital markets and increased capital constraints on banks may make it more difficult for us to
borrow money or raise capital needed to finance the construction of new projects, expand existing projects, acquire certain
businesses and refinance our existing debt.
Our business is capital intensive, and we seek to finance a significant portion of our existing assets, as well as our investments
in new assets, with debt capital to the extent that we believe such financing is prudent and accretive to stockholder value.
As of December 31, 2016, we had approximately $2.6 billion in long-term debt and project debt. Prolonged instability or
deterioration in the bank credit and/or debt and equity capital markets may adversely affect our ability to obtain refinancing of
our existing debt on favorable terms, or at all. Such circumstances could adversely affect our business, financial condition, and/
or the share price of our common stock.
We intend to grow our business through the development of new projects, the expansion and/or enhancement of existing facilities,
and opportunistic acquisitions of projects or businesses. Such investments may be large enough to require capital in excess of our
cash on hand and availability under our existing credit facilities. Prolonged instability or deterioration in the credit markets may
adversely impact our access to capital on terms that we find acceptable, thereby impacting our ability to execute our strategy to
grow our business.
Our reputation could be adversely affected if we are unable to operate our businesses in compliance with laws, or if our
efforts to grow our business results in adverse publicity.
If we encounter regulatory compliance issues in the course of operating our businesses, we may experience adverse publicity,
which may intensify if such non-compliance results in civil or criminal liability. This adverse publicity may harm our reputation,
and result in difficulties in attracting new customers, or retaining existing customers.
With respect to our efforts to grow and maintain our business globally, we sometimes experience opposition from advocacy
groups or others intended to halt our development or on-going business. Such opposition is often intended to discourage third
parties from doing business with us and may be based on misleading, inaccurate, incomplete or inflammatory assertions. Our
reputation may be adversely affected as a result of adverse publicity resulting from such opposition. Such damage to our reputation
could adversely affect our ability to grow and maintain our business.
Changes in technology may have a material adverse effect on our profitability.
Our company and others have recognized the value of the traditional waste stream as a potential resource. Research and
development activities are ongoing to provide alternative and more efficient technologies to manage waste, produce or extract by-
products from waste, or to produce power. We and many other companies are pursuing these technologies, and capital is being
invested to find new approaches to waste management, waste treatment, and renewable power generation. It is possible that this
deployment of capital may lead to advances in these or other technologies which will reduce the cost of waste management or
power production to a level below our costs and/or provide new or alternative methods of waste management or energy generation
that become more accepted than those we currently utilize. Unless we are able to participate in these advances, any of these changes
could have a material adverse effect on our revenue, profitability and the value of our existing facilities.
Our ability to optimize our operations depends in part on our ability to compete for and obtain fuel for our facilities, and
our failure to do so may adversely affect our financial results.
Our EfW facilities depend on solid waste for fuel, which provides a source of revenue. For some of our EfW facilities, the
availability of solid waste to us, as well as the tipping fee that we charge to attract solid waste to our facilities, depends upon
competition from a number of sources such as other EfW facilities, landfills and transfer stations competing for waste in the market
area. In addition, we may need to obtain waste on a competitive basis as our long-term contracts expire at our owned facilities.
There has been consolidation, and there may be further consolidation, in the solid waste industry that would reduce the number
of solid waste collectors or haulers that are competing for disposal facilities or enable such collectors or haulers to use wholesale
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purchasing to negotiate favorable below-market rates. The consolidation in the solid waste industry has resulted in companies
with vertically integrated collection activities and disposal facilities. Such consolidation may result in economies of scale for those
companies, as well as the use of disposal capacity at facilities owned by such companies or by affiliated companies. Such activities
can affect both the availability of waste to us for processing at some of our EfW facilities and market pricing, which could materially
and adversely affect our results of operations.
Exposure to foreign currency fluctuations may affect our results from operations or construction costs of facilities we develop
in international markets.
We have sought to participate in projects where the host country has allowed the convertibility of its currency into U.S. dollars
and repatriation of earnings, capital and profits subject to compliance with local regulatory requirements. As and if we grow our
business in other countries and enter new international markets, we expect to invest substantial amounts in foreign currencies to
pay for the construction costs of facilities we develop, or for the cost to acquire existing businesses or assets. Currency volatility
in those markets, as well as the effectiveness of any currency hedging strategies we may implement, may impact the amount we
are required to invest in new projects, as well as our reported results.
Our growth could strain our resources and cause our business to suffer.
We have made and may continue to plan and execute acquisitions and take other actions to grow our base business. Acquisitions
present significant challenges and risks relating to the integration of the business into the company. If we make acquisitions, it
could place a strain on our management systems, infrastructure and resources, as well as present new or different risks to our
business. We expect that we will need to continually evaluate and maintain our financial and managerial controls, reporting systems
and procedures. We will also need to expand, train and manage our workforce worldwide. We can provide no assurances that the
company will manage acquisitions successfully.
Our ability to successfully manage organizational, process and cost-efficiency initiatives could strain our resources and
affect our profitability.
We have made and may continue to undertake organizational, process and cost efficiency changes intended to improve our
business. These changes, which may include implementation of new systems and processes, staff adjustments and reassignments
of responsibilities, are important to our business success. Failure or delay in implementing these actions, or ineffective
implementation could strain our resources and systems, resulting in disruption to our business and/or adversely affecting our
results.
Our businesses generate their revenue primarily under long-term contracts and must avoid defaults under those contracts
in order to service their debt and avoid material liability to contract counterparties.
We must satisfy performance and other obligations under contracts governing EfW facilities. These contracts typically require
us to meet certain performance criteria relating to amounts of waste processed, energy generation rates per ton of waste processed,
residue quantity and environmental standards. Our failure to satisfy these criteria may subject us to termination of operating
contracts. If such a termination were to occur, we would lose the cash flow related to the projects and incur material termination
damage liability, which may be guaranteed by us. In circumstances where the contract has been terminated due to our default, we
may not have sufficient sources of cash to pay such damages. We cannot assure you that we will be able to continue to perform
our respective obligations under such contracts in order to avoid such contract terminations, or damages related to any such contract
termination, or that if we could not avoid such terminations that we would have the cash resources to pay amounts that may then
become due.
We have provided guarantees and financial support in connection with our projects.
We are obligated to guarantee or provide financial support for our projects in one or more of the following forms:
• support agreements in connection with construction, service or operating agreement-related obligations;
• direct guarantees of certain debt relating to our facilities;
• contingent obligations to pay lease payment installments in connection with certain of our facilities;
• agreements to arrange financing for projects under development;
• contingent credit support for damages arising from performance failures;
• environmental indemnities; and
• contingent capital and credit support to finance costs, in most cases in connection with a corresponding increase in service
fees, relating to uncontrollable circumstances.
Many of these contingent obligations cannot readily be quantified, but, if we were required to provide this support, it could
materially and adversely affect our cash flow, results of operations and financial condition.
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Our businesses depend on performance by third parties under contractual arrangements.
Our waste and energy services businesses depend on a limited number of third parties to, among other things, purchase the
electric and steam energy produced by our facilities, supply and deliver the waste and other goods and services necessary for the
operation of our energy facilities, and purchase the metals we recover. The viability of our facilities depends significantly upon
the performance by third parties in accordance with long-term and short-term contracts, and such performance depends on factors
which may be beyond our control. If those third parties do not perform their obligations, or are excused from performing their
obligations because of nonperformance by our waste and energy services businesses or other parties to the contracts, or due to
force majeure events or changes in laws or regulations, our businesses may not be able to secure alternate arrangements on
substantially the same terms, or at all. In addition, the bankruptcy or financial stability of third parties with whom we do business
could result in nonpayment or nonperformance of that party’s obligations to us. The economic slowdown and disruptions in credit
markets have strained resources of these third parties, and could make it difficult for them to honor their obligations to us.
We are subject to counterparty and market risk with respect to transactions with financial and other institutions.
Following the expiration of our initial contracts to sell electricity from our projects, we expect to have on a relative basis more
exposure to market risk, and therefore revenue fluctuations, in energy markets than in waste markets. Consequently, we may enter
into futures, forward contracts, swaps or options with financial institutions to hedge our exposure to market risk in energy markets.
We can provide no assurances as to the financial stability or viability of these financial and other institutions.
Concentration of suppliers and customers may expose us to heightened financial exposure.
Our waste and energy services businesses often rely on single suppliers and single customers at our facilities, exposing such
facilities to financial risks if any supplier or customer should fail to perform its obligations.
For example, our businesses often rely on a single supplier to provide waste, fuel, water and other services required to operate
a facility and on a single customer or a few customers to purchase all or a significant portion of a facility’s output. The financial
performance of these facilities depends on such customers and suppliers continuing to perform their obligations under their long-
term agreements. A facility’s financial results could be materially and adversely affected if any one customer or supplier fails to
fulfill its contractual obligations and we are unable to find other customers or suppliers to produce the same level of profitability.
We cannot assure you that such performance failures by third parties will not occur, or that if they do occur, such failures will not
adversely affect the cash flows or profitability of our businesses.
In addition, we rely on the municipal clients as a source not only of waste for fuel, but also of revenue from the fees for waste
services we provide. Because our contracts with municipal clients are generally long-term, we may be adversely affected if the
credit quality of one or more of our municipal clients were to decline materially.
Our waste operations are concentrated in one region and expose us to regional economic or market declines.
The majority of our waste disposal facilities are located in the northeastern United States, primarily along the Washington, D.C.
to Boston, Massachusetts corridor. Adverse economic developments in this region could affect regional waste generation rates
and demand for waste management services provided by us. Adverse market developments caused by additional waste processing
capacity in this region could adversely affect waste disposal pricing. Either of these developments could have a material adverse
effect on our profitability and cash generation.
Exposure to international economic and political factors may materially and adversely affect our international businesses.
Our international operations expose us to political, legal, tax, currency, inflation, convertibility and repatriation risks, as well
as potential constraints on the development and operation of potential business, any of which can limit the benefits to us of an
international project.
The financing, development and operation of projects outside the United States can entail significant political and financial
risks, which vary by country, including:
• changes in law or regulations;
• changes in electricity pricing;
• changes in foreign tax laws and regulations;
• changes in United States federal, state and local laws, including tax laws, related to foreign operations;
• compliance with United States federal, state and local foreign corrupt practices laws;
• changes in government policies or personnel;
• changes in general economic conditions affecting each country, including conditions in financial markets;
• changes in labor relations in operations outside the United States;
• political, economic or military instability and civil unrest;
• expropriation and confiscation of assets and facilities; and
• credit quality of entities that purchase our power.
27
The legal and financial environment in foreign countries in which we currently own assets or projects could also make it more
difficult for us to enforce our rights under agreements relating to such projects.
Any or all of the risks identified above with respect to our international projects could adversely affect our profitability and cash
generation. As a result, these risks may have a material adverse effect on our business, consolidated financial condition and results
of operations.
Our reputation could be adversely affected if our businesses, or third parties with whom we have a relationship, were to
fail to comply with United States or foreign anti-corruption laws or regulations.
Some of our projects and new business may be conducted in countries where corruption has historically penetrated the economy
to a greater extent than in the United States. It is our policy to comply, and to require our local partners and those with whom we
do business to comply, with all applicable anti-bribery laws, such as the U.S. Foreign Corrupt Practices Act, and with applicable
local laws of the foreign countries in which we operate. Our reputation may be adversely affected if we were reported to be
associated with corrupt practices or if we or our local partners failed to comply with such laws. Such damage to our reputation
could adversely affect our ability to grow our business.
Energy regulation could adversely affect our revenue and costs of operations.
Our waste and energy services businesses are subject to extensive energy regulations by federal, state and foreign authorities.
We cannot predict whether the federal, state or foreign governments will modify or adopt new legislation or regulations relating
to the solid waste or energy industries. The economics, including the costs, of operating our facilities may be adversely affected
by any changes in these regulations or in their interpretation or implementation or any future inability to comply with existing or
future regulations or requirements.
If our businesses lose existing exemptions under the Federal Power Act, the economics and operations of our energy projects
could be adversely affected, including as a result of rate regulation by the Federal Energy Regulatory Commission with respect
to our output of electricity, which could result in lower prices for sales of electricity and increased compliance costs. In addition,
depending on the terms of the project’s power purchase agreement, a loss of our exemptions could allow the power purchaser to
cease taking and paying for electricity under existing contracts. Such results could cause the loss of some or all contract revenue
or otherwise impair the value of a project and could trigger defaults under provisions of the applicable project contracts and
financing agreements. Defaults under such financing agreements could render the underlying debt immediately due and payable.
Under such circumstances, we cannot assure you that revenue received, the costs incurred, or both, in connection with the project
could be recovered through sales to other purchasers.
Failure to obtain regulatory approvals could adversely affect our operations.
Our waste and energy services businesses are continually in the process of obtaining or renewing federal, state, local and foreign
approvals required to operate our facilities. While we believe our businesses currently have all necessary operating approvals, we
may not always be able to obtain all required regulatory approvals, and we may not be able to obtain any necessary modifications
to existing regulatory approvals or maintain all required regulatory approvals. If there is a delay in obtaining any required regulatory
approvals or if we fail to obtain and comply with any required regulatory approvals, the operation of our facilities or the sale of
electricity to third parties could be prevented, made subject to additional regulation or subject our businesses to additional costs
or a decrease in revenue.
The energy industry is becoming increasingly competitive, and we might not successfully respond to these changes.
We may not be able to respond in a timely or effective manner to the changes resulting in increased competition in the energy
industry in global markets. These changes may include deregulation of the electric utility industry in some markets, privatization
of the electric utility industry in other markets and increasing competition in all markets. To the extent competitive pressures
increase and the pricing and sale of electricity assumes more characteristics of a commodity business, the economics of our business
may be subject to greater volatility and we might not successfully respond to these changes.
Future impairment charges could have a material adverse impact on our financial condition and results of operations.
In accordance with accounting guidance, we evaluate long-lived assets for impairment whenever events or changes in
circumstances, such as significant adverse changes in regulation, business climate or market conditions, could potentially indicate
the carrying amount may not be recoverable. Significant reductions in our expected revenue or cash flows for an extended period
of time resulting from such events could result in future asset impairment charges, which could have a material adverse impact
on our financial condition and results of operations.
28
Security breaches and other disruptions to our information technology infrastructure could interfere with our operations,
compromise information belonging to us and our customers, suppliers or employees, and expose us to liability that could
adversely impact our business and reputation.
In the ordinary course of business, we rely on information technology networks and systems to process, transmit and store
electronic information, and to manage or support a variety of business processes and activities. Despite security measures and
business continuity plans, interruptions and breaches of computer and communications systems, including computer viruses,
"hacking" and "cyber-attacks," power outages, telecommunication or utility facilities, system failures, natural disasters or other
catastrophic events that could impair our ability to conduct business and communicate internally and with our customers, or result
in the theft of trade secrets or other misappropriation of assets, or otherwise compromise privacy of sensitive information belonging
to us, our customers or other business partners. Any such events could result in legal claims or proceedings, liability or penalties
under privacy laws, disruption in revenue from operations, and damage to our reputation, which could adversely affect our business.
We cannot be certain that our NOLs will continue to be available to offset our federal tax liability.
As of December 31, 2016, we had $288 million of net operating loss carryforwards (“NOLs”). NOLs offset our consolidated
taxable income and will expire in various amounts, if not used, between 2028 and 2033 The NOLs are also used to offset income
from certain grantor trusts that were established as part of the reorganization in 1990 of certain of our subsidiaries engaged in the
insurance business and are administered by state regulatory agencies. As the administration of these grantor trusts concludes,
taxable income could result, utilizing a portion of our NOLs and accelerating the date on which we may be otherwise obligated
to pay incremental cash taxes.
Our insurance and contractual protections may not always cover lost revenue, increased expense or contractual liabilities.
Although our businesses maintain insurance, obtain warranties from vendors, require contractors to meet certain performance
levels and, in some cases, pass risks we cannot control to the service recipient or output purchaser, the proceeds of such insurance,
warranties, performance guarantees or risk sharing arrangements may not be adequate to cover lost revenue, increased expense
or contractual liabilities.
We depend on our senior management and key personnel and we may have difficulty attracting and retaining qualified
professionals.
Our future operating results depend to a large extent upon the continued contributions of key senior managers and personnel.
In addition, we are dependent on our ability to attract, train, retain and motivate highly skilled employees. However, there is
significant competition for employees with the requisite level of experience and qualifications. If we cannot attract, train, retain
and motivate qualified personnel, we may be unable to compete effectively and our growth may be limited, which could have a
material adverse effect on our business, results of operations, financial condition and prospects and our ability to fulfill our debt
obligations.
Our controls and procedures may not prevent or detect all errors or acts of fraud.
Any disclosure controls and procedures or internal controls and procedures, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control
system must consider the benefits of controls relative to their costs. Inherent limitations within a control system include the realities
that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by an unauthorized
override of the controls. While the design of any system of controls is to provide reasonable assurance of the effectiveness of
disclosure controls, such design is also based in part upon certain assumptions about the likelihood of future events, and such
assumptions, while reasonable, may not take into account all potential future conditions. Accordingly, because of the inherent
limitations in a cost effective control system, misstatements due to error or fraud may occur and may not be prevented or detected.
Failure to maintain an effective system of internal controls over financial reporting may have an adverse effect on our stock
price.
We have in the past discovered, and may potentially in the future discover, areas of internal control over financial reporting that
may require improvement. If we are unable to assert that our internal control over financial reporting is effective now or in any
future period, or if our independent auditors are unable to express an opinion on the effectiveness of our internal controls, we
could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on
our stock price.
Provisions of our certificate of incorporation, our credit facilities and our other corporate debt could discourage an acquisition
of us by a third party.
Certain provisions of our credit facilities and our other corporate debt could make it more difficult or more expensive for a third
party to acquire us. Upon the occurrence of certain transactions constituting a fundamental change, holders of our credit facilities
29
and our other corporate debt will have the right to require Covanta Holding or Covanta Energy, as the case may be, to repurchase
their corporate debt or repay the facilities, as applicable. In addition, provisions of our certificate of incorporation and bylaws,
each as amended, could make it more difficult for a third party to acquire control of us. For example, our certificate of incorporation
authorizes our board of directors to issue preferred stock without requiring any stockholder approval, and preferred stock could
be issued as a defensive measure in response to a takeover proposal. All these provisions could make it more difficult for a third
party to acquire us or discourage a third party from acquiring us even if an acquisition might be in the best interest of our stockholders.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
We lease approximately 250,000 square feet of office space throughout North America, including 104,000 square feet for our
headquarters in Morristown, New Jersey. In addition, we own 83 acres of undeveloped land in California. As of December 31,
2016, we owned, had equity investments in and/or operated 83 facilities in the North America segment consisting of 41 EfW
operations, 4 landfills (primarily for ash disposal), 17 transfer stations, 15 environmental services facilities, 2 wood waste (biomass)
energy projects, 2 water (hydroelectric) energy projects, one landfill gas project and one regional metals recycling facility. Principal
projects are described above under Item 1. Business — North America Segment. Projects in the North America segment that we
own or lease are conducted at properties, which we also own or lease, aggregating approximately 1,712 acres, of which 1,393 acres
are owned and 319 acres are leased.
We operate projects outside of our North America segment and have offices located in Dublin, Ireland and Shanghai, China,
where we lease office space of approximately 6,180 square feet. As of December 31, 2016, we are the part owner/operator of two
international projects with businesses conducted at properties that are either leased or have land rights aggregating to 12 acres.
Principal projects are described above under Item 1. Business — Other Projects.
Item 3. LEGAL PROCEEDINGS
For information regarding legal proceedings, see Item 8. Financial Statements And Supplementary Data — Note 18.
Commitments and Contingencies, which information is incorporated herein by reference.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
30
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the New York Stock Exchange under the symbol “CVA”. On February 17, 2017, there were
approximately 746 holders of record of our common stock. On February 17, 2017, the closing price of our common stock on the
New York Stock Exchange was $16.00 per share. The following table sets forth the high and low stock prices of our common
stock for the last two years.
First Quarter . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . .
$
$
$
$
High
17.75
17.22
17.16
15.95
$
$
$
$
2016
Low
Dividend
Declared
High
2015
Low
Dividend
Declared
12.48
15.52
14.43
13.45
$
$
$
$
0.25
0.25
0.25
0.25
$
$
$
$
23.04
22.85
21.80
18.36
$
$
$
$
19.25
19.99
17.08
13.69
$
$
$
$
0.25
0.25
0.25
0.25
Under current financing arrangements, there are restrictions on the ability of our subsidiaries to transfer funds to us in the form
of cash dividends, loans or advances that could limit the future payment of dividends on our common stock. However, given our
strong cash generation, we anticipate returning additional capital to our shareholders. See Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources and Item 8. Financial Statements
and Supplementary Data — Note 5. Equity and Earnings Per Share ("EPS") for additional information on the restrictions under
our financing arrangements and our dividend payments. See Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters regarding securities authorized for issuance under equity compensation plans.
Share Repurchases
Under our share repurchase program, common stock repurchases may be made in the open market, in privately negotiated
transactions from time to time, or by other available methods, at management’s discretion 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. As of December 31, 2016, the amount remaining under our currently authorized share
repurchase program was $66 million.
31
Performance Measurement Comparison
The following performance graph sets forth a comparison of the yearly percentage change in the Company’s cumulative total
stockholder return on common stock with the Standard and Poor’s Midcap 400 Index*, the Dow Jones US Conventional Electricity
Index**, and the Dow Jones US Waste & Disposal Services Index**. The foregoing cumulative total returns are computed assuming
(a) an initial investment of $100, and (b) the reinvestment of dividends at the frequency which dividends were paid during the
applicable years. The graph above reflects comparative information for the five fiscal years beginning with the close of trading
on December 31, 2011 and ending December 31, 2016.
The stockholder return reflected above is not necessarily indicative of future performance.
* The Standard and Poor’s Midcap 400 Index is a capitalization-weighted index designed to measure performance of the broad domestic economy through
changes in the aggregate market value of the component stocks representing all major industries. Copyright 2017 Standard and Poor’s, Inc. All Rights
Reserved. Used with permission.
** The Dow Jones US Waste & Disposal Services Index and the Dow Jones US Conventional Electricity Index are maintained by Dow Jones & Company, Inc.
As described by Dow Jones, the Dow Jones US Waste & Services Index consists of providers of pollution control and environmental services for the
management, recovery and disposal of solid and hazardous waste materials, such as landfills and recycling centers. The Dow Jones US Conventional
Electricity Index consists of companies generating and distributing electricity through the burning of fossil fuels such as coal, petroleum and natural gas, and
through nuclear energy. Copyright 2017 Dow Jones & Company. All Rights Reserved. Used with permission.
32
Item 6. SELECTED FINANCIAL DATA
The selected financial information presented below should be read in conjunction with Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data.
2016
2015
For the Years Ended December 31,
2014
(In millions, except per share amounts)
2013
1,699
1,590
109
$
$
$
(4) $
1,645
1,536
109
69
$
$
$
$
1,682
1,528
154
$
$
$
(1) $
Statements of Operations Data:
Operating revenue . . . . . . . . . . . . . . . . . . . . . .
Operating expense . . . . . . . . . . . . . . . . . . . . . .
Operating income (1) . . . . . . . . . . . . . . . . . . . . .
(Loss) income from continuing operations . . .
Loss from discontinued operations, net of
taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . .
Net (loss) income attributable to Covanta
Holding Corporation stockholders:
Continuing operations . . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . . .
Basic (Loss) Earnings per share attributable to
Covanta Holding Corporation:
Continuing operations . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . .
Covanta Holding Corporation . . . . . . . . . .
Diluted (Loss) Earnings per share attributable
to Covanta Holding Corporation:
Continuing operations . . . . . . . . . . . . . . . .
Discontinued operations . . . . . . . . . . . . . .
Covanta Holding Corporation . . . . . . . . . .
Cash dividend declared per share. . . . . . . . . . .
$
$
$
$
$
$
$
$
$
$
$
$
$
— $
(4) $
(4) $
— $
(0.03) $
—
(0.03) $
(0.03) $
—
(0.03) $
1.00
$
Weighted average common shares
outstanding:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
129
129
— $
(1) $
(2) $
— $
(0.01) $
—
(0.01) $
(0.01) $
—
(0.01) $
— $
$
69
$
68
— $
$
$
$
$
$
0.52
—
0.52
0.51
—
0.51
1.00
132
133
2012
1,643
1,339
304
138
(20)
118
136
(20)
1.03
(0.15)
0.88
1.02
(0.15)
0.87
1,630
1,395
235
42
$
$
$
$
(52) $
(10) $
$
43
(52) $
$
0.33
(0.40)
(0.07) $
$
0.33
(0.40)
(0.07) $
0.86
$
0.66
$
0.60
130
130
129
130
132
133
Balance Sheet Data: (1)
Cash and cash equivalents . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . .
Total assets. . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt (incl. current portion). . . .
Project debt (incl. current portion) . . . . . .
Total liabilities. . . . . . . . . . . . . . . . . . . . . .
Total Covanta Holding Corporation
stockholders' equity . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
2016
2015
As of December 31,
2014
(In millions)
2013
2012
84
3,024
4,284
2,252
383
3,815
469
$
$
$
$
$
$
$
94
2,690
4,234
2,263
198
3,594
638
$
$
$
$
$
$
$
84
2,607
4,178
1,948
222
3,394
782
$
$
$
$
$
$
$
190
2,579
4,357
2,062
212
3,451
902
$
$
$
$
$
$
$
233
2,509
4,501
1,988
293
3,452
1,042
(1) As revised for the years ended December 31, 2015 and prior. See Item 8. Financial Statements and Supplementary Data - Note 1. Organization
and Summary of Significant Accounting Policies - Reclassifications and Accounting Pronouncements Recently Adopted.
33
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The terms “we,” “our,” “ours,” “us,” “Covanta” and “Company” refer to Covanta Holding Corporation and its subsidiaries; the
term “Covanta Energy” refers to our subsidiary Covanta Energy, LLC and its subsidiaries.
OVERVIEW
Covanta is one of the world’s largest owners and operators of infrastructure for the conversion of waste to energy (known as
“energy-from-waste” or “EfW”), as well as other waste disposal and renewable energy production businesses. Energy-from-waste
serves two key markets as both a sustainable waste management solution that is environmentally superior to landfilling and as a
source of clean energy that reduces overall greenhouse gas ("GHG") emissions. Energy-from-waste is also 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. For a discussion of our facilities, the energy-from-waste
process and the environmental benefits of energy-from-waste, see Item 1. Business.
We have one reportable segment, North America, which is comprised of waste and energy services operations located primarily
in the United States and Canada. Additional information about our reportable segment is contained in Item. 1. Business and Item 8.
Financial Statements And Supplementary Data — Note 6. Financial Information by Business Segments.
For a discussion of key strategies and the execution thereof in 2016, see Item 1. Business — Strategy and Execution on Strategy.
General Business Conditions
See Item 1. Business — Markets, Competition and Business Conditions for a discussion of factors affecting business conditions
and financial results.
RESULTS OF OPERATIONS
The following general discussions should be read in conjunction with the consolidated financial statements, the notes to the
consolidated financial statements and other financial information appearing and referred to elsewhere in this report. Additional
detail relating to changes in operating revenue and operating expense and the quantification of specific factors affecting or causing
such changes, is provided in the segment discussion below.
The comparability of the information provided below with respect to our revenue, expense and certain other items for periods
during each of the years presented was affected by several factors. As outlined in Item 8. Financial Statements And Supplementary
Data — Note 1. Organization and Summary of Significant Accounting Policies and Note 3. New Business and Asset Management,
our business development initiatives and acquisitions resulted in various transactions, which are reflected in comparative revenue
and expense. These factors must be taken into account in developing meaningful comparisons between the periods compared
below.
The Results of Operations discussion below compares our revenue, expense and certain other items during each of the years
presented for continuing operations.
The following terms used within the Results of Operations discussion are defined as follows:
• “Organic growth”: reflects the performance of the business on a comparable period-over-period basis, excluding the impacts
of transactions and contract transitions.
• “Transactions”: includes the impacts of acquisitions, divestitures, and the addition or loss of operating contracts.
• “Contract transitions”: includes the impact of the expiration of: (a) long-term major waste and service contracts, most typically
representing the transition to a new contract structure, and (b) long-term energy contracts.
34
RESULTS OF OPERATIONS — OPERATING INCOME
Year Ended December 31, 2016 vs. Year Ended December 31, 2015
Consolidated:
2016
2015
(In millions)
Variance
Increase (Decrease)
For the Years Ended December 31,
OPERATING REVENUE:
Waste and service revenue . . . . . . . . . . . . . . . . . . . . . $
1,187
$
1,104
$
Energy revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recycled metals revenue . . . . . . . . . . . . . . . . . . . . . .
Other operating revenue . . . . . . . . . . . . . . . . . . . . . . .
Total operating revenue. . . . . . . . . . . . . . . . . . . . .
OPERATING EXPENSE:
Plant operating expense . . . . . . . . . . . . . . . . . . . . . . .
Other operating expense. . . . . . . . . . . . . . . . . . . . . . .
General and administrative expense. . . . . . . . . . . . . .
Depreciation and amortization expense . . . . . . . . . . .
Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expense . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating Revenue
Waste and Service Revenue
Consolidated (in millions):
370
61
81
1,699
1,177
86
100
207
20
421
61
59
1,645
1,129
73
93
198
43
1,590
109
$
1,536
109
$
83
(51)
—
22
54
48
13
7
9
(23)
54
—
For the Years Ended
December 31,
2016
2015
Variance
EfW waste and service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Environmental services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total waste and service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
962
99
186
36
(96)
1,187
$
$
$
929
56
159
38
(78)
1,104
33
43
27
(2)
(18)
83
EfW Facilities - Tons Received (1) (in millions):
For the Years Ended
December 31,
2016
2015
Variance
Contracted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uncontracted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Tons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17.4
2.2
19.5
17.2
2.2
19.4
0.2
—
0.1
(1) Includes solid tons only. Does not include contribution from China investments. Certain amounts may not total due to rounding.
Waste and service revenue increased by $83 million year-over-year, driven by organic growth of $35 million and net contribution
from transactions of $52 million, partially offset by a decline of $5 million related to contract transitions. Within organic growth,
EfW waste processing revenue increased $24 million (2.5%) due to price and $2 million (0.2%) due to volume, and environmental
services revenue increased by $12 million as a result of increased activity at newly acquired environmental services businesses.
Transactions impacting revenue in the period included environmental services acquisitions ($30 million), a full year of operations
under the New York City MTS contract, and commencement of operations at the Durham-York EfW facility.
35
Energy Revenue
Consolidated (1) (in millions):
For the Years Ended
December 31,
2016
2015
Variance
EfW energy sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EfW capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total energy revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
321
$
308
$
40
9
370
$
38
75
421
13
2
(66)
(51)
(1) Covanta share only. EfW excludes contribution from China investments. Represents the sale of electricity and steam based upon output
delivered and capacity provided. Certain amounts may not total due to rounding.
Total EfW (in millions):
2016
2015
Variance
Years Ended December 31,
Revenue (1)
Volume(1), (2)
% of
Total
Volume
Revenue (1)
Volume(1), (2)
% of
Total
Volume
Revenue
Volume
At Market . . . . . . . . . . . . . . . . . .
$
Contracted. . . . . . . . . . . . . . . . . .
Hedged . . . . . . . . . . . . . . . . . . . .
Total EfW . . . . . . . . . . . . . . . . . . . .
$
33
245
83
361
1.0
3.1
1.9
6.0
17% $
51%
32%
100% $
46
238
62
346
1.4
3.0
1.4
5.8
24% $
(13)
(0.4)
53%
23%
100%
7
21
15
0.1
0.5
0.2
(1) Covanta share only. EfW excludes China. Represents the sale of electricity and steam based upon output delivered and capacity provided.
(2) Steam converted to MWh at an assumed average rate of 11 klbs of steam / MWh.
Certain amounts may not total due to rounding.
Energy revenue decreased by $51 million year-over-year, driven by a $66 million decline from transactions (including $36
million related to economically dispatching biomass facilities and $29 million resulting from the exchange of our ownership
interest in a facility in China, both in the first quarter of 2016), $5 million from lower production at EfW facilities (primarily
related to turbine generator downtime at our Plymouth facility) and a $6 million decline related to the expiration of certain long-
term energy contracts. These declines were partially offset by higher revenue following waste and service contract transitions (as
a result of increased share of energy revenue).
Recycled Metal Revenue
Recycled Metal Revenue (in millions):
March 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
June 30,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total for the Year Ended December 31,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
For the
Quarters Ended
2016
2015
13
17
14
17
61
$
$
16
17
16
12
61
Metal Revenue
(in millions)
Years Ended December 31,
Tons Sold
(in thousands) (1)
Tons Recovered
(in thousands)
2016
2015
2016
2015
2016
2015
Ferrous Metal . . . . . . . . . . . . . $
Non-Ferrous Metal . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . $
38
23
61
$
$
38
23
61
345
36
330
32
401
36
353
32
(1) Represents the portion of total volume that is equivalent to Covanta’s share of revenue under applicable client revenue sharing
arrangements.
36
Recycled metals revenue was flat year-over-year, with higher metal recovery and the benefit of processing on realized sales
prices for ferrous scrap offset by lower market prices.
Other Operating Revenue
Other operating revenue increased by $22 million for the twelve month comparative period primarily due to higher construction
revenue.
Operating Expense
Plant Operating Expense
Consolidated (in millions):
Plant maintenance (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plant operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Years Ended
December 31,
2016
2015
Variance
$
$
$
279
898
$
270
859
1,177
$
1,129
9
39
48
(1) Plant maintenance costs include our internal maintenance team and non-facility employee costs for facility scheduled and unscheduled
maintenance and repair expense.
Plant operating expenses increased by $48 million for the twelve month comparable period, driven primarily by higher incentive
compensation expense ($24 million), increased EfW plant maintenance expense ($17 million), escalation in wages and benefits
($16 million), the start-up of our centralized metals processing facility ($4 million), other organic cost increases ($5 million) and
the impact of contract transitions ($4 million), partially offset by transactions, as noted above, reducing plant operating expenses
by $22 million on a net basis.
Other Operating Expense
Other operating expenses increased by $13 million for the twelve month comparable period primarily due to higher construction
expense, partially offset by increased insurance recoveries.
For additional information, see Item 8. Financial Statements And Supplementary Data - Note 14.Supplementary Information -
Other Operating Expenses.
General and Administrative Expense
Consolidated general and administrative expenses increased for the twelve month comparative period by $7 million primarily
due to an increase in incentive compensation.
Impairment Charges
During the year ended December 31, 2016, we recorded non-cash impairment charges of $20 million, pre-tax, of which $13
million related to the previously planned closure of our Pittsfield EfW facility which is now expected to continue operating,
and $3 million, pre-tax, related to our Tartech investment. During the year ended December 31, 2015, we recorded non-cash
impairment charges totaling $43 million related to our biomass facilities. For additional information, see Item 8. Financial
Statements And Supplementary Data — Note 14. Supplementary Information — Impairment Charges.
37
RESULTS OF OPERATIONS — OPERATING INCOME
Year Ended December 31, 2015 vs. Year Ended December 31, 2014
Consolidated:
2015
2014
(In millions)
Variance
Increase (Decrease)
For the Years Ended December 31,
OPERATING REVENUE:
Waste and service revenue . . . . . . . . . . . . . . . . . . . . . $
1,104
$
1,032
$
Energy revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recycled metals revenue . . . . . . . . . . . . . . . . . . . . . .
Other operating revenue . . . . . . . . . . . . . . . . . . . . . . .
Total operating revenue. . . . . . . . . . . . . . . . . . . . .
OPERATING EXPENSE:
Plant operating expense . . . . . . . . . . . . . . . . . . . . . . .
Other operating expense. . . . . . . . . . . . . . . . . . . . . . .
General and administrative expense. . . . . . . . . . . . . .
Depreciation and amortization expense . . . . . . . . . . .
Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expense . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating Revenue
Waste and Service Revenue
Consolidated (in millions):
421
61
59
1,645
1,129
73
93
198
43
460
93
97
1,682
1,055
101
97
211
64
1,536
109
$
1,528
154
$
72
(39)
(32)
(38)
(37)
74
(28)
(4)
(13)
(21)
8
(45)
For the Years Ended
December 31,
2015
2014
Variance
EfW waste and service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Environmental services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Municipal services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intercompany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total waste and service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
929
56
159
38
(78)
1,104
$
$
$
933
9
93
47
(50)
1,032
(4)
47
66
(9)
(28)
72
North America Segment - EfW Facilities - Tons Received (1) (in millions):
For the Years Ended
December 31,
2015
2014
Variance
Contracted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uncontracted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Tons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17.2
2.2
19.4
16.0
2.7
18.7
1.2
(0.5)
0.7
(1) Includes solid tons only. Does not include contribution from China investments. Certain amounts may not total due to rounding.
Waste and service revenue increased by $72 million year-over-year, driven by organic growth of $13 million and net contribution
from transactions of $85 million, partially offset by a decline of $26 million related to contract transitions. Within organic growth,
EfW waste processing revenue increased $11 million (1.1%) due to price and $1 million (0.1%) due to volume. Transactions
impacting revenue in the period included environmental services acquisitions ($27 million) and the start-up of the NYC MTS
contract.
38
Energy Revenue
Consolidated (1) (in millions):
For the Years Ended
December 31,
2015
2014
Variance
EfW energy sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EfW capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total energy revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
308
$
325
$
38
75
421
$
32
103
460
(17)
6
(28)
(39)
(1) Covanta share only. EfW excludes contribution from China investments. Represents the sale of electricity and steam based upon output
delivered and capacity provided. Certain amounts may not total due to rounding.
Years Ended December 31,
2015
2014
Variance
Total EfW (in millions):
Revenue (1)
Volume(1), (2)
% of
Total
Volume
Revenue (1)
Volume(1), (2)
% of
Total
Volume
Revenue
Volume
At Market . . . . . . . . . . . . . . . . . .
$
Contracted. . . . . . . . . . . . . . . . . .
Hedged . . . . . . . . . . . . . . . . . . . .
Total EfW . . . . . . . . . . . . . . . . . . . .
$
46
238
62
346
1.4
3.0
1.4
5.8
24% $
53%
23%
100% $
52
247
59
358
1.1
3.2
1.4
5.6
19% $
56%
25%
100%
(6)
(9)
3
(12)
0.3
(0.2)
—
0.2
(1) Covanta share only. EfW excludes China. Represents the sale of electricity and steam based upon output delivered and capacity provided.
(2) Steam converted to MWh at an assumed average rate of 11 klbs of steam / MWh.
Certain amounts may not total due to rounding.
Energy revenue decreased by $39 million year-over-year, driven by a $26 million decline for biomass facilities primarily due
to lower market pricing and economically dispatching a biomass facility, a $21 million decline in pricing at EfW facilities, a $4
million decline in production at EfW facilities, partially offset by higher revenue following waste and service contract transitions
(as a result of increased share of energy revenue) and a $3 million contribution from transactions.
Recycled Metal Revenue
Recycled Metal Revenue (in millions):
March 31,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June 30, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total for the year ended December 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
For the
Quarters Ended
2015
2014
16
17
16
12
61
$
$
21
25
26
21
93
Metal Revenue
(in millions)
Years Ended December 31,
Tons Sold
(in thousands) (1)
Tons Recovered
(in thousands)
2015
2014
2015
2014
2015
2014
Ferrous Metal . . . . . . . . . . . . . $
Non-Ferrous Metal . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . $
38
23
61
$
$
65
28
93
330
32
340
30
353
32
327
30
(1) Represents the portion of total volume that is equivalent to Covanta’s share of revenue under applicable client revenue sharing
arrangements.
39
Recycled metals revenue were $32 million lower year-over-year, driven principally by a decline in recycled metal market
pricing.
Other Operating Revenue
The decrease of $38 million on a consolidated basis in other operating revenue for the twelve month comparative period was
primarily due to lower construction revenue.
Operating Expense
Plant Operating Expense
Consolidated (in millions):
Plant maintenance (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plant operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Years Ended
December 31,
2015
2014
Variance
$
$
$
270
859
$
245
810
1,129
$
1,055
25
49
74
(1) Plant maintenance costs include our internal maintenance team and non-facility employee costs for facility scheduled and unscheduled
maintenance and repair expense.
For the twelve month comparative period, plant operating expense on both a consolidated and North America segment basis
increased by $74 million.
Plant operating expenses increased by $74 million for the twelve month comparable period, driven by an increase in plant
maintenance of $31 million due to the adoption of the service concession arrangement accounting guidance, an increase of $31
million due to newly acquired environmental services business, $23 million from the start-up of the New York City MTS contract,
$9 million from additional costs related to transfer stations, an $8 million impact from contract transitions, a $7 million increase
in transportation costs related to our metals operations, partially offset by lower incentive compensation of $26 million and a $16
million decrease due to economically dispatching a biomass facility.
Other Operating Expense
Other operating expense decreased by $28 million due to lower construction expense and the sale of our insurance business at
the end of 2014.
Impairment charges
During the year ended December 31, 2015, we recorded non-cash impairment charges totaling $43 million related to our biomass
facilities. During the year ended December 31, 2014, we recorded non-cash impairment charges totaling $64 million consisting
of $14 million related to the sale of our insurance business, $34 million related to our California biomass facility assets, and $16
million related to contract intangibles. For additional information, see Item 8. Financial Statements And Supplementary Data —
Note 14. Supplementary Information — Impairment charges.
40
CONSOLIDATED RESULTS OF OPERATIONS — NON-OPERATING INCOME ITEMS
Years Ended December 31, 2016, 2015 and 2014
Other Expense:
For the Years Ended
December 31,
2015
2016
Variance
Increase (Decrease)
2014
2016 vs 2015
2015 vs 2014
(In millions)
CONSOLIDATED RESULTS OF OPERATIONS:
Investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1
$
— $
1
$
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(139)
(134)
Non-cash convertible debt related expense . . . . . . . . . . . . . . .
Gain on asset sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on extinguishment of debt. . . . . . . . . . . . . . . . . . . . . . . .
Other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
44
—
(1)
—
—
(2)
(1)
(135)
(13)
—
(2)
(1)
Total other expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(95) $
(137) $
(150)
1
$
(5)
—
44
2
—
42
(1)
1
13
—
—
—
13
Interest expense increased for the year ended December 31, 2016 compared to the year ended December 31, 2015 due to higher
levels of borrowing under our Revolving Credit Facility.
Non-cash convertible debt related expense decreased for the year ended December 31, 2015 compared to the year ended December
31, 2014, due to the maturity of the 3.25% Cash Convertible Senior Notes in June 2014.
Gain on assets sales for the year ended December 31, 2016, is primarily due to the sale of our interests in China. For additional
information see Item 8. Financial Statements And Supplementary Data — Note 4. Dispositions, Assets Held for Sale and
Discontinued Operations.
Loss on extinguishment of debt is comprised of the write-off of deferred financing costs in connection with refinancing of
previously existing financing arrangements.
Income Tax Expense:
For the Years Ended
December 31,
Variance
Increase (Decrease)
2016
2015
2014
2016 vs 2015
2015 vs 2014
(In millions, except percentages)
CONSOLIDATED RESULTS OF OPERATIONS:
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
22
$
(84)
$
15
$
106
$
(99)
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
150%
302%
388%
The decrease in effective tax rate for the year ended December 31, 2016, compared to the year ended December 31, 2015 is
primarily due to the combined effects of (i) the recognition of tax benefit due to the resolution of the IRS audit in 2015 and (ii)
the fact that the Company turned from pre-tax loss in 2015 to pre-tax income in 2016. The decrease in the effective tax rate for
the year ended December 31, 2015, compared to the year ended December 31, 2014 was primarily due to the recognition of tax
benefit due to the resolution of the IRS audit in 2015 and non-recurring adjustments from the prior year.
41
Net (Loss) Income Attributable to Covanta Holding Corporation and Earnings Per Share:
For the Years Ended
December 31,
2015
2016
Variance
Increase (Decrease)
2014
2016 vs 2015
2015 vs 2014
(In millions, except per share amounts)
CONSOLIDATED RESULTS OF OPERATIONS:
Net (Loss) Income Attributable to Covanta Holding
Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(4) $
68
$
(2) $
(72) $
70
(Loss) Earnings Per Share Attributable to Covanta Holding
Corporation stockholders:
Weighted Average Shares:
Basic: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
129
129
(Loss) Earnings Per Share:
Basic: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Dividend Declared Per Share (1) . . . . . . . . . . . . . . . . . . . .
$
$
$
132
133
0.52
0.51
130
130
(3)
(4)
$
$
$
(0.01) $
(0.01) $
(0.55) $
(0.54) $
0.86
$
— $
2
3
0.53
0.52
0.14
(0.03) $
(0.03) $
1.00
$
1.00
(1) For information on dividends declared to shareholders and share repurchases, see Liquidity and Capital Resources below.
42
Supplementary Financial Information — Adjusted Earnings Per Share (“Adjusted EPS”) (Non-GAAP Discussion)
We use a number of different financial measures, both United States generally accepted accounting principles (“GAAP”) and
non-GAAP, in assessing the overall performance of our business. To supplement our results prepared in accordance with GAAP,
we use the measure of Adjusted EPS, which is a non-GAAP financial measure as defined by the Securities and Exchange
Commission (“SEC”). The non-GAAP financial measure of Adjusted EPS is not intended as a substitute or as an alternative to
diluted earnings per share as an indicator of our performance or any other measure of performance derived in accordance with
GAAP. In addition, our non-GAAP financial measures may be different from non-GAAP financial measures used by other
companies, limiting their usefulness for comparison purposes. We use the non-GAAP financial measure of Adjusted EPS to enhance
the usefulness of our financial information by providing a measure which management internally uses to assess and evaluate the
overall performance and highlight trends in the ongoing business.
Adjusted EPS excludes certain income and expense items that are not representative of our ongoing business and operations,
which are included in the calculation of diluted earnings per share in accordance with GAAP. The following items are not all-
inclusive, but are examples of reconciling items in prior comparative and future periods. They would include the results of operations
of our insurance subsidiaries, impairment charges, the effect of derivative instruments not designated as hedging instruments,
significant gains or losses from the disposition or restructuring of businesses, gains and losses on assets held for sale, transaction-
related costs, income and loss on the extinguishment of debt and other significant items that would not be representative of our
ongoing business.
In order to provide a meaningful basis for comparison, we are providing information with respect to our Adjusted EPS for the
years ended December 31, 2016, 2015 and 2014, respectively, reconciled for each such period to diluted earnings per share, which
is believed to be the most directly comparable measure under GAAP (in millions, except per share amounts):
Diluted (Loss) Earnings Per Share from Continuing Operations. . . . . . .
Reconciling items (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted EPS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
(0.03) $
(0.03)
(0.06) $
0.51
(0.44)
0.07
$
$
(0.01)
0.40
0.39
Years Ended December 31,
2016
2015
2014
(1) Additional information is provided in the Reconciling Items table below.
43
2
64
9
—
2
1
1
79
(32)
—
—
—
4
1
52
0.40
130
Years Ended December 31,
2016
2015
2014
$
— $
— $
Reconciling Items
Operating loss related to insurance subsidiaries . . . . . . . . . . . . . . . . . . .
Impairment charges (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Severance and reorganization costs (b) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on asset sales (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect on income of derivative instruments not designated as hedging
instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of foreign exchange (gain) loss on indebtedness. . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total reconciling items, pre-tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma income tax impact (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of IRS audit settlement (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment to uncertain tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax liability related to expected gain on sale of China assets (c) (e) . . . . . .
ARC purchase accounting adjustment tax impact . . . . . . . . . . . . . . . . . .
Grantor trust activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Continuing Operations Reconciling Items, net of tax . . . . $
20
2
(44)
—
2
(1)
—
(21)
2
—
14
—
—
1
(4) $
43
7
—
2
(6)
3
1
50
(20)
(93)
—
4
—
—
(59) $
Diluted (Loss) Earnings Per Share Impact . . . . . . . . . . . . . . . . . . . . .
$
(0.03) $
(0.44) $
Weighted Average Diluted Shares Outstanding. . . . . . . . . . . . . . . . . . . .
129
133
(a)
For additional information, see Item 8. Financial Statements And Supplementary Information — Note 14. Supplementary Information -
Impairment charges.
(b) The year ended December 31, 2015 included $6 million of costs incurred in connection with separation agreements related to the departure
of two executive officers of which $4 million relates to non-cash compensation. The year ended December 31, 2014 included certain costs
incurred in connection with cost savings initiatives.
(c) Gain on assets sales for the year ended December 31, 2016, is primarily due to the sale of our interests in China. For additional information
see Item 8. Financial Statements And Supplementary Data — Note 4. Dispositions, Assets Held for Sale and Discontinued Operations.
(d) We calculate the federal and state tax impact of each item using the statutory federal tax rate and applicable blended state rate.
(e)
For additional information, see Item 8. Financial Statements And Supplementary Data — Note 15. Income Taxes.
44
Supplementary Financial Information — Adjusted EBITDA (Non-GAAP Discussion)
To supplement our results prepared in accordance with GAAP, we use the measure of Adjusted EBITDA, which is a non-GAAP
financial measure as defined by the SEC. This non-GAAP financial measure is described below, and is not intended as a substitute
and should not be considered in isolation from measures of financial performance prepared in accordance with GAAP. In addition,
our use of non-GAAP financial measures may be different from non-GAAP financial measures used by other companies, limiting
their usefulness for comparison purposes. The presentation of Adjusted EBITDA is intended to enhance the usefulness of our
financial information by providing a measure which management internally uses to assess and evaluate the overall performance
of its business and those of possible acquisition candidates, and highlight trends in the overall business.
We use Adjusted EBITDA to provide further information that is useful to an understanding of the financial covenants contained
in the credit facilities of our most significant subsidiary, Covanta Energy, and as additional ways of viewing aspects of its operations
that, when viewed with the GAAP results and the accompanying reconciliations to corresponding GAAP financial measures,
provide a more complete understanding of our core business. The calculation of Adjusted EBITDA is based on the definition in
Covanta Energy’s Credit Facilities (as defined and described below under Liquidity and Capital Resources), which we have
guaranteed. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, as adjusted for additional
items subtracted from or added to net income. Because our business is substantially comprised of that of Covanta Energy, our
financial performance is substantially similar to that of Covanta Energy. For this reason, and in order to avoid use of multiple
financial measures, which are not all from the same entity, the calculation of Adjusted EBITDA and other financial measures
presented herein are measured on a consolidated basis, less the results of operations of our insurance subsidiaries in 2014, prior
to their sale in the fourth quarter of 2014. Under the Credit Facilities, Covanta Energy is required to satisfy certain financial
covenants, including certain ratios of which Adjusted EBITDA is an important component. Compliance with such financial
covenants is expected to be the principal limiting factor that will affect our ability to engage in a broad range of activities in
furtherance of our business, including making certain investments, acquiring businesses and incurring additional debt. Covanta
Energy was in compliance with these covenants as of December 31, 2016. Failure to comply with such financial covenants could
result in a default under the Credit Facilities, which default would have a material adverse effect on our financial condition and
liquidity.
Adjusted EBITDA should not be considered as an alternative to net income or cash flow provided by operating activities as
indicators of our performance or liquidity or any other measures of performance or liquidity derived in accordance with GAAP.
In order to provide a meaningful basis for comparison, we are providing information with respect to our Adjusted EBITDA for
the years ended December 31, 2016, 2015 and 2014, respectively, reconciled for each such period to net income and cash flow
provided by operating activities from continuing operations, which are believed to be the most directly comparable measures under
GAAP. The following is a reconciliation of Net (Loss) Income to Adjusted EBITDA (in millions):
45
Adjusted EBITDA
2016
2015
2014
Years Ended
December 31,
Net (Loss) Income Attributable to Covanta Holding Corporation . . . . . . . . . . . . .
$
(4) $
Operating loss related to insurance subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense, net
Non-cash convertible debt related expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charges (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on asset sales (a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to noncontrolling interests in subsidiaries . . . . . . . . . . . .
Other adjustments:
Capital-type expenditures at service fee operated facilities (b) . . . . . . . . . . . . . . .
Debt service billing in excess of revenue recognized. . . . . . . . . . . . . . . . . . . . . .
Severance and reorganization costs (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash compensation expense (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-cash items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
207
138
—
22
20
(44)
—
—
39
4
3
16
6
3
$
68
—
198
134
—
(84)
43
—
2
1
31
1
4
18
6
6
(2)
2
211
134
13
15
64
—
2
1
—
2
9
17
5
1
476
474
414
410
$
360
428
$
(a) For additional information, see Adjusted EPS above.
(b) Adjustment for impact of adoption of FASB ASC 853 - Service Concession Arrangements in order to provide comparability to prior
period results. These type of expenditures at our service fee operated facilities were historically capitalized prior to adoption of this
new accounting standard effective January 1, 2015.
(c) The year ended December 31, 2015 includes $4 million of costs incurred in connection with separation agreements related to the
departure of two executive officers.
(d) Includes certain other items that are added back under the definition of Adjusted EBITDA in Covanta Energy LLC's credit
agreement.
46
The following is a reconciliation of cash flow provided by operating activities from continuing operations to Adjusted EBITDA
(in millions):
Years Ended December 31,
2016
2015
2014
Cash flow provided by operating activities from continuing operations. . . . . . .
$
Cash paid for interest, net of capitalized interest . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital type expenditures at service fee operated facilities (a) . . . . . . . . . . . . . . . . . .
Adjustment for working capital and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
282
135
6
39
(52)
$
249
131
2
31
15
Adjusted EBITDA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
410
$
428
$
340
119
11
—
4
474
(a) See Adjusted EBITDA - Note (c) above.
For additional discussion related to management’s use of non-GAAP measures, see Liquidity and Capital Resources —
Supplementary Financial Information — Free Cash Flow (Non-GAAP Discussion) below.
BUSINESS OUTLOOK
In 2017 and beyond, we expect that our financial results will be affected by several factors, including: market prices, contract
transitions, new contracts, new project development and construction, acquisitions, and the organic growth of earnings and cash
flow generated by our existing assets. In order to drive organic growth, we will be focused on growing our environmental services
and profiled waste businesses, enhanced metals recovery and centralized processing, ash management, continuous improvement
using Lean Six Sigma concepts, and managing facility production and operating costs.
In 2017, the following specific factors are expected to impact our financial results as compared to 2016 (as measured by Adjusted
EBITDA):
Positive factors include:
•
•
•
Contribution from the organic growth initiatives discussed above;
The commencement of commercial operations of our Dublin EfW facility, which is anticipated in late 2017; and
Approximately $10 million from favorable waste and service contract transitions.
Negative factors include:
•
•
Approximately $25 million of mark-to-market on the expiration of long-term power purchase agreements; and
$0 to $20 million lower anticipated market prices for electricity as compared to our hedged prices in 2016.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are our cash and cash equivalents, cash flow generated from our ongoing operations, and
available capacity under our Revolving Credit Facility, which we believe will allow us to meet our liquidity needs. For additional
information regarding our credit facilities and other debt, see Item 8. Financial Statements And Supplementary Date - Note 11.
Consolidated Debt.
In 2017, we expect to generate net cash from operating activities which may not alone meet all of our cash requirements for
both capital expenditures to maintain our existing assets and for ongoing dividends to shareholders, in which case we would utilize
our Revolving Credit Facility on an interim basis. See Results of Operations - Business Outlook above for discussion of the factors
impacting our 2017 business outlook. We intend to utilize debt financing as the primary means to fund investments in the growth
of our business in 2017, including completing the construction of the Dublin EfW facility (utilizing non-recourse project financing
arranged in 2014) and other investments in our organic growth initiatives (utilizing borrowings under our Revolving Credit Facility).
We have substantial indebtedness, including $1.1 billion that will mature through 2020. We generally intend to refinance these
instruments prior to maturity with like-kind financing in the bank and/or debt capital markets in order to maintain a capital structure
comprised primarily of long-term debt, which we believe appropriately matches the long-term nature of our assets and contracts.
The loan documentation governing the Credit Facilities contains various affirmative and negative covenants, as well as financial
maintenance covenants (financial ratios), that limit our ability to engage in certain types of transactions. We were in compliance
with all of the covenants under the Credit Facilities as of December 31, 2016. Further, we do not anticipate our existing debt
covenants to restrict our ability to undertake additional financing.
47
As of December 31, 2016, Covanta Energy had $1.2 billion in senior secured credit facilities, which includes a $1.0 billion
Revolving Credit Facility expiring between 2019 and 2020. As of December 31, 2016, our available liquidity was as follows (in
millions):
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Available borrowing capacity under Revolving Credit Facility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total available liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
84
501
585
As of December 31, 2016
In addition, as of December 31, 2016, we had restricted cash of $110 million, of which $17 million was designated for future
payment of project debt principal. 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. For additional information on restricted funds held in trust, see Item 8. Financial Statements And Supplementary Data —
Note 1. Organization and Summary of Significant Accounting Policies - Restricted Funds Held in Trust.
We typically receive cash distributions from our North America segment projects on a monthly basis. The frequency and
predictability of which differs depending upon various factors, including, whether a project is domestic or international, and
whether a project has been able to operate at its historical levels of production. The timing of our receipt of cash from construction
projects for public sector clients 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.
Our primary future cash requirements will be to fund capital expenditures to maintain our existing businesses, service our debt,
invest in the growth of our business, and return capital to our shareholders. We believe that our liquidity position and ongoing
cash flow from operations will be sufficient to finance these requirements.
The following summarizes our key financing activities completed during the year ended December 31, 2016:
• We received pre-tax proceeds of $105 million from the sale of our ownership interests in China, utilizing approximately $95
million of the proceeds to repay borrowings under our Revolving Credit Facility.
• We extended the lease term related to our Union County EfW facility through 2053. Due primarily to the length of the extension,
we recorded a lease liability of $104 million, calculated utilizing an incremental borrowing rate of 5.0%.
• In December 2016, at our option, we redeemed $30 million of 6.45% tax-exempt project bonds due 2022 related to our
Southeastern Connecticut EfW facility.
• During 2016, we utilized €147 million of the €250 million Dublin Senior Term Loan to fund construction costs of the Dublin
EfW facility.
Share Repurchases and Dividends
For additional information on share repurchases and dividends, see Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities and Item 8. Financial Statements And Supplementary Data — Note
5. Equity and Earnings Per Share ("EPS").
Sources and Uses of Cash Flow from Continuing Operations
Year Ended December 31, 2016 vs. Year Ended December 31, 2015
Net cash provided by operating activities from continuing operations for the year ended December 31, 2016 increased $33
million from the prior year period. The increase was primarily due to lower employee bonus payments paid in 2016 related to
2015 company performance.
Net cash used in investing activities from continuing operations for the year ended December 31, 2016 decreased $194
million from the prior year period. The net decrease was primarily due to proceeds received from the sale of our interests in China
of $105 million in 2016, as well as reduced acquisition activity by $63 million as compared to the prior year.
Net cash provided by financing activities from continuing operations for the year ended December 31, 2016 decreased $248
million from the prior year period primarily due to a reduction in net direct borrowings under our Revolving Credit Facility totaling
$208 million, and a reduction in net proceeds from long-term debt borrowings totaling $97 million, partially offset by increased
borrowings under Dublin project financing of $73 million as compared to the prior year.
Year Ended December 31, 2015 vs. Year Ended December 31, 2014
Net cash provided by operating activities from continuing operations for the year ended December 31, 2015 decreased $91
million from the prior year period. The decrease was primarily due to a decrease in working capital coupled with lower operating
48
results, including the adoption of service concession guidance, which resulted in a $31 million increase in plant operating expenses.
In prior years, such amounts would have been classified as investing activities. For additional information, see Item 8. Financial
Statements And Supplementary Information — Note 1. Organization and Summary of Significant Accounting Policies - Accounting
Pronouncements Recently Adopted.
Net cash used in investing activities from continuing operations for the year ended December 31, 2015 increased $216
million from the prior year period. The increase was primarily due to higher capital investment of $160 million primarily related
to construction of the Dublin EfW facility, offset by the impact of the change due to the adoption of accounting guidance discussed
above and a $59 million increase from the acquisition of four environmental services businesses in the current year as compared
to one in the prior year.
Net cash provided by financing activities from continuing operations for the year ended December 31, 2015 increased $418
million from the prior year period due to increased net borrowings under our Revolving Credit Facility of $168 million, the issuance
of New Jersey Series tax-exempt bonds of $90 million, and borrowings under Dublin EfW facility project financing arrangements
totaling $148 million and a net decrease in repayment of other long term debt of approximately $150 million, partially offset by
a $48 million decrease in proceeds from capital leases, a $33 million increase in cash used to repay project debt and a $62 million
increase in cash used for cash dividends and common stock repurchases in the current year.
Supplementary Financial Information — Free Cash Flow (Non-GAAP Discussion)
To supplement our results prepared in accordance with GAAP, we use the measure of Free Cash Flow, which is a non-GAAP
measure as defined by the SEC. This non-GAAP financial measure is not intended as a substitute and should not be considered
in isolation from measures of liquidity prepared in accordance with GAAP. In addition, our use of Free Cash Flow may be different
from similarly identified non-GAAP measures used by other companies, limiting its usefulness for comparison purposes. The
presentation of Free Cash Flow is intended to enhance the usefulness of our financial information by providing measures which
management internally uses to assess and evaluate the overall performance of its business and those of possible acquisition
candidates, and highlight trends in the overall business.
We use the non-GAAP financial measure of Free Cash Flow as a criterion of liquidity and performance-based components of
employee compensation. Free Cash Flow is defined as cash flow provided by operating activities, excluding the cash flow provided
by or used in our insurance subsidiaries, less maintenance capital expenditures, which are capital expenditures primarily to maintain
our existing facilities. We use Free Cash Flow as a measure of liquidity to determine amounts we can reinvest in our core businesses,
such as amounts available to make acquisitions, invest in construction of new projects, make principal payments on debt, or return
capital to our shareholders through dividends and/or stock repurchases. For additional discussion related to management’s use of
non-GAAP measures, see Results of Operations — Supplementary Financial Information — Adjusted EBITDA (Non-
GAAP Discussion) above.
In order to provide a meaningful basis for comparison, we are providing information with respect to our Free Cash Flow for the
years ended December 31, 2016, 2015 and 2014, reconciled for each such period to cash flow provided by operating activities
from continuing operations, which we believe to be the most directly comparable measure under GAAP.
49
340
1
(101)
240
(143)
12
(131)
(101)
—
(101)
405
—
—
63
10
(3)
(3)
(29)
—
443
The following is a reconciliation of Free Cash Flow and its primary uses (in millions):
Years Ended December 31,
2016
2015
2014
Cash flow provided by operating activities of continuing operations . . . . . . . . . . . .
$
282
$
249
$
Plus: Cash flow used in operating activities from insurance activities. . . . . . . . . . . .
Less: Maintenance capital expenditures (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(110)
—
(102)
Free Cash Flow. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
172
$
147
$
Uses of Free Cash Flow
Investments: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Growth investments (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investing activities, net (c). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
(253) $
(346) $
4
—
(249) $
(346) $
Return of capital to shareholders:
Cash dividends paid to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Common stock repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total return of capital to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Capital raising activities:
Net proceeds from issuance of corporate debt (d) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from issuance of project debt (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Net proceeds from Dublin financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from equipment financing capital lease (f) . . . . . . . . . . . . . . . . . . . . .
Net proceeds from the exercise of options for common stock. . . . . . . . . . . . . . . . .
Change in restricted funds held in trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other financing activities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of China assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from capital raising activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Debt repayments:
Net cash used for scheduled principal payments on corporate debt . . . . . . . . . . . .
Payments related to Cash Conversion Option (g). . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the settlement of Note Hedge (g). . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used for principal payments on project debt (h) . . . . . . . . . . . . . . . . . . . .
Payment of equipment financing capital lease (f) . . . . . . . . . . . . . . . . . . . . . . . . . .
Voluntary prepayment of corporate debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt repayments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowing activities - Revolving Credit Facility, net. . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . .
Net change in cash and cash equivalents from continuing operations . . . . . . . . . . . .
$
$
$
$
$
(131) $
(20)
(151) $
— $
—
159
—
—
29
(6)
(6)
105
281
$
(133) $
(30)
(163) $
$
98
15
85
15
—
—
5
(7)
—
211
$
(4) $
(1) $
(462)
—
—
(52)
(4)
—
(60) $
(5) $
— $
(12) $
—
—
(38)
(4)
—
(43) $
203
$
(4) $
5
$
(83)
83
(29)
(1)
(95)
(587)
35
(5)
(106)
(a) Purchases of property, plant and equipment are also referred to as capital expenditures. Capital expenditures that primarily maintain existing
facilities are classified as maintenance capital expenditures. Growth investments include investments in growth opportunities, including
organic growth initiatives, technology, business development, and other similar expenditures. The following table provides the components
of total purchases of property, plant and equipment:
50
Years Ended December 31,
2016
2015
2014
Maintenance capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(110) $
(102) $
Capital expenditures associated with construction of Dublin EfW facility . . . . . . .
Capital expenditures associated with organic growth initiatives . . . . . . . . . . . . . . .
Capital expenditures associated with the New York City MTS contract. . . . . . . . .
Capital expenditures associated with Essex County EfW emissions control
system. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total capital expenditures associated with growth investments . . . . . . . . . . . . . .
Capital expenditures associated with property insurance events . . . . . . . . . . . . . . .
(162)
(46)
(3)
(33)
(244)
(5)
(184)
(34)
(30)
(26)
(274)
—
Total purchases of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . .
$
(359) $
(376) $
(101)
(14)
(25)
(59)
(17)
(115)
—
(216)
(b) Growth investments include investments in growth opportunities, including organic growth initiatives, technology, business development,
and other similar expenditures.
Years Ended December 31,
2016
2015
2014
Capital expenditures associated with growth investments . . . . . . . . . . . . . . . . . . . . .
$
(244) $
(274) $
Investments in connection with the Dublin EfW facility, net of capital
expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other organic growth investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
(9)
—
—
(72)
Total growth investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(253) $
(346) $
(c) Other investing activities include net payments from the purchase/sale of investment securities.
(d) Excludes borrowings under the Revolving Credit Facility. Calculated as follows:
Years Ended December 31,
2016
2015
2014
Proceeds from borrowings on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
— $
294
$
Refinanced long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Financing costs related to issuance of long-term debt . . . . . . . . . . . . . . . . . . .
—
—
(195)
(1)
Net proceeds from issuance of corporate debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
— $
98
$
(e) During the third quarter in 2014, we received proceeds from a Junior Term Loan related to our Dublin project:
Years Ended December 31,
2016
2015
2014
Proceeds from borrowings on project debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
— $
59
$
Refinanced project debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in restricted funds held in trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Funding into escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Financing cost related to the issuance of project debt. . . . . . . . . . . . . . . . . . . .
Net proceeds from issuance of project debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
—
— $
— $
(42)
—
(2)
15
$
(115)
(14)
(1)
(13)
(143)
412
—
(7)
405
63
—
—
(63)
—
(f) During 2015 and 2014, we financed $15 million and $63 million for equipment related to our New York City MTS contract.
(g) The $460 million of 3.25% Cash Convertible Senior Notes matured on June 1, 2014. Upon maturity, we were required to pay $83 million
to satisfy the obligation under the Cash Conversion Option in addition to the principal amount of the 3.25% Notes. We cash-settled the
Note Hedge for $83 million effectively offsetting our liability under the Cash Conversion Option.
51
(h) Calculated as follows:
Total principal payments on project debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Decrease in related restricted funds held in trust . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used for principal payments on project debt . . . . . . . . . . . . . . . . . . . . . . .
$
(51) $
(1)
(52) $
(43) $
5
(38) $
(52)
23
(29)
Years Ended December 31,
2016
2015
2014
Available Sources of Liquidity
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.
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
As of December 31,
2016
2015
(in millions)
18
66
84
$
$
44
50
94
Credit Facilities
Effective April 2015, we amended and restated Covanta Energy’s senior secured credit facilities, which consist of a $1.0 billion
revolving credit facility, expiring 2019 through 2020, (the “Revolving Credit Facility”) and a $196 million term loan due 2020
(the “Term Loan”) (collectively referred to as the "Credit Facilities"). For a detailed description of the terms of the Credit Facilities,
see Item 8. Financial Statements And Supplementary Data — Note 11. Consolidated Debt.
Consolidated Debt
The face value of our consolidated debt is as follows (in millions):
As of December 31,
2016
2015
Corporate Debt:
Revolving Credit Facility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Term Loan due 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.25% Senior Notes due 2020 . . . . . . . . . . . . . . . . . . . . . . . . . .
6.375% Senior Notes due 2022 . . . . . . . . . . . . . . . . . . . . . . . . .
5.875% Senior Notes due 2024 . . . . . . . . . . . . . . . . . . . . . . . . .
4.00% - 5.25% Tax-Exempt Bonds due 2024 - 2045. . . . . . . . .
3.48% - 4.52% Equipment Leases due 2020 - 2027 . . . . . . . . .
Total corporate debt (including current portion) . . . . . . . . . . . . $
Project Debt:
Domestic project debt - service fee facilities. . . . . . . . . . . . . . . $
Domestic project debt - tip fee facilities . . . . . . . . . . . . . . . . . .
Union capital lease. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dublin Senior Term Loan due 2021. . . . . . . . . . . . . . . . . . . . . .
Dublin Junior Term Loan due 2022. . . . . . . . . . . . . . . . . . . . . .
Total project debt (including current portion) . . . . . . . . . . . . . . $
Total Debt Outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
52
343
196
400
400
400
464
69
2,272
78
16
99
155
58
406
2,678
$
$
$
$
$
348
200
400
400
400
464
73
2,285
117
23
—
—
57
197
2,482
As of December 31, 2016, the maturities of debt, excluding premiums and deferred financing costs are as follows (in millions):
2017
2018
2019
2020
2021
Thereafter
Total
Revolving Credit Facility . . . .
Term Loan . . . . . . . . . . . . . . . .
Senior Notes . . . . . . . . . . . . . .
Tax-Exempt Bonds . . . . . . . . .
Equipment Leases . . . . . . . . . .
Project Debt . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . .
$
— $
5
—
—
5
22
32
$
$
— $
5
—
—
5
31
41
$
— $
5
—
—
5
26
36
$
343
181
400
—
5
17
946
$
$
— $
—
—
—
5
144
149
$
— $
—
800
464
44
166
1,474
$
343
196
1,200
464
69
406
2,678
For a detailed description of the terms of the debt instruments noted in the table above, see Item 8. Financial Statements And
Supplementary Data — Note 11. Consolidated Debt. The loan documentation governing the Credit Facilities contains various
affirmative and negative covenants, as well as financial maintenance covenants, that limit our ability to engage in certain types
of transactions. We were in compliance with all of the affirmative and negative covenants under the Credit Facilities as of
December 31, 2016.
Dublin Project Financing
The investment in the Dublin EfW facility is expected to total approximately €500 million, which will be funded with a
combination of third party non-recourse project financing (€375 million) and the contribution of approximately €125 million of
project equity by our subsidiary, Covanta Energy, which has been fully funded as of December 31, 2015. For additional information
on the project financing terms, see Item 8. Financial Statements And Supplementary Data — Note 11. Consolidated Debt. We
entered into interest rate swap agreements in order to hedge our exposure to adverse variable interest rate fluctuations under the
Dublin Senior Term Loan. For additional information, see Item 8. Financial Statements And Supplementary Data — Note 13.
Derivative Instruments.
Project Debt
Financing for the construction of our existing energy-from-waste projects in the North America segment was generally raised
through tax-exempt and taxable municipal revenue bonds issued by or on behalf of the municipal client. In the case of facilities
owned by a subsidiary of ours, the municipal issuers of the bond loaned the bond proceeds to our subsidiary to pay for facility
construction. Financing for international projects in which we have an ownership or operating interest is generally raised through
commercial loans from local lenders; financing arranged through international banks; and/or bonds issued to institutional investors.
In most international projects, the instruments defining the rights of debt holders generally provide that the project subsidiary may
not make distributions to its parent until periodic debt service obligations are satisfied and other financial covenants are complied
with. For additional information on project debt, see Item 8. Financial Statements And Supplementary Data — Note 11.
Consolidated Debt.
53
Capital Requirements
The following table summarizes our gross contractual obligations including project debt, leases and other obligations as of
December 31, 2016 (in millions):
Total
2017
Payments Due by Period
2018 and
2019
2020 and
2021
2022 and
Beyond
RECORDED LIABILITIES:
Project debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Term Loan (1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revolving Credit Facility (1) . . . . . . . . . . . . . . . .
7.25% Senior Notes (2) . . . . . . . . . . . . . . . . . . . .
6.375% Senior Notes (3) . . . . . . . . . . . . . . . . . . .
5.875% Senior Notes (4) . . . . . . . . . . . . . . . . . . .
Tax-exempt bonds due 2024-2045 (5) . . . . . . . . .
Equipment leases (6) . . . . . . . . . . . . . . . . . . . . . .
Total debt obligations. . . . . . . . . . . . . . . . . . .
Less: Non-recourse debt (7). . . . . . . . . . . . . . . . .
Total recourse debt. . . . . . . . . . . . . . . . . . . . . .
Dublin Convertible Preferred (8) . . . . . . . . . . . . .
Uncertainty in income tax obligations (9) . . . . . .
OTHER:
Interest payments (10) . . . . . . . . . . . . . . . . . . . . .
Less: Non-recourse interest payments . . . . . . . .
Total recourse interest payments . . . . . . . . . . .
Dublin future obligations (11) . . . . . . . . . . . . . . . .
Interest related to Dublin future obligations (11) .
Purchase obligations (12) . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . .
Retirement plan obligations (13) . . . . . . . . . . . . .
Total obligations. . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
$
$
$
$
$
406
196
343
400
400
400
464
69
2,678
(475)
2,203
117
43
1,304
(184)
1,120
108
48
33
57
4
3,733
$
$
$
$
$
$
$
$
$
$
$
$
$
22
5
—
—
—
—
—
5
32
(27)
5
$
$
57
10
—
—
—
—
—
10
77
(67)
10
$
— $
— $
1
149
(20)
129
$
$
$
— $
10
$
— $
$
8
$
1
13
293
(34)
259
8
21
33
13
1
154
$
358
$
$
$
$
$
$
$
$
$
161
181
343
400
—
—
—
10
1,095
(171)
924
10
3
215
(31)
184
100
$
$
$
$
$
$
$
17
$
— $
$
12
$
1
166
—
—
—
400
400
464
44
1,474
(210)
1,264
107
26
647
(99)
548
—
—
—
24
1
1,251
$
1,970
(1) Interest payments on the Term Loan and letter of credit fees are estimated based on current LIBOR rates and are estimated assuming
scheduled principal repayments. See Item 8. Financial Statements And Supplementary Data — Note 11. Consolidated Debt.
(2) Interest on the 7.25% Notes is payable semi-annually in arrears on June 1 and December 1 of each year, commencing on June 1, 2011 and
will mature on December 1, 2020 unless earlier redeemed or repurchased. See Item 8. Financial Statements And Supplementary Data
— Note 11. Consolidated Debt.
(3) Interest on the 6.375% Notes is payable semi-annually in arrears on April 1 and October 1 of each year, commencing on October 1, 2012
and will mature on October 1, 2022 unless earlier redeemed or repurchased. See Item 8. Financial Statements And Supplementary Data
— Note 11. Consolidated Debt.
(4) Interest on the 5.875% Notes is payable semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1,
2014 and will mature on March 21, 2024 unless earlier redeemed or repurchased. See Item 8. Financial Statements And Supplementary
Data — Note 11. Consolidated Debt.
(5) The tax-exempt bonds bear interest between 4% and 5.25%. Interest on the $335 million of tax-exempt bonds issued in 2012, is payable
semi-annually on May 1 and November 1 of each year, commencing on May 1, 2013. Interest on the $130 million of tax-exempt bonds
issued in 2015, is payable semi-annually on January 1 and July 1 of each year, commencing on January 1, 2016. For a detailed description
of the terms of the Tax-Exempt bonds, see Item 8. Financial Statements And Supplementary Data — Note 11. Consolidated Debt.
(6) The original lease terms range from 10 years to 12 years and the fixed interest rates range from 3.48% to 4.52%.
(7) Payment obligations for the project debt and equipment leases associated with owned energy-from-waste facilities are limited recourse to
operating subsidiaries and non-recourse to us, subject to operating performance guarantees and commitments.
(8) The Stakeholder Loan accrues dividends at a fixed rate of 13.50% per annum. The dividends are payable 50% in cash and 50% accrued to
the principal balance on a monthly basis prior to the operational commencement date, and payable 100% in cash semi-annually thereafter,
54
subject to available project cash flows after debt service. See Item 8. Financial Statements And Supplementary Data — Note 11. Consolidated
Debt - Dublin Convertible Preferred.
(9) Accounting for uncertainty in income tax obligations is based upon the expected date of settlement taking into account all of our administrative
rights including possible litigation.
(10) Interest payments represent accruals for cash interest payments. Excludes interest payments on Dublin Senior Term Loan.
(11) Projected obligations relating to our Dublin Senior Term Loan. See Item 8. Financial Statements And Supplementary Data — Note 11.
Consolidated Debt.
(12) Purchase obligations relate to capital commitments related to our New York City waste transport and disposal contract. See Item 8. Financial
Statements And Supplementary Data — Note 3. New Business and Asset Management for additional information.
(13) Retirement plan obligations are based on actuarial estimates for the non-qualified pension plan obligations and post-retirement plan
obligations only as of December 31, 2016. In 2012, the qualified pension plan was terminated and final settlement occurred in 2013. See
Item 8. Financial Statements And Supplementary Data — Note 16. Employee Benefit Plans.
Other Commitments
Other commitments as of December 31, 2016 were as follows (in millions):
Commitments Expiring by Period
Less Than
One Year
More Than
One Year
Total
Letters of credit issued under the Revolving Credit Facility . . . . . . . $
Letters of credit - other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surety bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other commitments — net . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
156
61
158
375
$
$
— $
—
—
— $
156
61
158
375
For additional information on other commitments, see Item 8. Financial Statements And Supplementary Data — Note 18.
Commitments and Contingencies - Other Matters.
New York City Waste Transport and Disposal Contract
In August 2013, New York City awarded us a contract to handle waste transport and disposal from two marine transfer stations
located in Queens and Manhattan. Service for the Queens marine transfer station began in early 2015, service for the Manhattan
marine transfer station is expected to follow pending notice to proceed to be issued by New York City, which is anticipated in
2018. As of December 31, 2016, we expect to incur approximately $33 million of additional capital expenditures, primarily for
transportation equipment.
Other Factors Affecting Liquidity
We may from time to time engage in construction activity for public sector clients, either for new projects or expansions of
existing projects. We historically receive payments for this activity based upon completion of 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.
This variability can in turn result in meaningful swings between periods in our Cash Flow from Operations and Free Cash Flow
(which we use as a non-GAAP liquidity measure). For additional information related to Cash Flow from Operations see Liquidity
and Capital Resources — Sources and Uses of Cash Flow from Continuing Operations and Liquidity and Capital Resources —
Supplementary Financial Information — Free Cash Flow (Non-GAAP Discussion) above.
Our capital structure includes multiple debt securities and credit facilities, each with different maturity dates. As and when we
refinance each element of our capital structure, we may consider utilizing the same or different types of debt securities and credit
facilities, depending upon market conditions and general business requirements. Our selection of the same or different refinancing
structures could materially increase or decrease our annual cash interest expense in future periods.
Insurance Coverage
We periodically review our insurance programs to ensure that our coverage is appropriate for the risks attendant to our business.
We have obtained insurance for our employees, assets and operations that provide coverage for what we believe are probable
maximum losses, subject to self-insured retentions, policy limits and premium costs which we believe to be appropriate. However,
the insurance obtained does not cover us for all possible losses, and coverage available in the market may change over time.
Off-Balance Sheet Arrangements
We are party to a lease arrangement at our Union County, New Jersey energy-from-waste facility in which we lease the facility
from the Union County Utilities Authority, referred to as the “UCUA.” We guarantee a portion of the rent due under the lease,
which is sufficient to allow UCUA to make debt service payments due on the tax exempt bonds issued by it to finance the
construction of the facility and which are scheduled to mature in 2031.
55
We are also a party to various lease arrangements pursuant to which we lease rolling stock in connection with our operating
activities, as well as lease certain office space and equipment. Rent payable under these arrangements is not material to our financial
position. We generally use operating lease treatment for all of the foregoing arrangements. A summary of our operating lease
obligations is contained in Item 8. Financial Statements And Supplementary Data — Note 10. Operating Leases.
As described above under Other Commitments, we have issued or are party to performance guarantees and related contractual
obligations undertaken mainly pursuant to agreements to construct and/or operate certain energy-from-waste facilities. To date,
we have not incurred material liabilities under our guarantees.
We have investments in several investees and joint ventures that are accounted for under the equity and cost methods and
therefore we do not consolidate the financial information of those companies. See Item 8. Financial Statements And Supplementary
Data — Note 9. Equity Method Investments for additional information regarding these investments.
56
DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing our consolidated financial statements in accordance with GAAP, we are required to use judgment in making estimates
and assumptions that affect the amounts reported in our consolidated financial statements and related notes. We base our estimates
on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. These
estimates form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from
other sources. Many of our critical accounting policies are subject to significant judgments and uncertainties that could potentially
result in materially different results under different conditions and assumptions. Future events rarely develop exactly as forecast,
and the best estimates routinely require adjustment.
Policy
Judgments and estimates
Effect if actual results differ
from assumptions
Revenue and Expense Recognition
(Construction Contracts)
Construction contracts are typically
signed in conjunction with agreements to
operate a newly constructed project. Upon
completion of the construction element of
these contracts, we recognize service
revenue over the term of the service
element of the contract.
Revenue under existing fixed-price
construction contracts are recognized
using the percentage-of-completion
method, measured by the cost-to-cost
method.
If we enter new contracts that contain
multiple element arrangements, the
revenue will be allocated between
construction revenue and other project
revenue (waste disposal revenue and
electricity and steam sales) based on the
relative fair value of each element
provided the delivered elements have
value to customers on a standalone basis.
Amounts allocated to each element are
based on its objectively determined fair
value, such as the sales price for the
product or service when it is sold
separately or competitor prices for similar
products or services.
Purchase Accounting
We allocate acquisition purchase prices to
identified tangible and intangible assets
acquired and liabilities assumed based on
their estimated fair values at the dates of
acquisition, with any residual amounts
allocated to goodwill. The fair value
estimates used reflect our best estimates
for the highest and best use by market
participants.
We estimate our total construction
costs for the contract throughout the
project. As the project progresses,
revisions to our estimated costs may
be necessary.
If a revision to our estimated
construction costs is required, the
amount of revenue and the related
operating income recognized will
also fluctuate.
Given the unique nature of our
business, we are likely to use our
best estimate of selling price in
allocating revenue between
construction, and other project
revenue (waste and service revenue,
and electricity and steam sales). This
allocation would be performed at the
inception of the new contracts and
when a material modification occurs.
The allocation of revenue will
impact the timing of revenue
recognized for each unit, where the
amount allocated to construction will
be recognized in earlier periods
followed by the remainder over the
service period. Any subsequent
modification to the contracts that are
considered material could result in a
change in the amount and timing of
revenue to be recognized.
These estimates are subject to
uncertainties and contingencies. For
example, we used the discounted
cash flow method to estimate the
value of many of our assets, which
entailed developing projections of
future cash flows.
If the cash flows from the acquired
net assets differ significantly from
our estimates, the amounts recorded
could be subject to impairments.
Furthermore, to the extent we change
our initial estimates of the remaining
useful life of the assets or liabilities,
future depreciation and amortization
expense could be impacted.
57
Judgments and estimates
Effect if actual results differ
from assumptions
Future events or change in
circumstances may occur that require
another assessment in future periods
based on cash flows and discount
rates in effect at that time.
Our judgments regarding the
existence of impairment indicators
are based on regulatory factors,
market conditions, anticipated cash
flows and operational performance
of our assets.
When determining the fair value of
our asset groupings and intangible
assets for impairment assessments,
we make assumptions regarding
their fair values which are dependent
on estimates of future cash flows,
discount rates, and other factors.
Our judgments regarding the
existence of impairment indicators
are based on regulatory factors,
market conditions, anticipated cash
flows and operational performance
of our assets.
When determining the fair value of
our reporting unit for impairment
assessments, we make assumptions
regarding the fair value which is
dependent on estimates of future
cash flows, discount rates, and other
factors.
The impairment assessment of
goodwill performed in the periods
presented resulted in the conclusion
that the fair value was not less than
the carrying value.
In future years, if there is a
significant change in the estimated
cash flows, discount rates or other
factors that cause the fair values to
significantly decrease, there could be
impairments which could materially
impact our results of operations.
Policy
Long-lived Assets and Intangible Assets
Our long-lived assets include property,
plant and equipment; waste, service and
energy contracts; amortizable intangible
assets; and other assets. We evaluate the
recoverability of the long-lived assets
when there are indicators of possible
impairment. Such indicators may include
a decline in market, new regulation,
recurring or expected operating losses,
change in business strategy, or other
changes that would impact the use or
benefit received from the assets. The
assessment is performed by grouping the
long-lived assets at the lowest level of
identifiable cash flows for the related
assets or group of assets (such as the
facility level). Initially the carrying value
of the asset or asset group is compared to
its undiscounted expected future cash
flows. If the carrying value is in excess of
the undiscounted cash flows, the carrying
value is then compared to the fair value.
Fair value may be estimated based upon
the discounted cash flows, market or
replacement cost methods based on the
assumptions of a third-party market
participant. Impairment is recognized if
the fair value is less than the carrying
value.
Goodwill
As of December 31, 2016, we had $302
million of goodwill recorded in our North
America reportable segment, which is
comprised of two reporting units (see
Note 8. Other Intangible Assets and
Goodwill). We evaluate our goodwill
annually and when indications of
impairment exist.
We have the option to perform our initial
assessment over the possible impairment
of goodwill either qualitatively or
quantitatively. Under the qualitative
assessment, consideration is given to both
external factors (including
macroeconomic and industry conditions)
and our own internal factors (including
internal costs, recent financial
performance, management, business
strategy, customers, and stock price).
During the fourth quarter of 2016 we
performed the required annual impairment
review of our recorded goodwill. We
determined that there was no indication of
impairment as the fair value of our
reporting units exceeded their carrying
values.
58
Policy
Insurance Reserves and Self-Insurance
for Employee Benefit Plans
We retain a substantial portion of the risk
related to certain general liability,
workers’ compensation and medical
claims. However, we maintain stop-loss
coverage to limit the exposure related to
employee benefit plans and liability
insurance over retained risks. Liabilities
associated with these losses include
estimates of both claims filed and losses
incurred but not yet reported ("IBNR").
We use actuarial methods which consider
a number of factors to estimate our
ultimate cost of losses. Our insurance
reserves and medical liability accrual was
$16 million and $14 million as of
December 31, 2016 and 2015,
respectively.
Deferred Tax Assets
As described in Item 8. Financial
Statements And Supplementary Data —
Note 15. Income Taxes, we have recorded
a deferred tax asset related to our NOLs.
The NOLs will expire in various amounts
beginning on December 31, 2028 through
December 31, 2033, if not used.
Deferred tax assets 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.
Judgments and estimates
Effect if actual results differ
from assumptions
We believe that the amounts accrued
are adequate; however, our liabilities
could be significantly affected if
future occurrences or loss
developments differ from our
estimates of both claims filed and
losses incurred but not yet reported.
A 1% change in average claim costs
would impact our self-insurance
expense by less than $1 million.
To the extent our estimation of the
reversal of temporary differences and
operating income generated differs
from actual results, we could be
required to adjust the carrying
amount of the deferred tax assets.
We estimated that we had gross
NOLs of approximately $288
million for federal income tax
purposes and $291 million for state
income tax purposes as of the end of
2016. We also estimated our tax
credits as approximately $54 million
and our deferred tax assets are offset
by a valuation allowance of
approximately $71 million.
The amount recorded was calculated
based upon future taxable income
arising from (a) the reversal of
temporary differences during the
period the NOLs are available and
(b) future operating income
expected, to the extent it is
reasonably predictable.
Judgment is involved in assessing
whether a valuation allowance is
required on our deferred tax assets.
RECENT ACCOUNTING PRONOUNCEMENTS
See Item 8. Financial Statements And Supplementary Data — Note 2. Recent Accounting Pronouncements for a summary of
new accounting pronouncements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, our subsidiaries are party to financial instruments that are subject to market risks arising from
changes in commodity prices, interest rates, foreign currency exchange rates, and derivative instruments. Our use of derivative
instruments is very limited and we do not enter into derivative instruments for trading purposes. The following analysis provides
quantitative information regarding our exposure to financial instruments with market risks. We use a sensitivity model to evaluate
the fair value or cash flows of financial instruments with exposure to market risk that assumes instantaneous, parallel shifts in
exchange rates and interest rate yield curves. There are certain limitations inherent in the sensitivity analysis presented, primarily
due to the assumption that exchange rates change in a parallel manner and that interest rates change instantaneously. In addition,
the fair value estimates presented herein are based on pertinent information available to us as of December 31, 2016. Further
information is included in Item 8. Financial Statements And Supplementary Data — Note 12. Financial Instruments and Note 13.
Derivative Instruments.
59
Commodity Price Risk
Energy Price Risk
In contrast to our waste disposal agreements, as a result of structural and regulatory changes in the energy markets over time,
we expect that multi-year contracts for energy sales will generally be less available than in the past, thereby increasing our exposure
to energy market price volatility upon expiration. As our historic energy contracts have expired and our service fee contracts have
transitioned to tip fee contracts, our exposure to market energy prices has increased. We expect this trend to continue. In order to
mitigate our exposure to near-term (one to three years) revenue fluctuations in energy markets, we enter into hedging arrangements
and we expect to do so in the future. Our efforts in this regard will involve only mitigation of price volatility for the energy we
produce, and will not involve speculative energy trading. In connection with this hedging strategy, we have entered into swap
agreements with various financial institutions to hedge our exposure to market risk. As of December 31, 2016, the net fair value
of the energy derivatives of $2 million pre-tax, was recorded as a $3 million current asset and a $1 million current liability and as
a component of Accumulated Other Comprehensive Income (“AOCI”).
Recycled Metals Price Risk
We recover and sell ferrous and non-ferrous metals, with pricing linked to related commodity indices. Therefore, our metals
revenue is completely exposed to market price fluctuations. A 10% change in the current market rates would impact recycled
metals revenue by approximately $3 million and $4 million for ferrous and non-ferrous, respectively. We are currently unable to
mitigate this exposure effectively either via long-term pricing contracts or with hedging instruments as there are limited options
to enter into such arrangements for this segment of the market.
Waste Price Risk
We have some protection against fluctuations in fuel (municipal waste) price risk in our North America segment energy-from-
waste business because approximately 78% of our municipal waste is provided under multi-year contracts where we are paid for
our fuel at fixed rates. At our tip fee energy-from-waste facilities, differing amounts of waste processing capacity are not subject
to long-term contracts and, therefore, we are partially exposed to the risk of market fluctuations in the waste disposal fees we may
charge for fuel. At service fee facilities, waste disposal fees generally increase annually due to annual contract price escalations
intended to reflect changes in our costs. Declines in waste disposal fees at our energy-from-waste facilities are mitigated through
internalizing waste disposal by utilizing our network of transfer stations located throughout the northeast United States and by
increasing our profiled waste volumes, which we can sell at a higher price than municipal solid waste.
We expect that multi-year contracts for waste supply at facilities we own or lease will continue to be available on acceptable
terms in the marketplace, at least for a substantial portion of facility capacity, as municipalities continue to value long-term
committed and sustainable waste disposal capacity. We also expect that an increasing portion of system capacity will be contracted
on a shorter-term basis, and so we will have more frequent exposure to waste market risk.
Interest Rate Risk
Outstanding loan balances under the Credit Facilities bear interest at floating rates, which are calculated as either interest at a
reserve adjusted British Bankers Association Interest Settlement Rate, commonly referred to as “LIBOR,” the “prime rate” or the
Federal Funds rate plus 0.5% per annum, plus a borrowing margin. For details as to the various election options under the Credit
Facility, see Item 8. Financial Statements And Supplementary Data — Note 11. Consolidated Debt. As of December 31, 2016, the
outstanding balance of the Term Loan was $195 million. We have not entered into any interest rate hedging arrangements against
this balance. A hypothetical increase of 1% in the underlying December 31, 2016 market interest rates would result in a potential
reduction to twelve-month future earnings of approximately $2 million, pre-tax. For details, see Item 8. Financial Statements And
Supplementary Data — Note 11. Consolidated Debt.
In order to hedge the risk of adverse variable interest rate fluctuations associated with the Dublin Project Senior Term Loan, we
have entered into floating to fixed rate swap agreements, denominated in Euros for the full €250 million loan amount with various
financial institutions that terminate between 2017 and 2021. This interest rate swap is designated as a cash flow hedge, which is
recorded at fair value as a noncurrent liability with changes in fair value recorded as a component of AOCI. As of December 31,
2016, the fair value of the interest rate swap derivative of $20 million pre-tax, was recorded as a noncurrent liability. For additional
information, see Item 8. Financial Statements And Supplementary Data — Note 13. Derivative Instruments.
Foreign Currency Exchange Rate Risk
We have operations in various foreign markets, including China, Canada, Ireland and Italy. As and to the extent we grow our
international business, we expect to invest in foreign currencies to pay either for the construction costs of facilities we develop,
or for the cost to acquire existing businesses or assets. Currency volatility in those markets, as well as the effectiveness of any
currency hedging strategies we may implement, may impact both the amount we are required to invest in new projects as well as
our financial returns on these projects and our reported results. We have mitigated our currency risks in certain cases by structuring
our project contracts so that our revenue adjust in line with corresponding changes in the relevant currency rates. In such cases,
60
only that portion of our working capital investment and associated project debt, if any, that are denominated in a currency other
than the project entity’s functional currency are exposed to currency risks. As of December 31, 2016, the fair value of the foreign
currency derivatives of zero pre-tax, was recorded as a current asset. For additional information, see Item 8. Financial Statements
And Supplementary Data — Note 13. Derivative Instruments.
As of December 31, 2016, we also had equity investments in foreign subsidiaries and projects. See Item 8. Financial Statements
And Supplementary Data — Note 9. Equity Method Investments for further discussion.
61
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the Years Ended December 31, 2016, 2015, and 2014 . . . . . . . . . . .
Consolidated Statements of Comprehensive (Loss) Income for the Years Ended December 31, 2016, 2015, and
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of December 31, 2016 and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flow for the Years Ended December 31, 2016, 2015, and 2014. . . . . . . . . . . .
Consolidated Statements of Equity for the Years Ended December 31, 2016, 2015 and 2014 . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 1. Organization and Summary of Significant Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 2. Recent Accounting Pronouncements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 3. New Business and Asset Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 4. Dispositions, Assets Held for Sale and Discontinued Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 5. Equity and Earnings Per Share ("EPS"). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 6. Financial Information by Business Segments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 7. Amortization of Waste, Service and Energy Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 8. Other Intangible Assets and Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 9. Equity Method Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 10. Operating Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 11. Consolidated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 12. Financial Instruments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 13. Derivative Instruments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 14. Supplementary Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 15. Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 16. Employee Benefit Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 17. Stock-Based Award Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 18. Commitments and Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 19. Quarterly Data (Unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 20. Subsequent Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statement Schedule: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule II Valuation and Qualifying Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
63
64
65
66
67
69
70
70
76
77
79
80
82
83
84
84
85
86
94
96
97
99
102
104
107
110
110
110
110
62
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Covanta Holding Corporation
We have audited the accompanying consolidated balance sheets of Covanta Holding Corporation (the “Company”) as of
December 31, 2016 and 2015, and the related consolidated statements of operations, comprehensive (loss) income, equity, and
cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement
schedule listed in the Index at Item 8. These financial statements and schedule are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position
of Covanta Holding Corporation at December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows
for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for service
concession arrangements as a result of the adoption of the amendments to the Financial Accounting Standards Board Accounting
(FASB) Standards Codification resulting from Accounting Standards Update (ASU) No. 2014-05, “Service Concession
Arrangements,” effective January 1, 2015. As discussed in Note 1 to the consolidated financial statements, the Company changed
the classification of all deferred tax assets and liabilities to noncurrent on the consolidated balance sheet as a result of the adoption
of the amendments to the FASB Accounting Standards Codification resulting from ASU No. 2015-17, “Balance Sheet Classification
of Deferred Taxes,” effective December 31, 2015. As discussed in Note 1 to the consolidated financial statements, the Company
changed the classification of its debt issuance costs to be presented as a direct reduction from the carrying amount of the related
liability on the consolidated balance sheet as a result of the adoption and the amendments to the FASB Accounting Standards
Codification resulting in ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs”, effective January 1, 2016.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
Covanta Holding Corporation's internal control over financial reporting as of December 31, 2016, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
Framework) and our report dated February 28, 2017 expressed an adverse opinion thereon.
/s/ Ernst & Young LLP
MetroPark, New Jersey
February 28, 2017
63
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
2016
2014
2015
(In millions, except per share amounts)
OPERATING REVENUE:
Waste and service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,187
$
1,104
$
Energy revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recycled metals revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OPERATING EXPENSE:
Plant operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other operating expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense):
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash convertible debt related expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on asset sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income tax (expense) benefit and equity in net income from
unconsolidated investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax (expense) benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in net income from unconsolidated investments . . . . . . . . . . . . . . . . . . . . . . .
NET (LOSS) INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Net income attributable to noncontrolling interests in subsidiaries. . . . . . . . . .
NET (LOSS) INCOME ATTRIBUTABLE TO COVANTA HOLDING
CORPORATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
370
61
81
1,699
1,177
86
100
207
20
1,590
109
1
(139)
—
44
—
(1)
(95)
14
(22)
4
(4)
—
421
61
59
1,645
1,129
73
93
198
43
1,536
109
—
(134)
—
—
(2)
(1)
(137)
(28)
84
13
69
1
(4) $
68
$
Weighted Average Common Shares Outstanding
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
129
129
132
133
(Loss) Income Per Share Attributable to Covanta Holding Corporation
Stockholders:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Dividend Declared Per Share: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
(0.03) $
(0.03) $
1.00
$
0.52
0.51
1.00
$
$
$
The accompanying notes are an integral part of the consolidated financial statements.
1,032
460
93
97
1,682
1,055
101
97
211
64
1,528
154
1
(135)
(13)
—
(2)
(1)
(150)
4
(15)
10
(1)
1
(2)
130
130
(0.01)
(0.01)
0.86
64
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
For the Years Ended December 31,
2016
2015
2014
(In millions)
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized (loss) gain on derivative instruments, net of tax (benefit) expense
of $(8), $7, and $2, respectively. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net unrealized loss on available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss attributable to Covanta Holding Corporation . . . . . . . . .
Comprehensive (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(4) $
(7)
(21)
—
(28)
(32)
Less: Net income attributable to noncontrolling interests in subsidiaries . . . . . . .
Comprehensive (loss) income attributable to Covanta Holding Corporation . . . . . .
$
—
(32) $
69
(22)
10
—
(12)
57
1
56
$
$
(1)
(12)
(7)
(1)
(20)
(21)
1
(22)
The accompanying notes are an integral part of the consolidated financial statements.
65
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Current:
ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Restricted funds held in trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivables (less allowances of $9 million and $7 million, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Current Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted funds held in trust. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Waste, service and energy contracts, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
LIABILITIES AND EQUITY
Current:
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Current portion of project debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Project debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Waste and service contracts, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and Contingencies (Note 18)
Equity:
Covanta Holding Corporation stockholders' equity:
Preferred stock ($0.10 par value; authorized 10 shares; none issued and outstanding) . . . . . . . . . . . . . . . . . . . . . . . .
Common stock ($0.10 par value; authorized 250 shares; issued 136 shares, outstanding 130 and 131, respectively)
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Covanta Holding Corporation stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interests in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities and Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
As of December 31,
2016
2015
(In millions, except per
share amounts)
84
56
332
72
—
544
3,024
54
263
34
302
63
4,284
9
22
98
289
—
418
2,243
361
617
7
169
3,815
—
14
807
(62)
(289)
(1)
469
—
469
4,284
$
$
$
$
94
77
312
117
97
697
2,690
83
284
38
301
141
4,234
8
16
90
234
23
371
2,255
182
595
13
178
3,594
—
14
801
(34)
(143)
—
638
2
640
4,234
The accompanying notes are an integral part of the consolidated financial statements.
66
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
OPERATING ACTIVITIES:
For the Years Ended December 31,
2016
2015
2014
(In millions)
Net (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(4) $
69
$
(1)
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of long-term debt deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on asset sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt premium and discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash convertible debt related expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity in net income from unconsolidated investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends from unconsolidated investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IRS audit settlement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in restricted funds held in trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in operating assets and liabilities, net of effects of acquisitions:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt services billings in excess of revenue recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total adjustments for continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INVESTING ACTIVITIES:
Purchase of property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of businesses, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of noncontrolling interests in subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from asset sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property insurance proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the sale of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from available-for-sale marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities from continuing operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by investing activities from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
207
6
(44)
20
1
—
—
2
16
(4)
2
21
—
22
(6)
(19)
(1)
45
(2)
20
286
282
—
282
(359)
(9)
—
—
109
3
—
—
2
(254)
—
(254)
198
8
—
43
—
2
—
1
18
(13)
5
(11)
(93)
28
16
(12)
5
(8)
(5)
(2)
180
249
—
249
(376)
(72)
—
—
—
1
—
—
(1)
(448)
—
(448)
211
8
—
64
(1)
2
13
4
17
(10)
11
4
—
11
2
(40)
17
57
(22)
(7)
341
340
1
341
(216)
(13)
(12)
(4)
—
2
6
11
(6)
(232)
3
(229)
67
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW – (Continued)
FINANCING ACTIVITIES:
Proceeds from borrowings on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from borrowings on revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from equipment financing capital lease. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from borrowings on project debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from borrowings on Dublin project financing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from the exercise of options for common stock, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from settlement of Note Hedge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments related to Cash Conversion Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of borrowings on revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of equipment financing capital lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal payments on project debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments of deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends paid to stockholders. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common stock repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in restricted funds held in trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by financing activities from continuing operations . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities from discontinued operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by financing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Cash and cash equivalents of assets held for sale and discontinued operations at end of period . . .
Cash and cash equivalents of continuing operations at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash Paid for Interest and Income Taxes:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income taxes, net of refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
For the Years Ended December 31,
2016
2015
2014
(In millions)
—
744
—
—
159
—
—
—
(4)
(749)
(4)
(51)
(6)
(131)
(20)
28
(6)
(40)
—
(40)
—
(12)
96
84
—
84
150
6
$
$
$
294
895
15
59
86
—
—
—
(196)
(692)
(4)
(85)
(11)
(133)
(30)
5
5
208
—
208
(4)
5
91
96
2
94
141
2
$
$
$
412
531
63
63
—
10
(83)
83
(557)
(496)
(1)
(52)
(36)
(101)
—
(43)
(3)
(210)
(6)
(216)
(5)
(109)
200
91
7
84
121
11
The accompanying notes are an integral part of the consolidated financial statements.
68
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
Covanta Holding Corporation Stockholders’ Equity
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Earnings
(Deficit)
(In millions)
Treasury Stock
Shares
Amount
Noncontrolling
Interests in
Subsidiaries
Total
Balance as of December 31, 2013 . . . .
136
$
14
$
790
$
(2) $
101
6
$
(1) $
4
$
Stock-based compensation expense. . . .
Dividend declared . . . . . . . . . . . . . . . . .
Shares repurchased for tax
withholdings for vested stock
awards . . . . . . . . . . . . . . . . . . . . . . . .
Exercise of options to purchase
common stock . . . . . . . . . . . . . . . . . .
Exercise of warrants. . . . . . . . . . . . . . . .
Shares issued in non-vested stock
award . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of noncontrolling interests
in subsidiaries . . . . . . . . . . . . . . . . . .
Comprehensive (loss) income, net of
income taxes . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2014 . . . .
Opening retained earnings adjustment. .
Stock-based compensation expense. . . .
Dividend declared . . . . . . . . . . . . . . . . .
Common stock repurchased. . . . . . . . . .
Shares repurchased for tax
withholdings for vested stock
awards . . . . . . . . . . . . . . . . . . . . . . . .
Distribution to partners of
noncontrolling interest of
subsidiaries . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment for acquisition of
noncontrolling interests in
subsidiaries . . . . . . . . . . . . . . . . . . . .
Comprehensive (loss) income, net of
income taxes . . . . . . . . . . . . . . . . . . .
17
(4)
10
1
(9)
136
$
14
$
805
$
(20)
(22) $
18
(13)
(5)
(4)
Balance as of December 31, 2015
136
$
14
$
801
$
Stock-based compensation expense. . . .
Dividend declared . . . . . . . . . . . . . . . . .
Common stock repurchased. . . . . . . . . .
Shares repurchased for tax
withholdings for vested stock
awards . . . . . . . . . . . . . . . . . . . . . . . .
Exchange of China equity investments .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive loss, net of income
taxes. . . . . . . . . . . . . . . . . . . . . . . . . .
16
(6)
(4)
Balance as of December 31, 2016 . . . .
136
$
14
$
807
$
(12)
(34) $
(28)
(62) $
(114)
(2)
(15)
(45)
(133)
(19)
1
68
(143)
(132)
(11)
1
(4)
(289)
906
17
(114)
(4)
10
1
—
1
(1)
(1)
(1)
1
(3)
(12)
3
$ — $
1
2
$
2
(1)
1
2
$
(2)
5
$ — $
1
(1)
(21)
784
(45)
18
(133)
(32)
(5)
(1)
1
(4)
57
640
16
(132)
(18)
(4)
(2)
1
6
$
(1) $
—
— $
(32)
469
The accompanying notes are an integral part of the consolidated financial statements.
69
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The terms “we,” “our,” “ours,” “us” and “Company” refer to Covanta Holding Corporation and its subsidiaries; the term “Covanta
Energy” refers to our subsidiary Covanta Energy, LLC and its subsidiaries.
Organization
Covanta is one of the world’s largest owners and operators of infrastructure for the conversion of waste to energy (known as
“energy-from-waste” or “EfW”), and also owns and operates related waste transport and disposal and other renewable energy
production businesses. EfW serves two key markets as both a sustainable waste management solution that is environmentally
superior to landfilling and as a source of clean energy that reduces overall greenhouse gas emissions and is considered renewable
under the laws of many states and under federal law. Our facilities are critical infrastructure assets that allow our customers, which
are principally municipal entities, to provide an essential public service.
Our EfW facilities earn revenue from both the disposal of waste and the generation of electricity and/or steam, generally under
contracts, as well as from the sale of metal recovered during the EfW process. We process approximately 20 million tons of solid
waste annually. We operate and/or have ownership positions in 42 energy-from-waste facilities, which are primarily located in
North America, and 5 additional energy generation facilities, including other renewable energy production facilities in North
America (wood biomass and hydroelectric). In total, these assets produce approximately 10 million megawatt hours (“MWh”) of
baseload electricity annually. We also operate a waste management infrastructure that is complementary to our core EfW business.
We have one reportable segment, North America, which is comprised of waste and energy services operations located primarily
in the United States and Canada. We are currently constructing an EfW facility in Dublin, Ireland, which we own and will operate
upon completion. We hold interests in an energy-from-waste facility in Italy and an infrastructure business in China which is
engaged in energy-from-waste operations. For additional information on our reportable segment, see Note 6. Financial Information
by Business Segments.
During 2016, we divested the majority of our investments in China. For additional information see Note 4. Dispositions, Assets
Held for Sale and Discontinued Operations.
Summary of Significant Accounting Policies
The financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in
the United States of America ("GAAP"). The following is a description of our significant accounting policies.
Principles of Consolidation
The consolidated financial statements reflect the results of our operations, cash flows and financial position of our majority-
owned or controlled subsidiaries. All intercompany accounts and transactions have been eliminated.
Equity and Cost Method Investments
Investments in unconsolidated entities over which we have significant influence are accounted for under the equity method of
accounting. Investments in entities in which we do not have the ability to exert significant influence over the investees’ operating
and financing activities are accounted for under the cost method of accounting. Cost-method investments are carried at historical
cost unless indicators of impairment are identified. We monitor investments for other-than-temporary declines in value and make
reductions when appropriate. For additional information on equity method investments, see Note 9. Equity Method Investments.
For additional information on our cost method investment in China, see Note 4. Dispositions, Assets Held for Sale and Discontinued
Operations.
Revenue Recognition
Our revenue is generated from the fees we earn for: waste disposal, operating energy-from-waste and independent power facilities,
servicing project debt, and for waste transportation and processing; from the sale of electricity and steam; from the sale of recycled
ferrous and non-ferrous metal; and from construction services. The fees charged for our services are generally defined in our
service agreements and vary based on contract-specific terms. We generally recognize revenue as services are performed or products
are delivered. For example, revenue typically is recognized as waste is received or processed at our facilities, metals are shipped
from our sites or as kilowatts are delivered to a customer by an EfW facility or independent power production plant.
Revenue under existing fixed-price or cost-plus construction contracts is recognized using the percentage-of-completion method,
measured by the cost-to-cost method. If an arrangement involves multiple deliverables, the delivered items are considered separate
units of accounting if the items have value on a stand-alone basis. Amounts allocated to each element are based on its objectively
determined fair value, such as the sales price for the product or service when it is sold separately or competitor prices for similar
products or services.
70
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Plant Operating Expense
Plant operating expense includes facility employee costs, expense for materials and parts for facility scheduled and unscheduled
maintenance and repair expense, which includes costs related to our internal maintenance team and non-facility employee costs.
Plant operating expense also includes hauling and disposal expenses, fuel costs, chemicals and reagents, operating lease expense,
and other facility operating related expense.
Pass Through Costs
Pass through costs are costs for which we receive a direct contractually committed reimbursement from the municipal client
that sponsors an EfW project. These costs generally include utility charges, insurance premiums, ash residue transportation and
disposal, and certain chemical costs. These costs are recorded net of municipal client reimbursements in our consolidated financial
statements. Total pass through costs for the years ended December 31, 2016, 2015 and 2014 were $41 million, $52 million, and
$59 million, respectively.
Income Taxes
Deferred income taxes are based on the difference between the financial reporting and tax basis of assets and liabilities. The
deferred income tax provision represents the change during the reporting period in the deferred tax assets and deferred tax liabilities,
net of the effect of acquisitions and dispositions. Deferred tax assets include tax losses and credit carryforwards and are reduced
by a valuation allowance if, based on available evidence, it is more likely than not that some portion or all of the deferred tax assets
will not be realized.
We file a consolidated federal income tax return for each of the periods covered by the consolidated financial statements, which
include all eligible United States subsidiary companies. Foreign subsidiaries are taxed according to regulations existing in the
countries in which they do business. Our federal consolidated income tax return also includes the taxable results of certain grantor
trusts, which are excluded from our consolidated financial statements; however, certain related tax attributes are recorded in our
consolidated financial statements since they are part of our federal tax return. For additional information, see Note 15. Income
Taxes.
Stock-Based Compensation
Stock-based compensation for share-based awards to employees is accounted for as compensation expense based on their grant
date fair values. For additional information, see Note 17. Stock-Based Award Plans.
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid investments having maturities of three months or less
from the date of purchase. These short-term investments are stated at cost, which approximates fair value. Balances held by our
international subsidiaries are not generally available for near-term liquidity in our domestic operations.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist of amounts due to us from normal business activities. Allowances for doubtful accounts are the
estimated losses from the inability of customers to make required payments. We use historical experience, as well as current market
information, in determining the estimate.
Restricted Funds Held in Trust
Restricted funds held in trust are primarily amounts received and held by third party trustees relating to certain projects we own.
We generally do not control these accounts and these funds may be used only for specified purposes. These funds include debt
service reserves for payment of principal and interest on project debt. Revenue funds are comprised of deposits of revenue received
with respect to projects prior to their disbursement. Other funds include escrowed debt proceeds, amounts held in trust for operations,
maintenance, environmental obligations, operating lease reserves in accordance with agreements with our clients, and amounts
held for future scheduled distributions. Such funds are invested principally in money market funds, bank deposits and certificates
of deposit, United States treasury bills and notes, United States government agency securities, and high-quality municipal bonds.
71
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Restricted fund balances are as follows (in millions):
As of December 31,
2016
2015
Current
Noncurrent
Current
Noncurrent
Debt service funds - principal . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt service funds - interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt service funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Revenue funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
10
1
11
3
42
56
$
$
7
—
7
—
47
54
$
$
9
1
10
4
63
77
$
$
8
—
8
—
75
83
Deferred Revenue
Deferred revenue included in Accrued expenses and other current liabilities on our consolidated balance sheet consisted of the
following (in millions):
Advance billings to municipalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5
11
16
$
$
6
7
13
Advance billings to certain customers are billed one or two months prior to performance of service and are recognized as income
As of December 31,
2016
2015
in the period the service is provided.
Property, Plant and Equipment
Property, plant, and equipment acquired in business acquisitions is recorded at our estimate of fair value on the date of the
acquisition. Additions, improvements and major expenditures are capitalized if they increase the original capacity or extend the
remaining useful life of the original asset more than one year. Maintenance repairs and minor expenditures are expensed in the
period incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which
generally range from three years for computer equipment to 50 years for certain infrastructure components of energy-from-waste
facilities. Property, plant and equipment at our service fee operated facilities are not recognized on our balance sheet due to the
adoption of the service concession arrangements guidance described in greater detail within the Accounting Pronouncements
Recently Adopted discussion below. Any additions, improvements and major expenditures for which we are responsible at our
service fee operated facilities are expensed in the period incurred. Our leasehold improvements are depreciated over the life of the
lease term or the asset life, whichever is shorter. Upon retirement or disposal of assets, the cost and related accumulated depreciation
are removed from the consolidated balance sheets and any gain or loss is reflected in the consolidated statements of operations.
Property, plant and equipment consisted of the following (in millions):
As of December 31,
2016
2015
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Facilities and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Landfills (primarily for ash disposal). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant, and equipment — net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
29
4,188
63
433
4,713
(1,689)
3,024
$
$
22
3,885
64
266
4,237
(1,547)
2,690
Depreciation and amortization expense related to property, plant and equipment was $185 million, $177 million, and $191
million, for the years ended December 31, 2016, 2015 and 2014, respectively. Non-cash investing activities related to capital
expenditures for growth projects totaled $41 million and $26 million as of December 31, 2016 and 2015, respectively and were
recorded in accrued expenses and other current liabilities on our consolidated balance sheet.
Property, plant and equipment is evaluated for impairment whenever events or changes in circumstances indicate their carrying
value may not be recoverable over their estimated useful life. In reviewing for recoverability, we compare the carrying amount of
72
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
the relevant assets to their estimated undiscounted future cash flows. When the estimated undiscounted future cash flows are less
than the assets carrying amount, the carrying amount is compared to the assets fair value. If the assets fair value is less than the
carrying amount an impairment charge is recognized to reduce the assets carrying amount to its fair value. For additional information,
see Note 14. Supplementary Information - Impairment Charges.
Asset Retirement Obligations
We recognize a liability for asset retirement obligations when it is incurred, which is generally upon acquisition, construction,
or development. Our liabilities include closure and post-closure costs for landfill cells and site restoration for certain energy-from-
waste and power producing sites. We principally determine the liability using internal estimates of the costs using current
information, assumptions, and interest rates, but also use independent appraisals as appropriate to estimate costs. When a new
liability for asset retirement obligation is recorded, we capitalize the cost of the liability by increasing the carrying amount of the
related long-lived asset. The liability is accreted to its present value each period and the capitalized cost is depreciated over the
useful life of the related asset. We recognize period-to-period changes in the liability resulting from revisions to the timing or the
amount of the original estimate of the undiscounted cash flows.
Current and noncurrent asset retirement obligations are included in Accrued expenses and other current liabilities and Other
liabilities, respectively, on our consolidated balance sheet. Our asset retirement obligation is presented as follows (in millions):
Beginning of period asset retirement obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
End of period asset retirement obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncurrent asset retirement obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
—
30
(3)
27
(1) Comprised primarily of expenditures and settlements of the asset retirement obligation liability, net revisions based on current estimates
2
(7)
25
—
25
$
$
As of December 31,
2016
2015
$
30
$
28
of the liability and revised expected cash flows and life of the liability.
Intangible Assets and Liabilities
Our waste, service and energy contracts are intangible assets related to long-term operating contracts at acquired facilities. These
intangible assets and liabilities, as well as lease interest and other finite and indefinite-lived intangible assets, are recorded at their
estimated fair market values upon acquisition based primarily upon discounted cash flows in accordance with accounting standards
related to business combinations. See Note 7. Amortization of Waste, Service and Energy Contracts and Note 8. Other Intangible
Assets and Goodwill.
Intangible assets with finite lives are evaluated for impairment whenever events or changes in circumstances indicate their
carrying value may not be recoverable over their estimated useful life. In reviewing for recoverability, we compare the carrying
amount of the relevant assets to their estimated undiscounted future cash flows. When the estimated undiscounted future cash
flows are less than the assets carrying amount, the carrying amount is compared to the assets fair value. If the assets fair value is
less than the carrying amount an impairment charge is recognized to reduce the assets carrying amount to its fair value. As of
December 31, 2016, there were no indicators of impairment identified.
Goodwill
Goodwill is the excess of our purchase cost over the fair value of the net assets of acquired businesses. We do not amortize
goodwill, but we assess our goodwill for impairment at least annually. We assess whether a goodwill impairment exists using both
qualitative and quantitative assessments. When we elect to perform a qualitative assessment, it involves determining whether
events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying
amount, including goodwill. If based on this qualitative assessment we determine it is more likely than not that the fair value of a
reporting unit is less than its carrying amount, or if we did not elect to perform the qualitative assessment we will perform a
quantitative assessment.
A quantitative assessment of goodwill requires a comparison of the estimated fair value of the reporting unit to which the goodwill
has been assigned to its carrying value. All goodwill is related to the North America reportable segment, which is comprised of
two reporting units. A reporting unit is defined as an operating segment or a component of an operating segment to the extent
discrete financial information is available that is reviewed by segment management. If the carrying value of the reporting unit
exceeds the fair value, the reporting unit’s goodwill is compared to its implied value of goodwill. If the carrying value of the
73
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
reporting unit’s goodwill exceeds the implied value, an impairment charge is recognized to reduce the carrying value to the implied
value.
There were no impairment charges recognized related to our evaluation of goodwill for the years ended December 31, 2016,
2015 and 2014.
Business Combinations
We recognize the assets acquired and liabilities assumed in a business combination at fair value including any noncontrolling
interest of the acquired entity; recognize any goodwill acquired; establish the acquisition-date fair value based on the highest and
best use by market participants for the asset as the measurement objective; and disclose information needed to evaluate and
understand the nature and financial effect of the business combination. We expense transaction costs directly associated to the
acquisition as incurred; capitalize in-process research and development costs, if any; and record a liability for contingent
consideration at the measurement date with subsequent remeasurement recognized in the results of operations. Any costs for
business restructuring and exit activities related to the acquired company are included in the post-combination results of operations.
Tax adjustments related to previously recorded business combinations, if any, are recognized in the results of operations.
Accumulated Other Comprehensive Income ("AOCI")
AOCI, in the consolidated statements of equity, includes unrealized gains and losses excluded from the consolidated statements
of operations. These unrealized gains and losses consisted of the following (in millions):
Foreign currency translation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension and other postretirement plan unrecognized net gain . . . . . . . . . . . . . . . . . . . .
Net unrealized loss on derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
(41) $
2
(23)
(62) $
The changes in accumulated other comprehensive (loss) income are as follows (in millions):
As of December 31,
2016
2015
Pension and
Other
Postretirement
Plan
Unrecognized
Net Gain
Net
Unrealized
Loss on
Derivatives
Foreign
Currency
Translation
Total
Balance December 31, 2014
Other comprehensive (loss) income before reclassifications
Amounts reclassified from accumulated other
comprehensive loss
Net current period comprehensive (loss) income
Balance December 31, 2015
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other
comprehensive loss
Net current period comprehensive loss
Balance December 31, 2016
(12) $
(22)
—
(22)
(34) $
(2)
(5)
(7)
(41) $
2
—
—
—
2
—
—
—
2
$
$
$
(12) $
10
—
10
(2) $
(21)
—
(21)
(23) $
$
$
$
74
(34)
2
(2)
(34)
(22)
(12)
—
(12)
(34)
(23)
(5)
(28)
(62)
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Accumulated Other Comprehensive Income
Component
Amount Reclassified from Accumulated Other Comprehensive Income
Year Ended
December 31, 2016
of Operations
Affected Line Item in the Consolidated Statement
Foreign currency translation
Total reclassifications
$
$
5 Gain on asset sales (1)
5 Total before tax
— Tax benefit
5 Net of tax
(1) For additional information see, Note 4. Dispositions, Assets Held for Sale and Discontinued Operations.
Derivative Instruments
We recognize derivative instruments on the balance sheet at their fair value. The cash conversion option and note hedge were
derivative instruments that were recorded at fair value quarterly with changes in fair value recognized in our consolidated statements
of operations as non-cash convertible debt related expense. We have entered into swap agreements with various financial institutions
to hedge our exposure to energy price risk and interest rate risk. Changes in the fair value of the energy derivatives and the interest
rate swap are recognized as a component of AOCI. For additional information, see Note 13. Derivative Instruments.
Foreign Currency Translation
For foreign operations, assets and liabilities are translated at year-end exchange rates and revenue and expense are translated at
the average exchange rates during the year. Unrealized gains and losses resulting from foreign currency translation are included
in the consolidated statements of equity as a component of AOCI. Currency transaction gains and losses are recorded in other
operating expense in the consolidated statements of operations.
Pension and Postretirement Benefit Obligations
Our pension and other postretirement benefit plans are accounted for based on actuarially-determined estimates. For additional
information, see Note 16. Employee Benefit Plans.
Share Repurchases
Under our share repurchase program, common stock repurchases may be made, from time to time, in the open market, in privately
negotiated transactions, or by other available methods, at management’s discretion and in accordance with applicable federal
securities laws. The timing and amounts of any repurchases will depend on many factors, including our capital structure, the market
price of our common stock and overall market conditions, and whether any restrictions then exist under our policies relating to
trading in compliance with securities laws. Purchase price over par value for share repurchases are allocated to additional paid-in
capital up to the weighted average amount per share recorded at the time of initial issuance of our common stock, with any excess
recorded as a reduction to retained earnings. For additional information, see Note 5. Equity and Earnings Per Share ("EPS").
Use of Estimates
The preparation of financial statements requires us to make estimates and assumptions that affect the reported amounts of assets
or liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Significant estimates
include: useful lives of long-lived assets, asset retirement obligations, construction expense estimates, unbilled service receivables,
fair value of financial instruments, fair value of the reporting units for goodwill impairment analysis, fair value of long-lived assets
for impairment analysis, renewable energy credits, stock-based compensation, purchase accounting allocations, cash flows and
taxable income from future operations, deferred taxes, allowances for uncollectible receivables, and liabilities related to employee
medical benefit obligations, workers’ compensation, severance and certain litigation.
Reclassifications
Certain amounts have been reclassified in our prior period consolidated balance sheet to conform to current year presentation
and such amounts were not material to current and prior periods. During the year ended December 31, 2016, we concluded that it
was appropriate to include Net interest expense on project debt within Interest expense, net on our consolidated statement of
operations because such amounts were deemed immaterial. Previously, Net interest expense on project debt was reported separately,
as a component of Operating expense. For the years ended December 31, 2015 and 2014, Net interest expense on project debt of
$9 million and $10 million, respectively, was reclassified to Interest expense, net on our consolidated statement of operations and
as a result, Operating income increased accordingly for those periods.
75
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Change in Estimate
Revenue under our Durham York construction contract is recognized using the percentage-of-completion method, measured by
the cost-to-cost method. We evaluate the estimate of our total construction costs for the contract throughout the life of the project
and make revisions to our estimated costs as necessary. During the year ended December 31, 2015, we reduced our overall profit
estimate related to this construction project by $20 million. The project was completed in 2015 and no further significant construction
expenses were incurred related to this project. We are currently seeking to resolve outstanding disputes with our primary contractor
for the Durham-York construction project, for additional information see Note 18. Commitments and Contingencies.
Accounting Pronouncements Recently Adopted
Effective January 1, 2016, we adopted guidance concerning the presentation of debt issuance costs, which are required to be
presented as a direct reduction from the carrying amount of the related debt liability. We adopted this guidance retrospectively,
which resulted in a reduction in our December 31, 2015 current and non-current asset balances of $5 million and $20 million,
respectively, along with a corresponding reduction in current and long-term debt balances. The December 31, 2015 balance sheet
includes certain costs for Dublin project financing within current assets for debt that has not yet been drawn down. For additional
information, see Note 11. Consolidated Debt.
Effective January 1, 2015, we were required to adopt guidance concerning service concession arrangements. The amendment
applies to an operating entity of a service concession arrangement entered into with a public-sector entity grantor when the
arrangement meets certain conditions. The amendments specify that such an arrangement may not be accounted for as a lease nor
should the infrastructure used in a service concession arrangement be recognized as property, plant and equipment by the operating
entity. Instead, the operating entity should refer to other guidance to account for the arrangement, such as Topic 605 of the Accounting
Standard Codification - Revenue Recognition. We adopted this guidance using a modified retrospective approach which requires
the cumulative effect of applying this guidance to arrangements existing at the beginning of the period of adoption be recognized
as an adjustment to retained earnings. As a result, accumulated deficit as of January 1, 2015 as originally reported of $15 million
increased by $45 million ($75 million reduction of property, plant and equipment, net of tax of $30 million) to $60 million.
The adoption of this guidance had the following effect on our consolidated statement of operations for the year ended December
31, 2015 (in millions, except per share amounts):
Plant operating expense
Depreciation and amortization
Income tax expense
Net income attributable to Covanta Holding Corporation
Basic and Diluted income per share
Increase (Decrease)
31
(22)
(4)
(5)
(0.04)
$
$
$
$
$
Effective December 31, 2015, we early adopted the guidance, on a prospective basis, concerning simplified presentation of
deferred income taxes by requiring that deferred tax assets and liabilities be classified as non-current in the statement of financial
position. Adoption of this guidance resulted in reclassification of our net current deferred tax asset of $67 million to the net non-
current deferred tax asset in our consolidated balance sheet as of December 31, 2015.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In January of 2017, the Financial Accounting Standards Board ("FASB") issued guidance clarifying the definition of a business
to assist entities when determining whether an integrated set of assets and activities meets the definition of a business. The update
provides that when substantially all the fair value of the assets acquired is concentrated in a single identifiable asset or a group of
similar identifiable assets, the set is not a business. The guidance is effective for fiscal years beginning after December 15, 2017,
including interim periods within those fiscal years. The adoption of this new guidance is not expected to have a material impact
on our consolidated financial statements.
In January of 2017, the FASB issued updated guidance to eliminate the requirement to calculate the implied fair value of goodwill
to measure a goodwill impairment charge (Step 2). As a result, an impairment charge will equal the amount by which a reporting
unit’s carrying amount exceeds its fair value, not to exceed the amount of goodwill allocated to the reporting unit. An entity still
has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.
The amendment should be applied on a prospective basis. The guidance is effective for goodwill impairment tests in fiscal years
beginning after December 15, 2019. Early adoption is permitted for goodwill impairment tests performed after January 1, 2017.
The impact of this guidance for the Company will depend on the outcomes of future goodwill impairment tests.
76
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In November of 2016, the FASB issued guidance requiring that a statement of cash flows explain the change during the period
in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The guidance
is required to be adopted in the first quarter of 2018 on a retrospective basis. Adoption of this guidance will eliminate the disclosure
of Change in restricted funds held in trust, which we currently include in Net cash provided by operating and Net cash provided
by financing activities on our consolidated statement of cash flows.
In October 2016, the FASB issued guidance requiring comprehensive recognition of current and deferred income taxes on intra-
entity asset transfers other than inventory, which was previously prohibited. The guidance now requires us to recognize the tax
expense from the intra-entity transfer of an asset when the transfer occurs, even though the pre-tax effects of that transaction are
eliminated in consolidation. We are required to adopt this guidance in the first quarter of 2018 on a modified retrospective basis
through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. Early adoption is
permitted. We are currently evaluating the impact this guidance will have on our consolidated financial statements.
In August 2016, the FASB issued updated guidance on eight specific cash flow issues with regard to how cash receipts and cash
payments are presented and classified in the statement of cash flows in order to clarify existing guidance and reduce diversity in
practice. The guidance is required to be adopted in the first quarter of 2018 on a retrospective basis, unless it is impracticable to
apply, in which case it should be applied prospectively as of the earliest date practicable. Early adoption is permitted. We are
currently evaluating the impact this guidance will have on our consolidated statement of cash flows.
In March 2016, the FASB issued amended guidance relating to employee share-based compensation. Under the new guidance
we are required to recognize the tax effects of stock compensation as income tax expense or benefit in the income statement and
treat the tax effects of exercised or vested awards as discrete items in the reporting period in which they occur. Excess tax benefits
are required to be classified as operating activities, and shares we withhold on behalf of employees for tax purposes are required
to be classified as financing activities. We may make an accounting policy election to continue to estimate the number of awards
that are expected to vest or account for forfeitures when they occur. The threshold to qualify for equity classification permits
withholding up to the maximum statutory tax rates. This guidance is required to be adopted in the first quarter of 2017. We are
currently evaluating the impact this guidance will have on our consolidated financial statements.
In February 2016, the FASB issued amended guidance for lease arrangements in order to increase transparency and comparability
by providing additional information to users of financial statements regarding an entity's leasing activities. The revised guidance
seeks to achieve this objective by requiring reporting entities to recognize lease assets and lease liabilities on the balance sheet for
substantially all lease arrangements. The guidance, which is required to be adopted in the first quarter of 2019, will be applied on
a modified retrospective basis beginning with the earliest period presented. Early adoption is permitted. We are currently evaluating
the impact of adopting this guidance on our consolidated financial statements.
In January 2016, the FASB issued accounting guidance that would require equity investments not accounted for as an equity
method investment or that result in consolidation to be recorded at their fair value with changes in fair value recognized in our
consolidated statements of operations. Those equity investments that do not have a readily determinable fair value may be measured
at cost less impairment, if any, plus or minus changes resulting from observable price changes. This standard is required to be
adopted in the first quarter of 2018, with early adoption prohibited. We are currently evaluating the impact this guidance will have
on our consolidated financial statements and related disclosures.
In May 2014, the FASB issued Accounting Standards update 2014-09, “Revenue from Contracts with Customers.” The standard
is based on the principle that revenue is recognized in an amount expected to be collected and to which the entity expects to be
entitled in exchange for the transfer of goods or services. In addition, the standard requires disclosure of the nature, amount, timing,
and certainty of revenue arising from contracts with customers. In August 2015, the FASB deferred the effective date by one year
to January 1, 2018, while providing the option to early adopt the standard on the original effective date of January 1, 2017. Covanta
will adopt the standard on January 1, 2018, as required. The standard can be adopted either retrospectively or as a cumulative-
effect adjustment as of the date of adoption. We are currently determining the impacts of the standard on our consolidated financial
statements and are evaluating the options with respect to our transition method. Our implementation approach includes performing
a detailed review of key contracts representative of the services that we provide and assessing the conformance of historical
accounting policies and practices with the standard. Because the standard may impact our business processes, systems and controls,
we have initiated the development of a comprehensive change management project plan to guide the implementation.
NOTE 3. NEW BUSINESS AND ASSET MANAGEMENT
The acquisitions in the section below are not material to our consolidated financial statements individually or in the aggregate
and therefore, disclosures of pro forma financial information have not been presented. The results of operations reflect the period
of ownership of the acquired businesses, business development projects and dispositions.
77
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Environmental Services Acquisitions
During 2016, we acquired two environmental services business, in separate transactions, for a total of $9 million. During 2015,
we acquired four environmental services businesses (one of which was accounted for as an asset purchase), in separate transactions,
for a total of $69 million. During 2014, we acquired one environmental services business for $13 million.
These acquisitions expand our Covanta Environmental Solutions capabilities and client service offerings, and allow us to direct
additional non-hazardous profiled waste volumes into our EfW facilities, and therefore are highly synergistic with our existing
business.
Pittsfield EfW Facility
In March 2016, we exercised an early termination option available under the steam sale agreement at our Pittsfield EfW facility
that would have been effective in March 2017. Upon termination of the steam agreement, we intended to cease operations at the
Pittsfield facility. As a result, during the first quarter of 2016, we recorded a non-cash impairment charge of $13 million, pre-tax,
which was calculated based on the estimated cash flows for this facility during its remaining operations utilizing Level 3 inputs.
For more information regarding fair value measurements, see Note 12. Financial Instruments.
In October 2016, we withdrew our termination notice. The City of Pittsfield has agreed to fund certain upgrades to the facility
and the State of Massachusetts will provide energy tax credits, both of which will serve to improve the economics of the facility.
In addition, we will continue to sell steam generated by the facility under an amended agreement.
Dublin EfW Facility
In 2014, we entered into agreements to build, own and operate the Dublin EfW facility, a 600,000 metric ton-per-year, 58
megawatt facility in Dublin, Ireland. The project will source residential, commercial and profiled waste from Dublin and the
surrounding areas and will sell electricity into the local electricity grid, with over 50% of the facility’s generation expected to
qualify for preferential pricing under Ireland’s renewable feed-in tariff. We commenced construction of the facility in the fourth
quarter of 2014, with operational commencement expected in late-2017. We will operate the facility under a 45-year public-private-
partnership, after which ownership of the facility will transfer to the City of Dublin. Our total investment in the project is expected
to be approximately €500 million, funded by project equity (approximately €125 million) and third party non-recourse project
financing (€375 million). For additional information related to funding for this project, see Note 11. Consolidated Debt - Dublin
Project Financing.
New York City Waste Transport and Disposal Contract
In 2013, New York City's Department of Sanitation awarded us a contract to handle waste transport and disposal from two marine
transfer stations located in Queens and Manhattan. We are utilizing capacity at existing facilities for the disposal of an estimated
800,000 tons per year of municipal solid waste. Service for the Queens marine transfer station began in early 2015, with service
for the Manhattan marine transfer station expected to follow pending notice to proceed to be issued by New York City, which is
anticipated in 2018. The contract is for 20 years, effective from the commencement of operations at the Queens marine transfer
station in March 2015, with options for New York City to extend the term for two additional five-year periods, and requires waste
to be transported using a multi-modal approach. We have acquired equipment, including barges, railcars, containers, and intermodal
equipment to support this contract. We expect that our total initial investment will be approximately $150 million, including the
cost to acquire equipment of approximately $114 million and approximately $36 million of enhancements to existing facilities
that will be part of the network of assets supporting this contract. During the years ended December 31, 2016, 2015 and 2014, we
invested $3 million, $31 million and $59 million, respectively, in property, plant and equipment relating to this contract. Since
2013, we have invested a total of $115 million in property, plant and equipment relating to this contract.
Pinellas County Energy-from-Waste Facility
In 2014, we entered into a ten-year service fee contract to operate an existing 3,150 ton-per-day energy-from-waste facility
located in Pinellas County, Florida, and we assumed operations of the facility in December of 2014. In addition to the annual
service fee, during the initial few years of the contract we will complete a number of projects to improve operations of the facility.
Our client will pay for these projects, for which we will record construction revenue and expense.
Durham-York Energy-from-Waste Facility
During 2011, we began construction of a municipally-owned 140,000 metric ton-per-year greenfield EfW facility located in
Durham Region of Canada and owned by our municipal clients, the Durham and York Regions. We built the facility under the
terms of a fixed-price construction contract totaling C$250 million. The project entered commercial operations in January 2016
under a 20-year service fee contract. We are currently seeking to resolve outstanding disputes with our primary contractor for the
Durham-York construction project, for additional information see Note 18. Commitments and Contingencies.
78
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 4. DISPOSITIONS, ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
Dispositions
China Investments
Our interests in China included an 85% ownership of an EfW facility located in Jiangsu Province ("Taixing"), a 49% equity
interest in an EfW facility located in Sichuan Province and a 40% equity interest in Chongqing Sanfeng Covanta Environmental
Industry Co., a company located in the Chongqing Municipality that is engaged in the business of providing design and engineering,
procurement, construction services and equipment sales for EfW facilities in China, as well as operating services for EfW facilities.
During 2016, we completed the exchange of our project ownership interests in China for a 15% ownership interest in Chongqing
Sanfeng Environmental Industrial Group, Co., Ltd ("Sanfeng Environment") and subsequently sold approximately 90% of that
interest to a third-party, a subsidiary of CITIC Limited, a leading Chinese industrial conglomerate and investment company. As a
result, during the year ended December 31, 2016, we recorded a pre-tax gain of $41 million. We received pre-tax proceeds of $105
million. The gain resulted from the excess of pre-tax proceeds over the cost-method book value of $70 million, plus $5 million of
realized gains on the related cumulative foreign currency translation adjustment, that were reclassified out of other comprehensive
income. Subsequent to completing the exchange, Sanfeng Environment has made certain claims for indemnification under the
agreement related to the condition of the facility in Taixing. To the extent that any payment is made related to these claims, such
amount could reduce the gain as recorded in a future period.
In connection with these transactions, we entered into foreign currency exchange collars and forwards to hedge against rate
fluctuations that impacted the cash proceeds in U.S. dollar terms. For more information, see Note 13. Derivative Instruments.
As of December 31, 2016, our remaining cost-method investment in Sanfeng Environment totaled $7 million and was included
in our consolidated balance sheet as a component of "Other assets". There were no impairment indicators related to our cost-
method investment during the year ended December 31, 2016.
Insurance Business
During 2014, we sold our insurance subsidiary and recorded a non-cash impairment charge of $14 million comprised of the
write-down of the carrying amount in excess of the realizable fair value of $12 million, plus $2 million in disposal costs.
Assets Held for Sale Summary
During the second quarter of 2015, we determined that the assets and liabilities associated with our interests in China met the
criteria for classification as Assets Held for Sale, but did not meet the criteria for classification as Discontinued Operations. In
making this determination, we evaluated our consolidated subsidiary, Taixing, as well as our Sanfeng and Chengdu equity method
investments as a single disposal group under the applicable accounting guidance.
The assets and liabilities associated with our China investments are presented in our consolidated balance sheets as current
"Assets Held for Sale” and current "Liabilities Held for Sale.” The following table sets forth the assets and liabilities of the Assets
Held for Sale included in the consolidated balance sheets as of the dates indicated (in millions):
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noncurrent assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of project debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Project debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities held for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
As of December 31,
2016
2015
— $
—
—
—
—
— $
— $
—
—
—
— $
2
3
1
49
42
97
3
3
5
12
23
79
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Discontinued Operations Summary
During the fourth quarter of 2013, assets related to our development activities in the United Kingdom met the criteria to be
presented in discontinued operations. The results of operations of these businesses for the year ended December 31, 2014 was
comprised of Other operating revenue of $1 million and Other operating expense of $1 million. The cash flows of these businesses
for the year ended December 31, 2014 were presented separately in our consolidated statements of cash flows.
NOTE 5. EQUITY AND EARNINGS PER SHARE ("EPS")
Equity
In May 2014, the stockholders of the Company approved the Covanta Holding Corporation 2014 Equity Award Plan. For
additional information, see Note 17. Stock-Based Award Plans.
During the year ended December 31, 2016, we granted awards of 761,426 shares of restricted stock, 888,144 of restricted stock
units and withheld 210,438 shares of our common stock in connection with tax withholdings for vested stock awards. For
information related to stock-based award plans, see Note 17. Stock-Based Award Plans.
During the years ended December 31, 2016, 2015 and 2014 common shares repurchased and dividends declared were as follows
(in millions, except per share amounts):
Total repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Shares repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average cost per share. . . . . . . . . . . . . . . . . . . . . . . . . . . $
Dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
For the Years Ended December 31,
2016
2015
2014
18
1.2
15.29
132
1.00
$
$
$
$
32
2.1
15.33
133
1.00
$
$
$
$
—
—
—
114
0.86
As of December 31, 2016, there were 136 million shares of common stock issued of which 130 million shares were outstanding;
the remaining 6 million shares of common stock issued but not outstanding were held as treasury stock. As of December 31, 2016,
there were 4 million shares of common stock available for future issuance under equity plans.
As of December 31, 2016, there were 10 million shares of preferred stock authorized, with none issued or outstanding. The
preferred stock may be divided into a number of series as defined by our Board of Directors. The Board of Directors are authorized
to fix the rights, powers, preferences, privileges and restrictions granted to and imposed upon the preferred stock upon issuance.
Earnings Per Share
We calculate basic earnings per share ("EPS") using net earnings for the period and the weighted average number of outstanding
shares of our common stock, par value $0.10 per share, during the period. Basic weighted average shares outstanding have decreased
due to share repurchases. Diluted earnings per share computations, as calculated under the treasury stock method, include the
weighted average number of shares of additional outstanding common stock issuable for stock options, restricted stock awards
and restricted stock units whether or not currently exercisable. Diluted earnings per share does not include securities if their effect
was anti-dilutive. Basic and diluted weighted average shares outstanding were as follows (in millions):
Basic weighted average common shares outstanding . . . . . . . . . . . . . . . . . . .
Dilutive effect of restricted stock and restricted stock units (1) . . . . . . . . . . . .
Diluted weighted average common shares outstanding . . . . . . . . . . . . . . . . .
129
—
129
132
1
133
130
—
130
(1) Excludes the following securities because their inclusion would have been anti-dilutive (in millions):
For the Years Ended
December 31,
2016
2015
2014
80
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the Years Ended
December 31,
2016
2015
2014
Stock options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
1
1
—
1
—
—
—
1
1
—
25
In 2009, we issued warrants in connection with the issuance of 3.25% Cash Convertible Senior Notes that matured on June 1,
2014. The warrants were exercisable only at expiration in equal tranches over a 60 day period that began on September 2, 2014
and ended on November 26, 2014. The warrants were net share settled, which means that, with respect to any exercise date, we
delivered to the warrant holders a number of shares for each warrant equal to the excess of the volume-weighted average price of
our common stock on each exercise date over the then effective strike price of the warrants, divided by such volume-weighted
average price of our common stock, with a cash payment in lieu of fractional shares. During the year ended December 31, 2014,
1,430,870 shares of our common stock were issued in connection with warrant exercises. For additional information see Note 11.
Consolidated Debt - 3.25% Cash Convertible Senior Notes due 2014.
81
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 6. FINANCIAL INFORMATION BY BUSINESS SEGMENTS
We have one reportable segment, North America, which is comprised of waste and energy services operations located primarily
in the United States and Canada. The results of our reportable segment are as follows (in millions):
North America
All Other
(1)
Total
Year Ended December 31, 2016:
Operating revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Depreciation and amortization expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gain on asset sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Equity in net income from unconsolidated investments . . . . . . . . . . . . . . . . . $
As of December 31, 2016:
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Capital additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended December 31, 2015:
Operating revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Depreciation and amortization expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Equity in net income from unconsolidated investments . . . . . . . . . . . . . . . . . $
As of December 31, 2015:
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Capital additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended December 31, 2014:
Operating revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Depreciation and amortization expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Equity in net income from unconsolidated investments . . . . . . . . . . . . . . . . . $
As of December 31, 2014: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Capital additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,692
207
20
116
66
3
1
3,794
188
$
$
$
$
$
$
$
$
$
$
1,607
$
197
$
43
$
108
$
60
— $
3,838
175
$
$
1,641
$
208
$
50
$
168
$
$
63
— $
3,882
188
$
$
7
$
— $
— $
(7) $
$
72
$
41
$
3
490
171
$
$
38
$
$
1
— $
$
1
$
74
$
13
396
201
$
$
$
41
$
3
14
$
(14) $
$
84
$
10
297
28
$
$
1,699
207
20
109
138
44
4
4,284
359
1,645
198
43
109
134
13
4,234
376
1,682
211
64
154
147
10
4,179
216
(1) All other is comprised of the financial results of our insurance subsidiaries’ operations through the date of disposal and our international
assets.
Our operations are principally located in the United States. See the list of projects for the North America segment in Item 1.
Business. A summary of operating revenue and total assets by geographic area is as follows (in millions):
Operating Revenue:
Year Ended December 31, 2016. . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31, 2015. . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31, 2014. . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
1,677
1,589
1,567
$
$
$
22
56
115
$
$
$
1,699
1,645
1,682
United States
Other
Total
82
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Total Assets:
As of December 31, 2016 . . . . . . . . . . . . . . . . . . . . .
As of December 31, 2015 . . . . . . . . . . . . . . . . . . . . .
As of December 31, 2014 . . . . . . . . . . . . . . . . . . . . .
$
$
$
3,763
3,847
3,802
$
$
$
— $
$
97
$
96
521
290
281
$
$
$
4,284
4,234
4,179
United States
Assets Held
for Sale
Other
Total
NOTE 7. AMORTIZATION OF WASTE, SERVICE AND ENERGY CONTRACTS
Waste, Service and Energy Contracts
Our waste, service and energy contracts are intangible assets and liabilities relating to long-term operating contracts at acquired
facilities and are recorded upon acquisition at their estimated fair market values based upon discounted cash flows. Intangible
assets and liabilities are amortized using the straight line method over their useful lives. Waste, service and energy contracts
consisted of the following (in millions):
As of December 31, 2016
As of December 31, 2015
Remaining
Weighted Average
Useful
Life
Gross
Carrying
Amount
Accumulated
Amortization
Net
Gross
Carrying
Amount
Accumulated
Amortization
Net
Waste, service and energy
contracts (asset) . . . . . .
Waste and service
contracts (liability) . . . .
22 years
3 years
$
$
526
$
263
$
263
$
531
$
247
$
284
(131) $
(124) $
(7) $
(131) $
(118) $
(13)
The following table details the amount of the actual/estimated amortization expense and contra-expense associated with these
intangible assets and liabilities as of December 31, 2016 included or expected to be included in our consolidated statements of
operations for each of the years indicated (in millions):
Waste, Service and
Energy Contracts
(Amortization Expense)
Waste and Service
Contracts
(Contra-Expense)
Year ended December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
$
21
14
13
13
13
13
197
263
$
(6)
(2)
(2)
(2)
(1)
—
—
(7)
The weighted average number of years prior to the next renewal period for contracts that we have an intangible recorded is
6 years.
During the year ended December 31, 2014, we recorded non-cash impairment charges totaling $16 million related to service
contract intangibles that were recorded upon acquisition in 2009. See Note 14. Supplementary Information - Impairment charges
discussion for additional information.
83
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 8. OTHER INTANGIBLE ASSETS AND GOODWILL
Other Intangible Assets
Other intangible assets consisted of the following (in millions):
As of December 31, 2016
As of December 31, 2015
Remaining
Weighted
Average Useful
Life
Gross
Carrying
Amount
Accumulated
Amortization
Net
Gross
Carrying
Amount
Accumulated
Amortization
Net
Customer relationships and
other . . . . . . . . . . . . . . . . .
8 years
Other intangibles . . . . . . . . .
Indefinite
Other intangible assets, net
$
$
43
4
47
$
$
13
—
13
$
$
30
4
34
$
$
40
4
44
$
$
6
—
6
$
$
34
4
38
The following table details the amount of the estimated amortization expense associated with other intangible assets as of
December 31, 2016 expected to be included in our statements of operations for each of the years indicated (in millions):
Annual remaining amortization . . . . . . .
$
5
$
5
$
5
$
4
$
3
2017
2018
2019
2020
2021
Thereafter
8
$
$
Total
30
Amortization expense related to other intangible assets was $6 million, $2 million and $1 million for the years ended December 31,
2016, 2015 and 2014, respectively.
Goodwill
Goodwill represents the total consideration paid in excess of the fair value of the net tangible and identifiable intangible assets
acquired and the liabilities assumed in acquisitions. Goodwill has an indefinite life and is not amortized but is reviewed for
impairment under the provisions of accounting standards for goodwill. All goodwill is related to the North America reporting
segment, which is comprised of two reporting units. We performed the required annual impairment review of our recorded goodwill
for our reporting units as of October 1, 2016 and determined that the fair value of our reporting units was not less than their relative
carrying values. As of December 31, 2016, goodwill of approximately $56 million was deductible for federal income tax purposes.
The following table details the changes in carrying value of goodwill (in millions):
Balance as of December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Goodwill related to acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill related to acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total
274
27
301
1
302
NOTE 9. EQUITY METHOD INVESTMENTS
Our subsidiaries are parties to agreements through which we have equity investments in several operating projects. The joint
venture agreements generally provide for the sharing of operational control as well as voting percentages. We record our share of
earnings from our equity investees in equity in net income from unconsolidated investments in our consolidated statements of
operations.
84
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As of December 31, 2016 and 2015, investments in investees and joint ventures accounted for under the equity method, included
in Other assets on our consolidated balance sheet, were as follows (dollars in millions):
Ownership Interest
as of
December 31, 2016
2016
Ownership Interest
as of
December 31, 2015
2015
South Fork Plant (U.S.) . . . . . . . . . . . . . . .
Koma Kulshan Plant (U.S.) . . . . . . . . . . . .
TARTECH (U.S.) (1) . . . . . . . . . . . . . . . . . .
Ambiente 2000 (Italy) . . . . . . . . . . . . . . . .
Total investments in investees and joint
ventures . . . . . . . . . . . . . . . . . . . . . . . .
Investments in investees and joint
ventures classified as held for sale: (2)
Sanfeng (China). . . . . . . . . . . . . . . . . . . .
Chengdu (China) . . . . . . . . . . . . . . . . . . .
Total investments in investees and joint
ventures classified as held for sale. . . .
50%
50%
50%
40%
—%
—%
$
$
$
—
4
1
—
5
—
—
—
50%
50%
50%
40%
40%
49%
$
$
$
$
—
5
5
—
10
17
22
39
(1) During 2016, we recorded a net impairment of our investment in this joint venture, see Note 14. Supplementary
Information for additional information.
(2) During 2016, we divested the majority of our investments in China, see Note 4. Dispositions, Assets Held for Sale and
Discontinued Operations for additional information.
NOTE 10. OPERATING LEASES
Leases are primarily operating leases for leaseholds on EfW facilities, as well as for trucks and automobiles, office space and
machinery and equipment. Some of these operating leases have renewal options. Expense under operating leases was $19 million,
$16 million, and $15 million, for the years ended December 31, 2016, 2015 and 2014, respectively.
The following is a schedule, by year, of future minimum rental payments required under operating leases that have initial or
remaining non-cancelable lease terms in excess of one year as of December 31, 2016 (in millions):
Future Minimum Rental Payments . . . . .
$
8
$
7
$
6
$
6
$
6
2017
2018
2019
2020
2021
Thereafter
24
$
Total
$
57
85
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 11. CONSOLIDATED DEBT
Consolidated debt is as follows (in millions):
LONG-TERM DEBT:
Revolving Credit Facility (2.98% - 3.23%)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Term Loan, net (2.48%)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit Facilities Sub-total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7.25% Senior Notes due 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6.375% Senior Notes due 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.875% Senior Notes due 2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: deferred financing costs related to senior notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior Notes Sub-total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.00% - 5.25% Tax-Exempt Bonds due from 2024 to 2045 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: deferred financing costs related to tax-exempt bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-Exempt Bonds Sub-total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.48% - 4.52% Equipment financing capital leases due 2020 through 2027 . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncurrent long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PROJECT DEBT:
North America project debt
4.00 - 5.00% North America Project Debt related to Service Fee structures due 2017 through 2035
Union capital lease due 2017 through 2053 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5.248% - 6.20% North America Project Debt related to Tip Fee structures due 2017 through 2020. . . . . . .
Unamortized debt premium, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: deferred financing costs related to North America project debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total North America project debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other project debt:
Dublin senior loan due 2021 (5.72% - 6.41%)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt discount related to Dublin senior loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: deferred financing costs related to Dublin senior loan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dublin senior loan, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dublin junior loan due 2022 (9.23% - 9.73%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt discount related to Dublin junior loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: deferred financing costs related to Dublin junior loan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dublin junior loan, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other project debt, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total project debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Current portion, includes $1 and $1 of net unamortized premium . . . . . . . . . . . . . . . . . . . . . . . .
Noncurrent project debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL CONSOLIDATED DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Current debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL NONCURRENT CONSOLIDATED DEBT
(1) Eurodollar rates only; excludes base rate borrowings.
(2) Reflects hedged fixed rates.
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
86
As of December 31,
2015
2016
343
$
$
$
$
$
$
$
$
$
$
$
$
$
$
195
538
400
400
400
(14)
1,186
464
(5)
459
69
2,252
(9)
2,243
78
99
16
4
(1)
196
155
(6)
(18)
131
58
(1)
(1)
56
$
187
383
(22)
361
2,635
(31)
2,604
$
$
$
348
200
548
400
400
400
(16)
1,184
464
(6)
458
73
2,263
(8)
2,255
117
—
23
5
(1)
144
—
—
—
—
57
(1)
(2)
54
54
198
(16)
182
2,461
(24)
2,437
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Credit Facilities
Our subsidiary, Covanta Energy, has $1.2 billion in senior secured credit facilities consisting of a $1.0 billion revolving credit
facility expiring 2019 through 2020 (the “Revolving Credit Facility”) and a $196 million term loan due 2020 (the “Term Loan”)
(collectively referred to as the "Credit Facilities").
The Revolving Credit Facility is available for the issuance of letters of credit of up to $600 million, provides for a $50 million sub-
limit for the issuance of swing line loans (a loan that can be requested in US Dollars on a same day basis for a short drawing
period); and is available in US Dollars, Euros, Pounds Sterling, Canadian Dollars and certain other currencies to be agreed upon,
in each case for either borrowings or for the issuance of letters of credit. The proceeds under the Revolving Credit Facility are
available for working capital and general corporate purposes of Covanta Energy and its subsidiaries.
We have the option to establish additional term loan commitments and/or increase the size of the Revolving Credit Facility
(collectively, the “Incremental Facilities”), subject to the satisfaction of certain conditions and obtaining sufficient lender
commitments, in an amount up to the greater of $500 million and the amount that, after giving effect to the incurrence of such
Incremental Facilities, would not result in a leverage ratio, as defined in the credit agreement governing our Credit Facilities (the
“Credit Agreement”), exceeding 2.75:1.00.
Availability under Revolving Credit Facility
As of December 31, 2016, we had availability under the Revolving Credit Facility as follows (in millions):
Revolving Credit Facility . . . . . . . . . . $
1,000
2020
$
343
$
156
$
501
Total
Facility
Commitment
Expiring (1)
Direct Borrowings
as of
December 31, 2016
Outstanding Letters
of Credit as of
December 31, 2016
Availability as of
December 31, 2016
(1) The Tranche B commitment of $50 million expires in March 2019.
During the year ended December 31, 2016, we made aggregate cumulative direct borrowings of $744 million under the Revolving
Credit Facility, and repaid $749 million prior to the end of the year.
Repayment Terms
As of December 31, 2016, the Term Loan has mandatory principal payments of $5 million in each year from 2017 through 2019
and $181 million in 2020. The Credit Facilities are pre-payable at our option at any time.
Interest and Fees
Borrowings under the Credit Facilities bear interest, at our option, at either a base rate or a Eurodollar rate plus an applicable
margin determined by a pricing grid based on Covanta Energy’s leverage ratio. Base rate is defined as the higher of (i) the Federal
Funds Effective Rate plus 0.50%, (ii) the rate the administrative agent announces from time to time as its per annum “prime rate”
or (iii) the London Interbank Offered Rate (“LIBOR”), or a comparable or successor rate, plus 1.00%. Base rate borrowings under
the Revolving Credit Facility bear interest at the base rate plus an applicable margin ranging from 0.75% to 1.75%. Eurodollar
borrowings under the Revolving Credit Facility bear interest at LIBOR plus an applicable margin ranging from 1.75% to 2.75%.
Fees for issuances of letters of credit include fronting fees equal to 0.15% per annum and a participation fee for the lenders equal
to the applicable interest margin for LIBOR rate borrowings. We will incur an unused commitment fee ranging from 0.30% to
0.50% on the unused amount of commitments under the Revolving Credit Facility.
Base rate borrowings under the Term Loan bear interest at the base rate plus an applicable margin ranging from 0.75% to 1.00%.
Eurodollar borrowings under the Term Loan bear interest at LIBOR plus an applicable margin ranging from 1.75% to 2.00%.
Guarantees and Securitization
The Credit Facilities are guaranteed by us and by certain of our subsidiaries. The subsidiaries that are party to the Credit Facilities
agreed to secure all of the obligations under the Credit Facilities by granting, for the benefit of secured parties, a first priority lien
on substantially all of their assets, to the extent permitted by existing contractual obligations. The Credit Facilities are also secured
by a pledge of substantially all of the capital stock of each of our domestic subsidiaries and 65% of substantially all the capital
stock of each of our directly-owned foreign subsidiaries, in each case to the extent not otherwise pledged.
87
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Credit Agreement Covenants
The loan documentation governing the Credit Facilities contains various affirmative and negative covenants, as well as financial
maintenance covenants, that limit our ability to engage in certain types of transactions. We were in compliance with all of the
affirmative and negative covenants under the Credit Facilities as of December 31, 2016.
The negative covenants of the Credit Facilities limit our and our restricted subsidiaries’ ability to, among other things:
• incur additional indebtedness (including guarantee obligations);
• create certain liens against or security interests over certain property;
• pay dividends on, redeem, or repurchase our capital stock or make other restricted junior payments;
• enter into agreements that restrict the ability of our subsidiaries to make distributions or other payments to us;
• 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 (“Adjusted EBITDA”). The definition of Adjusted EBITDA in the
Credit Facilities excludes certain non-recurring and non-cash charges.
• a minimum Interest Coverage Ratio of 3.00 to 1.00, which measures Covanta Energy’s Adjusted EBITDA to its consolidated
interest expense plus certain interest expense of ours, to the extent paid by Covanta Energy as calculated in the Credit
Agreement.
Senior Notes and Debentures
7.25% Senior Notes due 2020 (the “7.25% Notes”)
In 2010, we sold $400 million aggregate principal amount of 7.25% Senior Notes due 2020. Interest on the 7.25% Notes is
payable semi-annually on June 1 and December 1 of each year, commencing on June 1, 2011 and the 7.25% Notes will mature on
December 1, 2020 unless earlier redeemed or repurchased.
At our option, the 7.25% Notes are subject to redemption at any time, in whole or in part, at the redemption prices set forth in
the indenture, together with accrued and unpaid interest, if any, to the date of redemption.
The 7.25% Notes are senior unsecured obligations, ranking equally in right of payment with any of the future senior unsecured
indebtedness of Covanta Holding Corporation. The 7.25% Notes are effectively junior to our existing and future secured
indebtedness, including any guarantee of indebtedness under the Credit Facilities. The 7.25% Notes are not guaranteed by any of
our subsidiaries and are effectively subordinated to all existing and future indebtedness and other liabilities of our subsidiaries.
The indenture for the 7.25% Notes may limit our ability and the ability of certain of our subsidiaries to:
• incur additional indebtedness;
• pay dividends or make other distributions or repurchase or redeem their capital stock;
• prepay, redeem or repurchase certain debt;
• make loans and investments;
• sell restricted assets;
• 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.
If and for so long as the 7.25% Notes have an investment grade rating and no default under the indenture has occurred, certain
of the covenants will be suspended.
If we sell certain of our assets or experience specific kinds of changes in control, we must offer to purchase the 7.25% Notes.
The occurrence of specific kinds of changes in control will be a triggering event requiring us to offer to purchase from the holders
88
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
all or a portion of the 7.25% Notes at a price equal to 101% of their principal amount, together with accrued and unpaid interest,
if any, to the date of purchase. In addition, certain asset dispositions will be triggering events that may require us to use the proceeds
from those asset dispositions to make an offer to purchase the 7.25% Notes at 100% of their principal amount, together with accrued
and unpaid interest, if any, to the date of purchase if such proceeds are not otherwise used within 365 days to repay indebtedness
or to invest or commit to invest such proceeds in additional assets related to our business or capital stock of a restricted subsidiary.
6.375% Senior Notes due 2022 (the “6.375% Notes”)
In March 2012, we sold $400 million aggregate principal amount of 6.375% Senior Notes due 2022. Interest on the 6.375%
Notes is payable semi-annually on April 1 and October 1 of each year, commencing on October 1, 2012, and the 6.375% Notes
will mature on October 1, 2022 unless earlier redeemed or repurchased. Net proceeds from the sale of the 6.375% Notes were
$392 million, consisting of gross proceeds of $400 million net of $8 million in offering expenses. We used a portion of the net
proceeds of the 6.375% Notes offering to repay a portion of the amounts outstanding under Covanta Energy’s previously existing
term loan.
At our option, the 6.375% Notes are subject to redemption at any time on or after April 1, 2017, in whole or in part, at the
redemption prices set forth in the indenture, together with accrued and unpaid interest, if any, to the date of redemption. In addition,
at any time prior to April 1, 2017, we may redeem some or all of the 6.375% Notes at a price equal to 100% of their principal
amount, plus accrued and unpaid interest, plus a “make-whole premium”.
Other terms and conditions of the 6.375% Notes, including guarantees and security, covenants, and repurchase requirements in
the case of certain asset sales or a change of control, are substantially similar to those described above under 7.25% Notes.
5.875% Senior Notes due 2024 (the "5.875% Notes")
In March 2014, we sold $400 million aggregate principal amount of 5.875% Senior Notes due March 2024. Interest on the
5.875% Notes is payable semi-annually on March 1 and September 1 of each year, commencing on September 1, 2014, and the
5.875% Notes will mature on March 1, 2024 unless earlier redeemed or repurchased. Net proceeds from the sale of the 5.875%
Notes were approximately $393 million, consisting of gross proceeds of $400 million net of approximately $7 million in offering
expenses. We used the net proceeds of the 5.875% Notes offering in part for the repayment of the 3.25% Cash Convertible Notes
at maturity on June 1, 2014.
The 5.875% Notes are subject to redemption at our option, at any time on or after March 1, 2019, in whole or in part, at the
redemption prices set forth in the prospectus supplement, plus accrued and unpaid interest. At any time prior to March 1, 2017,
we may redeem up to 35% of the original principal amount of the 5.875% Notes with the proceeds of certain equity offerings at
a redemption price of 105.875% of the principal amount of the 5.875% Notes plus accrued and unpaid interest. At any time prior
to March 1, 2019, we may also redeem the 5.875% Notes, in whole but not in part, at a price equal to 100% of the principal amount
of the 5.875% Notes, plus accrued and unpaid interest and a “make-whole premium.”
Other terms and conditions of the 5.875% Notes, including guarantees and security, covenants, and repurchase requirements in
the case of certain asset sales or a change of control, are substantially similar to those described above under 7.25% Notes.
3.25% Cash Convertible Senior Notes due 2014 (the “3.25% Notes”)
In 2009, we issued $460 million aggregate principal amount of the 3.25% Notes due in 2014 in a private transaction exempt
from registration under the Securities Act of 1933, as amended. We used the net proceeds from the offering for general corporate
purposes, including capital expenditures, permitted investments or permitted acquisitions. On June 1, 2014, we repaid the $460
million 3.25% Notes utilizing net proceeds from the March 2014 5.875% Notes issuance.
During the period from March 1, 2014 to May 30, 2014, and under certain additional limited circumstances, the 3.25% Notes
were cash convertible by holders thereof (the "Cash Conversion Option"). The conversion rate was 64.6669 shares of our common
stock (which represented a conversion price of approximately $15.46 per share) for the period from March 17, 2014 through March
21, 2014, and 65.3501 shares of our common stock (which represented a conversion price of approximately $15.30 per share), as
adjusted for the dividend paid on April 2, 2014, for the period from March 24, 2014 to May 30, 2014. We did not deliver common
stock (or any other securities) upon conversion. Upon maturity, we were required to pay $83 million to satisfy the obligation under
the Cash Conversion Option in addition to the principal amount of the 3.25% Notes.
In connection with the issuance of 3.25% Notes offering, we entered into privately negotiated cash convertible note hedge
transactions (the “Note Hedge”) with affiliates of certain of the initial purchasers of the 3.25% Notes which we cash-settled for
$83 million upon maturity of the 3.25% Notes and effectively offset our liability under the Cash Conversion Option.
In connection with the issuance of the 3.25% Notes, we also sold warrants, correlating to the number of shares underlying the
3.25% Notes. The warrants were exercisable only at expiration in equal tranches over a 60 day period which began on September
89
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2, 2014 and ended on November 26, 2014. During the year ended December 31, 2014, 1,430,870 shares of our common stock
were issued in connection with warrant exercises.
4.00% - 5.25% Tax-Exempt Bonds due from 2024-2045 ("Tax-Exempt Bonds")
In November 2012, we issued tax-exempt corporate bonds totaling $335 million. Proceeds from the offerings were utilized to
refinance tax-exempt project debt at our Haverhill, Niagara and SEMASS facilities, as well as to fund certain capital expenditures
in Massachusetts. Approximately $7 million of financing costs were incurred, of which $3 million was expensed and $4 million
will be recognized over the term of the debt.
In August 2015, we issued two new series of fixed rate tax-exempt corporate bonds totaling $130 million. Proceeds from the
offerings were utilized to refinance tax-exempt project debt at our Delaware Valley facility and to fund certain capital improvements
at our Essex County facility. Financing costs were not material.
Details of the issues and the use of proceeds are as follows (dollars in millions):
Series
Amount Maturity
Coupon
Use of Proceeds
Massachusetts Series 2012A .
$
Massachusetts Series 2012B .
Massachusetts Series 2012C .
Niagara Series 2012A . . . . . .
Niagara Series 2012B . . . . . .
New Jersey Series 2015A. . . .
Pennsylvania Series 2015A . .
20
67
82
130
35
90
40
$
464
2027
2042
2042
2042
2024
2045
2043
4.875%
4.875%
5.25%
5.25%
4.00%
5.25%
5.00%
New proceeds for qualifying capital expenditures in
Massachusetts
Redeem SEMASS project debt
Redeem Haverhill project debt
Redeem Niagara project debt
Redeem Niagara project debt
Finance qualifying expenditures at Essex County
facility
Refinance outstanding tax-exempt debt
We entered into a loan agreement with the Massachusetts Development Finance Agency under which they issued the Resource
Recovery Revenue Bonds (the “Massachusetts Series” bonds in the table above) and loaned the proceeds of the Massachusetts
Series bonds to us for the purposes of (i) financing qualifying capital expenditures at certain solid waste disposal facilities in
Massachusetts and (ii) redeeming the outstanding principal balance of the SEMASS and Haverhill project debt.
We entered into a loan agreement with the Niagara Area Development Corporation under which they issued the Solid Waste
Disposal Facility Refunding Revenue Bonds (the “Niagara Series” bonds in the table above) and loaned the proceeds of the Niagara
Series bonds to us for the purpose of redeeming the outstanding principal balance of the Niagara project debt.
The Massachusetts Series bonds and the Niagara Series bonds are obligations of Covanta Holding Corporation, are guaranteed
by Covanta Energy; and are not secured by project assets. Principal and interest on the Massachusetts Series bonds and the Niagara
Series bonds are payable from the repayments we make to the Massachusetts Development Finance Agency and Niagara Area
Development Corporation, respectively, pursuant to the respective loan agreements.
The Massachusetts Series bonds and the Niagara Series bonds bear interest at the interest rates per annum set forth in the table
above, payable semi-annually on May 1 and November 1 of each year, commencing on May 1, 2013.
We entered into a loan agreement with the Essex County Improvement Authority under which they issued the Solid Waste
Disposal Revenue Bonds (the “New Jersey Series” bonds in the table above) and loaned the proceeds to us for the purposes of
financing capital improvements at our Essex County facility, including a new emissions control system. Interest on the bonds is
paid semi-annually on January 1 and July 1 of each year beginning on January 1, 2016. Interest expense incurred during the
construction period will be capitalized.
We entered into a loan agreement with the Delaware County Industrial Development Authority under which they issued the
Refunding Revenue Bonds (the “Pennsylvania Series” bonds in the table above) and loaned the proceeds to us for the purpose of
redeeming the outstanding $34 million principal amount of the Variable Rate Bonds and of refinancing $6 million of project debt
due on July 1, 2015 at our Delaware Valley facility. See Variable Rate Tax-Exempt Demand Bonds due 2043 below. Interest on
the bonds is paid semi-annually on January 1 and July 1 of each year beginning on January 1, 2016.
Each of the loan agreements contains customary events of default, including failure to make any payments when due, failure to
perform its covenants under the respective loan agreement, and the bankruptcy or insolvency. Additionally, each of the loan
agreements contains cross-default provisions that relate to our other indebtedness. Upon the occurrence of an event of default, the
unpaid balance of the loan under the applicable loan agreement will become due and payable immediately.
90
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Massachusetts Series bonds and the Niagara Series bonds contain certain terms including mandatory redemption requirements
in the event that (i) the respective loan agreement is determined to be invalid, or (ii) the respective bonds are determined to be
taxable. In the event of a mandatory redemption of the bonds, we will have an obligation under each respective loan agreement
to prepay the respective loan in order to fund the redemption.
Tax-Exempt Variable Rate Demand Bonds due 2043 ("Variable Rate Bonds")
In July 2013 and 2014, we issued $22 million and $12 million, respectively of tax-exempt corporate variable-rate demand
bonds, which were secured by a letter of credit issued under our Revolving Credit Facility and had a maturity date of July 1, 2043.
Proceeds from the offering were utilized to refinance project debt at our Delaware Valley facility due through July 1, 2014.
In August 2015, we refinanced the $34 million of outstanding Variable Rate Bonds with a portion of the net proceeds of the
$40 million Pennsylvania Series 2015A bonds due 2043. See 4.00% - 5.25% Tax-Exempt Bonds due from 2024-2045 above.
Union County EfW Capital Lease Arrangement
In June 2016, we extended the lease term related to the Union County EfW facility through 2053, which resulted in capital
lease treatment for the revised lease. We recorded a lease liability of $104 million, calculated utilizing an incremental borrowing
rate of 5.0% which is included in long-term project debt on our consolidated balance sheet. The lease includes certain periods of
contingent rentals based upon plant performance as either a share of revenue or a share of plant profits. These contingent payments
have been excluded from the calculation of the lease liability and instead will be treated as a period expense when incurred. As
of December 31, 2016, the outstanding borrowings under the capital lease have mandatory amortization payments remaining as
follows (in millions):
Annual Remaining Amortization
$
5
$
5
$
5
$
6
$
6
$
72
2017
2018
2019
2020
2021
Thereafter
Equipment Financing Capital Lease Arrangements
In 2014, we entered into equipment financing capital lease arrangements to finance the purchase of barges, railcars, containers
and intermodal equipment related to our New York City contract. The lease terms range from 10 years to 12 years and the fixed
interest rates range from 3.48% to 4.52%. The outstanding borrowings under the equipment financing capital lease arrangements
were $69 million as of December 31, 2016, and have mandatory amortization payments remaining as follows (in millions):
Annual Remaining Amortization. . . . . . .
$
5
$
5
$
5
$
5
$
5
$
44
2017
2018
2019
2020
2021
Thereafter
Depreciation associated with these capital lease arrangements is included in Depreciation and amortization expense on our
consolidated statement of operations. For additional information see Note 1. Organization and Summary of Significant Accounting
Policies - Property, Plant and Equipment.
PROJECT DEBT
The maturities of long-term project debt as of December 31, 2016 are as follows (in millions):
Debt . . . . . . . . . . . . . . . . . . . . . .
Premium and deferred
financing costs . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . .
2017
2018
2019
2020
2021
Thereafter
Total
$
22
$
31
$
26
$
17
$ 144
$
166
$ 406
Less:
Current
Portion
$
(22) $
Total
Noncurrent
Project Debt
384
(5)
(5)
(5)
$
17
$
26
$
21
$
(5)
12
(4)
$ 140
$
1
167
(23)
$ 383
$
—
(22) $
(23)
361
Project debt associated with the financing of energy-from-waste facilities is arranged by municipal entities through the issuance
of tax-exempt and taxable revenue bonds or other borrowings. For those facilities we own, that project debt is recorded as a liability
on our consolidated financial statements. Generally, debt service for project debt related to Service Fee structures is the primary
responsibility of municipal entities, whereas debt service for project debt related to Tip Fee structures is paid by our project
subsidiary from project revenue expected to be sufficient to cover such expense.
91
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Payment obligations for our project debt associated with energy-from-waste facilities are generally limited recourse to the
operating subsidiary and non-recourse to us, subject to operating performance guarantees and commitments. These obligations
are typically secured by the revenue pledged under the respective indentures and by a mortgage lien and a security interest in the
respective energy-from-waste facility and related assets. As of December 31, 2016, such revenue bonds were collateralized by
property, plant and equipment with a net carrying value of $669 million and restricted funds held in trust of approximately $84
million.
In April 2015, in connection with a long-term service fee contract extension at our Onondaga County facility, our Onondaga
County client refinanced $42 million of outstanding project debt with $54 million of new tax-exempt bonds issued with a $5
million premium. The incremental proceeds were used to establish a $15 million restricted cash fund to be used toward facility
projects and to satisfy $2 million in transaction costs which will be deferred and amortized over the term of the bonds. The bonds
bear interest from 4.00% to 5.00% and have scheduled annual payments with final maturity on May 1, 2035. Consistent with other
service fee projects we own and have project debt in place, the client community will pay us debt service revenue equivalent to
the principal and interest on the bonds.
Dublin Project Financing
During 2014, we executed agreements for project financing totaling €375 million to fund a majority of the construction costs
of the Dublin EfW facility. The project financing package includes: (i) €300 million of project debt under a credit facility agreement
with various lenders (the “Dublin Credit Agreement”), which consists of a €250 million senior secured term loan (the “Dublin
Senior Term Loan”) and a €50 million second lien term loan (the “Dublin Junior Term Loan”), and (ii) a €75 million convertible
preferred investment (the “Dublin Convertible Preferred”), which was committed by a leading global energy infrastructure investor.
For additional information related to this project, see Note 3. New Business and Asset Management.
Dublin Senior Term Loan due 2021
As of December 31, 2016, $155 million (€147 million) of the €250 million Dublin Senior Term Loan has been drawn and is
included in project debt on our consolidated balance sheet. The remainder of the Dublin Senior Term Loan is expected to be drawn
over the course of 2017 to fund remaining construction costs. Key commercial terms of the Dublin Senior Term Loan include:
• Final maturity on September 30, 2021 (approximately four years after the anticipated operational commencement date of the
facility).
• Scheduled repayments will be made semi-annually according to a 15-year amortization profile, beginning in 2018. The loan
is pre-payable at our option following operational commencement.
• Borrowings will bear interest at the Euro Interbank Offered Rate ("EURIBOR") plus an applicable margin, which will range
from 4.00% to 4.50% according to a pre-determined schedule. Interest on outstanding borrowings will be payable in cash
monthly prior to the operational commencement date of the facility, and payable in cash semi-annually after the operational
commencement date, based on the prevailing one and six month EURIBOR rates, respectively. Undrawn commitments will
accrue commitment fees at a rate of 2.25% per annum. We entered into interest rate swap agreements in order to hedge our
exposure to adverse variable interest rate fluctuations under the Dublin Senior Term Loan. For additional information, see
Note 13. Derivative Instruments.
• The Dublin Senior Term Loan is a senior obligation of the project company and certain other related subsidiaries, all of which
are wholly-owned by us, and is secured by a first priority lien on substantially all of the project-related assets. The Dublin
Senior Term Loan is non-recourse to us and our subsidiary Covanta Energy. See Note 18. Commitments and Contingencies
for a description of the commitments of Covanta Energy related to the Dublin project financing.
• The Dublin Credit Agreement contains positive, negative and financial maintenance covenants that are customary for a project
financing of this type. Our ability to service the Dublin Junior Term Loan and the Dublin Convertible Preferred and to make
cash distributions to common equity following the operational commencement date is subject to ongoing compliance with
these covenants, including maintaining a minimum debt service coverage ratio and loan life coverage ratio on the Dublin
Senior Term Loan.
Dublin Junior Term Loan due 2022
The €50 million Dublin Junior Term Loan was funded into an escrow account in September 2014 and was utilized in 2015 to
fund construction costs as our initial equity investment into the project and the Dublin Convertible Preferred were fully utilized.
As of December 31, 2016, $58 million (€55 million), inclusive of interest accrued to the balance of the loan, is included in project
debt on our consolidated balance sheet. Key commercial terms of the Dublin Junior Term Loan include:
• Final maturity on March 31, 2022 (six months after the maturity of the Dublin Senior Term Loan).
92
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
• Scheduled repayments will be made semi-annually according to a 15-year amortization profile, beginning in 2018. The loan
is pre-payable at our option following operational commencement.
• Borrowings bear interest at a fixed rate of 5.23% during the first six months of the loan, and thereafter at fixed rates ranging
from 9.23% to 9.73% according to a pre-determined schedule. Interest on outstanding borrowings is payable semi-annually
and will be payable 50% in cash and 50% accrued to the balance of the loan prior to the operational commencement date of
the facility, and payable 100% in cash after the operational commencement date.
• The Dublin Junior Term Loan is a junior obligation of the project company and certain other related subsidiaries, all of which
are wholly-owned by us, and is secured by a second priority lien on substantially all of the project-related assets and a first
priority lien on the assets of the top tier project holding company. The Dublin Junior Term Loan is non-recourse to us and our
subsidiary Covanta Energy.
• Under the Dublin Credit Agreement, our ability to service the Dublin Convertible Preferred and to make cash distributions to
common equity is subject to ongoing compliance with the covenants under the agreement, including maintaining a minimum
debt service coverage ratio and loan life coverage ratio on the Dublin Junior Term Loan.
Dublin Convertible Preferred
The €75 million Dublin Convertible Preferred was utilized to fund construction costs in 2015 after our initial equity investment
into the project was fully utilized. As of December 31, 2016, the Dublin convertible preferred instrument of $87 million, (€83
million) inclusive of dividends accrued to the balance, was included in other noncurrent liabilities in our consolidated balance
sheet. The instrument has: (i) a liquidation preference equal to par value of the investment, (ii) a preferred claim on project cash
flows during operations (after debt service) to pay a fixed dividend rate and repay principal according to an amortization schedule,
and (iii) an option to convert loan principal into a common equity interest in the project.
The Dublin Convertible Preferred is structured as a shareholder loan (the “Stakeholder Loan”) with the concurrent issuance of
warrants (the “Stakeholder Warrants”). Key commercial terms of the Dublin Convertible Preferred include:
• The Stakeholder Loan will accrue dividends at a fixed rate of 13.50% per annum. The dividends are payable 50% in cash and
50% accrued to the principal balance on a monthly basis prior to the operational commencement date, and payable 100% in
cash semi-annually thereafter, subject to available project cash flows after debt service.
• Scheduled repayments of principal of the Stakeholder Loan will be made semi-annually according to a 13-year amortization
profile beginning in 2020 (two years after the operational commencement date), with a final repayment date of September 30,
2032, all subject to available project cash flows after debt service.
• Voluntary prepayments are not permitted during the first five years of the Stakeholder Loan, after which the principal is pre-
payable at our option in increments of 33% of the aggregate outstanding principal balance per year.
• The Stakeholder Loan is mandatorily pre-payable at the option of the Stakeholder Loan holder(s) under certain circumstances
in the event of a refinancing of the Dublin Senior Term Loan and/or the Dublin Junior Term Loan.
• The Stakeholder Warrants are exercisable into ordinary shares of our subsidiary holding company that owns 100% of the
project company on five conversion dates, scheduled at six month intervals, beginning on the operational commencement
date, or upon a refinancing of the Dublin Credit Agreement. The warrants contain customary anti-dilution protection and are
exercisable on a cashless basis at a specified conversion price on each conversion date, representing a set premium to the
original subscription price for common shares (i.e., Covanta’s subscription price) that increases over time. The number of
shares that can potentially be issued upon exercise is limited to a maximum of 24.99% of the outstanding shares.
• The Dublin Convertible Preferred holder(s) is entitled to nominate two out of five voting board members of the project
subsidiary holding company. The right to nominate board members will be reduced with future reductions in the outstanding
principal amount of the Stakeholder Loan and/or number of common shares held following conversion of the Stakeholder
Warrants.
Financing Costs
All deferred financing costs are amortized to interest expense over the life of the related debt using the effective interest method.
For each of the years ended December 31, 2016, 2015 and 2014 amortization of deferred financing costs included as a component
of interest expense totaled $6 million, $8 million and $8 million, respectively.
Capitalized Interest
93
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Interest expense paid and costs amortized to interest expense related to project financing are capitalized during the construction
and start-up phase of the project. During the years ended December 31, 2016, 2015 and 2014, interest expense of $26 million,
$10 million and $2 million, respectively, was capitalized.
NOTE 12. FINANCIAL INSTRUMENTS
Fair Value Measurements
Authoritative guidance associated with fair value measurements provides a framework for measuring fair value and establishes
a fair value hierarchy that prioritizes the inputs used to measure fair value, giving the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1 inputs), then significant other observable inputs (Level 2 inputs) and
the lowest priority to significant unobservable inputs (Level 3 inputs). The following methods and assumptions were used to
estimate the fair value of each class of financial instruments:
• For cash and cash equivalents, restricted funds, and marketable securities, the carrying value of these amounts is a reasonable
estimate of their fair value. The fair value of restricted funds held in trust is based on quoted market prices of the investments
held by the trustee.
• Fair values for long-term debt and project debt are determined using quoted market prices.
• The fair value for interest rate swaps were determined by obtaining quotes from two counterparties (one is a holder of the
long position and the other is in the short) and extrapolating those across the long and short notional amounts. The fair value
of the interest rate swaps was adjusted to reflect counterparty risk of non-performance, and was based on the counterparty’s
credit spread in the credit derivatives market.
• The fair values of our energy hedges were determined using the spread between our fixed price and the forward curve
information available within the market.
• The fair value of our foreign currency hedge was determined by obtaining quotes from two counterparties and is based on
market accepted option pricing methodology which utilizes inputs such as the currency spot rate as of the balance sheet date,
the strike price of the options and volatility.
The estimated fair value amounts have been determined using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we would realize in a current market
exchange. The fair-value estimates presented herein are based on pertinent information available to us as of December 31, 2016.
Such amounts have not been comprehensively revalued for purposes of these financial statements since December 31, 2016, and
current estimates of fair value may differ significantly from the amounts presented herein.
94
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following financial instruments are recorded at their estimated fair value. The following table presents information about
the recurring fair value measurement of our assets and liabilities as of December 31, 2016 and 2015:
Financial Instruments Recorded at Fair Value on a Recurring Basis:
Fair Value
Measurement Level
As of December 31,
2016
2015
(In millions)
Assets:
Cash and cash equivalents:
Bank deposits and certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cash and cash equivalents:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted funds held in trust:
Bank deposits and certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Treasury/agency obligations (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and municipal obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial paper/guaranteed investment contracts/repurchase agreements .
Total restricted funds held in trust: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments:
Mutual and bond funds (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative asset — energy hedges (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities:
Derivative liability — energy hedges (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative liability — interest rate swaps (4) (5). . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
1
1
1
1
1
1
1
2
2
2
$
$
$
$
79
5
84
12
36
14
46
2
110
2
3
199
1
20
21
$
$
$
$
89
5
94
9
66
18
59
8
160
2
21
277
—
14
14
The following financial instruments are recorded at their carrying amount (in millions):
Financial Instruments Recorded at Carrying Amount:
Assets:
Accounts receivables (6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities:
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Project debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31, 2016
As of December 31, 2015
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
$
$
$
333
2,252
383
$
$
$
333
2,237
387
$
$
$
314
2,263
198
$
$
$
314
2,244
206
(1) The U.S. Treasury/agency obligations in restricted funds held in trust are primarily comprised of Federal Home Loan Mortgage Corporation
securities at fair value.
(2) Included in other noncurrent assets in the consolidated balance sheets.
(3) Included in prepaid expenses and other current assets in the consolidated balance sheets.
(4) Included in accrued expenses and other current liabilities in the consolidated balance sheets.
(5) Included in other noncurrent liabilities in the consolidated balance sheets.
(6) Includes $1 million and $2 million of noncurrent receivables in other noncurrent assets in the consolidated balance sheets as of December 31,
2016 and 2015.
In addition to the recurring fair value measurements, certain assets are measured at fair value on a non-recurring basis when an
indication of impairment is identified and the assets fair value is determined to be less than its carrying value. See Note 14.
Supplementary Information - Impairment Charges for additional information.
95
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 13. DERIVATIVE INSTRUMENTS
The following disclosures summarize the fair value of derivative instruments not designated as hedging instruments in the
consolidated balance sheets and the effect of changes in fair value related to those derivative instruments not designated as hedging
instruments on the consolidated statements of operations (in millions):
Derivative Instruments Not Designated
As Hedging Instruments
Asset Derivatives:
Balance Sheet Location
2016
2015
Fair Value as of December 31,
Foreign currency hedges. . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other current assets . . . . . .
$
— $
6
Effect on Income of Derivative Instruments
Not Designated As Hedging Instruments
Location of Gain or (Loss) Recognized
in Income on Derivatives
Foreign currency hedge. . . . . . . . . . . . . . . . Other expense, net . . . . . . . . . . . . . . . . . . . . . . .
Note hedge. . . . . . . . . . . . . . . . . . . . . . . . . . Non-cash convertible debt related expense . . . .
Cash conversion option . . . . . . . . . . . . . . . . Non-cash convertible debt related expense . . . .
Effect on income of derivative instruments not designated as hedging instruments . . . . . . . . . .
Foreign Currency Hedge
Amount of Gain (Loss) Recognized In Income
on Derivatives
For the Years Ended December 31,
2016
2015
2014
$
$
(2) $
—
—
(2) $
6
$
—
—
6
$
—
5
(5)
—
In order to hedge the risk of adverse foreign currency exchange rate fluctuations impacting the expected sale proceeds from our
equity transfer agreement in China (See Note 4. Dispositions, Assets Held for Sale and Discontinued Operations), we entered into
a foreign currency exchange collar with two financial institutions covering approximately $100 million of notional to protect
against further rate fluctuations pending the sale of our ownership interest to CITIC, which was completed during September 2016.
The foreign currency hedge is accounted for as a derivative instrument and, as such, was recorded at fair value quarterly with any
change in fair value recognized in our consolidated statements of operations as other expense, net. During the twelve months ended
December 31, 2016, cash provided by foreign currency exchange settlements totaled $5 million and was included in net cash used
in investing activities on our condensed consolidated statement of cash flows.
As of December 31, 2016, we received $105 million of gross sale proceeds relating to the aforementioned sale of our ownership
interests to CITIC and therefore, settled or canceled remaining foreign currency exchange derivatives related to this hedged
transaction, resulting in a current asset balance of zero. As of December 31, 2015, the fair value of the foreign currency exchange
derivatives of $6 million, pre-tax, was recorded as a current asset.
We have also entered into foreign currency forwards to manage foreign currency exchange rate fluctuations associated with a
series of fixed payments to be made by an international subsidiary through the end of 2017. This foreign currency forward is
accounted for as a derivative instrument at fair value in our consolidated balance sheet with any changes in fair value
recognized in our consolidated statements of operations as "Other expense, net." This derivative instrument was not material to
our consolidated statement of operations nor was it material to our condensed consolidated balance sheet as of December 31,
2016.
Cash Conversion Option, Note Hedge and Contingent Interest features related to the 3.25% Cash Convertible Senior Notes
The cash conversion option was a derivative instrument which was recorded at fair value quarterly with any change in fair value
being recognized in our consolidated statements of operations as non-cash convertible debt related expense. The note hedge was
accounted for as a derivative instrument and, as such, was recorded at fair value quarterly with any change in fair value being
recognized in our consolidated statements of operations as non-cash convertible debt related expense.
The 3.25% Notes matured on June 1, 2014. Upon maturity, we were required to pay $83 million to satisfy the obligation under
the cash conversion option in addition to the principal amount of the 3.25% Notes. The note hedge settled for $83 million and
effectively offset our exposure to the cash payments in excess of the principal amount made under the cash conversion option.
The income recognized as a result of changes in the credit valuation adjustment related to the note hedge was not material.
96
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Energy Price Risk
Following the expiration of certain long-term energy sales contracts, we may have exposure to market risk, and therefore revenue
fluctuations, in energy markets. We have entered into contractual arrangements that will mitigate our exposure to short-term
volatility through a variety of hedging techniques, and will continue to do so in the future. Our efforts in this regard will involve
only mitigation of price volatility for the energy we produce, and will not involve taking positions (either long or short) on energy
prices in excess of our physical generation. The amount of energy generation for which we have hedged under agreements with
various financial institutions is indicated in the following table (in millions):
Calendar Year
Hedged MWh
2017
2018
Total
2.4
1.0
3.4
As of December 31, 2016, the net fair value of the energy derivatives of $2 million, pre-tax, was recorded as a $3 million current
asset and a $1 million noncurrent liability and as a component of AOCI. As of December 31, 2016, the amount of hedge
ineffectiveness was not material. The net fair value energy derivative balance of $2 million includes a natural gas hedge transaction
of 1.3 million British Thermal Units to mitigate exposure to short-term volatility in certain contracted steam prices during the 2017
calendar year. As of December 31, 2015, the fair value of the energy derivatives of $21 million, pre-tax, was recorded as a current
asset and as a component of AOCI. The change in fair value was recorded as a component of comprehensive income.
During the twelve months ended December 31, 2016, cash provided by and used in energy derivative settlements of $32 million
and zero, respectively, was included in net cash provided by operating activities on our consolidated statement of cash flows.
During the twelve months ended December 31, 2015, cash provided by and used in energy derivative settlements of $17 million
and $7 million, respectively, was included in the change in net cash provided by operating activities on our consolidated statement
of cash flows.
Interest Rate Swaps
In order to hedge the risk of adverse variable interest rate fluctuations associated with the Dublin senior term loan, we have
entered into floating to fixed rate swap agreements with various financial institutions maturing between 2017 and 2021, denominated
in Euros, for the full €250 million loan amount. This interest rate swap is designated as a cash flow hedge which is recorded at
fair value with changes in fair value recorded as a component of AOCI. As of December 31, 2016, the fair value of the interest
rate swap derivative of $20 million, pre-tax, was recorded as a $2 million and $18 million current and noncurrent liability,
respectively. There was an immaterial amount of ineffectiveness recorded during the quarter recognized in our consolidated
statements of operations as interest expense. As of December 31, 2015, the fair value of the interest rate swap derivative of $14
million, pre-tax, was recorded as a noncurrent liability.
NOTE 14. SUPPLEMENTARY INFORMATION
Other Operating Expense, net
Plymouth Energy-from-Waste Facility
In May 2016, our Plymouth energy-from-waste facility experienced a turbine generator failure. Damage to the turbine generator
was extensive and operations at the facility were suspended promptly to assess the cause and extent of damage. The facility is
capable of processing waste without utilizing the turbine generator to generate electricity, and we resumed waste processing
operations in early June. The facility resumed generating electricity early in the first quarter of 2017, after the generator and other
damaged equipment were replaced. The cost of replacement and business interruption losses were insured under the terms of
applicable insurance policies, subject to deductibles. During the year ended December 31, 2106, we recorded insurance recoveries
in our consolidated statements of operations, related to this matter, as follows (in millions):
Insurance recoveries for repair and reconstruction costs (net of write-down of assets, reduction
to Other operating expense, net)
Insurance recoveries for business interruption and clean-up costs, net of costs incurred
(reduction to Plant operating expense)
$
$
5
3
97
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Impairment Charges
The components of impairment charges are as follows (in millions):
North America segment:
Impairment charges related to tangible and intangible assets (1) . . . . . . . . . . . . . $
Impairment charges related to biomass facilities and biomass equity
investment (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charges - other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
North America segment sub-total: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other:
Impairment charge related to insurance business (3). . . . . . . . . . . . . . . . . . . . . . .
Total impairment charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
For the Years Ended
December 31,
2016
2015
2014
16
$
— $
—
4
20
—
20
$
43
—
43
—
43
$
16
34
—
50
14
64
(1) Impairment charges related to tangible and intangible assets are related to the following:
• During the year ended December 31, 2016, we recorded a non-cash impairment charge of $13 million, pre-tax, related to the previously
planned closure of our Pittsfield EfW facility which is now expected to continue operating. For additional information see Note 3. New
Business and Asset Management. We also recorded a non-cash impairment charge of $3 million, pre-tax, related to a joint-venture project,
see Tartech Investment discussion below.
• On June 30, 2014, our service agreement with the Dutchess County Resource Recovery Agency under which we operated the Hudson
Valley EfW facility expired. In 2014, we recorded a $9 million non-cash impairment charge of the intangible asset that was recorded
upon acquisition in 2009 based on the expected cash flows over the remaining life of the contract utilizing Level 3 inputs.
• On April 3, 2014, the Montgomery County (PA) Commissioners (the “County”) unanimously voted to dissolve the Waste System Authority
of Eastern Montgomery County (the “WSA”). The Abington transfer station was constructed by the County and subsequently deeded to
the WSA, which was responsible for its operation. We operated the transfer station through the end of the current contract, which expired
on December 31, 2014. However, due to the dissolution of the WSA, it was not able to renew our current contract to operate the Abington
transfer station. During the year ended December 31, 2014, we recorded a non-cash impairment charge of $7 million of the service
contract intangible with the WSA that was recorded upon acquisition in 2009 based on the expected cash flows over the remaining life
of the contract utilizing Level 3 inputs.
(2) Impairments related to our biomass assets are as follows:
• During the year ended 2015, we identified indicators of impairment associated with our biomass facilities, primarily due to a decline in
energy market pricing. As a result of these developments, we recorded a non-cash impairment charge of $43 million, pre-tax, which was
calculated based on a range of potential outcomes utilizing various estimated cash flows for these facilities utilizing Level 3 inputs.
• During year ended December 31, 2014, we identified indicators of impairment associated with our California Biomass facilities, primarily
that we were unsuccessful in securing new long-term power purchase agreements to replace the current power purchase agreements,
which were approaching the end of their terms. Based on expected cash flows utilizing Level 3 inputs, we recorded a non-cash impairment
charge of $34 million to reduce the carrying value of the California Biomass assets to their estimated fair value.
(3) During 2014, we sold our insurance subsidiaries and recorded a non-cash impairment of $14 million comprised of the write-down of the
carrying amount in excess of the realizable fair value of $12 million, plus $2 million in disposal costs.
Tartech Investment
We are party to a joint venture that was formed to recover and recycle metals from EfW ash monofills in North America. During
the year ended December 31, 2016, due to operational difficulties and the decline in the scrap metal market, a valuation of the
entity was conducted. As a result, we recorded a net impairment of our investment in this joint venture of $3 million, pre-tax,
which represents our portion of the carrying value of the entity in excess of the fair value. Such amount was calculated based on
the estimated liquidation value of the tangible equipment utilizing Level 3 inputs. For more information regarding fair value
measurements, see Note 12. Financial Instruments.
98
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Non-Cash Convertible Debt Related Expense
The components of non-cash convertible debt related expense are as follows (in millions):
For the Years Ended
December 31,
2016
2015
2014
Debt discount accretion related to the 3.25% Notes . . . . . . . . . . . . . . . . . . . . $
Fair value changes related to the cash convertible note hedge . . . . . . . . . . . .
Fair value changes related to the cash conversion option derivative . . . . . . .
Total non-cash convertible debt related expense . . . . . . . . . . . . . . . . . . . . . $
— $
—
—
— $
— $
—
—
— $
Selected Supplementary Balance Sheet Information
Selected supplementary balance sheet information is as follows (in millions):
As of December 31,
2016
2015
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Hedge receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Spare parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Renewable energy credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total prepaid expenses and other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating expenses, payroll and related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities to client communities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total accrued expenses and other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . $
28
3
21
3
17
72
164
16
19
30
35
25
289
$
$
$
$
13
(5)
5
13
37
25
17
15
23
117
114
13
22
24
34
27
234
NOTE 15. INCOME TAXES
We file a federal consolidated income tax return with our eligible subsidiaries. Our federal consolidated income tax return also
includes the taxable results of certain grantor trusts described below. The components of income tax expense were as follows (in
millions):
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
99
For the Years Ended December 31,
2015
2014
2016
(2) $
6
(2)
2
28
(9)
1
20
22
$
(91) $
16
2
(73)
7
(11)
(7)
(11)
(84) $
(1)
4
3
6
(4)
16
(3)
9
15
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Domestic and foreign pre-tax income (loss) was as follows (in millions):
For the Years Ended December 31,
2015
2014
2016
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
26
(12)
14
$
$
$
6
(34)
(28) $
14
(10)
4
The effective income tax rate was 150%, 302%, and 388% for the years ended December 31, 2016, 2015 and 2014, respectively.
The decrease in effective tax rate for the year ended December 31, 2016, compared to the year ended December 31, 2015 is
primarily due to the combined effects of (i) the recognition of tax benefit due to the resolution of the IRS audit in 2015 and (ii)
the fact that the Company turned from pre-tax loss in 2015 to pre-tax income in 2016, offset by the uncertain tax positions recorded
in 2016. The decrease in the effective tax rate for the year ended December 31, 2015, compared to the year ended December 31,
2014 was primarily due to the recognition of tax benefit due to the resolution of the IRS audit in 2015 and non-recurring adjustments
from the prior year.
A reconciliation of our income tax expense (benefit) at the federal statutory income tax rate of 35% to income tax expense
(benefit) at the effective tax rate is as follows (in millions):
For the Years Ended December 31,
2016
2015
2014
Income tax expense (benefit) at the federal statutory rate . . . . . . . . .
State and other tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax rate differential on foreign earnings. . . . . . . . . . . . . . . . . . . . . . .
Permanent differences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Production tax credits/R&E tax credits. . . . . . . . . . . . . . . . . . . . . . . .
State ITC credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liability for uncertain tax positions . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustment to deferred tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income tax expense (benefit). . . . . . . . . . . . . . . . . . . . . . . . . .
$
5
1
4
4
—
(4)
2
16
(5)
(1)
$
(10) $
1
8
4
(3)
—
(7)
(82)
4
1
$
22
$
(84) $
1
8
5
4
(4)
—
3
5
(9)
2
15
We had consolidated federal NOLs estimated to be approximately $288 million for federal income tax purposes as of the end
of 2016. These consolidated federal NOLs will expire, if not used, in the following amounts in the following years (in millions):
2028 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2030 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2031 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2032 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2033 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Amount of
Carryforward
Expiring
64
29
1
1
193
288
In addition to the consolidated federal NOLs, as of December 31, 2016, we had state NOL carryforwards of approximately $291
million, which expire between 2028 and 2035, net foreign NOL carryforwards of approximately $227 million expiring between
2017 and 2036. The federal tax credit carryforwards include production tax credits of $47 million expiring between 2024 and
2036, and minimum tax credits of $7 million with no expiration. Additionally, we had state income tax credit of $1 million. The
corresponding deferred tax assets are offset by a valuation allowance of approximately $71 million.
100
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The tax effects of temporary differences that give rise to the deferred tax assets and liabilities are presented as follows
(in millions):
Deferred tax assets:
Capital loss carryforward. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid and other costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets attributable to pass-through entities . . . . . . . . . . . . . . . . . . . . .
Retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AMT and other credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Unbilled accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities attributable to pass-through entities . . . . . . . . . . . . . . . . . .
Deferred gain on convertible debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Swap income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total gross deferred tax liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
As of December 31,
2016
2015
— $
143
20
71
17
3
4
55
313
(71)
242
3
780
36
22
13
—
—
5
859
617
$
3
157
24
36
17
—
4
67
308
(73)
235
4
725
18
26
20
2
23
11
829
594
Cumulative undistributed foreign earnings for which United States taxes were not provided were included in consolidated
retained earnings in the amount of approximately $257 million and $264 million as of December 31, 2016 and 2015, respectively.
Such amounts are considered permanently invested, therefore no provision for U.S. income taxes has been accrued. Determination
of the unrecognized deferred tax liability for these undistributed foreign earnings is not practicable.
Deferred tax assets relating to employee stock based compensation deductions were reduced to reflect exercises of non-qualified
stock option grants and vesting of restricted stock. Some exercises of non-qualified stock option grants and vesting of restricted
stock resulted in tax deductions in excess of previously recorded benefits resulting in a "windfall". Although these additional
deductions were reported on the corporate tax returns and increased NOLs, these related tax benefits were not recognized for
financial reporting purposes. These windfalls will not be recognized until the related deductions result in a reduction of taxes
payable and cash tax payments. Accordingly, since the tax benefit does not reduce our current taxes payable, these tax benefits
were not reflected in deferred tax assets for financial reporting purposes as of December 31, 2016 and 2015. Such benefits included
in NOLs but not reflected in deferred tax assets were approximately $26 million as of both December 31, 2016 and 2015.
101
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):
Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additions based on tax positions related to the current year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions for lapse in applicable statute of limitations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related to the current year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions for lapse in applicable statute of limitations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related to the current year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions for lapse in applicable statute of limitations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
128
8
—
(3)
—
133
12
—
—
(109)
36
16
4
(3)
(4)
(6)
43
The uncertain tax positions, exclusive of interest and penalties, were $43 million and $36 million as of December 31, 2016 and
2015, respectively, which also represent potential tax benefits that if recognized, would impact the effective tax rate.
We record interest accrued on liabilities for uncertain tax positions and penalties as part of the tax provision. As of December 31,
2016 and 2015, we had accrued interest and penalties associated with liabilities for uncertain tax positions of $3 million and $1
million, respectively. We continue to reflect interest accrued and penalties on uncertain tax positions as part of the tax provision.
Audits for federal income tax returns are closed for the years through 2009. However, the Internal Revenue Service ("IRS") can
audit the NOL's generated during those years in the years that the NOL's are utilized.
State income tax returns are generally subject to examination for a period of three to six years after the filing of the respective
tax return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year
after formal notification to the states. We have various state income tax returns in the process of examination, administrative appeals
or litigation.
Our NOLs predominantly arose from our predecessor insurance entities, formerly named Mission Insurance Group, Inc.,
(“Mission”). These Mission insurance entities have been in state insolvency proceedings in California and Missouri since the late
1980's. The amount of NOLs available to us will be reduced by any taxable income or increased by any taxable losses generated
by current members of our consolidated tax group, which include grantor trusts associated with the Mission insurance entities.
While we cannot predict what amounts, if any, may be includable in taxable income as a result of the final administration of
these grantor trusts, substantial actions toward such final administration have been taken and we believe that neither arrangements
with the California Commissioner of Insurance nor the final administration by the Missouri Director will result in a material
reduction in available NOLs.
NOTE 16. EMPLOYEE BENEFIT PLANS
We sponsor various retirement plans covering the majority of our employees and retirees in the United States, as well as other
postretirement benefit plans for a small number of retirees in the United States that include healthcare benefits and life insurance
coverage. Employees in the United States not participating in our retirement plans generally participate in retirement plans offered
by collective bargaining units of which these employees are members. The majority of our international employees participate in
defined benefit or defined contribution retirement plans as required or available in accordance with local laws.
102
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Defined Contribution Plans
Substantially all of our employees in the United States are eligible to participate in the defined contribution plans we sponsor.
The defined contribution plans allow employees to contribute a portion of their compensation on a pre-tax basis in accordance
with specified guidelines. We match a percentage of employee contributions up to certain limits. We also provide a company
contribution to the defined contribution plans for eligible employees. Our costs related to defined contribution plans were $17
million, $16 million and $16 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Pension and Postretirement Benefit Obligations
In 2012, the IRS approved our plan to terminate the qualified defined benefit pension plan. During 2013, $35 million of annuity
contracts were purchased on behalf of participants who elected an annuity option and we recorded a pre-tax defined benefit pension
plan settlement gain of $6 million, which was recorded as other operating income in our consolidated statements of operations.
Such annuity purchase concluded the termination of the defined benefit pension plan, accordingly, we have no future obligations
related to the qualified defined benefit pension plan.
The discount rate for the non-qualified pension plans was 4.10%, 4.35% and 4.05% for the years ended December 31, 2016,
2015 and 2014, respectively.
For the other postretirement benefit plan, an annual rate of increase of 7.0% in the per capita cost of health care benefits was
assumed for 2016 for covered employees. An average increase of 7.0% was assumed for 2017. The average increase was then
projected to gradually decline to 5.0% in 2022 and remain at that level. In general, assumed health care cost trend rates have a
significant effect on the amounts reported for the health care plan. A one-percentage point change (either increase or decrease) in
the assumed health care trend rate would have an immaterial (approximately $0.2 million) effect on either total service and interest
cost components or postretirement benefit obligations.
For the pension plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligation, accumulated
benefit obligation, and fair value of plan assets were $1 million, $1 million and $0, respectively, as of December 31, 2016 and $4
million, $4 million, and $0, respectively, as of December 31, 2015.
As of December 31, 2016, we estimate that the future benefits payable over the next ten years for the retirement and postretirement
plans in place are $1 million for pension benefits, $2 million for other benefits (net of Medicare Part D subsidy) and $0 million
for attributable to Medicare Part D subsidy.
Pension costs for our defined benefit plans and other post-retirement benefit plans were not material.
103
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Obligation and Funded Status
The following table is a reconciliation of the changes in the benefit obligations and fair value of assets for our non-qualified
defined benefit pension plan and other postretirement benefit plan, the funded status (using a December 31 measurement date) of
the plans and the related amounts recognized in our consolidated balance sheets (in millions, except percentages as noted):
Change in benefit obligation:
Benefit obligation at beginning of year . . . . . . . . . . . . . . . . .
Actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . .
Change in plan assets:
Plan assets at fair value at beginning of year . . . . . . . . . . . .
Contributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan assets at fair value at end of year. . . . . . . . . . . . . . . . . .
Reconciliation of accrued benefit liability and net
amount recognized:
Funded status of the plan. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrecognized net gain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income recognized:
Net actuarial gain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net prior service cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total as of December 31,. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average assumptions used to determine net
periodic benefit expense for years ending
December 31:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average assumptions used to determine
projected benefit obligations as of December 31:
$
$
$
$
$
$
$
$
Non-qualified Pension Benefits
Other Benefits
For the Years Ended
December 31,
For the Years Ended
December 31,
2016
2015
2016
2015
4
—
(3)
1
$
$
— $
3
(3)
— $
(1)
—
(1)
$
$
— $
(1)
(1)
$
4
—
—
4
$
$
— $
—
—
— $
(4)
—
(4)
$
$
— $
(1)
(1)
$
4
(1)
—
3
$
$
— $
—
—
— $
(3)
—
(3)
(4)
—
(4)
$
$
$
$
5
(1)
—
4
—
—
—
—
(4)
—
(4)
(4)
—
(4)
4.35%
4.05%
3.75%
3.50%
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.10%
4.35%
3.55%
3.75%
NOTE 17. STOCK-BASED AWARD PLANS
Stock-Based Award Plans
In May 2014, the stockholders of the Company approved the Covanta Holding Corporation 2014 Equity Award Plan (the “Plan”)
to provide incentive compensation to non-employee directors, officers and employees, and to consolidate the two previously
existing equity compensation plans into a single plan: the Company’s Equity Award Plan for Employees and Officers (the “Former
Employee Plan”) and the Company’s Equity Award Plan for Directors (the “Former Director Plan,” and together with the Former
Employee Plan, the “Former Plans”). Shares that were available for issuance under the Former Plans will be available for issuance
under the Plan. The stockholders of the Company also approved the authorization of 6 million new shares of our common stock
for issuance under the Plan.
The purpose of the Plan is to promote our interests (including our subsidiaries and affiliates) and our stockholders’ interests by
using equity interests to attract, retain and motivate our management, non-employee directors and other eligible persons and to
encourage and reward their contributions to our performance and profitability. The Plan provides for awards to be made in the
form of (a) shares of restricted stock, (b) restricted stock units, (c) incentive stock options, (d) non-qualified stock options, (e) stock
appreciation rights, (f) performance awards, or (g) other stock-based awards which relate to or serve a similar function to the
awards described above. Awards may be made on a standalone, combination or tandem basis.
104
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Stock-Based Compensation
We recognize compensation costs using the graded vesting attribution method over the requisite service period of the award,
which is generally three to five years. We recognize compensation expense based on the number of stock options, restricted stock
awards and restricted stock units expected to vest by using an estimate of expected forfeitures. We review the forfeiture rates at
least annually and revise compensation expense, if necessary. During 2016, the average forfeiture rates were 12% for restricted
stock awards and 15% for restricted stock units. Stock-based compensation expense is as follows (in millions, except for weighted
average years):
Total Compensation Expense
for the Years Ended December 31,
2016
2015
2014
As of December 31, 2016
Unrecognized
stock-based
compensation
expense
Weighted-
average years
to be
recognized
Restricted Stock Awards . . . . . . . . . . . . . . . . . . . . . .
Restricted Stock Units . . . . . . . . . . . . . . . . . . . . . . . .
$
$
10
6
$
$
11
6
$
$
11
6
$
$
7
8
1.4
2.1
Restricted Stock Awards
Restricted stock awards that have been issued to employees typically vest over a three-year period. Restricted stock awards are
stock-based awards for which the employee or director does not have a vested right to the stock (“nonvested”) until the requisite
service period has been rendered or the required financial performance factor has been reached for each pre-determined vesting
date. Stock-based compensation expense for each financial performance factor is recognized beginning in the period when
management has determined it is probable the financial performance factor will be achieved for the respective vesting period. The
fair value of shares vested during the year was $9 million.
Restricted stock awards to employees are subject to forfeiture if the employee is not employed on the vesting date. Restricted
stock awards issued to directors are not subject to forfeiture in the event a director ceases to be a member of the Board of Directors,
except in limited circumstances. Restricted stock awards will be expensed over the requisite service period, subject to an estimated
forfeiture rate. Prior to vesting, restricted stock awards have all of the rights of common stock (other than the right to sell or
otherwise transfer, when issued). We calculate the fair value of share-based stock awards based on the closing price on the date
the award was granted.
During 2016 we awarded certain employees 752,426 shares of restricted stock. The restricted stock awards will be expensed
over the requisite service period, subject to an estimated 12% average forfeiture rate. The terms of the restricted stock awards
include vesting provisions based solely on continued service. If the service criteria are satisfied, the restricted stock awards vest
generally during March of 2017, 2018, and 2019.
During 2016, we awarded 9,000 shares of restricted stock for annual director compensation. We determined that the service
vesting condition of these restricted stock awards to be non-substantive and, in accordance with accounting principles for stock
compensation, recorded the entire fair value of the award as compensation expense on the grant date.
Changes in nonvested restricted stock awards were as follows (in thousands, except per share amounts):
2016
Weighted-
Average
Grant Date
Fair Value
Number of
Shares
As of December 31,
2015
Number of
Shares
Weighted-
Average
Grant Date
Fair Value
2014
Weighted-
Average
Grant Date
Fair Value
Number of
Shares
Nonvested at the beginning of
the year . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . .
Nonvested at the end of the year .
$
1,060
$
761
(532) $
(69) $
$
1,220
19.79
15.14
19.36
17.51
17.20
$
1,240
$
573
(661) $
(92) $
$
1,060
17.67
21.88
17.69
19.36
19.79
$
1,166
$
721
(608) $
(39) $
$
1,240
17.85
17.20
17.27
17.80
17.67
105
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Restricted Stock Units
In 2010, we awarded restricted stock units (“RSUs”) to certain employees in connection with specified growth-based acquisitions
or development projects. Vesting of the RSUs is based on the net present value of projected cash flows of the applicable acquisition
or development project, calculated as of the award date versus the vesting date. Vesting will occur after at least three years have
passed following an acquisition or upon the later of three years from the grant date or one year following the commencement of
commercial operations for development projects. For certain stock unit awards, dividends accrue prior to vesting and are paid
when the awards vest. We calculate the fair value of share-based stock awards based on the closing price on the date the award
was granted.
In January, 2016, we awarded certain employees 356,622 RSUs related to a special retention bonus that will vest after a three-
year period.
In March, 2016, we awarded certain employees 471,381 RSUs, 390,728 of which will vest based upon the Company’s cumulative
Free Cash Flow per share over a three-year performance period.
In May, 2016, we awarded 54,591 restricted stock units for annual director compensation. We determined the service vesting
condition of these restricted stock awards and restricted stock units to be non-substantive and, in accordance with accounting
principles for stock compensation, recorded the entire fair value of the awards as compensation expense on the grant date.
In September, 2016, the Board of Directors appointed two new board members. We awarded 5,550 restricted stock units for
the prorated portion of the annual director compensation with respect to these directors. We determined the service vesting condition
of these restricted stock awards and restricted stock units to be non-substantive and, in accordance with accounting principles for
stock compensation, recorded the entire fair value of the awards as compensation expense on the grant date.
Changes in nonvested restricted stock units were as follows (in thousands, except per share amounts):
2016
Weighted-
Average
Grant Date
Fair Value
Number of
Shares
As of December 31,
2015
Number of
Shares
Weighted-
Average
Grant Date
Fair Value
2014
Weighted-
Average
Grant Date
Fair Value
Number of
Shares
$
1,189
$
888
(51) $
(223) $
$
1,803
17.60
14.65
20.24
16.29
16.25
$
894
$
322
(21) $
(6) $
$
1,189
15.93
21.95
17.94
21.99
17.60
$
691
$
247
(44) $
— $
$
894
16.66
14.60
16.51
—
15.93
Nonvested at the beginning of
the year . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . .
Nonvested at the end of the year .
Stock Options
We have also awarded stock options to certain employees and directors. Stock options awarded to directors vested immediately.
Stock options awarded to employees have typically vested annually over three to five years and expire over ten years. We calculate
the fair value of our share-based option awards using the Black-Scholes option pricing model which requires estimates of the
expected life of the award and stock price volatility.
106
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes activity and balance information of the options under the 2014 Stock Option Plan:
2016
Weighted
Average
Exercise
Price
Shares
As of December 31,
2015
Weighted
Average
Exercise
Price
Shares
2014
Weighted
Average
Exercise
Price
Shares
(in thousands, except per share amounts)
1,100
$
— $
— $
(20) $
— $
$
$
1,080
1,080
4,003
21.37
—
—
—
—
21.38
21.38
1,113
$
— $
(13) $
— $
— $
$
$
1,100
1,100
5,652
21.25
—
11.40
—
—
21.37
21.37
$
1,686
25
$
(532) $
(66) $
— $
$
$
1,113
1,100
6,548
20.42
20.58
18.53
20.52
—
21.25
21.26
2014 Stock Option Plan
Outstanding at the beginning of the
year . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . .
Expired . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . .
Outstanding at the end of the year . .
Options exercisable at year end . . . .
Options available for future grant . .
As of December 31, 2016, options for shares were in the following price ranges (in thousands, except years and per share
amounts):
Exercise Price Range
$20.52 — $20.58 . . . . . . . . .
$23.30 — $24.76 . . . . . . . . .
Options Outstanding
Number of
Shares
Weighted Average
Exercise Price
$
$
850
230
1,080
20.52
24.57
Weighted
Average
Remaining
Contractual Life
(Years)
0.4
1.4
Options Exercisable
Number of
Shares
Weighted Average
Exercise Price
$
$
850
230
1,080
20.52
24.57
The total cash received from the exercise of stock options was zero, less than $1 million and $10 million, for the years ended
December 31, 2016, 2015 and 2014, respectively. The tax benefits related to the exercise of the non-qualified stock options and
the vesting of the restricted stock award were not recognized during the years ended December 31, 2016, 2015 and 2014 due to
our NOLs. When the NOLs have been fully utilized by us, we will recognize a tax benefit and an increase in additional paid-in
capital for the excess tax deductions received on the exercised non-qualified stock options and vested restricted stock. Future
realization of the tax benefit will be presented in cash flows from financing activities in the consolidated statements of cash flows
in the period the tax benefit is recognized. Previously recorded tax benefits that are in excess of the realized tax benefit on a
particular non-qualified stock option or restricted stock are recorded as an increase to income tax expense since there is no additional
paid-in capital pool available to offset these reduced tax benefits.
The aggregate intrinsic value as of December 31, 2016 for options exercisable was $0 for options outstanding and options vested.
All options outstanding as of December 31, 2016 are fully vested. The aggregate intrinsic value represents the total pre-tax intrinsic
value (the difference between the closing stock price on the last trading day of 2016 and the exercise price, multiplied by the
number of in-the-money options) that would have been received by the option holders had all option holders exercised their options
on the last trading day of 2016 (December 30, 2016). The intrinsic value changes based on the fair market value of our common
stock. The total intrinsic value of options exercised for the years ended as of December 31, 2016, 2015 and 2014 was $0, $0, and
$1 million, respectively.
As of December 31, 2016, there were options to purchase 1 million shares of common stock that had vested at a weighted average
exercise price of $21.38.
NOTE 18. COMMITMENTS AND CONTINGENCIES
We and/or our subsidiaries are party to a number of claims, lawsuits and pending actions, most of which are routine and all of
which are incidental to our business. We assess the likelihood of potential losses on an ongoing basis and when losses are considered
probable and reasonably estimable, record as a loss an estimate of the outcome. If we can only estimate the range of a possible
loss, an amount representing the low end of the range of possible outcomes is recorded. Our assessments are based on estimates
and assumptions that have been deemed reasonable by management, but the assessment process relies on estimates and assumptions
107
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
that may prove to be incomplete or inaccurate, and unanticipated events or circumstances may occur that might cause us to change
those estimates and assumptions. The final consequences of these proceedings are not presently determinable with certainty. As
of December 31, 2016 and 2015, accruals for our loss contingencies approximated $11 million and $1 million, respectively.
Environmental Matters
Our operations are subject to environmental regulatory laws and environmental remediation laws. Although our operations are
occasionally subject to proceedings and orders pertaining to emissions into the environment and other environmental violations,
which may result in fines, penalties, damages or other sanctions, we believe that we are in substantial compliance with existing
environmental laws and regulations.
We may be identified, along with other entities, as being among parties potentially responsible for contribution to costs associated
with the correction and remediation of environmental conditions at disposal sites subject to federal and/or analogous state laws.
In certain instances, we may be exposed to joint and several liabilities for remedial action or damages. Our liability in connection
with such environmental claims will depend on many factors, including our volumetric share of waste, the total cost of remediation,
and the financial viability of other companies that also sent waste to a given site and, in the case of divested operations, the
contractual arrangement with the purchaser of such operations.
The potential costs related to the matters described below and the possible impact on future operations are uncertain due in part
to the complexity of governmental laws and regulations and their interpretations, the varying costs and effectiveness of cleanup
technologies, the uncertain level of insurance or other types of recovery and the questionable level of our responsibility. Although
the ultimate outcome and expense of any litigation, including environmental remediation, is uncertain, we believe that the following
proceedings will not have a material adverse effect on our consolidated financial position or results of operations.
Lower Passaic River Matter. In August 2004, the United States Environmental Protection Agency (the “EPA”) notified Covanta
Essex Company (“Essex”) that it was a potentially responsible party (“PRP”) for Superfund response actions in the Lower Passaic
River Study Area, referred to as “LPRSA,” a 17 mile stretch of river in northern New Jersey. Essex’s LPRSA costs to date are not
material to its financial position and results of operations; however, to date the EPA has not sought any LPRSA remedial costs or
natural resource damages against PRPs. On March 3, 2016, the EPA released the Record of Decision (“ROD”) for its Focused
Feasibility Study of the lower 8 miles of the LPRSA; the EPA’s selected remedy includes capping/dredging of sediment, institutional
controls and long-term monitoring. The Essex facility started operating in 1990 and Essex does not believe there have been any
releases to the LPRSA, but in any event believes any releases would have been de minimis considering the history of the LPRSA;
however, it is not possible at this time to predict that outcome or to estimate the range of possible loss relating to Essex’s liability
in the matter, including for LPRSA remedial costs and/or natural resource damages.
Tulsa Matter. In January 2016, we were informed by the office of the United States Attorney for the Northern District of
Oklahoma (“U.S. Attorney”) that our subsidiary, Covanta Tulsa Renewable Energy LLC, is the target of a criminal investigation
being conducted by the EPA. We understand that the EPA plans to allege improprieties in the recording and reporting of emissions
data during an October 2013 incident involving one of the three municipal waste combustion units at our Tulsa, Oklahoma facility.
We believe that our operations in Tulsa were and are in compliance with existing laws and regulations in all material respects.
While we can provide no assurance as to the outcome of this matter, we do not believe that the investigation or any issues arising
therefrom will have a material adverse effect on our financial position, cash flows or results of operations.
Other Matters
Durham-York Contractor Arbitration
We are seeking to resolve outstanding disputes with our primary contractor for the Durham-York construction project regarding
(i) claims by the contractor for change orders and other expense reimbursement and (ii) claims by us for charges and liquidated
damages for project completion delays. Our contract with this contractor contemplates binding arbitration to resolve these disputes,
which we expect may conclude in 2017. While we do not expect resolution of these disputes to have a material adverse impact on
our financial position, it could be material to our results of operations and or cash flows in any given accounting period.
China Indemnification Claims
Subsequent to completing the exchange of our project ownership interests in China for a 15% ownership interest in Sanfeng
Environment (see Note 4. Dispositions, Assets Held for Sale and Discontinued Operations), Sanfeng Environment made certain
claims for indemnification under the agreement related to the condition of the facility in Taixing. To the extent that any payment
is made related to these claims, such amount could reduce the gain recorded in a future period.
108
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Other Commitments
Other commitments as of December 31, 2016 were as follows (in millions):
Commitments Expiring by Period
Total
Less Than
One Year
More Than
One Year
Letters of credit issued under the Revolving Credit Facility. . . . . . . . . . . . .
Letters of credit - other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surety bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other commitments — net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
156
61
158
375
$
$
— $
—
—
— $
156
61
158
375
The letters of credit were issued to secure our performance under various contractual undertakings related to our domestic and
international projects or to secure obligations under our insurance program. Each letter of credit relating to a project is required
to be maintained in effect for the period specified in related project contracts, and generally may be drawn if it is not renewed prior
to expiration of that period.
We believe that we will be able to fully perform under our contracts to which these existing letters of credit relate, and that it
is unlikely that letters of credit would be drawn because of a default of our performance obligations. If any of these letters of credit
were to be drawn by the beneficiary, the amount drawn would be immediately repayable by us to the issuing bank. If we do not
immediately repay such amounts drawn under letters of credit issued under the Revolving Credit Facility, unreimbursed amounts
would be treated under the Credit Facilities as either additional term loans or as revolving loans.
The surety bonds listed in the table above relate primarily to construction and performance obligations and support for other
obligations, including closure requirements of various energy projects when such projects cease operating. Were these bonds to
be drawn upon, we would have a contractual obligation to indemnify the surety company.
We have certain contingent obligations related to the 7.25% Notes, 6.375% Notes, 5.875% Notes, and Tax-Exempt Bonds.
Holders may require us to repurchase their 7.25% Notes, 6.375% Notes, 5.875% Notes and Tax-Exempt Bonds if a fundamental
change occurs. For specific criteria related to the redemption features of the 5.875% Notes, 7.25% Notes or 6.375% Notes, see Note
11. Consolidated Debt.
We have issued or are party to guarantees and related contractual support obligations undertaken pursuant to agreements to
construct and operate waste and energy facilities. For some projects, such performance guarantees include obligations to repay
certain financial obligations if the project revenue is insufficient to do so, or to obtain or guarantee financing for a project. With
respect to our businesses, we have issued guarantees to municipal clients and other parties that our subsidiaries will perform in
accordance with contractual terms, including, where required, the payment of damages or other obligations. Additionally, damages
payable under such guarantees for our energy-from-waste facilities could expose us to recourse liability on project debt. If we
must perform under one or more of such guarantees, our liability for damages upon contract termination would be reduced by
funds held in trust and proceeds from sales of the facilities securing the project debt and is presently not estimable. Depending
upon the circumstances giving rise to such damages, the contractual terms of the applicable contracts, and the contract counterparty’s
choice of remedy at the time a claim against a guarantee is made, the amounts owed pursuant to one or more of such guarantees
could be greater than our then-available sources of funds. To date, we have not incurred material liabilities under such guarantees.
Dublin EfW Facility
In connection with the financing of the Dublin EfW facility, Covanta Energy has made commitments for contingent support as
follows: (1) lending commitments up to €25 million to fund working capital shortfalls in the project company under certain
circumstances during operations; and (2) up to €75 million commitment in the aggregate to provide support payments to the project
company, under certain circumstances, in the event waste revenue falls below minimum levels (set far below anticipated levels).
For additional information on the Dublin EfW facility, see Note 3. New Business and Asset Management and Note 11. Consolidated
Debt.
New York City Contract Investments
In 2013, New York City awarded us a contract to handle waste transport and disposal from two marine transfer stations located
in Queens and Manhattan. Service for the Queens marine transfer station began in early 2015, service for the Manhattan marine
transfer station is expected to follow pending notice to proceed to be issued by New York City which is anticipated in 2018. As of
December 31, 2016, we expect to incur approximately $33 million of additional capital expenditures, primarily for transportation
equipment.
109
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 19. QUARTERLY DATA (UNAUDITED)
The following table presents quarterly unaudited financial data for the periods presented on the consolidated statements of
operations (in millions, except per share amounts):
March 31,
June 30,
September 30,
December 31,
2016
2015
2016
2015
2016
2015
2016
2015
Calendar Quarter Ended
Operating revenue . . . . . . . . . . . . . .
Operating (loss) income (1). . . . . . . .
Net (loss) income. . . . . . . . . . . . . . .
Net (loss) income attributable to
Covanta Holding Corporation . . .
(Loss) Earnings per share
attributable to Covanta Holding
Corporation stockholders:
Basic . . . . . . . . . . . . . . . . . . . . . . .
Diluted. . . . . . . . . . . . . . . . . . . . . .
Cash dividend declared per share: . .
$
$
$
$
$
$
$
403
$
(14) $
(37) $
383
7
$
$
418
5
$
$
(37) $
(29) $
408
$
(15) $
(6) $
(37) $
(37) $
(29) $
(6) $
(0.29) $
(0.28) $
(0.23) $
(0.05) $
(0.29) $
(0.28) $
(0.23) $
(0.05) $
421
60
54
54
0.42
0.42
0.25
$
0.25
$
0.25
$
0.25
$
0.25
$
$
$
$
$
$
$
422
74
34
34
0.26
0.25
0.25
$
$
$
$
$
$
$
457
58
8
8
0.06
0.06
0.25
$
$
$
$
$
$
$
432
43
78
77
0.59
0.58
0.25
(1)As restated for the quarters ending March 31, June 30, September 30 and December 31, 2015, for reclassification of Net
interest expense (income) on project debt of $2 million, $5 million, $3 million, and $(1) million, respectively, to Interest
expense, net on our consolidated statement of operations. As a result, Operating income (loss) increased (decreased)
accordingly.
NOTE 20. SUBSEQUENT EVENTS
Southeast Connecticut Energy-from -Waste Facility
On February 22, 2017, we extended our agreement with the Southeastern Connecticut Regional Resource Recovery Authority
for an additional four years. As a result, our Southeast Connecticut energy-from-waste facility is now operating under a tip fee
structure.
Fairfax County Energy-from-Waste Facility
On February 2, 2017, our Fairfax County energy-from waste facility located in Lorton, Virginia experienced a fire in the front-
end receiving portion of the facility. We are still investigating and evaluating the impact of the event, and once this effort is
completed, we may have an asset impairment. The cost of repair or replacement, and business interruption losses, are insured,
subject to applicable deductibles. We do not expect that this will have a significant impact on our 2017 financial results.
Schedule II — Valuation and Qualifying Accounts
Receivables Valuation and Qualifying Accounts
Additions
Balance
Beginning
of Year
Charged to
Costs and
Expense
Charged to
Other
Accounts
(In millions)
Deductions
Balance at
End of
Period
2016 – Reserves for doubtful accounts . . . . .
2015 – Reserves for doubtful accounts . . . . .
2014 – Reserves for doubtful accounts . . . . .
$
$
$
7
6
4
$
$
$
110
3
1
4
$
$
$
— $
— $
— $
1
$
— $
$
2
9
7
6
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There were no disagreements with accountants on accounting and financial disclosure.
Item 9A. CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of Covanta’s disclosure controls and procedures, as required by Rule 13a-15(b) and 15d-15(b) under the
Securities Exchange Act of 1934 (the “Exchange Act”) as of December 31, 2016. Our disclosure controls and procedures are
designed to reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange
Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding disclosure and is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission’s rules and forms.
Our management, including our Chief Executive Officer and Chief Financial Officer, believes that any disclosure controls
and procedures or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must consider
the benefits of controls relative to their costs. Inherent limitations within a control system include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more people, or by unauthorized override of the
control. While the design of any system of controls is to provide reasonable assurance of the effectiveness of disclosure
controls, such design is also based in part upon certain assumptions about the likelihood of future events, and such
assumptions, while reasonable, may not take into account all potential future conditions. Accordingly, because of the inherent
limitations in a cost effective control system, misstatements due to error or fraud may occur and may not be prevented or
detected.
Our management has conducted an assessment of its internal control over financial reporting as of December 31, 2016 as
required by Section 404 of the Sarbanes-Oxley Act. Management’s report on our internal control over financial reporting is
included on page 113. The Independent Registered Public Accounting Firm’s report with respect to the effectiveness of our
internal control over financial reporting is included on page 114.
As previously disclosed in Item 4 of our Quarterly Reports on Form 10-Q filed during the year ended December 31, 2016,
our Chief Executive Officer and Chief Financial Officer concluded that we did not maintain effective internal controls over
financial reporting because we had control deficiencies which constituted "material weaknesses" in two areas: (i) municipally-
owned facility construction accounting and (ii) income tax accounting. Our Chief Executive Officer and Chief Financial
Officer have concluded that, based on their reviews, the first material weakness noted above has been remediated, while the
second, as further explained below, requires additional time to test the effectiveness of corrective measures taken, and thus has
not been remediated. As such, our Chief Executive officer and Chief Financial Officer have concluded that our disclosure
controls and procedures are not effective to provide the reasonable assurance described above.
Changes in Internal Control over Financial Reporting
Municipally-Owned Facility Construction Accounting
As previously disclosed, our management concluded that there was a material weakness in our internal control over
financial reporting related to the estimation and timeliness of the reporting of certain costs associate with an outage related to
certain remediation work on the Durham-York project and initial start-up operations of the project. The Durham-York project
was our only municipally-owned project in original construction or start-up. When long-term construction revenue contracts
for facilities that are municipally owned move to a projected net loss position, as the Durham-York contract did in the quarter
ended June 30, 2015, all changes to the projected net loss are required to be recorded in the period those changes are identified.
During the quarter ended June 30, 2015, we estimated incremental costs expected to be incurred to conduct outages to modify
certain equipment, and to conduct initial start-up operations. During the quarter ended September 30, 2015, we determined that
our prior estimate was not sufficiently accurate, and required refinement to our projected net loss. We determined that our
inability to estimate such outage and start-up costs with sufficient accuracy during the period they were identified constituted a
material weakness in our internal controls over financial reporting.
During the quarter ended March 31, 2016, we determined that our estimate of construction costs associated with our Dublin
construction project during the quarter ended December 31, 2015, was also not sufficiently accurate. While this project is not
municipally-owned, and the inaccurate cost estimates resulted in an immaterial financial statement impact, we determined that
our inability to estimate such costs was due to the existing material weakness in our internal controls over financial reporting.
We took the following steps to remediate the material weakness discussed above:
111
•
•
•
Improved coordination among the management of several functions (operations, project management and accounting)
to ensure that the information required for proper financial reporting is identified, evaluated, refined and reported on a
timely basis;
Implemented controls to improve the precision of the estimates of costs which are to be factored into the overall
profitability or loss of a project involving public-owned facilities and to ensure that such precision levels are
appropriately factored into our profit or loss recognition;
Implemented enhanced reviews by the accounting and finance department to ensure that project cost reports which are
used as a tool to track such outage and start-up expenditures are accurately stated and include all expenditures and
accruals;
• Consolidated forecasting and overall financial oversight responsibility with financial controllers at ongoing facility
construction projects to provide a single point of coordination between the construction, operations, client
management, and finance and accounting functions, and to provide oversight of the financial reporting of construction
activities; and
• Engaged additional personnel to assist with the review of change orders, claims events and other interactions between
the company and its contractors and subcontractors on all major construction contracts.
During the quarters ended March 31, June 30, September 30 and December 31, 2016, we continued to observe the operation
of each of the control changes effected as part of our remediation efforts, for the purpose of evaluating their effectiveness over
a period of time sufficient for management to conclude whether the reported material weakness has been remediated.
We have concluded that the period of time over which the operating effectiveness of the newly implemented and modified
controls have been observed is sufficient for our Chief Executive Officer and Chief Financial Officer to conclude that this
material weakness has been effectively remediated. Our management has concluded that the identified material weakness in
internal control over financial reporting discussed above was fully remediated as of December 31, 2016.
Income Tax Accounting
Our management concluded that there was a material weakness in our internal control over financial reporting related to the
precision of the review to ensure the accuracy of certain cumulative deferred tax balances, including the precision of the review
to ensure the accuracy of the state income tax rate applied to certain cumulative deferred tax balances and the review of the tax
impact of certain business transactions. We took the following steps to remediate the material weakness discussed above:
• Revised task assignments to ensure that discrete items impacting the blended state tax rate are subject to a more
comprehensive review process by successive levels of management;
• Enhanced the review of the application of the state tax rate to cumulative deferred income tax balances;
•
Implemented specific technologies minimizing our reliance on supplementary spreadsheets to perform tax
calculations, reducing the risk of manual computational error and allowing for a more effective and timely review of
tax accounting results; and
Implemented analytical procedures to validate actual tax accounting results to supplement internal control reviews
using the expected impact of discrete items as a basis.
•
We identified the following additional steps, which will be implemented effective January 1, 2017, to enhance our
previously described remediation plan:
• Enhance the analysis of tax-sensitive aspects of a business transaction;
Formalize the documentation of the above referenced tax analysis; and
•
Implement a review, by the Vice President of Tax, of the above referenced tax analysis prior to finalizing.
•
Because some of the controls included in our remediation plan will be implemented effective January 1, 2017, and other
new and modified controls, as previously described, have only been operational for a portion of 2016, we have concluded that
more time is necessary to observe the effectiveness of the controls before our Chief Executive Officer and Chief Financial
Officer can conclude that these material weakness have been effectively remediated.
Except as noted in the preceding paragraphs, there has not been any change in our system of internal control over financial
reporting during the quarter ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect,
internal control over financial reporting.
112
Management’s Report on Internal Control over Financial Reporting
The management of Covanta Holding Corporation (“Covanta”) is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).
All internal control systems, no matter how well designed, have inherent limitations including the possibility of human error and
the circumvention or overriding of controls. Further, because of changes in conditions, the effectiveness of internal controls may
vary over time. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Accordingly, even those systems determined to be effective can provide us only with reasonable assurance with respect to financial
statement preparation and presentation.
Covanta’s management has assessed the effectiveness of internal control over financial reporting as of December 31, 2016,
following the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control -
Integrated Framework (2013 Framework). Based on our assessment under the framework in Internal Control - Integrated
Framework (2013 Framework), Covanta’s management has concluded that our internal control over financial reporting was not
effective as of December 31, 2016.
Our independent auditors, Ernst & Young LLP, have issued an attestation report on our internal control over financial reporting.
This report appears on page 114 of this report on Form 10-K for the year ended December 31, 2016.
/s/ Stephen J. Jones
Stephen J. Jones
President and Chief Executive Officer
/s/ Bradford J. Helgeson
Bradford J. Helgeson
Executive Vice President and Chief Financial Officer
February 28, 2017
113
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Covanta Holding Corporation
We have audited Covanta Holding Corporation’s internal control over financial reporting as of December 31, 2016, based on
criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 Framework) (the COSO criteria). Covanta Holding Corporation’s management is responsible for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over
financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is
a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented
or detected on a timely basis. The following material weakness has been identified and included in management's assessment.
Management has identified a material weakness in controls related to the precision of the review to ensure the accuracy of certain
cumulative deferred tax balances, including the precision of the review to ensure the accuracy of the state income tax rate applied
to certain cumulative deferred tax balances and the review of the tax impact of certain business transactions. We also have audited,
in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance
sheets of Covanta Holding Corporation as of December 31, 2016 and 2015, and the related consolidated statements of operations,
comprehensive (loss) income, equity and cash flows in each of the three years in the period ended December 31, 2016. This
material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2016
consolidated financial statements, and this report does not affect our report dated February 28, 2017, which expressed an unqualified
opinion on those financial statements.
In our opinion, because of the effect of the material weakness, described above on the achievement of the objectives of the control
criteria, Covanta Holding Corporation has not maintained effective internal control over financial reporting as of December 31,
2016, based on COSO criteria.
/s/ Ernst & Young LLP
MetroPark, New Jersey
February 28, 2017
114
Item 9B. OTHER INFORMATION
None.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information regarding our executive officers is incorporated by reference herein from the discussion under Item 1. Business —
Executive Officers of this Annual Report on Form 10-K. We have a Code of Conduct and Ethics for Senior Financial Officers and
a Policy of Business Conduct. The Code of Conduct and Ethics applies to our Chief Executive Officer, Chief Financial Officer,
Chief Accounting Officer, Controller or persons performing similar functions. The Policy of Business Conduct applies to all of
our directors, officers and employees and those of our subsidiaries. Both the Code of Conduct and Ethics and the Policy of Business
Conduct are posted on our website at www.covanta.com on the Corporate Governance page. We will post on our website any
amendments to or waivers of the Code of Conduct and Ethics or Policy of Business Conduct for executive officers or directors,
in accordance with applicable laws and regulations. The remaining information called for by this Item 10 is incorporated by
reference herein from the discussions under the headings “Election of Directors,” “Board Structure and Composition — Committees
of the Board,” and “Security Ownership of Certain Beneficial Owners and Management — Section 16(a) Beneficial Ownership
Reporting Compliance” in our definitive Proxy Statement for the 2017 Annual Meeting of Stockholders.
Item 11. EXECUTIVE COMPENSATION
The information required by Item 11 of Form 10-K is incorporated by reference herein from the discussions under the headings
“Compensation Committee Report,” “Board Structure and Composition — Compensation of the Board,” and “Executive
Compensation” in our definitive Proxy Statement for the 2017 Annual Meeting of Stockholders.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by Item 12 of Form 10-K with respect to directors, executive officers and certain beneficial owners
is incorporated by reference herein from the discussion under the heading “Security Ownership of Certain Beneficial Owners and
Management” in our definitive Proxy Statement for the 2017 Annual Meeting of Stockholders.
Equity Compensation Plans
The following table sets forth information regarding the number of our securities that could be issued upon the exercise of
outstanding options, the weighted average exercise price of those options in the Covanta Holding Corporation 2014 Equity Award
Plan (the "Plan") and the number of securities remaining for future issuance under the Plan as of December 31, 2016.
Plan Category
Equity Compensation Plans Approved By Security
Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity Compensation Plans Not Approved By Security
Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
(A)
Weighted Average
Exercise Price of
Outstanding
Options, Warrants
and Rights
(B)
Number of Securities
Remaining
Available for Future
Issuance
Under Equity
Compensation
Plans (Excluding
Securities
Reflected in Column A)
(C)
1,079,809
$
N/A
1,079,809
$
21.38
N/A
21.38
4,369,327
N/A
4,369,327
(1) Of the 4,369,327 shares that remain available for future issuance, 366,451 have been forfeited, therefore, 4,002,876 shares are currently
available for issuance under the equity compensation plans.
115
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by Item 13 of Form 10-K is incorporated by reference herein from the discussions under the headings
“Board Structure and Composition” and “Certain Relationships and Related Person Transactions” in the definitive Proxy Statement
for the 2017 Annual Meeting of Stockholders.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 of Form 10-K is incorporated by reference herein from the discussion under the heading
“Independent Registered Public Accountant Fees” in the definitive Proxy Statement for the 2017 Annual Meeting of Stockholders.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report:
(1) Consolidated Financial Statements of Covanta Holding Corporation:
Included in Part II of this Report:
Consolidated Statements of Operations for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2016, 2015 and 2014
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Equity for the years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements, for the years ended December 31, 2016, 2015 and 2014
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm, on the consolidated financial statements of
Covanta Holding Corporation for the years ended December 31, 2016, 2015 and 2014
(2) Financial Statement Schedules of Covanta Holding Corporation:
Included in Part II of this report: Schedule II — Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, not significant or not required, or because the required
information is included in the financial statement notes thereto.
(3) Exhibits:
EXHIBIT INDEX
Exhibit No.
Description
Articles of Incorporation and By-Laws.
Restated Certificate of Incorporation of Covanta Holding Corporation (incorporated herein by reference to
Exhibit 3.1 of Covanta Holding Corporation’s Current Report on Form 8-K dated January 19, 2007 and filed with
the SEC on January 19, 2007).
Amended and Restated Bylaws of Covanta Holding Corporation, effective December 8, 2011 (incorporated herein
by reference to Exhibit 3.1(ii) of Covanta Holding Corporation’s Current Report on Form 8-K dated September
19, 2013 filed with the SEC on September 20, 2013).
3.1†. . . . .
3.2†. . . . .
Instruments Defining Rights of Security Holders, Including Indentures.
Registration Rights Agreement dated November 8, 2002 among Covanta Holding Corporation and SZ
Investments, L.L.C. (incorporated herein by reference to Exhibit 10.6 of Covanta Holding Corporation’s Annual
Report on Form 10-K for the year ended December 27, 2002 and filed with the SEC on March 27, 2003).
4.1†. . . . .
Registration Rights Agreement between Covanta Holding Corporation, D.E. Shaw Laminar Portfolios, L.L.C.,
SZ Investments, L.L.C., and Third Avenue Trust, on behalf of The Third Avenue Value Fund Series, dated
December 2, 2003 (incorporated herein by reference to Exhibit 4.1 of Covanta Holding Corporation’s Current
Report on Form 8-K dated December 2, 2003 and filed with the SEC on December 5, 2003).
4.2†. . . . .
Indenture dated as of January 18, 2007 between Covanta Holding Corporation and Wells Fargo Bank, National
Association, as trustee (incorporated herein by reference to Exhibit 4.1 of Covanta Holding Corporation’s
Registration Statement on Form S-3 (Reg. No. 333-140082) filed with the SEC on January 19, 2007).
4.3†. . . . .
116
Second Supplemental Indenture dated as of December 1, 2010 between Covanta Holding Corporation and
Wells Fargo Bank, National Association, as trustee (including the Form of Note) (incorporated herein by
reference to Exhibit 4.3 of Covanta Holding Corporation’s Current Report on Form 8-K dated December 1,
2010 and filed with the SEC on December 1, 2010).
Third Supplemental Indenture dated as of March 19, 2012 between Covanta Holding Corporation and Wells
Fargo Bank, National Association, as trustee (incorporated herein by reference to Exhibit 4.2 of Covanta
Holding Corporation’s Current Report on Form 8-K dated March 19, 2012 and filed with the SEC on March 19,
2012).
Fourth Supplemental Indenture dated as of March 6, 2014 between Covanta Holding Corporation and Wells
Fargo Bank, National Association, as trustee (incorporated herein by reference to Exhibit 4.2 of Covanta
Holding Corporation’s Current Report on Form 8-K dated March 6, 2014 and filled with the SEC on March 6,
2014).
4.4†. . . . .
4.5†. . . . .
4.6†. . . . .
Material Contracts.
Tax Sharing Agreement, dated as of March 10, 2004, by and between Covanta Holding Corporation, Covanta
Energy Corporation, and Covanta Power International Holdings, Inc. (incorporated herein by reference to
Exhibit 10.25 of Covanta Holding Corporation’s Annual Report on Form 10-K for the year ended December 31,
2003 and filed with the SEC on March 15, 2004).
10.1†. . . .
Amendment No. 1 to Tax Sharing Agreement, dated as of June 24, 2005, by and between Covanta Holding
Corporation, Covanta Energy Corporation and Covanta Power International Holdings, Inc., amending Tax Sharing
Agreement between Covanta Holding Corporation, Covanta Energy Corporation and Covanta Power International
Holdings, Inc. dated as of March 10, 2004 (incorporated herein by reference to Exhibit 10.8 of Covanta Holding
Corporation’s Current Report on Form 8-K dated June 24, 2005 and filed with the SEC on June 30, 2005).
Covanta Energy Savings Plan, as amended by December 2003 amendment (incorporated herein by reference to
Exhibit 10.25 of Covanta Holding Corporation’s Annual Report on Form 10-K for the year ended December 31,
2004 and filed with the SEC on March 16, 2005).
Rehabilitation Plan Implementation Agreement, dated January 11, 2006, by and between John Garamendi,
Insurance Commissioner of the State of California, in his capacity as Trustee of the Mission Insurance
Company Trust, the Mission National Insurance Company Trust and the Enterprise Insurance Company Trust,
on the one hand, and Covanta Holding Corporation, on the other hand (incorporated herein by reference to
Exhibit 10.1 of Covanta Holding Corporation’s Current Report on Form 8-K dated March 2, 2006 and filed
with the SEC on March 6, 2006).
Amendment to Rehabilitation Plan Implementation Agreement, accepted and agreed to on March 17, 2006
(incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Current Report on Form 8-
K dated March 17, 2006 and filed with the SEC on March 20, 2006).
Amendment to Agreement Regarding Closing (Exhibit A to the Rehabilitation Plan Implementation
Agreement), dated January 10, 2006, by and between John Garamendi, Insurance Commissioner of the State of
California, in his capacity as Trustee of the Mission Insurance Company Trust, the Mission National Insurance
Company Trust, and the Enterprise Insurance Company Trust, on the one hand, and Covanta Holding
Corporation, on the other hand (incorporated herein by reference to Exhibit 10.2 of Covanta Holding
Corporation’s Current Report on Form 8-K dated March 2, 2006 and filed with the SEC on March 6, 2006).
Pledge and Security Agreement, dated as of March 28, 2012, between each of Covanta Energy Corporation and
the other grantors party thereto, and Bank of America, N.A., as Collateral Agent (incorporated herein by
reference to Exhibit 10.1 of Covanta Holding Corporation's Current Report on Form 8-K dated March 28, 2012
and filed with the SEC on March 30, 2012).
Pledge Agreement, dated as of March 28, 2012, between Covanta Holding Corporation and Bank of America,
N.A., as Collateral Agent (incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation's
Current Report on Form 8-K dated March 28, 2012 and filed with the SEC on March 30, 2012).
Intercompany Subordination Agreement, dated as of March 28, 2012, among Covanta Energy Corporation,
Covanta Holding Corporation, certain subsidiaries of Covanta Energy Corporation, as Guarantor Subsidiaries,
certain other subsidiaries of Covanta Energy Company, as non-guarantor subsidiaries, and Bank of America,
N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 of Covanta Holding Corporation's
Current Report on Form 8-K dated March 28, 2012 and filed with the SEC on March 30, 2012).
Form of Covanta Holding Corporation Indemnification Agreement, entered into with each Director and Officer
(incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Current Report on Form 8-
K dated December 6, 2007 and filed with the SEC on December 12, 2007.
10.2†. . . .
10.3†*. . .
10.4†. . . .
10.5†. . . .
10.6†. . . .
10.7†. . . .
10.8†. . . .
10.9†. . . .
10.10†. . .
117
Equity Commitment for Rights Offering between Covanta Holding Corporation and SZ Investments L.L.C.
dated February 1, 2005 (incorporated herein by reference to Exhibit 10.2 of Covanta Holding Corporation’s
Current Report on Form 8-K dated January 31, 2005 and filed with the SEC on February 2, 2005).
Equity Commitment for Rights Offering between Covanta Holding Corporation and EGI-Fund (05-07) Investors,
L.L.C. dated February 1, 2005 (incorporated herein by reference to Exhibit 10.3 of Covanta Holding Corporation’s
Current Report on Form 8-K dated January 31, 2005 and filed with the SEC on February 2, 2005).
Equity Commitment for Rights Offering between Covanta Holding Corporation and Third Avenue Trust, on
behalf of The Third Avenue Value Fund Series dated February 1, 2005 (incorporated herein by reference to
Exhibit 10.4 of Covanta Holding Corporation’s Current Report on Form 8-K dated January 31, 2005 and filed
with the SEC on February 2, 2005).
Loan Agreement, dated as of November 1, 2012, by and between Covanta Holding Corporation and the
Massachusetts Development Finance Agency (incorporated by reference to Exhibit 10.1 of Covanta Holding
Corporation's Current Report on Form 8-K dated November 15, 2012 and filed with the SEC on November 19,
2012).
Loan Agreement, dated as of November 1, 2012, by and between Covanta Holding Corporation and the Niagara
Area Development Corporation Agency (incorporated herein by reference to Exhibit 10.1 of Covanta Holding
Corporation's Current Report on Form 8-K dated November 15, 2012 and filed with the SEC on November 19,
2012).
Guaranty Agreement, dated as of November 1, 2012, by and between Covanta Energy Corporation and Wells
Fargo Bank, National Association, pursuant to the Loan Agreement, dated as of November 1, 2012, by and
between Covanta Holding Corporation and the Massachusetts Development Finance Agency (incorporated
herein by reference to Exhibit 10.3 of Covanta Holding Corporation's Current Report on Form 8-K dated
November 15, 2012 and filed with the SEC on November 19, 2012).
Guaranty Agreement, dated as of November 1, 2012, by and between Covanta Energy Corporation and Wells
Fargo Bank, National Association, pursuant to the Loan Agreement, dated as of November 1, 2012, by and
between Covanta Holding Corporation and the Niagara Area Development Corporation Agency (incorporated
herein by reference to Exhibit 10.4 of Covanta Holding Corporation's Current Report on Form 8-K dated
November 15, 2012 and filed with the SEC on November 19, 2012).
Agreement, dated as of August 22, 2013, by and among Covanta Holding Corporation and John M. Huff, as Director
of the Missouri Department of Insurance, Financial Institutions and Professional Registration (the "Trustee") solely
in his capacity as trustee and statutory receiver of the Mission Reinsurance Corporation Trust and the Holland-
America Insurance Company Trust (incorporated herein by reference to Exhibit 10.1 of Covanta Holding
Corporation's Quarterly Report on Form 10-Q dated October 24, 2013 and filed with the SEC on October 24,
2013).
10.11†. . .
10.12†. . .
10.13†. . .
10.14†. . .
10.15†. . .
10.16†. . .
10.17†. . .
10.18†. . .
10.19†*. .
Covanta Holding Corporation 2014 Equity Award Plan (incorporated herein by reference to Exhibit 4.1 of
Covanta Holding Corporation’s Registration Statement on Form S-8 filed with the SEC on May 8, 2014).
Form of Covanta Holding Corporation Stock Option Agreement for Employees and Officers (incorporated
herein by reference to Exhibit 4.3 of Covanta Holding Corporation’s Registration Statement on Form S-8 filed
with the SEC on May 7, 2008).
10.20†*. .
10.21†*. .
Form of Growth Equity Award Agreement (incorporated herein by reference to Exhibit 10.1 of Covanta Holding
Corporation’s Current Report on Form 8-K dated February 24, 2010 and filed with the SEC on March 2, 2010).
Covanta Energy Corporation Senior Officers Severance Plan (incorporated herein by reference to Exhibit 10.2
of Covanta Holding Corporation’s Current Report on Form 8-K dated February 24, 2010 and filed with the SEC
on March 2, 2010).
Form of Covanta Holding Corporation Restricted Stock Award Agreement for Directors (incorporated herein by
reference to Exhibit 10.3 of Covanta Holding Corporation's Quarterly Report on Form 10-QA dated August 11,
2014 and filed with the SEC on August 11, 2014).
Form of Covanta Holding Corporation TSR Award Agreement for Employees and Officers (incorporated herein
by reference to Exhibit 10.4 of Covanta Holding Corporation's Quarterly Report on Form 10-QA dated August
11, 2014 and filed with the SEC on August 11, 2014).
Form of Covanta Holding Corporation Stock Option Award Agreement for Directors (incorporated herein by
reference to Exhibit 10.5 of Covanta Holding Corporation's Quarterly Report on Form 10-QA dated August 11,
2014 and filed with the SEC on August 11, 2014).
10.22†*. .
10.25†*. .
10.26†*. .
10.27†*. .
118
10.28*. . .
Form of Covanta Holding Corporation Restricted Stock Unit Agreement for Directors.
Amended and Restated Credit and Guaranty Agreement, dated as of April 10, 2015, among Covanta Energy,
LLC, Covanta Holding Corporation, certain subsidiaries of Covanta Energy, LLC, as guarantors, the lenders
party thereto, Bank of America, N.A., as Administrative Agent, Collateral Agent and Issuing Bank, Credit
Agricole Corporate and Investment Bank, JPMorgan Chase Bank, N.A., Citizens Bank, N.A. and MUFG Union
Bank, N.A, as Syndication Agents, and TD Bank, N.A., Sumitomo Mitsui Banking Corporation and Compass
Bank, as Co-Documentation Agents (incorporated herein by reference to Exhibit 10.1 of Covanta Holding
Corporation's Current Report on Form 8-K dated April 10, 2015 and filed with the SEC on April 20, 2015).
Succession Agreement by and among Covanta Holding Corporation, Covanta Energy LLC, Covanta Projects
LLC and Anthony J. Orlando dated January 5, 2015 (incorporated herein by reference to Exhibit 10.2 of
Covanta Holding Corporation’s Current Report on Form 8-K dated January 5, 2015 and filed with the SEC on
January 5, 2015).
Offer Letter from Covanta Holding Corporation to Stephen J. Jones dated January 5, 2015 (incorporated herein
by reference to Exhibit 10.1 of Covanta Holding Corporation’s Current Report on Form 8-K dated January 5,
2015 and filed with the SEC on January 5, 2015).
Offer Letter from Covanta Holding Corporation to Michael J. de Castro dated May 12, 2015 (incorporated
herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Current Report on Form 8-K dated June
2, 2015 and filed with the SEC on June 2, 2015).
Form of Covanta Holding Corporation 2014 Equity Award Plan Performance Share Award Agreement for
Employees and Officers (incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation's
Current Report on Form 8-K dated March 2, 2016 and filed with the SEC on March 2, 2016).
10.29†. . .
10.30†*. .
10.31†*. .
10.32†*. .
10.33†*. .
10.34*. . .
Form of Covanta Holding Corporation Restricted Stock Award Agreement for Senior Officers.
10.35*. . .
Form of Covanta Holding Corporation Restricted Stock Unit Agreement for Senior Officers.
Other.
12.1. . . . .
Computation of Ratio of Earnings to Fixed Charges
21.1 . . . . .
Subsidiaries of the Registrant
23.1. . . . .
Consent of Independent Registered Public Accounting Firm
31.1 . . . . .
Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002 by the Chief Executive Officer.
31.2. . . . .
Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002 by the Chief Financial Officer.
32 . . . . . .
Certification of periodic financial report pursuant to Section 906 of Sarbanes-Oxley Act of 2002 by the Chief
Executive Officer and Chief Financial Officer.
101.INS .
XBRL Instance Document
101.SCH .
XBRL Taxonomy Extension Schema
101.CAL.
XBRL Taxonomy Calculation Linkbase
101.LAB.
XBRL Taxonomy Extension Labels Linkbase
101.PRE .
XBRL Taxonomy Extension Presentation Linkbase
101.DEF .
XBRL Taxonomy Extension Definition Document
†
*
Not filed herewith, but incorporated herein by reference.
Management contract or compensatory plan or arrangement.
Pursuant to paragraph 601(b)(4)(iii)(A) of Regulation S-K, the registrant has omitted from the foregoing list of exhibits, and
hereby agrees to furnish to the Securities and Exchange Commission, upon its request, copies of certain instruments, each relating
to long-term debt not exceeding 10% of the total assets of the registrant and its subsidiaries on a consolidated basis.
119
(b) Exhibits: See list of Exhibits in this Part IV, Item 15(a)(3) above.
(c) Financial Statement Schedules: See Part IV, Item 15(a)(2) above.
120
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
COVANTA HOLDING CORPORATION
(Registrant)
By:
/S/ STEPHEN J. JONES
Stephen J. Jones
President and Chief Executive Officer
Date: February 28, 2017
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
President and Chief Executive Officer and
Director (Principal Executive Officer)
Executive Vice President, Chief Financial
Officer (Principal Financial Officer and
Principal Accounting Officer)
Date
February 28, 2017
February 28, 2017
/S/ STEPHEN J. JONES
Stephen J. Jones
/S/ BRADFORD J. HELGESON
Bradford J. Helgeson
/S/ SAMUEL ZELL
Samuel Zell
/S/ DAVID M. BARSE
David M. Barse
/S/ RONALD J. BROGLIO
Ronald J. Broglio
/S/ PETER C. B. BYNOE
Peter C. B. Bynoe
/S/ LINDA J. FISHER
Linda J. Fisher
/S/ JOSEPH M. HOLSTEN
Joseph M. Holsten
/S/ ANTHONY J. ORLANDO
Anthony J. Orlando
/S/ DANIELLE PLETKA
Danielle Pletka
/S/ MICHAEL W. RANGER
Michael W. Ranger
/S/ ROBERT S. SILBERMAN
Robert S. Silberman
/S/ JEAN SMITH
Jean Smith
Chairman of the Board
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
February 28, 2017
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
121
Exhibit 31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Stephen J. Jones certify that:
1.
I have reviewed this Annual Report on Form 10-K of Covanta Holding Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: February 28, 2017
/S/ STEPHEN J. JONES
Stephen J. Jones
President and Chief Executive Officer
Exhibit 31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Bradford J. Helgeson, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Covanta Holding Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report
is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by
this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: February 28, 2017
/S/ BRADFORD J. HELGESON
Bradford J. Helgeson
Executive Vice President and Chief Financial Officer
Certification of Periodic Financial Report Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32
In connection with the Annual Report on Form 10-K for the period ended December 31, 2016 of Covanta Holding
Corporation as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Stephen J. Jones and Bradford
J. Helgeson, as Chief Executive Officer and Chief Financial Officer, respectively, of Covanta Holding Corporation, each hereby
certifies, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
(1)
(2)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of Covanta Holding Corporation;
This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except
to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by Covanta Holding Corporation for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement has been provided to Covanta Holding Corporation and will be retained by
Covanta Holding Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
/S/ STEPHEN J. JONES
Stephen J. Jones
President and Chief Executive Officer
/S/ BRADFORD J. HELGESON
Bradford J. Helgeson
Executive Vice President and Chief Financial Officer
Date: February 28, 2017