outstanding under such agreement, 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, including the Debentures and which could have a material and adverse affect on our financial condition.
Our net operating loss carryforwards (“NOLs”), which offset our consolidated taxable income, will expire in various amounts, if not used, between 20092011 and 2028. The Internal Revenue Service (“IRS”) has not audited any of our tax returns for any of the years during the carryforward period including those returns for the years in which the losses giving rise to the NOLs were reported. We cannot assure you that we would prevail if the IRS were to challenge the availability of the NOLs. If the IRS were successful in challenging our NOLs, all orit is possible that some portion of the NOLs would not be available to offset our future consolidated taxable income.
requiring any stockholder approval, and preferred stock could be issued as a defensive measure in response to a takeover proposal. These provisions could make it more difficult for a third party to acquire us even if an acquisition might be in the best interest of our stockholders. In addition, certain
Certain provisions of the Debentures and Notes could make it more difficult or more expensive for a third party to acquire control of us. These provisions could make it more difficult for a third party to acquire us even if an acquisition might be in the best interest of our stockholders. Upon the occurrence of certain transactions constituting a fundamental change, the holders of the Debentures and Notes will have the right to require us to repurchase their Debentures.Debentures or Notes. We may also be required to issue additional shares upon conversion or provide for conversion based on the acquirer’s capital stock in the event of certain fundamental changes. These possibilities could discourage an acquisition of us.
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The market price of our common stock may fluctuate significantly, and this may make it difficult for holders to resell our common stock when they want or at prices that they find attractive.
The price of our common stock on the New York Stock Exchange constantly changes. We expect that the market price of our common stock will continue to fluctuate. In addition, because the Debentures are convertible into our common stock, volatility or depressed prices for our common stock could have a similar effect on the trading price of the Debentures. Consequently, there can be no assurance as to the liquidity of an investment in our common stock.
The market price of our common stock may fluctuate as a result of a variety of factors, many of which are beyond our control. These factors include:
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| • | changes in the waste and energy market conditions; |
| • | quarterly variations in our operating results; |
| • | our operating results that vary from the expectations of management, securities analysts and investors; |
| • | changes in expectations as to our future financial performance; |
| • | announcements of strategic developments, significant contracts, acquisitions and other material events by us or our competitors; |
| • | the operating and securities price performance of other companies that investors believe are comparable to us; |
| • | future sales of our equity or equity-related securities; |
| • | changes in the economy and the financial markets; |
| • | purchases or sales of large blocks of our stock by existing or new holders of our common stock; |
| • | departures of key personnel; |
| • | changes in governmental regulations; and |
| • | geopolitical conditions, such as acts or threats of terrorism or military conflicts. |
In addition, in recent years, the stock market in general has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons often unrelated to their operating performance. These broad market fluctuations may adversely affect the market price of our common stock, regardless of our operating results.
Future issuances of our common stock will dilute the ownership interests of stockholders and may adversely affect the trading price of our common stock.
We are not restricted from issuing additional shares of our common stock, or securities convertible into or exchangeable for our common stock. Future sales of substantial amounts of our common stock or equity-related securities in the public market, or the perception that such sales could occur, could materially and adversely affect prevailing trading prices of our common stock. In addition, the conversion of some or all of the Debentures will dilute the ownership interests of our existing stockholders. Any sales in the public market of our common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Debentures may encourage short selling by market participants because the conversion of the Debentures could depress the trading price of our common stock.
Concentrated stock ownership may discourage unsolicited acquisition proposals.
As of February 12, 2009, SZ Investments, L.L.C., together with its affiliate, EGI-Fund(05-07) Investors, L.L.C., referred to as“Fund 05-07” and, collectively with SZ Investments, L.L.C. “SZ Investments,” and Third Avenue Trust, on behalf of Third Avenue Value Fund, and their affiliates, referred to as “Third Avenue,” separately own approximately 10.7% and 5.9%, respectively, or when aggregated, approximately 16.6% of our outstanding common stock. Although there are no agreements among SZ Investments and Third Avenue regarding their voting or disposition of shares of our common stock, the level of their combined ownership of shares of our common stock could have the effect of discouraging or impeding an unsolicited acquisition proposal. Further, as a result, these stockholders may continue to have the ability to influence the election or removal of our directors and influence the outcome of matters presented for approval by our stockholders. Circumstances may occur in which the interests of these stockholders could be in conflict with the holders of the Debentures.
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Item 1B. | UNRESOLVED STAFF COMMENTS |
None.
We own 5.4 acres in Fairfield, New Jersey where our corporate offices reside. We lease approximately 104,000 square feet of office space in Morristown, New Jersey, to which we intend to relocate our corporate offices in late 2010. In addition, we lease various office facilities in California aggregating approximately 25,539 square feet and we own undeveloped land in Massachusetts and California aggregating approximately 95 acres. As of December 31, 2008,2009, we owned, had equity investment
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investments inand/or operated 64 domestic73 projects in the Americas segment consisting of 3541 energy-from-waste operations, fourtwo ashfills and two landfills, ten13 transfer stations, eight wood waste (biomass) energy projects, twofour water (hydroelectric) energy projects, and fivethree landfill gas energy projects. Principal projects are described above underItem 1. Business — Domestic BusinessAmericas Segment. Domestic projects notedProjects in the Americas segment which we own or lease are conducted at properties, which we also own or lease, aggregating approximately 1,6741,717 acres, of which approximately 1,3331,373 acres are owned and approximately 341 acres are leased.
We operate our internationalInternational segment projects through a network of offices located in Shanghai, Beijing and Guangzhou, China; Chennai, India; Manila, Philippines; Dublin, Ireland; and Birmingham, England, where we lease office space aggregating approximately 27,01824,973 square feet. We hold a long-term lease for 23 acres of undeveloped land in Cheshire, England. As of December 31, 2008,2009, we are the part owner/operator of teneight international projects, of which three are owned or controlled by subsidiaries, with businesses conducted at properties which are leased aggregating approximately 8966 acres. Principal projects are described above underItem 1. Business — International BusinessSegment.
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Item 3. | LEGAL PROCEEDINGS |
For information regarding legal proceedings, seeItem 8. Financial Statements And Supplementary Data — Note 21. Commitments and Contingencies of the Notes to the Consolidated Financial Statements in Item 8,, which information is incorporated herein by reference.
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Item 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matters were submitted to a vote of stockholders, through the solicitation of proxies or otherwise, during the quarter ended December 31, 2008.2009.
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PART II
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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 12, 2009,17, 2010, there were approximately 1,6401,442 holders of record of our common stock. On February 12, 2009,17, 2010, the closing price of our common stock on the New York Stock Exchange was $19.28$17.55 per share. The following table sets forth the high and low stock prices of our common stock for the last two years.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2008 | | 2007 | | | 2009 | | 2008 |
| | High | | Low | | High | | Low | | | High | | Low | | High | | Low |
|
First Quarter | | $ | 29.50 | | | $ | 22.89 | | | $ | 24.22 | | | $ | 21.29 | | | $ | 22.92 | | | $ | 12.47 | | | $ | 29.50 | | | $ | 22.89 | |
Second Quarter | | $ | 30.37 | | | $ | 26.03 | | | $ | 26.35 | | | $ | 21.69 | | | $ | 17.63 | | | $ | 12.61 | | | $ | 30.37 | | | $ | 26.03 | |
Third Quarter | | $ | 29.86 | | | $ | 20.40 | | | $ | 26.50 | | | $ | 20.60 | | | $ | 19.22 | | | $ | 16.12 | | | $ | 29.86 | | | $ | 20.40 | |
Fourth Quarter | | $ | 23.78 | | | $ | 15.46 | | | $ | 28.82 | | | $ | 23.16 | | | $ | 18.58 | | | $ | 16.50 | | | $ | 23.78 | | | $ | 15.46 | |
We have not paid dividends on our common stock and do not expect to declare or pay any dividends in the foreseeable future. We currently intend to retain all earnings to fund operations and expansion of our business. 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 would likely limit the future payment of dividends on our common stock. SeeItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resourcesand Note 6. Long-Term Debt of the Notes to the ConsolidatedItem 8. Financial Statements in And Supplementary Data — Note 11. Long-Term Debt.
SeeItem 8. Financial Statements And Supplementary Data — Note 4. Earnings Per Share and Equityregarding repurchased shares of our common stock in connection with tax withholdings for vested stock awards andItem 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Mattersregarding securities authorized for issuance under equity compensation plans.
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Item 6. | SELECTED FINANCIAL DATA |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, | | | For the Years Ended December 31, |
| | 2008 | | 2007 | | 2006 | | 2005(1) | | 2004(2) | | | 2009 | | 2008 | | 2007 | | 2006 | | 2005(1) |
| | (In thousands, except per share amounts) | | | (In thousands, except per share amounts) |
|
Statements of Operations Data | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating revenues | | $ | 1,664,253 | | | $ | 1,433,087 | | | $ | 1,268,536 | | | $ | 978,763 | | | $ | 576,196 | | | $ | 1,550,467 | | | $ | 1,664,253 | | | $ | 1,433,087 | | | $ | 1,268,536 | | | $ | 978,763 | |
Equity in net income from unconsolidated investments | | $ | 23,583 | | | $ | 22,196 | | | $ | 28,636 | | | $ | 25,609 | | | $ | 17,024 | | | $ | 23,036 | | | $ | 23,583 | | | $ | 22,196 | | | $ | 28,636 | | | $ | 25,609 | |
Net income | | $ | 139,273 | | | $ | 130,513 | | | $ | 105,789 | | | $ | 59,326 | | | $ | 34,094 | | |
Net income attributable to Covanta Holding Corporation | | | $ | 101,645 | | | $ | 128,960 | | | $ | 121,693 | | | $ | 105,789 | | | $ | 59,326 | |
Income per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.91 | | | $ | 0.85 | | | $ | 0.73 | | | $ | 0.49 | | | $ | 0.39 | | | $ | 0.66 | | | $ | 0.84 | | | $ | 0.80 | | | $ | 0.73 | | | $ | 0.49 | |
Diluted | | $ | 0.90 | | | $ | 0.85 | | | $ | 0.72 | | | $ | 0.46 | | | $ | 0.37 | | | $ | 0.66 | | | $ | 0.83 | | | $ | 0.79 | | | $ | 0.72 | | | $ | 0.46 | |
Weighted average common shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 153,345 | | | | 152,653 | | | | 145,663 | | | | 122,209 | | | | 88,543 | | | | 153,694 | | | | 153,345 | | | | 152,653 | | | | 145,663 | | | | 122,209 | |
Diluted | | | 154,732 | | | | 153,997 | | | | 147,030 | | | | 127,910 | | | | 91,199 | | | | 154,994 | | | | 154,732 | | | | 153,997 | | | | 147,030 | | | | 127,910 | |
| | | | | | | | | | | | | | | | | | | | |
| | As of December 31, | |
| | 2008 | | | 2007 | | | 2006 | | | 2005(1) | | | 2004(2) | |
| | (In thousands, except per share amounts) | |
|
Balance Sheet Data | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 192,393 | | | $ | 149,406 | | | $ | 233,442 | | | $ | 128,556 | | | $ | 96,148 | |
Restricted funds held in trust | | $ | 324,911 | | | $ | 379,864 | | | $ | 407,921 | | | $ | 447,432 | | | $ | 239,918 | |
Property, plant and equipment, net | | $ | 2,530,035 | | | $ | 2,620,507 | | | $ | 2,637,923 | | | $ | 2,724,843 | | | $ | 819,400 | |
Total assets | | $ | 4,279,989 | | | $ | 4,368,499 | | | $ | 4,437,820 | | | $ | 4,702,165 | | | $ | 1,939,081 | |
Long-term debt | | $ | 1,012,887 | | | $ | 1,019,432 | | | $ | 1,260,123 | | | $ | 1,308,119 | | | $ | 312,896 | |
Project debt | | $ | 1,078,370 | | | $ | 1,280,275 | | | $ | 1,435,947 | | | $ | 1,598,284 | | | $ | 944,737 | |
Stockholders’ equity | | $ | 1,152,119 | | | $ | 1,026,062 | | | $ | 739,152 | | | $ | 599,241 | | | $ | 134,815 | |
Book value per share of common stock(3) | | $ | 7.47 | | | $ | 6.67 | | | $ | 5.01 | | | $ | 4.24 | | | $ | 1.84 | |
Shares of common stock outstanding | | | 154,280 | | | | 153,922 | | | | 147,500 | | | | 141,166 | | | | 73,430 | |
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| | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2009 | | 2008 | | 2007 | | 2006 | | 2005(1) |
| | | | (In thousands, except per share amounts) | | |
|
Balance Sheet Data | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 433,683 | | | $ | 192,393 | | | $ | 149,406 | | | $ | 233,442 | | | $ | 128,556 | |
Restricted funds held in trust | | $ | 277,752 | | | $ | 324,911 | | | $ | 379,864 | | | $ | 407,921 | | | $ | 447,432 | |
Property, plant and equipment, net | | $ | 2,582,841 | | | $ | 2,530,035 | | | $ | 2,620,507 | | | $ | 2,637,923 | | | $ | 2,724,843 | |
Total assets | | $ | 4,934,282 | | | $ | 4,279,989 | | | $ | 4,368,499 | | | $ | 4,437,820 | | | $ | 4,702,165 | |
Long-term debt | | $ | 1,437,706 | | | $ | 948,518 | | | $ | 937,084 | | | $ | 1,260,123 | | | $ | 1,308,119 | |
Project debt | | $ | 959,364 | | | $ | 1,078,370 | | | $ | 1,280,275 | | | $ | 1,435,947 | | | $ | 1,598,284 | |
Total Covanta Holding Corporation stockholders’ equity | | $ | 1,383,006 | | | $ | 1,189,037 | | | $ | 1,073,293 | | | $ | 739,152 | | | $ | 599,241 | |
Book value per share of common stock(2) | | $ | 8.93 | | | $ | 7.71 | | | $ | 6.97 | | | $ | 5.01 | | | $ | 4.24 | |
Shares of common stock outstanding | | | 154,936 | | | | 154,280 | | | | 153,922 | | | | 147,500 | | | | 141,166 | |
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(1) | | For the year ended December 31, 2005, Covanta ARC Holdings, Inc.’s results of operations were included in our consolidated results subsequent to June 24, 2005. |
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(2) | | For the year ended December 31, 2004, Covanta Energy Corporation’s results of operations were included in our consolidated results subsequent to March 10, 2004. |
|
(3) | | Book value per share of common stock is calculated by dividing total Covanta Holding Corporation stockholders’ equity by the number of shares of common stock outstanding. |
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Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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 Corporation and its subsidiaries.
OVERVIEW
We are a leading developer, owner and operator 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 in the Americas, Europe and Asia. Our reportable segments are Americas (formerly referred to as “Domestic”) and International. We are organized as a holding company and conduct all of our operations through subsidiaries which are engaged predominantly in the businesses of waste and energy services. We also engage in the independent power production business outside the Americas. We have investments in subsidiaries engaged in insurance operations in California, primarily in property and casualty insurance.
We own, haveAs of December 31, 2009, we owned, had equity investments in,and/or operate 6064 energy generation facilities, 5056 of which arewere in the United StatesAmericas and 10eight of which arewere located outside the United States.Americas. Our energy generation facilities use a variety of fuels, including municipal solid waste, wood waste (biomass), landfill gas, water (hydroelectric), natural gas, coal, and heavy fuel-oil. We also own or operate several businesses that are associated with our energy-from-waste business, including a waste procurement business, a biomass procurement business, fourtwo ash fills and two landfills, which we use primarily for ash disposal, and several13 waste transfer stations.
We have extensive experience in developing, constructing, operating, acquiring and integrating waste and energy services businesses. We intend to continue to focus our efforts on enhancing stockholder value by implementingpursuing development and acquisition-based growth. We anticipate that a part of our financial,future growth will come from acquiring or investing in additional energy-from-waste, waste disposal and renewable energy production businesses in the Americas, Europe and Asia. Our business is capital intensive because it is based upon building and operating municipal solid waste processing and energy generating projects. In order to provide meaningful growth through development, we must be able to invest our funds, obtain equityand/or debt financing, and provide support to our operating subsidiaries.
For several years, we have expanded our network of waste and energy services businesses through acquisitions, equity investments and additional operating and growth strategies. Revenues were $1,664 million, $1,433 million,development contracts. In our Americas segment, from 2007 through 2009, we have added ten energy-from-waste facilities, two ashfills, eight transfer stations and $1,269 million and operating income was $256 million, $237 million, and $227 million for the years ended December 31, 2008, 2007, and 2006, respectively. The increase in revenues and operating income over the past three years is primarily attributablefour biomass projects to the successful executionnetwork of projects that we own, have equity investments in,and/or operate. In addition, we have completed the expansion of the energy-from-waste facilities located in Lee County, Florida and Hillsborough County, Florida and extended the related service contracts for these facilities. We recently entered into agreements to expand the Honolulu, Hawaii energy-from-waste facility, and to extend our operating agreement for that facility. We also entered into various contract extensions or new service agreements with existing energy-from-waste facilities, such as in Detroit, Michigan; Stanislaus County, California; Wallingford, Connecticut; Pasco County, Florida; Indianapolis, Indiana; Kent County, Michigan; and growth strategies.Hempstead, New York. During this period, we have added approximately 17% in waste disposal capacity and 17% in gross electric capacity in our Americas segment. We have also acquired a 3,000 tons per day (“tpd”) energy-from-waste business in Miami-Dade, Florida in February 2010.
In our International segment, we have commenced construction of a 1,700 metric tpd energy-from-waste project serving the City of Dublin, Ireland and surrounding communities. We also have equity interests in two companies located in China, one through which we hold minority interests in two existing energy-from-waste facilities and the other through which we are constructing an 1,800 tpd energy-from-waste facility in Sichuan Province in China. We also hold a controlling interest in a company constructing a 350 tpd energy-from-waste facility in Jiangsu Province in China. Additional information related to our acquisitions and business development is provided below underGrowth and Development.
The Energy-From-Waste Solution
Our mission is to be the world’s leading energy-from-waste company, with a complementary network of renewable energy generation and waste disposal assets. We expect to build value for our stockholders by satisfying our clients’ waste disposal and energy generation needs with safe, reliable and environmentally superiorsustainable solutions. In order to accomplish this mission and create additional value for our stockholders, we are focused on:
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| • | providing customers with superior service and effectively managing our existing businesses;business; |
| • | generating sufficient cash to meet our liquidity needs and invest in our business; |
| • | advancing our Clean World Initiative in order to enhance the business;value of our existing business and create new opportunities; and |
| • | developing new projects and making acquisitions to grow our business in the Americas, Europe and Asia. |
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We believe that our business offers solutions to public sector leaders around the world in two related elements of critical infrastructure: waste disposal and renewable energy generation. We believe that the environmental benefits of energy-from-waste, as an alternative to landfilling, are clear and compelling: utilizingby processing municipal solid waste in energy-from-waste reducesfacilities we reduce greenhouse gas (“GHG”) emissions, lowerslower the risk of groundwater contamination, and conservesconserve land. At the same time, energy-from-waste generates clean, reliable energy from a renewable fuel source, thus reducing dependence on fossil fuels, the combustion of which is itself a major contributor to GHG emissions. As public planners in the Americas, Europe and Asia address their needs for more environmentally sustainable waste disposal and energy generation in the years ahead, we believe that energy-from-waste will be an increasingly attractive alternative. We will also consider, for application in domesticthe Americas and international markets,International segments, acquiring or developing new technologies that complement our existing renewable energy and waste services businesses.
Our business offers sustainable solutions to energy and environmental problems, and our corporate culture is increasingly focused on themes of sustainability in all of its forms. We aspire to continuous improvement in
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environmental performance, beyond mere compliance with legally required standards. This ethos is embodied in our “Clean World Initiative”,Initiative,” an umbrella program under which we are:
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| • | investing in research and development of new technologies to enhance existing operations and create new business opportunities in renewable energy and waste management; |
| • | exploring and implementing processes and technologies at our facilities to improve energy efficiency and lessen environmental impacts; and |
| • | partnering with governments and non-governmental organizations to pursue sustainable programs, reduce the use of environmentally harmful materials in commerce and communicate the benefits of energy-from-waste. |
Our Clean World Initiative is designed to be consistent with our mission to be the world’s leading energy-from-waste company by providing environmentally superior solutions, advancing our technical expertise and creating new business opportunities. It represents an investment in our future that we believe will enhance stockholder value.
Also inIn order to create new business opportunities and benefits and enhance stockholder value, we are actively engaged in the current discussion among policy makers in the United States regarding the benefits of energy-from-waste and the reduction of our dependence on landfilling for waste disposal and fossil fuels for energy. Given the currentongoing global economic dislocationsslowdown and related unemployment, the Obama administration ispolicy makers are also expected to focus on economic stimulus, job creation, and job creation.energy security. We believe that the construction and permanent jobs created by additional energy-from-waste development representsrepresent the type of “green jobs”, on critical infrastructure, that will beare consistent with the administration’sthis focus. The extent to which we are successful in growing our business will depend in part on our ability to effectively communicate the benefits of energy-from-waste to public planners seeking waste disposal solutions and to policy makers seeking to encourage renewable energy technologies (and the associated “green jobs”) as viable alternatives to reliance on fossil fuels as a source of energy.
Our senior management team has extensive experience in developing, constructing, operating, acquiring and integrating waste and energy services businesses. We intendThe United States Congress is currently debating proposals designed to continue to focus our efforts on pursuing development and acquisition-based growth. We anticipate that a part of our future growth will come from acquiring or investing in additional energy-from-waste, waste disposal andencourage two broad policy objectives: increased renewable energy production businessesgeneration, and reduction of fossil fuel usage and related GHG emissions. The United States House of Representatives passed a bill known as the America Clean Energy and Security Act of 2009 (“ACES”) which addresses both policy objectives, by means of a phased-in national renewable energy standard and a“cap-and-trade” system to reduce GHG emissions. Energy-from-waste and biomass have generally been included in the Americas, Europe and Asia. Our business is capital intensive because it is based upon building and operating municipal solid waste processing and energy generating projects. In orderACES bill to provide meaningful growth through development, we must be ableamong the technologies that help to invest our funds, obtain equityand/or debt financing, and provide support to our operating subsidiaries.
Economic Factors Affecting Business Conditions
The recent economic slowdown,achieve both policy objectives. Similar legislation has been introduced in the United States Senate. While legislation is far from final and internationally,a vigorous debate is expected when the House of Representatives and Senate bills are reconciled, we believe the direction of Congressional efforts could create additional growth opportunities for our business and increase energy revenue from existing facilities.
2009 Financial Summary
Our financial results for the year ended December 31, 2009 included total revenues of $1,550 million compared to $1,664 million for the year ended December 31, 2008. Net income attributable to Covanta Holding Corporation was $101.6 million and diluted earnings per share was $0.66 for the year ended December 31, 2009. In the same prior year period, net income attributable to Covanta Holding Corporation was $129.0 million and diluted earnings per share was $0.83.
A more detailed discussion of our financial results and liquidity can be found in theResults of Operationsdiscussion below. The highlights of the components of operating income between the two periods are as follows:
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| • | Americas segment revenue declined $25.2 million or 1.8% to $1,346 million. New business revenue was $72.5 million, related primarily to the Veolia EfW Acquisition. Existing business revenues declined by $97.7 million, of which $55.7 million was largely due to the impact of the slow economy which caused lower recycled metal, energy and waste prices. In addition, lower debt service revenue, a decline in construction activity, and net contract changes at various facilities contributed approximately $32.3 million to the decline. |
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| • | Americas segment operating expenses during the year increased by $35.0 million. New business operating expenses were $77.8 million and we also incurred acquisition-related transaction costs of $6.8 million, both of which were primarily associated with the Veolia EfW Acquisition. Existing business operating expenses decreased by $49.6 million primarily attributable to a $12.7 million decline in energy related expenses and greater internalization of waste disposal. In addition, lower levels of construction activity and the contract changes at various facilities contributed $36.8 million to the expense reduction. Reductions in existing business expenses were also attributable to lower depreciation expense, lower interest expense and reduced plant operating expense for renewable energy credits sold totaling $13.3 million. In 2008, operating expenses were lower by $13.5 million due to insurance recoveries recorded for the settlement of property damages and business interruption losses related to the SEMASS energy-from-waste facility. |
| • | International segment revenue decreased $95.2 million during the year while operating expenses declined by $97.4 million, resulting in operating income that was essentially flat with the prior year comparable period. The decreases in revenues and operating expenses resulted primarily from lower fuel costs at our Indian facilities. |
The components of diluted earnings per share are as follows:
| | | | | | | | |
| | For the Years Ended December 31, | |
| | 2009 | | | 2008 | |
|
Net tax impact from Grantor Trust activity(A) | | $ | (0.01 | ) | | $ | (0.10 | ) |
Veolia EfW acquisition-related costs, net of tax(B) | | | (0.02 | ) | | | — | |
Impact of SEMASS fire and insurance recoveries, net of write-down of assets and tax(C) | | | — | | | | 0.05 | |
All other | | | 0.69 | | | | 0.88 | |
| | | | | | | | |
Diluted Earnings Per Share | | $ | 0.66 | | | $ | 0.83 | |
| | | | | | | | |
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(A) | | During 2009 and 2008, we recognized additional tax liabilities associated with the activity from the wind-down of the grantor trusts that arose from our predecessor insurance entities. |
(B) | | This amount relates primarily to acquisition-related costs incurred associated with the acquisition of six energy-from-waste businesses and one transfer station business from Veolia Environmental Services North America Corp. (the “Veolia EfW Acquisition”) in 2009. Acquisition-related costs are no longer capitalized as a cost of the business acquired. Instead, these costs are expensed as they are incurred as a result of a recent accounting pronouncement which was effective January 1, 2009. |
(C) | | This amount primarily includes insurance recoveries for business interruption losses related to the SEMASS energy-from-waste facility fire on March 31, 2007. |
In 2009, we issued $460 million aggregate principal amount of 3.25% Cash Convertible Senior Notes (the “Notes”) due 2014. A more detailed discussion of this offering can be found in theLiquidity and Capital Resourcesdiscussion below.
As of December 31, 2009, in addition to our ongoing cash flow, we have access to several sources of liquidity, including our existing cash on hand of $434 million and the undrawn and available capacity of $300 million of our revolving credit facility (the “Revolving Loan Facility”). In addition, we had restricted cash of $278 million, of which $166 million was designated for future payment of project debt principal. SeeLiquidity and Capital Resources — Available Sources of Liquiditybelow.
Factors Affecting Business Conditions and Financial Results
Economic —The ongoing global economic slowdown has reduced demand for goods and services generally, which tends to reduce overall volumes of waste requiring disposal, and the pricing at which we can attract waste to fill available capacity. At the same time, the sharp declines in global oilnatural gas and other fossil fuel prices have pushed energyelectricity and steam pricing lower generally and may reduce the priceswhich causes lower revenue for the portion of the energy we sell which is not under short term arrangements.fixed-price contracts. Lastly, the downturn in economic activity tends to reducehas reduced global demand for and pricing of certain commodities, such as the scrap metals we recycle from our energy-from-waste facilities. The combinationcombined effects of these factors could reduceconditions reduced our revenue and cash flow.flow in 2009.
The same economic slowdown may reduce the demand for the waste disposal services and the energy that our facilities offer. Many of our customers are municipalities and public authorities, which are generally experiencing fiscal pressure as local and central governments seek to reduce expenses in order to address declining tax revenues which may result from the recent economic dislocationsslowdown and increases in unemployment. At the same time, continued dislocations in the financial sector may make it more difficult, and more costly, to finance new projects. These factors, particularly in the absence of energy policies which encourage renewable technologies such as energy-from-waste, may make it more difficult for us to sell waste disposal services or energy at prices sufficient to allow us to grow our business through developing and building new projects.projects, or through the acquisition of additional businesses.
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Acquisitions and Business DevelopmentSeasonal —
In our domestic business, we are pursuing additional growth opportunities through project expansions, new energy-from-waste and other renewable energy projects, contract extensions, acquisitions, and businesses ancillary to our existing business, such as additional waste transfer, transportation, processing and disposal.
We are also pursuing international wasteand/or renewable energy business opportunities, particularly in locations where the market demand, regulatory environment or other factors encourage technologies such as energy-from-waste to reduce dependence on landfilling for waste disposal and fossil fuels for energy production in order to reduce GHG emissions. In particular, we are focusing on the United Kingdom, Ireland and China, and are also pursuing opportunities in certain markets in Europe and in Canada and other markets in the Americas.
2008 acquisitions and business development
Domestic Business
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| • | We acquired Indeck Maine, LLC from co-owners Ridgewood Maine, L.L.C. and Indeck Energy Services, Inc. Indeck Maine, LLC owned and operated two biomass energy facilities. The two nearly identical facilities, located in West Enfield and Jonesboro, Maine, added a total of 49 gross megawatts (“MW”) to our renewable energy portfolio. We have begun to sell the electric output and intend to sell renewable energy credits from these facilities into the New England market. We acquired these two facilities for cash consideration of approximately $53.3 million, net of cash acquired, subject to final working capital adjustments. |
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| • | We acquired an energy-from-waste facility in Tulsa, Oklahoma from The CIT Group/Equipment Financing, Inc. for cash consideration of approximately $12.7 million. The design capacity of the facility is 1,125 tons per day (“tpd”) of waste and gross electric capacity of 16.5 MW. This facility was shut down by the prior owner in the summer of 2007 and we returned two of the facility’s three boilers to service in November 2008, and plan to return its third boiler to service during 2009. During the year ended December 31, 2008, we invested approximately $4.9 million in capital improvements to restore the operational performance of the facility. |
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| • | We acquired a landfill for the disposal of ash in Peabody, Massachusetts for cash consideration of approximately $7.4 million. We expect to utilize this landfill for disposal of ash from energy-from-waste facilities in the Northeast United States, including those that we own or operate. |
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| • | We entered into new tip fee contracts which will supply waste to the Wallingford, Connecticut facility, following the expiration of the existing service fee contract in 2010. These contracts in total are expected to supply waste utilizing most or all of the facility’s capacity through 2020. |
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| • | We entered into a new tip fee contract with Kent County in Michigan which commenced on January 1, 2009 and extended the existing contract from 2010 to 2023. This contract is expected to supply waste utilizing most or all of the facility’s capacity. Previously this was a service fee contract. |
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| • | We entered into a new service fee contract with the Pasco County Commission in Florida which commenced on January 1, 2009 and extended the existing contract from 2011 to 2016. |
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| • | We entered into a new tip fee contract with the City of Indianapolis for a term of 10 years which commenced upon expiration of the existing service fee contract in December 2008. This contract represents approximately 50% of the facility’s capacity. |
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| • | We entered into various agreements with multiple partners to invest in the development, testing or licensing of new technologies related to the transformation of waste materials into renewable fuels or the generation of energy. Initial licensing fees and demonstration unit purchases approximated $6.5 million during 2008. |
International Business
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| • | We entered into an agreement with Beijing Baoluo Investment Co., Ltd. (Beijing Baoluo”) to purchase a direct 58% equity interest in the Fuzhou project, a 1,200 metric tpd 24 MW mass-burn energy-from-waste project in China, for approximately $14 million. This purchase is conditional upon various regulatory and |
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| | other conditions precedent and is expected to close in early 2009. In 2007, we acquired a 40% equity interest in Chongqing Sanfeng Covanta Environmental Industry Co., Ltd. (“Sanfeng”), a company located in Chongqing Municipality, People’s Republic of China, which is engaged in the business of owning and operating energy-from-waste projects and providing design and engineering, procurement and construction services for energy-from-waste facilities in China. Sanfeng owns a 32% equity interest in the Fuzhou project. |
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| • | We and Chongqing Iron & Steel Company (Group) Limited have entered into a 25 year contract to build, own, and operate an 1,800 tpd energy-from-waste facility for Chengdu Municipality in Sichuan Province, People’s Republic of China. In connection with this award, we invested $17.1 million for a 49% equity interest in the project joint venture company. The Chengdu project is expected to commence construction in early 2009, and commence operations in 2011. |
2007 acquisitions and business development
Domestic Business
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| • | We acquired the operating businesses of EnergyAnswers Corporation (“EnergyAnswers”) for cash consideration of approximately $41 million. We also assumed net debt of $21 million ($23 million of consolidated indebtedness net of $2 million of restricted funds held in trust). These businesses include a 400 tpd energy-from-waste facility in Springfield, Massachusetts and a 240 tpd energy-from-waste facility in Pittsfield, Massachusetts. Both energy-from-waste projects have tip fee type contracts. Approximately 75% of waste revenues are contracted for at these facilities. In addition, we acquired businesses that include a landfill operation for ash disposal in Springfield, Massachusetts, and two transfer stations, one in Canaan, New York, permitted to transfer 600 tpd of waste, and the other located at the Springfield energy-from-waste facility, permitted to transfer 500 tpd of waste. We subsequently sold certain assets acquired in this transaction for a total consideration of $5.8 million during the fourth quarter of 2007 and during the first quarter of 2008. |
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| • | We acquired Central Valley Biomass Holdings, LLC (“Central Valley”) from The AES Corporation. Under the terms of the purchase agreement, we paid cash consideration of $51 million, plus approximately $5 million in cash related to post-closing adjustments and transaction costs. Central Valley owned two biomass energy facilities and a biomass energy fuel management business, all located in California’s Central Valley. These facilities added 75 MW to our portfolio of renewable energy plants. In addition, we invested approximately $8 million prior to December 31, 2007, and approximately $11 million during the year ended December 31, 2008, in capital improvements to increase the facilities’ productivity and improve environmental performance. These capital improvements were completed prior to September 30, 2008. |
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| • | We entered into a new tip fee contract with the Town of Hempstead in New York for a term of 25 years commencing upon expiration of the existing contract in August 2009. This contract provides approximately 50% of the facility’s capacity. We also entered into new tip fee contracts with other customers that expire between February 2011 and December 2014. These contracts provide an additional 40% of the facility’s capacity. |
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| • | We acquired two waste transfer stations in Westchester County, New York from Regus Industries, LLC for cash consideration of approximately $7.3 million. These facilities increased our total waste capacity by approximately 1,150 tpd and enhance our portfolio of transfer stations in the Northeast United States. |
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| • | We acquired a waste transfer station in Holliston, Massachusetts from Casella Waste Systems Inc. for cash consideration of approximately $7.5 million. This facility increased our total waste capacity by approximately 700 tpd. In addition, we invested approximately $4.2 million prior to December 31, 2007 and approximately $1 million during the year ended December 31, 2008 in capital improvements to enhance the environmental and operational performance of the transfer station. |
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| • | We completed the expansion and commenced the operation of the expanded energy-from-waste facility located in and owned by Lee County in Florida. We expanded waste processing capacity from 1,200 tpd to |
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| | 1,836 tpd and increased gross electricity capacity from 36.9 MW to 57.3 MW. As part of the agreement to implement this expansion, we received a long-term operating contract extension expiring in 2024. |
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| • | We entered into a ten year agreement to maintain and operate an 800 tpd energy-from-waste facility located in Harrisburg, Pennsylvania and obtained a right of first refusal to purchase the facility. Under the agreement, the term of which commenced February 1, 2008 following satisfaction of certain conditions precedent, we will earn a base annual service fee of approximately $10.5 million, which is subject to annual escalation and certain performance-based adjustments. We have also agreed to provide construction management services and to advance up to $25.5 million in funding for certain facility improvements required to enhance facility performance, the repayment of which is guaranteed by the City of Harrisburg. As of December 31, 2008, we advanced $8.2 million under this funding arrangement. The facility improvements are expected to be completed by mid 2009. |
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| • | We designed, constructed, operate and maintain the 1,200 tpd mass-burn energy-from-waste facility located in and owned by Hillsborough County in Florida. In August 2005, we entered into agreements with Hillsborough County to implement an expansion, and to extend the agreement under which we operate the facility to 2027. During 2006, environmental and other project related permits were secured and the expansion construction commenced on December 29, 2006. Completion of the expansion, and commencement of the operation of the expanded project, is expected in 2009. |
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| • | We acquired an additional 5% ownership interest in Pacific Ultrapower Chinese Station, a biomass energy facility located in California, which increased our equity ownership interest to 55%. |
International Business
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| • | In December 2007, we entered into a joint venture with Guangzhou Development Power Investment Co., Ltd. through which we intend to develop energy-from-waste projects in Guangdong Province, People’s Republic of China. We hold a 40% equity interest in the joint venture entity, Guangzhou Development Covanta Environmental Energy Co., Ltd (“GDC Environmental Energy”), and on June 6, 2008, we invested $1.5 million in this joint venture following receipt of final government approvals. We expect to make additional investments as and when GDC Environmental Energy is successful in developing projects. |
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| • | We purchased a 40% equity interest in Sanfeng, a company located in Chongqing Municipality, People’s Republic of China. Sanfeng is engaged in the business of owning and operating energy-from-waste projects and providing design and engineering, procurement and construction services for energy-from-waste facilities in China. Sanfeng currently owns minority equity interests in two 1,200 metric tpd 24 MW mass-burn energy-from-waste projects. Chongqing Iron & Steel Company (Group) Limited holds the remaining 60% equity interest in Sanfeng. We paid approximately $10 million in connection with our investment in Sanfeng. We expect to utilize Sanfeng as a key component of our effort to grow our energy-from-waste business in China. We expect to make additional investments as and when Sanfeng is successful in developing additional projects. |
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| • | We announced that we have entered into definitive agreements for the development of a 1,700 metric tpd energy-from-waste project serving the City of Dublin, Ireland and surrounding communities. The Dublin project, which marks our most significant entry to date into the European waste and renewable energy markets, is being developed and will be owned by Dublin Waste to Energy Limited, which we control and co-own with DONG Energy Generation A/S. Under the Dublin project agreements, several customary conditions must be satisfied before full construction can begin, including the issuance of all required licenses and permits and approvals. |
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| | We are responsible for the design and construction of the project, which is estimated to cost approximately 350 million euros and will require 36 months to complete, once full construction commences. We will operate and maintain the project for Dublin Waste to Energy Limited, which has a25-year tip fee type contract with Dublin to provide disposal service for approximately 320,000 metric tons of waste annually. The project is structured on a build-own-operate-transfer model, where ownership will transfer to Dublin after the25-year term, unless extended. The project is expected to sell electricity into the local grid under short-term arrangements. We and DONG Energy Generation A/S have committed to provide financing for |
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| | all phases of the project, and we expect to arrange for project financing. The primary approvals and licenses for the project have been obtained, and any remaining consents and approvals necessary to begin full construction are expected to be obtained in due course. We have begun to perform preliminary site demolition work and expect to commence full construction during the second quarter of 2009. |
Business Segments
Our reportable segments are Domestic and International, which are comprised of our domestic and international waste and energy services operations, respectively.
Domestic
For all energy-from-waste projects, we receive revenue from two primary sources: fees charged for operating projects or processing waste received and payments for electricity and steam sales. We also operate, and in some cases have ownership interests in, transfer stations and landfills which generate revenue from waste and ash disposal fees or operating fees. In addition, we own and in some cases operate, other renewable energy projects in the United States which generate electricity from wood waste (biomass), landfill gas, and hydroelectric resources. The electricity from these other renewable energy projects is sold to utilities. For these projects, we receive revenue from electricity sales, and in some cases cash from equity distributions.
International
We have ownership interests inand/or operate facilities internationally, including independent power production facilities in the Philippines, Bangladesh and India where we generate electricity by combusting coal, natural gas and heavy fuel-oil, and energy-from-waste facilities in China and Italy. We receive revenue from operating fees, electricity and steam sales, and in some cases cash from equity distributions.
Contract Structures
Most of our energy-from-waste 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 service agreement is different reflecting the specific needs and concerns of a client community, applicable regulatory requirements and other factors. Often, we design the facility, help to arrange for financing and then we either construct and equip the facility on a fixed price and schedule basis, or we undertake an alternative role, such as construction management, if that better meets the goals of our municipal client. Following construction and during operations, we receive revenue from two primary sources: fees we receive for operating projects or for processing waste received, and payments we receive for electricityand/or steam we sell.
We have 22 domestic energy-from-waste projects where we charge a fixed fee (which escalates over time pursuant to contractual indices that we believe are appropriate to reflect price inflation) for operation and maintenance services. We refer to these projects as having a “Service Fee” structure. Our contracts at Service Fee projects provide revenue that does not materially vary based on the amount of waste processed or energy generated and as such is relatively stable for the contract term. In addition, at most of our Service Fee projects, the operating subsidiary retains only a fraction of the energy revenues generated, with the balance used to provide a credit to the municipal client against its disposal costs. Therefore, in these projects, the municipal client derives most of the benefit and risk of energy production and changing energy prices.
We also have 16 energy-from-waste projects (13 domestic and 3 international) at which we receive a per-ton fee under contracts for processing waste. We refer to these projects as having a “Tip Fee” structure. At Tip Fee projects, we generally enter into long-term waste disposal contracts for a substantial portion of project disposal capacity and retain all of the energy revenue generated. These Tip Fee service agreements include stated fixed fees earned by us for processing waste up to certain base contractual amounts during specified periods. These Tip Fee service agreements also set forth the per-ton fees that are payable if we accept waste in excess of the base contractual amounts. The waste disposal and energy revenue from these projects is more dependent upon operating performance and, as such, is subject to greater revenue fluctuation to the extent performance levels fluctuate.
Under both structures, our returns are expected to be stable if we do not incur material unexpected operation and maintenance costs or other expenses. In addition, most of our energy-from-waste project contracts are
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structured so that contract counterparties generally bear, or share in, the costs associated with events or circumstances not within our control, such as uninsured force majeure events and changes in legal requirements. The stability of our revenues and returns could be affected by our ability to continue to enforce these obligations. Also, at some of our energy-from-waste facilities, commodity price risk is mitigated by passing through commodity costs to contract counterparties. With respect to our other domestic renewable energy projects and international independent power projects, such structural features generally do not exist because either we operate and maintain such facilities for our own account or we do so on a cost-plus basis rather than a fixed-fee basis.
We generally sell the energy output from our projects to local utilities pursuant to long-term contracts. Where a Service Fee structure exists, our client community usually retains most (generally 90%) of the energy revenues generated and pays the balance to us. Where Tip Fee structures exist, we generally retain 100% of the energy revenues. At several of our energy-from-waste projects, we sell energy output under short-term contracts or on a spot-basis to our customers. At our Tip Fee projects, we generally have a greater exposure to energy market price fluctuation, as well as a greater exposure to variability in project operating performance.
We receive the majority of our revenue under short and long term contracts, with little or no 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 this revenue is comprised of waste revenue, which has generally not been subject to material price volatility. Energy and metal pricing tends to be more volatile. During the second and third quarters of 2008, pricing for energy and recycled metals reached historically high levels and has subsequently declined materially.
At some of our domestic renewable energy and international independent power projects, our operating subsidiaries purchase fuel in the open markets which exposes us to fuel price risk. At other plants, fuel costs are contractually included in our electricity revenues, or fuel is provided by our customers. In some of our international projects, the project entity (which in some cases is not our subsidiary) has entered into long-term fuel purchase contracts that protect the project from changes in fuel prices, provided counterparties to such contracts perform their commitments.
Contract Duration
We operate energy-from-waste projects under long-term agreements. For those projects we own, our contract to sell the project’s energy output (either electricity or steam) generally expires at or after the date when the initial term of our contract to operate or receive waste also expires. Expiration of these contracts will subject us to greater market risk in maintaining and enhancing revenues as we enter into new contracts. Following the expiration of the initial contracts, we intend to enter into replacement or additional contracts for waste supplies and will sell our energy output either into the regional electricity grid or pursuant to new contracts. Because project debt on these facilities will be paid off at such time, we believe that we will be able to offer disposal services at rates that will attract sufficient quantities of waste and provide acceptable revenues. For those projects we operate but do not own, prior to the expiration of the initial term of our operating contract, we will seek to enter into renewal or replacement contracts to continue operating such projects. We will seek to bid competitively in the market for additional contracts to operate other facilities as similar contracts of other vendors expire.
Energy-from-Waste Project Ownership
In our domestic business, we operate many publicly-owned energy-from-waste facilities and own and operate many other energy-from-waste facilities. In addition, we operate several projects under a lease structure where a third party lessor owns the project. Regardless of ownership structure, we provide the same service to our municipal clients and customers.
Under any of these ownership structures, the municipalities typically borrow funds to pay for the facility construction by issuing bonds. In a private ownership structure, the municipal entity loans the bond proceeds to the project subsidiary, the facility is recorded as an asset, and the project debt is recorded as a liability, on our consolidated balance sheet. In a public ownership structure, the municipality would fund the construction costs without loaning the bond proceeds to us.
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At all projects where a Service Fee structure exists (regardless of ownership structure), our municipal clients are generally responsible contractually for paying the project debt after construction is complete. At the 10 publicly-owned Service Fee projects we operate, the municipality pays periodic debt service directly to a trustee under an indenture. We own 13 projects where a Service Fee structure exists, and at the majority of these projects the municipal client pays debt service as a component of a monthly service fee payment to us.
At projects we own where a Service Fee structure exists, a portion of the revenue we receive represents payments by the client community of debt service on project debt, which we pass along to a bond trustee for payment to bondholders of principal and interest when due. These payments will continue until cash in project debt service reserves is sufficient to pay all remaining debt service payments. Generally, this occurs in the final year of the service contracts, and during that year we will receive little or no payments representing project debt principal, and as a result we record little or no cash provided by operating activities during that period with respect to the debt for such projects.
For all projects where a Tip Fee structure exists, neither debt service nor lease rent is expressly included in the fee paid to us. Accordingly, we do not record revenue reflecting principal on this project debt or on lease rent. In most cases, our operating subsidiaries for these projects make equal monthly deposits with their respective project trustees in amounts sufficient for the trustees to pay principal and interest, or lease rent, when due.
The term of our operating contracts with municipal clients generally coincides with the term of the bonds issued to pay for the project construction. In many cases, the municipality has contractual rights (not obligations) to extend the contract. If a contract is not extended on a publicly-owned project, our role, and our revenue, with respect to that project would cease. If a contract is not extended on a project that we own, we would be free to enter into new revenue generating contracts for waste supply (with the municipality, other municipalities, or private waste haulers) and for electricity or steam sales. We would, in such cases, have no remaining project debt to repay from project revenue, and would be entitled to retain 100% of energy sales revenue.
Seasonal Trends
Our quarterly operating income from domesticfor the Americas and international operationsInternational segments, within the same fiscal year, typically differsdiffer substantially due to seasonal factors, primarily as a result of the timing of scheduled plant maintenance. We typically conduct scheduled maintenance periodically each year, which requires that individual boiler units temporarily cease operations. During these scheduled maintenance periods, we incur material repair and maintenance expenses and receive less revenue until the boiler units resume operations. This scheduled maintenance typically occurs during periods of off-peak electric demand in the spring and fall. The spring scheduled maintenance period is typically more extensive than scheduled maintenance conducted during the fall. As a result, we typically incur the highest maintenance expense in the first half of the year. Given these factors, we typically experience lower operating income from our projects during the first six months of each year and higher operating income during the second six months of each year.
In addition, at certain of our project subsidiaries, distributions of excess earnings (above and beyond monthly operation and maintenance service payments) are subject to periodic tests of project debt service coverage or requirements to maintain minimum working capital balances. While these distributions occur throughout the year based upon the specific terms of the relevant project debt arrangements, they are typically highest in the fourth quarter. Our net cash provided by operating activities exhibits seasonal fluctuations as a result of the timing of these distributions, including a benefit in the fourth quarter compared to the first nine months of the year.
Other Factors Affecting Performance —
We have historically performed 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. With respect to projects acquired in acquisitions, we have assumed contracts where there is less contractual protection against such risks and more exposure to market influences. For additional information about such risks and damages that we may owe for unexcused operating performance failures, seeItem 1A. Risk Factors.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, and boiler availability.
Our ability to meet or exceed historical levels of performance at projects, and our general financial performance, is affected by the following:
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| • | Seasonal or long-term changes in market prices for waste, energy, or ferrous and non-ferrous metals for projects where we sell into those markets; |
| • | Seasonal geographic changes in the price and availability of wood waste as fuel for our biomass facilities; |
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| • | Seasonal, geographic and other variations in the heat content of waste processed, and thereby the amount of waste that can be processed by an energy-from-waste facility; |
| • | Our ability to avoid unexpected increases in operating and maintenance costs while ensuring that adequate facility maintenance is conducted so that historic levels of operating performance can be sustained; |
| • | Contract counterparties’ ability to fulfill their obligations, including the ability of our various municipal customers to supply waste in contractually committed amounts, and the availability of alternate or additional sources of waste if excess processing capacity exists at our facilities; and |
| • | The availability and adequacy of insurance to cover losses from business interruption in the event of casualty or other insured events. |
General financial performance at our international projects is also affected by the following:
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| • | Changes in fuel price for projects in which such costs are not completely passed through to the electricity purchaser through revenue adjustments, or delays in the effectiveness of revenue adjustments; |
| • | The amounts of electricity actually requested by purchasers of electricity, and whether or when such requests are made, our facilities are then available to deliver such electricity; |
| • | The financial condition and creditworthiness of purchasers of power and services provided by us; |
| • | Fluctuations in the value of the domestic currency against the value of the U.S. dollar for projects in which we are paid in whole or in part in the domestic currency of the host country; and |
| • | Political risks inherent to the international business which could affect both the ability to operate the project in conformance with existing agreements and the repatriation of dividends from the host country. |
Business Segments
Our reportable segments are Americas and International. The Americas segment is comprised of waste and energy services operations primarily in the United States and Canada. The International segment is comprised of waste and energy services operations in other countries, currently those of the United Kingdom, Ireland, Italy, China, The Philippines, India and Bangladesh.
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Segment | | Description |
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Americas | | For all energy-from-waste projects, we receive revenue from two primary sources: fees charged for operating projects or processing waste received and payments for electricity and steam sales. We also operate, and in some cases have ownership interests in, transfer stations and landfills which generate revenue from waste and ash disposal fees or operating fees. In addition, we own and in some cases operate, other renewable energy projects primarily in the United States which generate electricity from wood waste (biomass), landfill gas, and hydroelectric resources. The electricity from these other renewable energy projects is sold to utilities. For these projects, we receive revenue from electricity sales, and in some cases cash from equity distributions. We may receive additional revenue from construction activity during periods when we are constructing new facilities or expanding existing facilities. |
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International | | We have ownership interests in and/or operate facilities internationally, including independent power production facilities in the Philippines, Bangladesh, China and India where we generate electricity by combusting coal, natural gas and heavy fuel-oil, and energy-from-waste facilities in China and Italy. We are constructing energy-from-waste facilities in Ireland and China. We receive revenue from operating fees, waste processing fees, electricity and steam sales, construction activities, and in some cases receive cash from equity distributions. |
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Contract Structures
Most of our energy-from-waste 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 service agreement is different reflecting the specific needs and concerns of a client community, applicable regulatory requirements and other factors. Often, we design the facility, help to arrange for financing and then we either construct and equip the facility on a fixed price and schedule basis, or we undertake an alternative role, such as construction management, if that better meets the goals of our municipal client. Following construction and during operations, we receive revenue from two primary sources: fees we receive for operating projects or for processing waste received, and payments we receive for electricityand/or steam we sell. Typical features of these agreements are as follows:
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Contract types | | projects | | processing waste received | | and/or steam we sell |
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Service Fee | | 28 | | We charge a fixed fee (which escalates over time pursuant to contractual indices that we believe are appropriate to reflect price inflation) for operation and maintenance services provided to these energy-from-waste projects. At projects that we own and where project debt is in place, a portion of our fee is dedicated to project debt service. Our contracts at Service Fee projects provide revenue that does not materially vary based on the amount of waste processed or energy generated and as such is relatively stable for the contract term. (28 Americas segment Service Fee projects). | | At most of our Service Fee projects, the operating subsidiary retains only a fraction of the energy revenues generated, with the balance (generally 90%) used to provide a credit to the municipal client against its disposal costs. Therefore, in these projects, the municipal client derives most of the benefit and risk of energy production and changing energy prices. |
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Tip Fee | | 16 | | We receive a per-ton fee under contracts for processing waste at Tip Fee projects. We generally enter into long-term waste disposal contracts for a substantial portion of the project’s disposal capacity. These Tip Fee service agreements include stated fixed fees earned by us for processing waste up to certain base contractual amounts during specified periods. These Tip Fee service agreements also set forth the per-ton fees that are payable if we accept waste in excess of the base contractual amounts. The waste disposal and energy revenue from these projects is more dependent upon operating performance and, as such, is subject to greater revenue fluctuation to the extent performance levels fluctuate. (13 Americas segment Tip Fee projects and 3 International segment Tip Fee projects). | | Where Tip Fee structures exist, we generally retain 100% of the energy revenues as well as risk associated with energy production and changing energy pricing. The majority of Tip Fee structures are under long-term fixed-price energy contracts. |
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Under both structures, our returns are expected to be stable if we do not incur material unexpected operation and maintenance costs or other expenses. In addition, most of our energy-from-waste project contracts are structured so that contract counterparties generally bear, or share in, the costs associated with events or circumstances not within our control, such as uninsured force majeure events and changes in legal requirements. The stability of our revenues and returns could be affected by our ability to continue to enforce these obligations. Also, at some of our energy-from-waste facilities, commodity price risk is mitigated by passing through commodity costs to contract counterparties. With respect to our other renewable energy projects and international independent power projects, such structural features generally do not exist because either we operate and maintain such facilities for our own account or we do so on a cost-plus basis rather than a fixed-fee basis.
We receive the majority of our revenue under short- and long-term contracts with little or no 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 sales of energy and metals. During the second and third quarters of 2008, pricing for energy and recycled metals reached historically high levels and has subsequently declined materially.
At some of our renewable energy and international independent power projects, our operating subsidiaries purchase fuel in the open markets which exposes us to fuel price risk. At other projects, fuel costs are contractually included in our electricity revenues, or fuel is provided by our customers. In some of our international projects, the project entity (which in some cases is not our subsidiary) has entered into long-term fuel purchase contracts that protect the project from fuel shortages, provided counterparties to such contracts perform their commitments.
We generally sell the energy output from our projects to local utilities pursuant to long-term contracts. At several of our energy-from-waste projects, we sell energy output under short-term contracts or on a spot-basis to our customers.
Contracted and Merchant Capacity
We operate energy-from-waste projects under long-term agreements. For those projects we own, our contract to sell the project’s energy output (either electricity or steam) generally expires on or after the date when the initial term of our contract to operate or receive waste also expires. Expiration of these contracts will subject us to greater market risk in maintaining and enhancing revenues as we enter into new contracts. Following the expiration of the initial contracts, we intend to enter into replacement or additional contracts for waste supplies and will sell our energy output either into the regional electricity grid or pursuant to new contracts. Because project debt on these facilities will be paid off at such time, we believe that we will be able to offer disposal services at rates that will attract sufficient quantities of waste and provide acceptable revenues. For those projects we operate but do not own, prior to the expiration of the initial term of our operating contract, we will seek to enter into renewal or replacement contracts to continue operating such projects. We will seek to bid competitively in the market for additional contracts to operate other facilities as similar contracts of other vendors expire.
Growth and Development
In our Americas segment, we are pursuing additional growth opportunities through project expansions, new energy-from-waste and other renewable energy projects, contract extensions, acquisitions, and businesses ancillary to our existing business, such as additional waste transfer, transportation, processing and disposal businesses. We also intend to maintain a focus on research and development of technologies that we believe will enhance our competitive position, and offer new technical solutions to waste and energy problems that augment and complement our business.
We are also pursuing international wasteand/or renewable energy business opportunities, particularly in locations where the market demand, regulatory environment or other factors encourage technologies such as energy-from-waste to reduce dependence on landfilling for waste disposal and fossil fuels for energy production in order to reduce GHG emissions. Outside of the Americas, we are focusing on the United Kingdom, Ireland, and China.
We have invested approximately $298.3 million, $91.9 million and $121.7 million for the years ended December 31, 2009, 2008 and 2007, respectively, for businesses acquired, the acquisition of non-controlling interests in subsidiaries and purchases of equity interests. The following is a discussion of acquisitions and business development for 2009, 2008 and 2007. SeeItem 8. Financial Statements And Supplementary Data — Note 3. Acquisitions, Business Development and Dispositionsfor additional information.
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ACQUISITIONS AND BUSINESS DEVELOPMENT
| | | | | | | | | | | | |
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Facility/Operating
| | | | | | | | | | | |
Contract | | Location | | Year | | | Transaction | | Type | | Summary |
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|
Long Beach Hudson Valley MacArthur Plymouth York Burnaby Abington | | CA NY NY PA PA Canada PA | | | 2009 | | | Acquisition | | EfW EfW EfW EfW EfW EfW Trans.St. | | We acquired six energy-from-waste businesses and one transfer station business from Veolia Environmental Services North America Corp. (the “Veolia EfW Acquisition”). The acquired businesses have a combined capacity of 6,600 tpd. Each of the operations acquired includes a long-term operating contract with the respective municipal client. Five of the energy-from-waste facilities and the transfer station are publicly-owned facilities. We acquired a majority ownership stake in one of the energy-from-waste facilities and subsequently purchased the remaining ownership stake in this facility. We completed the Veolia EfW Acquisition by acquiring a 3,000 tpd energy-from-waste business in Miami-Dade, Florida in February 2010.See Item 8. Financial Statements And Supplementary Data — Note 23. Subsequent Events. |
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Detroit | | MI | | | 2009 | | | Contract | | EfW | | We entered into an operating and maintenance agreement with owners of the Detroit energy-from-waste facility (2,832 tpd, 952 pounds of steam generated per day), pursuant to which we will operate, maintain and provide certain other services for a term of one year. Under this agreement, we will earn a fixed fee and pass through to the owners of the Detroit facility (or pay from the project revenues) all expenses associated with operations and maintenance of the facility. After paying all expenses, excess net revenues flow to the owners (see discussion below regarding our acquisition of an ownership interest in the facility). We entered into a waste disposal agreement with the Greater Detroit Resource Recovery Authority (“GDRRA”) pursuant to which we will dispose of the waste of the City of Detroit for a term of at least one year. The term of the waste disposal agreement will automatically renew for successive one year terms unless and until either party provides advance written notice of termination in accordance with the provisions of the agreement. We entered into a new short-term steam agreement for the Detroit energy-from-waste facility which expires in February 2010 while negotiations continue regarding a long-term steam agreement. Securing a long-term steam agreement with appropriate pricing is important for the long-term economic viability of the Detroit energy-from-waste facility. |
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Detroit | | MI | | | 2009 | | | Acquisition | | EfW | | A newly-formed Covanta subsidiary purchased an undivided 30% owner-participant interest in the Detroit energy-from-waste facility. In addition, as an owner-participant, we have the right, on one or more occasions, to call upon GDRRA to deliver the waste of the City of Detroit to the Detroit energy-from-waste facility at market-based rates. The call right continues for the duration of the agreements expiring in 2035, and is supported by the undertaking of the City of Detroit until 2021. |
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Stanislaus County | | CA | | | 2009 | | | Contract | | EfW | | We extended our service fee contract with Stanislaus County from 2010 to 2016. |
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Philadelphia Transfer Stations | | PA | | | 2009 | | | Acquisition | | Transfer Stations | | We acquired two waste transfer stations with combined capacity of 4,500 tpd in Philadelphia, Pennsylvania. |
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Maine Biomass Energy Facilities | | ME | | | 2008 | | | Acquisition | | Biomass | | We acquired Indeck Maine Energy, LLC which owned and operated two biomass energy facilities. The two nearly identical facilities, located in West Enfield and Jonesboro, Maine, added a total of 49 megawatts (“MW”) to our renewable energy portfolio. We sell the electric output and renewable energy credits from these facilities into the New England electricity market. |
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| | | | | | | | | | | | |
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Facility/Operating
| | | | | | | | | | | |
Contract | | Location | | Year | | | Transaction | | Type | | Summary |
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Tulsa | | OK | | | 2008 | | | Acquisition/ Contract | | EfW | | The design capacity of the facility is 1,125 tpd of waste and gross electric capacity of 16.5 MW (231 pounds of steam generated per day). This facility was shut down by the prior owner in the summer of 2007 and we returned two of the facility’s three boilers to service in 2008. In 2009, we entered into a new tip fee agreement with the City of Tulsa which expires in 2012 and a new steam contract for a term of 10 years expiring in 2019. |
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Peabody | | MA | | | 2008 | | | Acquisition | | Ash Landfill | | We acquired a landfill for the disposal of ash. |
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Harrisburg | | PA | | | 2008 | | | Contract | | EfW | | We entered into a ten year agreement to maintain and operate an 800 tpd energy-from-waste facility located in Harrisburg, Pennsylvania and obtained a right of first refusal to purchase the facility. SeeEnergy-From-Waste Under Advanced Development or Constructiondiscussion below related to this facility. |
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Indianapolis | | IN | | | 2008 | | | Contract | | EfW | | We entered into a new tip fee contract for a term of 10 years which commenced upon expiration of the existing service fee contract in December 2008. This contract represents approximately 50% of the facility’s capacity. (91 pounds of steam generated per day). |
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Kent County | | MI | | | 2008 | | | Contract | | EfW | | We entered into a new tip fee contract which commenced on January 1, 2009 and extended the existing operating contract from 2010 to 2023. This contract is expected to supply waste utilizing most or all of the facility’s capacity. Previously this was a service fee contract. |
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Pasco County | | FL | | | 2008 | | | Contract | | EfW | | We entered into a new service fee contract which commenced on January 1, 2009 and extended the existing contract from 2011 to 2016. |
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Wallingford | | CT | | | 2008 | | | Contract | | EfW | | We entered into new tip fee contracts to supply waste to the facility upon expiration of the existing service fee contract in 2010. These contracts in total are expected to supply waste utilizing most or all of the facility’s capacity through 2020. |
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Holliston | | MA | | | 2007 | | | Acquisition | | Transfer Station | | We acquired a waste transfer station with total waste capacity of 700 tpd. In addition, we invested a total of $5.2 million in 2007 and 2008 in capital improvements to enhance the environmental and operational performance of the transfer station. |
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Massachusetts EfW Facilities and Transfer Stations | | MA NY | | | 2007 | | | Acquisition | | EfW / Ash Landfill / Transfer Stations | | We acquired the operating businesses of EnergyAnswers Corporation. These businesses include a 400 tpd energy-from-waste facility in Springfield, Massachusetts and a 240 tpd energy-from-waste facility in Pittsfield, Massachusetts. Both energy-from-waste projects have tip fee type contracts. Approximately 75% of waste revenues are contracted for at these facilities. In addition, we acquired businesses that include a landfill operation for ash disposal in Springfield, Massachusetts and two transfer stations, one in Canaan, New York, permitted to transfer 600 tpd of waste, and the other located at the Springfield energy-from-waste facility, permitted to transfer 500 tpd of waste. |
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California Biomass Energy Facilities | | CA | | | 2007 | | | Acquisition | | Biomass | | We acquired Central Valley Biomass Holdings, LLC which owned two biomass energy facilities and a biomass energy fuel management business, all located in California’s Central Valley. These facilities added 75 MW to our portfolio of renewable energy projects. In addition, we invested a total of $19 million in 2007 and 2008 in capital improvements to increase the facilities’ productivity and improve environmental performance. |
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Westchester Transfer Stations | | NY | | | 2007 | | | Acquisition | | Transfer Stations | | We acquired two waste transfer stations with combined capacity of 1,150 tpd in Westchester County, New York. |
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| | | | | | | | | | | | |
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Facility/Operating
| | | | | | | | | | | |
Contract | | Location | | Year | | | Transaction | | Type | | Summary |
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Hempstead | | NY | | | 2007 | | | Contract | | EfW | | We entered into a new tip fee contract for a term of 25 years which commenced upon expiration of the previous contract in August 2009. This contract provides approximately 50% of the facility’s capacity. We also entered into new tip fee contracts with other customers that expire between February 2011 and December 2014. These contracts provide an additional 40% of the facility’s capacity. |
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ENERGY-FROM-WASTE
PROJECTS UNDER ADVANCED DEVELOPMENT OR CONSTRUCTION
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Project/Facility | | Location | | Summary |
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Technology Development | | | | We entered into various agreements with multiple partners to invest in the development, testing or licensing of new technologies related to the transformation of waste materials into renewable fuels or the generation of energy. Licensing fees and demonstration unit cumulative purchases totaled approximately $11.2 million in 2008 and 2009. |
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AMERICAS | | | | |
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Honolulu | | HI | | We operate and maintain the energy-from-waste facility located in and owned by the City and County of Honolulu, Hawaii. In December 2009, we entered into agreements with the City and County of Honolulu to expand the facility’s waste processing capacity from 2,160 tpd to 3,060 tpd and to increase the gross electricity capacity from 57 MW to 90 MW. The agreements also extend the service contract term by 20 years. The $302 million expansion project is a fixed-price construction project which will be funded and owned by the City and County of Honolulu. Environmental and other project related permits have been received and expansion construction has commenced. |
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Harrisburg | | PA | | See operating contract discussion above. We have an agreement to provide construction management services and advance up to $25.5 million (of which $20.7 million has been advanced and $19.4 million is outstanding as of December 31, 2009) in funding for certain facility improvements required to enhance facility performance, which are expected to be completed during 2010. The repayment of this funding is guaranteed by the City of Harrisburg, but is otherwise unsecured, and is junior to project bondholders’ rights. Current installment repayments of the advance have been received. However, due to the precarious financial condition of the City of Harrisburg, its substantial obligations, and its reported consideration of various future options (including seeking bankruptcy protection), we intend to closely monitor this situation and work with the City of Harrisburg and other stakeholders, to maintain our position in the project and recover our advance. |
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Hillsborough | | FL | | During the third quarter of 2009, we completed the expansion and commenced the operations of the expanded energy-from-waste located in Hillsborough County, Florida. We expanded waste processing capacity from 1,200 tpd to 1,800 tpd and increased gross electricity capacity from 29.0 MW to 46.5 MW. As part of the agreement to implement this expansion, we received a long-term operating contract extension to 2027. |
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Lee | | FL | | In December 2007, we completed the expansion and commenced the operation of the expanded energy-from-waste facility located in and owned by Lee County, Florida. We expanded waste processing capacity from 1,200 tpd to 1,836 tpd and increased gross electricity capacity from 36.9 MW to 57.3 MW. As part of the agreement to implement this expansion, we received a long-term operating contract extension expiring in 2024. |
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Project/Facility | | Location | | Summary |
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INTERNATIONAL |
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Dublin | | Ireland | | We are developing a 1,700 metric tpd energy-from-waste project serving the City of Dublin, Ireland and surrounding communities at an estimated cost of approximately €350 million. The Dublin project is being developed and will be owned by Dublin Waste to Energy Limited, which we control and co-own with DONG Energy Generation A/S. We are responsible for the design and construction of the project. We will operate and maintain the project for Dublin Waste to Energy Limited, which has a 25 year tip fee type contract with Dublin to provide disposal service for approximately 320,000 metric tons of waste annually. The project is structured on a build-own-operate-transfer model, where ownership will transfer to Dublin after the 25 year term, unless extended. The project is expected to sell electricity into the local grid. A portion of the electricity is expected to be eligible for a preferential renewable tariff. We and DONG Energy Generation A/S have committed to provide financing for all phases of the project. We expect to fund construction through existing sources of liquidity and effect project financing as the project progresses. The primary approvals and licenses for the project have been obtained and construction commenced in December 2009. |
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Taixing | | China | | Taixing Covanta Yanjiang Cogeneration Co., Ltd., of which we own 85%, entered into a 25 year concession agreement and waste supply agreements to build, own and operate a 350 metric tpd energy-from-waste facility for Taixing Municipality, in Jiangsu Province, People’s Republic of China. The project, which will be built on the site of our existing coal-fired facility in Taixing, will supply steam to an adjacent industrial park under short-term arrangements. We will continue to operate our existing coal-fired facility. The project company has obtained Rmb 165 million in project financing which, together with available cash from existing operations will fund construction costs. The Taixing project commenced construction in late 2009. |
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Chengdu | | China | | We and Chongqing Iron & Steel Company (Group) Limited have entered into a 25 year contract to build, own, and operate an 1,800 metric tpd energy-from-waste facility for Chengdu Municipality in Sichuan Province, People’s Republic of China. In connection with this award, we acquired a 49% equity interest in the project company. Construction of the facility has commenced and operation is expected to begin in 2011. The project company has obtained Rmb 480 million in project financing, of which 49% is guaranteed by us and 51% is guaranteed by Chongqing Iron & Steel Company (Group) Limited until the project has been constructed and for one year after operations commence. |
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Sanfeng | | China | | We purchased a 40% equity interest in Chongqing Sanfeng Covanta Environmental Industry Co., Ltd. (“Sanfeng”), a company located in Chongqing Municipality, People’s Republic of China. Sanfeng is engaged in the business of owning and operating energy-from-waste projects and providing design and engineering, procurement and construction services for energy-from-waste facilities in China. Sanfeng currently owns minority equity interests in two 1,200 metric tpd 24 MW mass-burn energy-from-waste projects. Chongqing Iron & Steel Company (Group) Limited holds the remaining 60% equity interest in Sanfeng. |
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RESULTS OF OPERATIONS
The comparability of the information provided below with respect to our revenues, expenses and certain other items for periods during each of the years presented was affected by several factors. As outlined above underAcquisitionsOverview— Growth and Business Development,our acquisition and business development initiatives in 2009, 2008 and 2007 resulted in various additional projects which increased comparative revenues and expenses. The Huantai and Linan coal facilities, both of which were located in China, were sold in June 2006 and September 2007, respectively, and were not included as consolidated subsidiaries since their respective disposition dates. These factors must be taken into account in developing meaningful comparisons between the periods compared below.
4847
RESULTS OF OPERATIONS — Year Ended December 31, 20082009 vs. Year Ended December 31, 20072008
Our consolidated results of operations are presented in the table below (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended
| | Increase
| | | For the Years Ended
| | Increase
| |
| | December 31, | | (Decrease) | | | December 31, | | (Decrease) | |
| | 2008 | | 2007 | | 2008 vs 2007 | | | 2009 | | 2008 | | 2009 vs 2008 | |
|
CONSOLIDATED RESULTS OF OPERATIONS: | | | | | | | | | | | | | | | | | | | | | | | | |
Total operating revenues | | $ | 1,664,253 | | | $ | 1,433,087 | | | $ | 231,166 | | | $ | 1,550,467 | | | $ | 1,664,253 | | | $ | (113,786 | ) |
Total operating expenses | | | 1,408,288 | | | | 1,196,477 | | | | 211,811 | | | | 1,354,632 | | | | 1,408,288 | | | | (53,656 | ) |
| | | | | | | | | | |
Operating income | | | 255,965 | | | | 236,610 | | | | 19,355 | | | | 195,835 | | | | 255,965 | | | | (60,130 | ) |
| | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | |
Investment income | | | 5,717 | | | | 10,578 | | | | (4,861 | ) | | | 4,007 | | | | 5,717 | | | | (1,710 | ) |
Interest expense | | | (46,804 | ) | | | (67,104 | ) | | | (20,300 | ) | | | (38,116 | ) | | | (46,804 | ) | | | (8,688 | ) |
Loss on extinguishment of debt | | | — | | | | (32,071 | ) | | | (32,071 | ) | |
Non-cash convertible debt related expense | | | | (24,290 | ) | | | (17,979 | ) | | | 6,311 | |
| | | | | | | | | | |
Total other expenses | | | (41,087 | ) | | | (88,597 | ) | | | (47,510 | ) | | | (58,399 | ) | | | (59,066 | ) | | | (667 | ) |
| | | | | | | | | | |
Income before income tax expense, minority interests and equity in net income from unconsolidated investments | | | 214,878 | | | | 148,013 | | | | 66,865 | | |
Income before income tax expense and equity in net income from unconsolidated investments | | | | 137,436 | | | | 196,899 | | | | (59,463 | ) |
Income tax expense | | | (92,227 | ) | | | (31,040 | ) | | | 61,187 | | | | (50,044 | ) | | | (84,561 | ) | | | (34,517 | ) |
Minority interests | | | (6,961 | ) | | | (8,656 | ) | | | (1,695 | ) | |
Equity in net income from unconsolidated investments | | | 23,583 | | | | 22,196 | | | | 1,387 | | | | 23,036 | | | | 23,583 | | | | (547 | ) |
| | | | | | | | | | |
NET INCOME | | $ | 139,273 | | | $ | 130,513 | | | | 8,760 | | | | 110,428 | | | | 135,921 | | | | (25,493 | ) |
| | | | | | |
Less: Net income attributable to noncontrolling interests in subsidiaries | | | | (8,783 | ) | | | (6,961 | ) | | | 1,822 | |
| | | | | | |
NET INCOME ATTRIBUTABLE TO COVANTA HOLDING CORPORATION | | | $ | 101,645 | | | $ | 128,960 | | | | (27,315 | ) |
| | | | | | | | | | |
Weighted Average Common Shares Outstanding: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 153,345 | | | | 152,653 | | | | 692 | | | | 153,694 | | | | 153,345 | | | | 349 | |
| | | | | | | | | | |
Diluted | | | 154,732 | | | | 153,997 | | | | 735 | | | | 154,994 | | | | 154,732 | | | | 262 | |
| | | | | | | | | | |
Earnings Per Share: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.91 | | | $ | 0.85 | | | $ | 0.06 | | | $ | 0.66 | | | $ | 0.84 | | | $ | (0.18 | ) |
| | | | | | | | | | |
Diluted | | $ | 0.90 | | | $ | 0.85 | | | $ | 0.05 | | | $ | 0.66 | | | $ | 0.83 | | | $ | (0.17 | ) |
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The following general discussions should be read in conjunction with the above table, the consolidated financial statements and the Notes thereto and other financial information appearing and referred to elsewhere in this report. Additional detail relating to changes in operating revenues and operating expenses, and the quantification of specific factors affecting or causing such changes, is provided in the DomesticAmericas and International segment discussions below.
Consolidated Results of Operations — Comparison of Results for the Year Ended December 31, 2009 vs. Results for the Year Ended December 31, 2008
Operating revenues decreased by $113.8 million primarily due to the following:
| | |
| • | decreased electricity and steam sales revenue due to lower fuel pass through costs at our Indian facilities and foreign exchange impacts in 2009, and |
| • | decreased waste and service revenues and decreased recycled metal revenues at our existing energy-from-waste facilities in our Americas segment, offset by |
| • | increased waste and services revenues at our new businesses in our Americas segment, primarily due to the Veolia EfW Acquisition, and |
| • | increased electricity and steam sales in our Americas segment due to the Veolia EfW Acquisition, other acquired businesses and new contracts at our Indianapolis and Kent facilities. |
Operating expenses decreased by $53.7 million primarily due to the following:
| | |
| • | decreased plant operating expenses at our Indian facilities resulting primarily from lower fuel costs and foreign exchange impacts in 2009, and |
| • | decreased plant operating expenses at our existing energy-from-waste facilities resulting primarily from lower energy costs, greater internalization of waste disposal and reduced maintenance expense due to less unscheduled down time, offset by |
| • | increased plant operating expenses at our existing energy-from-waste facilities resulting from cost escalations, and |
| • | increased operating costs resulting from the Veolia EfW Acquisition, and |
| • | $6.3 million of acquisition-related transaction costs primarily related to the Veolia EfW Acquisition, and |
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| | |
| • | $13.5 million of insurance recoveries recorded in 2008 for the settlement of property damages and business interruption losses related to the SEMASS energy-from-waste facility, and |
| • | higher costs resulting from the transition of the Indianapolis and Kent facilities from Service Fee to Tip Fee contracts, and |
| • | additional operating costs, net of contra expenses recorded related to the generation of renewable energy credits, from new businesses acquired in the Americas segment. |
Investment income decreased by $1.7 million primarily due to lower interest rates on invested funds. Interest expense decreased by $8.7 million primarily due to lower floating interest rates on the Term Loan Facility (as defined in theLiquiditysection below), offset by increased interest expense due to the issuance of the 3.25% Cash Convertible Senior Notes (“Notes”) which were issued in 2009. Non-cash convertible debt related expense increased by $6.3 million primarily due to the net changes to the valuation of the derivatives associated with the Notes and the amortization of the debt discount for the Notes which issued in 2009.
Income tax expense decreased by $34.5 million primarily due to lower pre-tax income resulting from decreased waste and service revenues and recycled metal revenue at our energy-from-waste facilities, an increase in production tax credits, and changes in the valuation allowance on net operating loss carryforwards (“NOLs”), and certain deferred tax assets. SeeItem 8. Financial Statements And Supplementary Data — Note 16. Income Taxesfor additional information.
Americas Segment Results of Operations — Comparison of Results for the Year Ended December 31, 2009 vs. Results for the Year Ended December 31, 2008
The Americas segment results of operations are presented in the table below (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended December 31, | | | Increase (Decrease) | |
| | 2009 | | | 2008 | | | 2009 vs 2008 | |
|
Waste and service revenues | | $ | 915,364 | | | $ | 930,537 | | | $ | (15,173 | ) |
Electricity and steam sales | | | 399,715 | | | | 384,640 | | | | 15,075 | |
Other operating revenues | | | 31,138 | | | | 56,254 | | | | (25,116 | ) |
| | | | | | | | | | | | |
Total operating revenues | | | 1,346,217 | | | | 1,371,431 | | | | (25,214 | ) |
| | | | | | | | | | | | |
Plant operating expenses | | | 802,638 | | | | 753,848 | | | | 48,790 | |
Depreciation and amortization expense | | | 194,925 | | | | 190,659 | | | | 4,266 | |
Net interest expense on project debt | | | 44,536 | | | | 47,816 | | | | (3,280 | ) |
General and administrative expenses | | | 82,580 | | | | 76,090 | | | | 6,490 | |
Insurance recoveries, net of write-down of assets | | | — | | | | (8,325 | ) | | | 8,325 | |
Other operating expenses | | | 26,785 | | | | 56,336 | | | | (29,551 | ) |
| | | | | | | | | | | | |
Total operating expenses | | | 1,151,464 | | | | 1,116,424 | | | | 35,040 | |
| | | | | | | | | | | | |
Operating income | | $ | 194,753 | | | $ | 255,007 | | | | (60,254 | ) |
| | | | | | | | | | | | |
Operating Revenues
Operating revenues for the Americas segment decreased by $25.2 million as reflected in the comparison of existing business and new business in the table below (in millions) and the discussion of key variance drivers which follows:
| | | | | | | | | | | | |
| | Americas Segment
| |
| | Operating Revenue Variances | |
| | Existing
| | | New
| | | | |
| | Business | | | Business(A) | | | Total | |
|
Waste and service revenues | | | | | | | | | | | | |
Service fee | | $ | (60.5 | ) | | $ | 38.9 | | | $ | (21.6 | ) |
Tip fee | | | 17.7 | | | | 13.1 | | | | 30.8 | |
Recycled metal | | | (25.0 | ) | | | 0.6 | | | | (24.4 | ) |
| | | | | | | | | | | | |
Total waste and service revenues | | | (67.8 | ) | | | 52.6 | | | | (15.2 | ) |
Electricity and steam sales | | | (4.0 | ) | | | 19.1 | | | | 15.1 | |
Other operating revenues | | | (25.9 | ) | | | 0.8 | | | | (25.1 | ) |
| | | | | | | | | | | | |
Total operating revenues | | $ | (97.7 | ) | | $ | 72.5 | | | $ | (25.2 | ) |
| | | | | | | | | | | | |
| | |
| (A) | The results of acquisitions are included in the new business variance through four quarters after acquisition or commencement of operation. |
| | |
| • | Revenues from Service Fee arrangements for existing business decreased primarily due to the cessation of contracts at our Indianapolis, Kent, and Detroit facilities and lower revenues earned explicitly to service project debt of |
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| | $22.5 million, of which $9.7 million was related to our Stanislaus client’s decision to repay project debt ahead of schedule in 2008, partially offset by contractual escalations. |
| | |
| • | Revenues from Tip Fee arrangements for existing business increased primarily due to the new contracts at our Indianapolis and Kent facilities, offset by lower waste prices and increased levels of waste disposal internalization. |
| • | Recycled metal revenues were $29.2 million which decreased compared to the same prior year period due to lower pricing, partially offset by increased recovered metal volume. During the second and third quarters of 2008, we experienced historically high prices for recycled metal which declined significantly during the fourth quarter of 2008. The impact these changes had on revenue is reflected in the table below (in millions): |
| | | | | | | | | | | | |
| | For the
| |
| | Quarters Ended | |
Total Recycled Metal Revenues | | 2009 | | | 2008 | | | 2007 | |
|
March 31, | | $ | 5.2 | | | $ | 11.4 | | | $ | 7.0 | |
June 30, | | | 5.8 | | | | 19.0 | | | | 7.5 | |
September 30, | | | 9.1 | | | | 17.3 | | | | 7.9 | |
December 31, | | | 9.1 | | | | 5.9 | | | | 9.1 | |
| | | | | | | | | | | | |
Total for the Year Ended December 31, | | $ | 29.2 | | | $ | 53.6 | | | $ | 31.5 | |
| | | | | | | | | | | | |
| | |
| • | Electricity and steam sales for existing business decreased by $4.0 million due to lower energy pricing, lower production and the contract change at the Detroit facility, offset by increased revenues of $20.4 million related to contract changes at our Indianapolis and Kent facilities. |
| • | Other operating revenues for existing business decreased primarily due to the timing of construction activity. |
Operating Expenses
Variances in plant operating expenses for the Americas segment are as follows (in millions):
| | | | | | | | | | | | |
| | Americas Segment
| |
| | Plant Operating Expense Variances | |
| | Existing
| | | New
| | | | |
| | Business | | | Business(A) | | | Total | |
|
Total plant operating expenses | | $ | (17.7 | ) | | $ | 66.5 | | | $ | 48.8 | |
| | | | | | | | | | | | |
| | |
| (A) | The results of acquisitions are included in the new business variance through four quarters after acquisition or commencement of operation. |
Existing business plant operating expenses decreased by $17.7 million primarily due to the new contract at the Detroit facility, the impact of lower energy related costs, greater internalization of waste disposal, and reduced maintenance expense primarily due to less unscheduled downtime, partially offset by cost escalations and higher costs resulting from the new contracts at our Indianapolis and Kent facilities. The decrease in existing business plant operating expense was partially offset by $5.2 million of business interruption insurance recoveries at our SEMASS energy-from-waste facility which was recorded in the second quarter of 2008.
Depreciation and amortization expense increased by $4.3 million primarily due to new business.
General and administrative expenses increased by $6.5 million due to the recognition of approximately $6.8 million in acquisition-related costs, primarily related to the Veolia EfW Acquisition.
Insurance recoveries, net of write-down of assets of $8.3 million were recorded in 2008 for recoveries related to the repair and reconstructions costs resulting from the SEMASS energy-from-waste facility fire in 2007. For additional information, see theAmericas Segment Results of Operations — Comparison of Results for the Year Ended December 31, 2008 vs. Results for the Year Ended December 31, 2007below.
Other operating expenses decreased by $29.6 million primarily due to timing of construction activity and lower losses on retirement of assets. SeeItem 8. Financial Statements And Supplementary Data — Note 15. Supplementary Financial Informationfor additional information.
50
International Segment Results of Operations — Comparison of Results for the Year Ended December 31, 2009 vs. Results for the Year Ended December 31, 2008
The international segment results of operations are presented in the table below (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended
| | | Increase
| |
| | December 31, | | | (Decrease) | |
| | 2009 | | | 2008 | | | 2009 vs 2008 | |
|
Waste and service revenues | | $ | 4,240 | | | $ | 3,990 | | | $ | 250 | |
Electricity and steam sales | | | 180,533 | | | | 275,976 | | | | (95,443 | ) |
| | | | | | | | | | | | |
Total operating revenues | | | 184,773 | | | | 279,966 | | | | (95,193 | ) |
| | | | | | | | | | | | |
Plant operating expenses | | | 143,528 | | | | 245,826 | | | | (102,298 | ) |
Depreciation and amortization expense | | | 7,834 | | | | 8,751 | | | | (917 | ) |
Net interest expense on project debt | | | 3,855 | | | | 5,918 | | | | (2,063 | ) |
General and administrative expenses | | | 24,325 | | | | 18,684 | | | | 5,641 | |
Other operating income | | | (74 | ) | | | (2,274 | ) | | | (2,200 | ) |
| | | | | | | | | | | | |
Total operating expenses | | | 179,468 | | | | 276,905 | | | | (97,437 | ) |
| | | | | | | | | | | | |
Operating income | | $ | 5,305 | | | $ | 3,061 | | | | 2,244 | |
| | | | | | | | | | | | |
The decreases in revenues and plant operating expenses resulted primarily from lower fuel costs at our Indian facilities, which are a pass through at both facilities, and decreased demand from the electricity offtaker and resulting lower electricity generation.
General and administrative expenses increased by $5.6 million primarily due to additional business development spending, and normal wage and benefit escalations.
Other operating income decreased by $2.2 million primarily due to insurance recoveries received in 2008, offset by unfavorable foreign exchange impacts in 2008.
In addition to the items discussed above, total operating income increased by approximately $2.2 million due to the effects of foreign currency translation adjustments of $3.1 million.
RESULTS OF OPERATIONS — Year Ended December 31, 2008 vs. Year Ended December 31, 2007
Our consolidated results of operations are presented in the table below (in thousands, except per share amounts):
| | | | | | | | | | | | |
| | For the Years Ended
| | | Increase
| |
| | December 31, | | | (Decrease) | |
| | 2008 | | | 2007 | | | 2008 vs 2007 | |
|
CONSOLIDATED RESULTS OF OPERATIONS: | | | | | | | | | | | | |
Total operating revenues | | $ | 1,664,253 | | | $ | 1,433,087 | | | $ | 231,166 | |
Total operating expenses | | | 1,408,288 | | | | 1,196,477 | | | | 211,811 | |
| | | | | | | | | | | | |
Operating income | | | 255,965 | | | | 236,610 | | | | 19,355 | |
| | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | |
Investment income | | | 5,717 | | | | 10,578 | | | | (4,861 | ) |
Interest expense | | | (46,804 | ) | | | (67,104 | ) | | | (20,300 | ) |
Non-cash convertible debt related expense | | | (17,979 | ) | | | (15,377 | ) | | | 2,602 | |
Loss on extinguishment of debt | | | — | | | | (32,071 | ) | | | (32,071 | ) |
| | | | | | | | | | | | |
Total other expenses | | | (59,066 | ) | | | (103,974 | ) | | | (44,908 | ) |
| | | | | | | | | | | | |
Income before income tax expense and equity in net income from unconsolidated investments | | | 196,899 | | | | 132,636 | | | | 64,263 | |
Income tax expense | | | (84,561 | ) | | | (24,483 | ) | | | 60,078 | |
Equity in net income from unconsolidated investments | | | 23,583 | | | | 22,196 | | | | 1,387 | |
| | | | | | | | | | | | |
NET INCOME | | | 135,921 | | | | 130,349 | | | | 5,572 | |
| | | | | | | | | | | | |
Less: Net income attributable to noncontrolling interests in subsidiaries | | | (6,961 | ) | | | (8,656 | ) | | | (1,695 | ) |
| | | | | | | | | | | | |
NET INCOME ATTRIBUTABLE TO COVANTA HOLDING CORPORATION | | $ | 128,960 | | | $ | 121,693 | | | | 7,267 | |
| | | | | | | | | | | | |
Weighted Average Common Shares Outstanding: | | | | | | | | | | | | |
Basic | | | 153,345 | | | | 152,653 | | | | 692 | |
| | | | | | | | | | | | |
Diluted | | | 154,732 | | | | 153,997 | | | | 735 | |
| | | | | | | | | | | | |
Earnings Per Share: | | | | | | | | | | | | |
Basic | | $ | 0.84 | | | $ | 0.80 | | | $ | 0.04 | |
| | | | | | | | | | | | |
Diluted | | $ | 0.83 | | | $ | 0.79 | | | $ | 0.04 | |
| | | | | | | | | | | | |
51
The following general discussions should be read in conjunction with the above table, the consolidated financial statements and the Notes thereto and other financial information appearing and referred to elsewhere in this report. Additional detail relating to changes in operating revenues and operating expenses, and the quantification of specific factors affecting or causing such changes, is provided in the Americas and International segment discussions below.
Consolidated Results of Operations — Comparison of Results for the Year Ended December 31, 2008 vs. Results for the Year Ended December 31, 2007
Operating revenues increased by $231.2 million primarily due to the following:
| | |
| • | increased waste and energy revenues at our existing energy-from-waste facilities, and |
| • | additional revenues from new businesses acquired in the DomesticAmericas segment, and |
| • | increased demand from the electricity offtaker and resulting higher electricity generation at our Indian facilities in the International segment. |
Operating expenses increased by $211.8 million primarily due to the following:
| | |
| • | increased plant operating expenses at our existing energy-from-waste facilities resulting from increased plant maintenance and cost escalations in the DomesticAmericas segment, and |
| • | increased plant operating expenses resulting from additional operating and maintenance costs from new businesses acquired in the DomesticAmericas segment, and |
| • | higher fuel costs, resulting from increased demand from the electricity offtaker and resulting higher electricity generation, at our Indian facilities in the International segment, and |
| • | higher general and administrative expenses primarily due to increased efforts to grow the business and normal wage and benefit escalations. |
49
Investment income decreased by $4.9 million primarily due to lower interest rates on invested funds. Interest expense decreased by $20.3 million primarily due to lower floating interest rates on the Term Loan Facility (as defined in theLiquidity and Capital Resourcessection below) and lower debt balances and interest rates resulting from the 2007 recapitalization. As a result of the recapitalization in the first quarter of 2007, we recognized a loss on extinguishment of debt charge of approximately $32.1 million, pre-tax. See Note 6. Long-Term Debt of the Notes to the ConsolidatedItem 8. Financial Statements (“Notes”) And Supplementary Data — Note 11. Long-Term Debtfor additional information.
Income tax expense increased by $61.2$60.1 million primarily due to increased pre-tax income resulting from increased waste and service revenues at our energy-from-waste facilities and additional revenues from new businesses acquired, taxes associated with the wind down of the grantor trusts and additional reserves for uncertain tax positions. SeeItem 8. Financial Statements And Supplementary Data — Note 9.16. Income Taxes of the Notes for additional information.
Equity in net income from unconsolidated investments increased by $1.4 million primarily due to increased earnings from Quezon Power, Inc. (“Quezon”), our 26% investment in the Philippines, comprised primarily of $4.3 million resulting from the strengthening of the U.S. Dollar against the Philippine Peso, partially offset by lower dividend income from the Trezzo facility and foreign exchange losses at our China facilities. SeeItem 8. Financial Statements And Supplementary Data — Note 8. Equity Method Investments of the Notes for additional information.
Domestic BusinessAmericas Segment Results of Operations — Comparison of Results for the Year Ended December 31, 2008 vs. Results for the Year Ended December 31, 2007
The domestic businessAmericas segment results of operations are presented in the table below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, | | Increase (Decrease) | | | For the Years Ended December 31, | | Increase (Decrease) | |
| | 2008 | | 2007 | | 2008 vs 2007 | | | 2008 | | 2007 | | 2008 vs 2007 | |
|
Waste and service revenues | | $ | 930,537 | | | $ | 860,252 | | | $ | 70,285 | | | $ | 930,537 | | | $ | 860,252 | | | $ | 70,285 | |
Electricity and steam sales | | | 384,640 | | | | 325,804 | | | | 58,836 | | | | 384,640 | | | | 325,804 | | | | 58,836 | |
Other operating revenues | | | 56,254 | | | | 59,561 | | | | (3,307 | ) | | | 56,254 | | | | 59,561 | | | | (3,307 | ) |
| | | | | | | | | | |
Total operating revenues | | | 1,371,431 | | | | 1,245,617 | | | | 125,814 | | | | 1,371,431 | | | | 1,245,617 | | | | 125,814 | |
| | | | | | | | | | |
Plant operating expenses | | | 753,848 | | | | 664,641 | | | | 89,207 | | | | 753,848 | | | | 664,641 | | | | 89,207 | |
Depreciation and amortization expense | | | 190,659 | | | | 187,875 | | | | 2,784 | | | | 190,659 | | | | 187,875 | | | | 2,784 | |
Net interest expense on project debt | | | 47,816 | | | | 48,198 | | | | (382 | ) | | | 47,816 | | | | 48,198 | | | | (382 | ) |
General and administrative expenses | | | 76,090 | | | | 71,022 | | | | 5,068 | | | | 76,090 | | | | 71,022 | | | | 5,068 | |
Insurance recoveries, net of write-down of assets | | | (8,325 | ) | | | — | | | | (8,325 | ) | | | (8,325 | ) | | | — | | | | (8,325 | ) |
Other operating expense | | | 56,336 | | | | 53,789 | | | | 2,547 | | |
Other operating expenses | | | | 56,336 | | | | 53,789 | | | | 2,547 | |
| | | | | | | | | | |
Total operating expenses | | | 1,116,424 | | | | 1,025,525 | | | | 90,899 | | | | 1,116,424 | | | | 1,025,525 | | | | 90,899 | |
| | | | | | | | | | |
Operating income | | $ | 255,007 | | | $ | 220,092 | | | | 34,915 | | | $ | 255,007 | | | $ | 220,092 | | | | 34,915 | |
| | | | | | | | | | |
52
Operating Revenues
Variances inOperating revenues for the domesticAmericas segment areincreased by $125.8 million for the twelve month comparative period as followsreflected in the comparison of existing business and new business in the table below (in millions): and the discussion of key variance drivers which follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Domestic Segment
| | | Americas Segment
| |
| | Operating Revenue Variances | | | Operating Revenue Variances | |
| | Existing
| | New
| | | | | Existing
| | New
| | | |
| | Business | | Business (A) | | Total | | | Business | | Business(A) | | Total | |
|
Waste and service revenues | | | | | | | | | | | | | | | | | | | | | | | | |
Service fee | | $ | 13.3 | | | $ | 0.6 | | | $ | 13.9 | | | $ | 13.3 | | | $ | 0.6 | | | $ | 13.9 | |
Tip fee | | | 3.9 | | | | 30.4 | | | | 34.3 | | | | 3.9 | | | | 30.4 | | | | 34.3 | |
Recycled metal | | | 21.1 | | | | 1.0 | | | | 22.1 | | | | 21.1 | | | | 1.0 | | | | 22.1 | |
| | | | | | | | | | | | | | |
Total waste and service revenues | | | 38.3 | | | | 32.0 | | | | 70.3 | | | | 38.3 | | | | 32.0 | | | | 70.3 | |
Electricity and steam sales | | | 36.7 | | | | 22.1 | | | | 58.8 | | | | 36.7 | | | | 22.1 | | | | 58.8 | |
Other operating revenues | | | (3.3 | ) | | | — | | | | (3.3 | ) | | | (3.3 | ) | | | — | | | | (3.3 | ) |
| | | | | | | | | | | | | | |
Total operating revenues | | $ | 71.7 | | | $ | 54.1 | | | $ | 125.8 | | | $ | 71.7 | | | $ | 54.1 | | | $ | 125.8 | |
| | | | | | | | | | | | | | |
50
| | |
| (A) | This column represents theThe results of operations foracquisitions are included in the year ended December 31, 2008 for businesses acquirednew business variance through four quarters after December 31, 2007, plus the resultsacquisition or commencement of operations for the nine months ended September 30, 2008 for businesses acquired during the quarter ended September 30, 2007, plus results of operations for the six months ended June 30, 2008 for businesses acquired during the quarter ended June 30, 2007, plus results of operations for the three months ended March 31, 2008 for businesses acquired during the quarter ended March 31, 2007.operation. |
| | |
| • | Revenues from Service Fee arrangements for existing business increased primarily due to contractual escalations, partially offset by lower revenues earned explicitly to service project debt of $1.4 million. |
| • | Revenues from Tip Fee arrangements for existing business increased due to increased waste volume handled in part due to the impact of a fire in 2007 at our SEMASS energy-from-waste facility, partially offset by slightly lower pricing. |
| • | Recycled metal revenues for existing business increased primarily due to higher pricing on average for the year. In addition, recovered metal volume increased due to the installation of new metal recovery systems, as well as due to enhancements made to existing systems. |
| • | Electricity and steam sales for existing business increased primarily due to higher energy rates, and increased production primarily resulting from capital improvements to increase productivity and improve environmental performance at the biomass facilities. |
During the second and third quarters of 2008, we experienced historically high prices for recycled metal which has declined significantly during the fourth quarter of 2008 as2008. The impact these changes had on revenue is reflected in the table below (in millions):
| | | | | | | | |
| | For the
| |
| | Quarters Ended | |
Total Recycled Metal Revenues | | 2008 | | | 2007 | |
|
March 31, | | $ | 11.4 | | | $ | 7.0 | |
June 30, | | | 19.0 | | | | 7.5 | |
September 30, | | | 17.3 | | | | 7.9 | |
December 31, | | | 5.9 | | | | 9.1 | |
| | | | | | | | |
Total for the Year Ended December 31, | | $ | 53.6 | | | $ | 31.5 | |
| | | | | | | | |
| | |
| • | Other operating revenues for existing business decreased primarily due to the timing of construction activity. |
Other operating revenues for existing business decreased primarily due to the timing of construction activity.
Operating Expenses
Variances in plant operating expenses for the domesticAmericas segment are as follows (in millions):
| | | | | | | | | | | | |
| | Domestic Segment
| |
| | Operating Expense Variances | |
| | Existing
| | | New
| | | | |
| | Business | | | Business (A) | | | Total | |
|
Total plant operating expenses | | $ | 36.8 | | | $ | 52.4 | | | $ | 89.2 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Americas Segment
| |
| | Plant Operating Expense Variances | |
| | Existing
| | | New
| | | | |
| | Business | | | Business(A) | | | Total | |
|
Total plant operating expenses | | $ | 36.8 | | | $ | 52.4 | | | $ | 89.2 | |
| | | | | | | | | | | | |
| | |
| (A) | This column represents theThe results of operations foracquisitions are included in the year ended December 31, 2008 for businesses acquirednew business variance through four quarters after December 31, 2007, plus the resultsacquisition or commencement of operations for the nine months ended September 30, 2008 for businesses acquired during the quarter ended September 30, 2007, plus results of operations for the six months ended June 30, 2008 for businesses acquired during the quarter ended June 30, 2007, plus results of operations for the three months ended March 31, 2008 for businesses acquired during the quarter ended March 31, 2007.operation. |
Existing business plant operating expenses increased by $36.8 million primarily due to cost escalations, including the impact of higher energy related costs. In addition, the cost for fuel at our biomass facilities increased due to higher
53
production. Cost increases were partially offset by $5.2 million of business interruption insurance recoveries at our SEMASS facility as discussed below.
Depreciation and amortization expense increased by $2.8 million primarily due to capital expenditures and new business.
General and administrative expenses increased by $5.1 million primarily due to increased efforts to grow the business and normal wage and benefit escalations.
51
On March 31, 2007, our SEMASS energy-from-waste facility located in Rochester, Massachusetts experienced a fire in the front-end receiving portion of the facility. Damage was extensive to this portion of the facility and operations at the facility were suspended completely for approximately 20 days. As a result of this loss, we recorded an asset impairment of $17.3 million, pre-tax, which represented the net book value of the assets destroyed.
The cost of repair or replacement, and business interruption losses, are insured under the terms of applicable insurance policies, subject to deductibles. Insurance recoveries were recorded as insurance recoveries, net of write-down of assets where such recoveries relate to repair and reconstruction costs, or as a reduction to plant operating expenses where such recoveries relate to other costs or business interruption losses. We recorded insurance recoveries in our consolidated statements of income and received cash proceeds in settlement of these claims as follows (in millions):
| | | | | | | | | | | | | | | | |
| | Insurance Recoveries Recorded | | | Cash Proceeds Received | |
| | For the Years Ended December 31, | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | |
|
Repair and reconstruction costs (Insurance recoveries, net of write-down of assets) | | $ | 8.3 | | | $ | 17.3 | | | $ | 16.2 | | | $ | 9.4 | |
Clean-up costs (reduction to Plant operating expenses) | | $ | — | | | $ | 2.7 | | | $ | — | | | $ | 2.7 | |
Business interruption losses (reduction to Plant operating expenses) | | $ | 5.2 | | | $ | 2.0 | | | $ | 7.2 | | | $ | — | |
| | | | | | | | | | | | | | | | |
| | Insurance Recoveries Recorded | | | Cash Proceeds Received | |
| | For the Years Ended December 31, | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | |
|
Repair and reconstruction costs (Insurance recoveries, net of write-down of assets) | | $ | 8.3 | | | $ | 17.3 | | | $ | 16.2 | | | $ | 9.4 | |
Clean-up costs (reduction to plant operating expenses) | | $ | — | | | $ | 2.7 | | | $ | — | | | $ | 2.7 | |
Business interruption losses (reduction to plant operating expenses) | | $ | 5.2 | | | $ | 2.0 | | | $ | 7.2 | | | $ | — | |
Other operating expenseexpenses increased by $2.5 million primarily due to losses on the retirement of fixed assets offset by reduced construction activity. SeeItem 8. Financial Statements And Supplementary Data — Note 12.15. Supplementary Financial Information of the Notes for additional information.
International BusinessSegment Results of Operations — Comparison of Results for the Year Ended December 31, 2008 vs. Results for the Year Ended December 31, 2007
The international businesssegment results of operations are presented in the table below (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended
| | | Increase
| |
| | December 31, | | | (Decrease) | |
| | 2008 | | | 2007 | | | 2008 vs 2007 | |
|
Waste and service revenues | | $ | 3,990 | | | $ | 4,144 | | | $ | (154 | ) |
Electricity and steam sales | | | 275,976 | | | | 173,073 | | | | 102,903 | |
| | | | | | | | | | | | |
Total operating revenues | | | 279,966 | | | | 177,217 | | | | 102,749 | |
| | | | | | | | | | | | |
Plant operating expenses | | | 245,826 | | | | 136,919 | | | | 108,907 | |
Depreciation and amortization expense | | | 8,751 | | | | 8,998 | | | | (247 | ) |
Net interest expense on project debt | | | 5,918 | | | | 6,381 | | | | (463 | ) |
General and administrative expenses | | | 18,684 | | | | 8,584 | | | | 10,100 | |
Other operating income | | | (2,274 | ) | | | (3,848 | ) | | | (1,574 | ) |
| | | | | | | | | | | | |
Total operating expenses | | | 276,905 | | | | 157,034 | | | | 119,871 | |
| | | | | | | | | | | | |
Operating income | | $ | 3,061 | | | $ | 20,183 | | | | (17,122 | ) |
| | | | | | | | | | | | |
The increases in revenues and plant operating expenses under energy contracts at both Indian facilities resulted primarily from increased demand from the electricity offtaker and resulting higher electricity generation. Higher fuel costs under these energy contracts are typically passed through to the electricity offtaker in the electricity tariff.
General and administrative expenses increased by $10.1 million primarily due to additional business development spending, increased litigation expense associated with an insurance claim associated with a coal facility in China which was sold in 2006, and normal wage and benefit escalations.
Other operating income decreased by $1.6 million primarily due the absence of the gain on sale of the Linan coal facility in 2007 and increased foreign currency exchange losses, partially offset by insurance recoveries associated with a coal facility in China which was sold in 2006.
52
RESULTS OF OPERATIONS — Year Ended December 31, 2007 vs. Year Ended December 31, 2006
Our consolidated results of operations are presented in the table below (in thousands, except per share amounts):
| | | | | | | | | | | | |
| | For the Years Ended
| | | Increase
| |
| | December 31, | | | (Decrease) | |
| | 2007 | | | 2006 | | | 2007 vs 2006 | |
|
CONSOLIDATED RESULTS OF OPERATIONS: | | | | | | | | | | | | |
Total operating revenues | | $ | 1,433,087 | | | $ | 1,268,536 | | | $ | 164,551 | |
Total operating expenses | | | 1,196,477 | | | | 1,041,776 | | | | 154,701 | |
| | | | | | | | | | | | |
Operating income | | | 236,610 | | | | 226,760 | | | | 9,850 | |
| | | | | | | | | | | | |
OTHER INCOME (EXPENSE): | | | | | | | | | | | | |
Investment income | | | 10,578 | | | | 11,770 | | | | (1,192 | ) |
Interest expense | | | (67,104 | ) | | | (109,507 | ) | | | (42,403 | ) |
Loss on extinguishment of debt | | | (32,071 | ) | | | (6,795 | ) | | | 25,276 | |
| | | | | | | | | | | | |
Total other expenses | | | (88,597 | ) | | | (104,532 | ) | | | (15,935 | ) |
| | | | | | | | | | | | |
Income before income tax expense, minority interests and equity in net income from unconsolidated investments | | | 148,013 | | | | 122,228 | | | | 25,785 | |
Income tax expense | | | (31,040 | ) | | | (38,465 | ) | | | (7,425 | ) |
Minority interests | | | (8,656 | ) | | | (6,610 | ) | | | 2,046 | |
Equity in net income from unconsolidated investments | | | 22,196 | | | | 28,636 | | | | (6,440 | ) |
| | | | | | | | | | | | |
NET INCOME | | $ | 130,513 | | | $ | 105,789 | | | | 24,724 | |
| | | | | | | | | | | | |
Weighted Average Common Shares Outstanding: | | | | | | | | | | | | |
Basic | | | 152,653 | | | | 145,663 | | | | 6,990 | |
| | | | | | | | | | | | |
Diluted | | | 153,997 | | | | 147,030 | | | | 6,967 | |
| | | | | | | | | | | | |
EARNINGS PER SHARE: | | | | | | | | | | | | |
Basic | | $ | 0.85 | | | $ | 0.73 | | | $ | 0.12 | |
| | | | | | | | | | | | |
Diluted | | $ | 0.85 | | | $ | 0.72 | | | $ | 0.13 | |
| | | | | | | | | | | | |
The following general discussions should be read in conjunction with the above table, the consolidated financial statements and the Notes thereto and other financial information appearing and referred to elsewhere in this report. Additional detail relating to changes in operating revenues and operating expenses, and the quantification of specific factors affecting or causing such changes, is provided in the Domestic and International segment discussions below.
Consolidated Results of Operations — Comparison of Results for the Year Ended December 31, 2007 vs. Results for the Year Ended December 31, 2006
Operating revenues increased by $164.6 million primarily due to the following:
| | |
| • | contribution from new businesses acquired, |
| • | increased construction revenues relating to expansion of our Hillsborough County facility, |
| • | higher waste and service revenues at our existing energy-from-waste facilities, and |
| • | increased demand from the electricity offtaker at our Indian facilities and resulting higher electricity generation. |
Operating expenses increased by $154.7 million primarily due to the following:
| | |
| • | operating costs of new businesses acquired, |
| • | increased construction expenses relating to the expansion of our Hillsborough County facility, |
| • | increased plant operating expenses due to normal escalations in costs, such as wages, materials, and plant maintenance, |
| • | expenses incurred as a result of a fire at our SEMASS energy-from-waste facility on March 31, 2007, and |
| • | increased plant operating expenses at our Indian facilities primarily due to increased demand from the electricity offtaker and resulting higher generation. |
53
Investment income decreased by $1.2 million primarily due to lower invested cash balances and lower interest rates on invested funds. Interest expense decreased by $42.4 million primarily due to lower loan balances and lower interest rates resulting from the 2007 recapitalization. As a result of the recapitalization in the first quarter of 2007, we recognized a loss on extinguishment of debt charge of approximately $32.1 million, pre-tax, which is comprised of the write-down of deferred financing costs, tender premiums paid for the intermediate subsidiary debt, and a call premium paid in connection with previously existing financing arrangements. These amounts were partially offset by the write-down of unamortized premiums relating to the intermediate subsidiary debt and a gain associated with the settlement of our interest rate swap agreements in February 2007. In May 2006, as a result of amendments to our financing arrangements that existed at that time, we recognized a loss on extinguishment of debt of $6.8 million for the year ended December 31, 2006. See Note 6. Long-Term Debt of the Notes for additional information.
Equity in net income from unconsolidated investments decreased by $6.4 million primarily due to the effects of the following factors relating to Quezon in the Philippines:
| | |
| • | Quezon recorded a cumulative deferred income tax benefit in 2006 of $31.7 million, of which $7.0 million relates to our equity share in Quezon. The realization of this deferred tax benefit is subject to fluctuations in the value of the Philippine peso versus the U.S. dollar. During the year ended December 31, 2007, we reduced the cumulative deferred income tax benefit by approximately $4.3 million, as a result of the strengthening of the Philippine peso versus the U.S. dollar; |
| • | A decrease in equity in net income from unconsolidated investments for the year ended December 31, 2007 of approximately $4.1 million due to increased tax expense for Quezon related to the conclusion of a six-year income tax holiday in May 2006; |
| • | Quezon recorded a gain in 2007 resulting from a settlement with Manila Electric Company (“Meralco”), the largest electric distribution company in the Philippines, related to various issues which had been pending for several years, including certain amendments to the contract to modify certain commercial terms and to resolve issues relating to the project’s performance during its first year of operation. The settlement primarily includes payment by Meralco to Quezon of approximately $8.5 million of prior uncollected receivables, of which $1.9 million relates to our equity share in Quezon. |
See Note 8. Equity Method Investments of the Notes for additional information.
Income tax expense decreased by $7.4 million primarily due to a reduction of the valuation allowance by $35.0 million, as discussed in Note 9. Income Taxes of the Notes. This was partially offset by expiring NOL tax benefits of $6.0 million and taxes at the statutory rate on increased pre-tax income resulting primarily from lower interest expense. During 2006, we recorded a one-time tax benefit of $10 million associated with the adoption of the permanent reinvestment exception under Accounting Principles Board (“APB”) Opinion No. 23, “Accounting for Income Taxes — Special Areas” (“APB 23”) as discussed in Note 9. Income Taxes of the Notes.
54
Domestic Business Results of Operations2009 Supplementary Financial Information — Adjusted EBITDA (Non-GAAP Discussion) — Comparison of Results for the Year Ended December 31, 2007 vs. Results for the Year Ended December 31, 2006
The domestic businessTo supplement our results prepared in accordance with United States generally accepted accounting principles (“GAAP”), we use the measure of operations are presentedAdjusted EBITDA, which is a non-GAAP measure as defined by the Securities and Exchange Commission. This non-GAAP financial measure is described below, and used in the tabletables below, 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 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 business. The calculation of Adjusted EBITDA is based on the definition in Covanta Energy’s credit facilities as described below underLiquidity 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 ours, measured on a consolidated basis. Under these 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 which 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, 2009. Failure to comply with such financial covenants could result in a default under these credit facilities, which default would have a material adverse affect 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 year ended December 31, 2009 and 2008, reconciled for each such period to net income and cash flow provided by operating activities, which are believed to be the most directly comparable measures under GAAP.
The following is a reconciliation of net income to Adjusted EBITDA (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended December 31, | | | Increase (Decrease) | |
| | 2007 | | | 2006 | | | 2007 vs 2006 | |
|
Waste and service revenues | | $ | 860,252 | | | $ | 813,260 | | | $ | 46,992 | |
Electricity and steam sales | | | 325,804 | | | | 301,339 | | | | 24,465 | |
Other operating revenues | | | 59,561 | | | | 3,328 | | | | 56,233 | |
| | | | | | | | | | | | |
Total operating revenues | | | 1,245,617 | | | | 1,117,927 | | | | 127,690 | |
| | | | | | | | | | | | |
Plant operating expenses | | | 664,641 | | | | 612,202 | | | | 52,439 | |
Depreciation and amortization expense | | | 187,875 | | | | 184,921 | | | | 2,954 | |
Net interest expense on project debt | | | 48,198 | | | | 53,270 | | | | (5,072 | ) |
General and administrative expenses | | | 71,022 | | | | 66,439 | | | | 4,583 | |
Other operating expense (income) | | | 53,789 | | | | (5,388 | ) | | | 59,177 | |
| | | | | | | | | | | | |
Total operating expenses | | | 1,025,525 | | | | 911,444 | | | | 114,081 | |
| | | | | | | | | | | | |
Operating income | | $ | 220,092 | | | $ | 206,483 | | | | 13,609 | |
| | | | | | | | | | | | |
| | | | | | | | |
| | For the Years Ended
| |
| | December 31, | |
| | 2009 | | | 2008 | |
|
Net Income Attributable to Covanta Holding Corporation | | $ | 101,645 | | | $ | 128,960 | |
Depreciation and amortization expense | | | 202,872 | | | | 199,488 | |
Debt service: | | | | | | | | |
Net interest expense on project debt | | | 48,391 | | | | 53,734 | |
Interest expense | | | 38,116 | | | | 46,804 | |
Non-cash convertible debt related expense | | | 24,290 | | | | 17,979 | |
Investment income | | | (4,007 | ) | | | (5,717 | ) |
| | | | | | | | |
Subtotal debt service | | | 106,790 | | | | 112,800 | |
Income tax expense | | | 50,044 | | | | 84,561 | |
Acquisition-related costs(A) | | | 6,289 | | | | — | |
Other adjustments: | | | | | | | | |
Change in unbilled service receivables | | | 18,620 | | | | 14,020 | |
Non-cash compensation expense | | | 14,220 | | | | 14,750 | |
Other(B) | | | 5,835 | | | | 12,249 | |
| | | | | | | | |
Subtotal other adjustments | | | 38,675 | | | | 41,019 | |
Net income attributable to noncontrolling interests in subsidiaries | | | 8,783 | | | | 6,961 | |
| | | | | | | | |
Total adjustments | | | 413,453 | | | | 444,829 | |
| | | | | | | | |
Adjusted EBITDA(C) | | $ | 515,098 | | | $ | 573,789 | |
| | | | | | | | |
Operating Revenues
Variances in revenues for the domestic segment are as follows (in millions):
| | | | | | | | | | | | |
| | Domestic Segment
| | | | |
| | Operating Revenue Variances | | | | |
| | Existing
| | | New
| | | | |
| | Business | | | Business (A) | | | Total | |
|
Waste and service revenues | | | | | | | | | | | | |
Service fee | | $ | 5.2 | | | $ | 14.9 | | | $ | 20.1 | |
Tip fee | | | 4.7 | | | | 13.9 | | | | 18.6 | |
Recycled metal | | | 8.2 | | | | 0.1 | | | | 8.3 | |
| | | | | | | | | | | | |
Total waste and service revenues | | | 18.1 | | | | 28.9 | | | | 47.0 | |
Electricity and steam sales | | | 9.7 | | | | 14.8 | | | | 24.5 | |
Other operating revenues | | | 56.2 | | | | — | | | | 56.2 | |
| | | | | | | | | | | | |
Total operating revenues | | $ | 84.0 | | | $ | 43.7 | | | $ | 127.7 | |
| | | | | | | | | | | | |
| |
(A) | This column represents the results of operations for the year ended December 31, 2007 for businesses acquired after December 31, 2006. |
| | |
| • | Revenues from Service Fee arrangements for existing business increased primarily due to contractual escalations, partially offset by lower revenues earned explicitly to service debt of $4.8 million. |
| • | Revenues from Tip Fee arrangements for existing business increased primarily due to pricing escalations, partially offset by a decrease in waste volume and reduced revenues of $4.1 million at our SEMASS facility following its fire on March 31, 2007. |
| • | Recycled metal revenues for existing business increased primarily due to higher pricing for ferrous and non-ferrous metal. |
| • | Electricity and steam sales for existing business increased primarily due to higher energy rates. This increase was partially offset by energy rate settlements of $3.7 million related to prior years, and a decrease in revenues of $1.9 million due to lower waste volume resulting from the temporary suspension of operations at our SEMASS facility following its fire on March 31, 2007. |
| • | Other operating revenues for existing business increased primarily due to construction revenues related to the expansion for the Hillsborough County facility. |
55
Operating Expenses
Variances in plant operating expenses for the domestic segment are as follows (in millions):
| | | | | | | | | | | | |
| | Domestic Segment
| | | | |
| | Operating Expense Variances | | | | |
| | Existing
| | | New
| | | | |
| | Business | | | Business (A) | | | Total | |
|
Total plant operating expenses | | $ | 10.7 | | | $ | 41.7 | | | $ | 52.4 | |
| | | | | | | | | | | | |
| | |
(A) | | This column representsamount relates primarily to acquisition-related costs associated with the resultsVeolia EfW Acquisition in 2009. Acquisition-related costs are no longer capitalized as a cost of operationsthe business acquired. Instead, these costs are expensed as they are incurred as a result of a recent accounting pronouncement which was effective January 1, 2009. |
(B) | | These items represent amounts that are non-cash in nature. |
(C) | | Adjusted EBITDA for 2008 includes the year ended Decemberimpact of $13.5 million related to insurance recoveries for repair, reconstruction and business interruption losses related to the SEMASS energy-from-waste facility fire on March 31, 2007 for businesses acquired after December 31, 2006.2007. |
Existing business plant operating expenses increased by $10.7The decrease in Adjusted EBITDA of $58.7 million from the prior year period was primarily due to normal escalations in costs such as wages, materials and plant maintenance, and higher stock-based compensation expense of $2.0 million. In addition, costs related to the fire at the SEMASS energy-from-waste facility were $3.3$25.0 million which was net of $2.7 million and $2.0 million of insurance recoveries forclean-up costs and business interruption, respectively.
Depreciation and amortization expense increased by $3.0 million primarily due to additions of property, plant and equipment.
Net interest expense on project debt decreased by $5.1 million primarilyrevenue reduction due to lower recycled metal prices; $20.2 million in revenue reduction due to lower energy price and production; lower revenues earned explicitly to service project debt balances.
Generalof $22.5 million, of which $9.7 million was related to accelerated repayment of project debt for one of our energy-from-waste facilities in 2008; and administrative expenses increased by $4.6$13.9 million primarilylower waste disposal revenue due to increased stock-based compensation expenseprice and increased business development spending.
On March 31, 2007, our SEMASS energy-from-waste facility located in Rochester, Massachusetts experienced a fire in the front-end receiving portion of the facility. Damage was extensive to this portion of the facility and operations at the facility were suspended completely for approximately 20 days. As a result of this loss, we recorded an asset impairment of $17.3 million, pre-tax, which represented the net book value of the assets destroyed. The cost of repair or replacement, and business interruption losses, were insured under the terms of applicable insurance policies, subject to deductibles. During the year ended December 31, 2007, we recorded insurance recoveries of $17.3 million related to repair and reconstruction, $2.7 million related toclean-up costs and $2.0 million related to business interruption losses. Insurance recoveries were recorded as a reduction to the loss related to the write-down of assets where such recoveries related to repair and reconstruction costs, or as a reduction tolower deliveries; partially offset by lower operating expenses where such recoveries related to other costs or business interruption losses. See Note 12. Supplementary Financial Information of the Notes for additional information.
Other operating expense increased by $59.2 million primarily due to costs related to expansion construction at the Hillsborough County facility. See Note 12. Supplementary Financial Information of the Notes for additional information.
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International Business Results of Operations — Comparison of Results for the Year Ended December 31, 2007 vs. Results for the Year Ended December 31, 2006expenses.
The international business resultsfollowing is a reconciliation of operations are presented in the table belowcash flow provided by operating activities to Adjusted EBITDA (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended
| | | Increase
| |
| | December 31, | | | (Decrease) | |
| | 2007 | | | 2006 | | | 2007 vs 2006 | |
|
Waste and service revenues | | $ | 4,144 | | | $ | 4,373 | | | $ | (229 | ) |
Electricity and steam sales | | | 173,073 | | | | 132,495 | | | | 40,578 | |
| | | | | | | | | | | | |
Total operating revenues | | | 177,217 | | | | 136,868 | | | | 40,349 | |
| | | | | | | | | | | | |
Plant operating expenses | | | 136,919 | | | | 99,954 | | | | 36,965 | |
Depreciation and amortization expense | | | 8,998 | | | | 8,193 | | | | 805 | |
Net interest expense on project debt | | | 6,381 | | | | 6,940 | | | | (559 | ) |
General and administrative expenses | | | 8,584 | | | | 4,394 | | | | 4,190 | |
Other operating income | | | (3,848 | ) | | | (2,452 | ) | | | 1,396 | |
| | | | | | | | | | | | |
Total operating expenses | | | 157,034 | | | | 117,029 | | | | 40,005 | |
| | | | | | | | | | | | |
Operating income | | $ | 20,183 | | | $ | 19,839 | | | | 344 | |
| | | | | | | | | | | | |
| | | | | | | | |
| | For the Years Ended
| |
| | December 31, | |
| | 2009 | | | 2008 | |
|
Cash flow provided by operating activities | | $ | 397,238 | | | $ | 402,607 | |
Acquisition-related costs | | | 4,619 | | | | — | |
Debt service | | | 106,790 | | | | 112,800 | |
Amortization of debt premium and deferred financing costs | | | 3,265 | | | | 7,023 | |
Other | | | 3,186 | | | | 51,359 | |
| | | | | | | | |
Adjusted EBITDA | | $ | 515,098 | | | $ | 573,789 | |
| | | | | | | | |
The increases in revenues and plant operating expenses under energy contracts at both Indian facilities resulted primarily from increased demand from the electricity offtaker and resulting higher electricity generation. The decreases in revenues and plant operating expenses from the Yanjiang facility in China resulted from lower steam sales. Additional decreases in revenues and plant operating expenses resulted from the sale of the Huantai coal facility in China during the second quarter of 2006 and the sale of the Linan coal facility in China during the third quarter of 2007.
Depreciation and amortization expense increased by $0.8 million primarily due to the foreign currency translation effects at our facilities in India.
Net interest expense on project debt decreased by $0.6 million primarily due to the scheduled quarterly pay down of project debt at both Indian facilities.
General and administrative expenses increased by $4.2 million primarily due to normal wage and benefit escalations and additional business development spending.
Other operating income increased by $1.4 million primarily due to the $1.7 million gain related to the sale of the Linan coal facility in China during the third quarter of 2007 combined with a $1.0 million re-measurement gain on the foreign currency denominated debt at one of the Indian facilities, compared to a $1.2 million gain related to the sale of the Huantai coal facility in China during the second quarter of 2006.
LIQUIDITY AND CAPITAL RESOURCES
Generating sufficientWe generate substantial cash flow from our ongoing business, which we believe will allow us to meet our liquidity needs, invest in our business, meet our liquidity needs, pay down project debt, and pursue strategic opportunities remain important objectivesgrowth opportunities. As of management. December 31, 2009, in addition to our ongoing cash flow, we had access to several sources of liquidity, as discussed inAvailable Sources of Liquiditybelow, including our existing cash on hand of $434 million and the undrawn and available capacity of $300 million of our revolving credit facility. In addition, we had restricted cash of $278 million, of which $166 million was designated for future payment of project debt principal.
We derive our cash flows principally from our operations atfrom the projects in our domesticAmericas and international projects, where our historical levels of productionInternational segments, which allow us to satisfy project debt covenants and payments and distribute cash. We typically receive cash distributions from our domesticAmericas segment projects on either a monthly or quarterly basis, whereas a material portion of cash from our international projects is received semi-annually, during the second and fourth quarters.
During the first quarter The frequency and predictability of 2007, we completedour receipt of cash from projects differs, depending upon various factors, including whether restrictions on distributions exist in applicable project debt arrangements, whether a comprehensive recapitalization utilizingproject is domestic or international, and whether a seriesproject has been able to operate at historical levels of equity and debt financings. Under these existing credit facilities, we have substantially greater, but not unrestricted, ability to make investments in our business and to take advantage of opportunities to grow our business through investments and acquisitions, both domestically and internationally.production.
Our primary future cash requirements will be to fund capital expenditures to maintain our existing businesses, make debt service payments and grow our business through acquisitions and business development. We will also seek to enhance our cash flow from renewals or replacement of existing contracts, from new contracts to expand
57
existing facilities or operate additional facilities and by investing in new projects. SeeManagement’s Discussion and Analysis of Financial Condition — Overview — AcquisitionsGrowth and Business Developmentabove.
The frequencySources and predictabilityUses of our receipt of cash from projects differs, depending upon various factors, including whether restrictions on distributions exist in applicable project debt arrangements, whether a project is domestic or international, and whether a project has been able to operate at historical levels of production.Cash Flow
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, | | | Increase (Decrease) | |
| | 2009 | | | 2008 | | | 2007 | | | 2009 vs 2008 | | | 2008 vs 2007 | |
| | (In thousands) | | | | | | | |
|
Net cash provided by operating activities | | $ | 397,238 | | | $ | 402,607 | | | $ | 363,591 | | | $ | (5,369 | ) | | $ | 39,016 | |
Net cash used in investing activities | | | (387,240 | ) | | | (189,308 | ) | | | (179,910 | ) | | | 197,932 | | | | 9,398 | |
Net cash provided by (used in) financing activities | | | 230,950 | | | | (170,242 | ) | | | (268,335 | ) | | | 401,192 | | | | (98,093 | ) |
Effect of exchange rate changes on cash and cash equivalents | | | 342 | | | | (70 | ) | | | 618 | | | | 412 | | | | (688 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | $ | 241,290 | | | $ | 42,987 | | | $ | (84,036 | ) | | | 198,303 | | | | 127,023 | |
| | | | | | | | | | | | | | | | | | | | |
Additionally, as of
56
Year Ended December 31, 2009 vs. Year Ended December 31, 2008 we had available credit for liquidity of $300 million under the Revolving Loan Facility (as defined below) and unrestricted cash of $192.4 million.
Under our Revolving Loan Facility, we have pro rata funding commitments from a large consortium of banks, including a 6.8% pro rata commitment from Lehman Brothers Commercial Bank. Lehman Brothers Commercial Bank is a subsidiary of Lehman Brothers Holdings, Inc., which filed for bankruptcy protection in September 2008. We believe that neither the Lehman Brothers Holdings, Inc. bankruptcy, nor the ability of Lehman Brothers Commercial Bank (which is not currently part of such bankruptcy proceeding) to fund its pro rata share of any draw request we may make, will have a material effect on our liquidity or capital resources.
As of December 31, 2008, we were in compliance with the covenants under the Credit Facilities (as defined below). We believe that when combined with our other sources of liquidity, including our existing cash on hand and the Revolving Loan Facility, we will generate sufficient cash over at least the next twelve months to meet operational needs, make capital expenditures, invest in the business and service debt due.
On September 22, 2008, we announced that our Board of Directors authorized the purchase of up to $30 million of our common stock in order to respond opportunistically to volatile market conditions. The share repurchases, if any, may take place from time to time based on market conditions and other factors. The authorization is expected to continue only for so long as recent volatile market conditions persist. As of December 31, 2008, we have not repurchased shares of our common stock under this program.
2007 Recapitalization
DuringNet cash provided by operating activities for the first quarteryear ended December 31, 2009 was $397.2 million, a decrease of 2007, we completed a comprehensive recapitalization utilizing a series$5.4 million from the prior year period. The decrease was primarily due to lower results of equityoperations, including $10.9 million of lower insurance recoveries and debt financings including$4.6 million of cash acquisition costs relating to the following transactions:Veolia EfW Acquisition, offset by reduced interest expense, $10.6 million received for an income tax refund and the timing of working capital.
Net cash used in investing activities for the year ended December 31, 2009 was $387.2 million, an increase of $197.9 million from the prior year period. The increase was primarily comprised of higher cash outflows of:
| | |
| • | $192.3 million related to higher acquisition of businesses in 2009, primarily the refinancing of our previously existing credit facilities with the new credit facilities, comprised of a $300 million revolving credit facility (the “Revolving Loan Facility”), a $320 million funded letter of credit facility (the “Funded L/C Facility”) and a $650 million term loan (collectively referred to as the “Credit Facilities”);Veolia EfW Acquisition; |
| • | an underwritten public offering$23.7 million to acquire the non-controlling interests of 6.118 million sharesone of our common stock, from which we received proceeds of approximately $136.6 million, net of underwriting discounts and commissions;the subsidiaries acquired in the Veolia EfW Acquisition; |
| • | an underwritten public offering$16.2 million of approximately $373.8property insurance proceeds received in 2008; |
| • | $3.0 million aggregate principal amount of 1.00% Senior Convertible Debentures due 2027 (the “Debentures”), from which we received proceeds of approximately $364.4 million, net of underwriting discounts and commissions;related to a loan issued for the Harrisburg energy-from-waste facility; and |
| • | the repayment,net $2.9 million of outflows relating to investing activity at our insurance subsidiary, comprising of $13.5 million lower proceeds from sales of investments in fixed maturities offset by means$10.6 million lower outflows for purchase of a tender offer and redemptions, of approximately $611.9 millioninvestments in aggregate principal amount of outstanding notes previously issued by our intermediate subsidiaries.fixed maturities. |
We completed our public offerings of common stock and Debentures, including over-allotment options exercisedOffset by underwriters, on January 31, 2007 and February 6, 2007, respectively, and we closed on the Credit Facilities on February 9, 2007. We completed our tender offer for approximately $604.4 million in aggregate principal amount of outstanding notes on February 22, 2007. On April 16, 2007 and September 6, 2007, all remaining outstanding ARC Notes and the remaining outstanding MSW I Notes and MSW II Notes were redeemed, respectively. Additional information, including material terms related to our recapitalization, are described in Note 6. Long-Term Debt of the Notes.
As a result of the recapitalization, we recognized a loss on extinguishment of debt of approximately $32.1 million, pre-tax, which was comprised of the write-down of deferred financing costs, tender premiums paid for the intermediate subsidiary debt, and a call premium paid in connection with previously existing financing arrangements. These amounts were partially offset by the write-down of unamortized premiums relating to the intermediate subsidiary debt and a gain associated with the settlement of our interest rate swap agreements.
58
Credit Agreement Financial Covenants
The loan documentation under the Credit Facilities contains customary affirmative and negative covenants and financial covenants as discussed in Note 6. Long-Term Debt of the Notes. We were in compliance with all required covenants as of December 31, 2008.
The financial covenants of the Credit Facilities, which are measured on a trailing four quarter period basis, include the following:lower cash outflows of:
| | |
| • | maximum Covanta Energy leverage ratio of 4.00$14.3 million in capital expenditures primarily due to 1.00 for the four quarter period ended December 31, 2008, which measures Covanta Energy’s principal amount of consolidated debt less certain restricted funds dedicatedlower maintenance capital expenditures; |
| • | $16.7 million in purchases to repayment of project debt principal and construction costs (“Consolidated Adjusted Debt”) to its adjusted earnings before interest, taxes, depreciation and amortization, as calculated under the Credit Facilities (“Adjusted EBITDA”). The definition of Adjusted EBITDAacquire land use rights in the Credit Facilities excludes certain non-cash charges. The maximum Covanta Energy leverage ratio allowed under the Credit Facilities adjustsUnited Kingdom and United States in future periods as follows:connection with development activities in 2008; and |
| • | $9.6 million related to lower purchases of equity interests in 2009. |
Net cash provided by financing activities for the year ended December 31, 2009 was $231.0 million, an increase of $401.2 million from the prior year period principally comprised of $387.3 million related to the proceeds received from the issuance of the Notes more fully described below:
The Notes and related transactions resulted in net proceeds of $387.3 million, consisting of:
| | |
| • | 4.00 to 1.00 for eachproceeds of $460.0 million from the sale of the four quarter periods ended March 31, June 30 and September 30, 2009;Notes; |
| • | 3.75 to 1.00 for eachproceeds of $54.0 million from the four quarter periods ended December 31, 2009, March 31, June 30 and September 30, 2010;sale of Warrants; |
| • | 3.50use of cash of $112.4 million to 1.00purchase the Note Hedge; and |
| • | use of cash of $14.3 million for each four quarter period thereafter;transaction related costs. |
The remaining net increase in sources of cash of $13.9 million was primarily driven by:
| | |
| • | maximum Covanta Energy capital expenditures incurred to maintain existing operating businessesrelease of $100$33.0 million per fiscal year, subject to adjustment due to an acquisitionfrom restricted funds; offset by Covanta Energy;a |
| • | payment of $9.8 million of interest rate swap termination costs; |
| • | net increase in project debt payments of $3.6 million; and |
| • | minimum Covanta Energy interest coverage ratiopayment of 3.00$3.9 million in higher distributions to 1.00, which measures Covanta Energy’s Adjusted EBITDA to its consolidated interest expense plus certain interest expensepartners of ours, to the extent paid by Covanta Energy.noncontrolling interests in subsidiaries. |
Sources and Uses of Cash Flow
| | | | | | | | | | | | �� | | | | | | | | |
| | For the Years Ended December 31, | | | Increase (Decrease) | |
| | 2008 | | | 2007 | | | 2006 | | | 2008 vs 2007 | | | 2007 vs 2006 | |
| | (In thousands) | |
|
Net cash provided by operating activities | | $ | 402,607 | | | $ | 363,591 | | | $ | 318,989 | | | $ | 39,016 | | | $ | 44,602 | |
Net cash used in investing activities | | | (189,308 | ) | | | (179,910 | ) | | | (66,904 | ) | | | 9,398 | | | | 113,006 | |
Net cash used in financing activities | | | (170,242 | ) | | | (268,335 | ) | | | (147,420 | ) | | | (98,093 | ) | | | 120,915 | |
Effect of exchange rate changes on cash and cash equivalents | | | (70 | ) | | | 618 | | | | 221 | | | | (688 | ) | | | 397 | |
| | | | | | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | $ | 42,987 | | | $ | (84,036 | ) | | $ | 104,886 | | | | 127,023 | | | | (188,922 | ) |
| | | | | | | | | | | | | | | | | | | | |
During the first quarter of 2008, we revised our presentation of the condensed consolidated statements of cash flows to present changes in restricted funds held in trust relating to operating activities as a component of cash flow from operating activities and changes in restricted funds held in trust relating to financing activities (debt principal related) as a component of cash flow from financing activities; previously we included all changes in restricted funds held in trust as a component of cash flow from financing activities. For the years ended December 31, 2007 and 2006, we have reclassified approximately $5.5 million and $7.8 million, respectively, as a component of cash flow from operating activities in order to conform to the current period presentation on the consolidated statements of cash flows.
Year Ended December 31, 2008 vs. Year Ended December 31, 2007
Net cash provided by operating activities for the year ended December 31, 2008 was $402.6 million, an increase of $39.0 million from the prior year period. The increase was primarily comprised of:
| | |
| • | $29.8 million from a combination of improved operating performance and lower net interest expense; and |
| • | an increase in non-property insurance proceeds of $9.2 million (including $7.2 million of business interruption recoveries related to the SEMASS energy-from-waste facility). |
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Net cash used in investing activities for the year ended December 31, 2008 was $189.3 million, an increase of $9.4 million from the prior year period. The increase was primarily related to lower cash outflows for acquisitions of businesses of approximately $37.1 million, and increased property insurance proceeds of $6.8 million, offset by higher cash outflows principally comprised of:
| | |
| • | $16.7 million to acquire land use rights in the United Kingdom and United States in connection with development activities; |
| • | an increase of $18.0 million related to investments in fixed maturities at our insurance subsidiary, partially offset by an increase of $5.2 million in proceeds from the sale of investments in fixed maturities at our insurance subsidiary; |
| • | $7.3 million of equity investments, of which $17.1 million related to the Chengdu project, offset by the $10.3 million equity investment in Sanfeng during the comparative period; |
| • | an increase in capital expenditures of $2.2 million; |
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| | |
| • | $8.2 million related to a loan issued for the Harrisburg energy-from-waste facility; and |
| • | $6.1 million of cash outflows comprised primarily of business development activities. |
Net cash used in financing activities for the year ended December 31, 2008 was $170.2 million, a decrease of $98.1 million from the prior year period due primarily to the 2007 recapitalization.refinancing of long-term debt in 2007. The net proceeds from refinancing the previously existing credit facilities with the New Credit Facilities was $5.6 million, net of transaction fees. Proceeds of approximately $364.4 million and $136.6 million, each net of underwriting discounts and commissions, were received during the three months ended March 31,in 2007 related to underwritten public offerings of 1.00% Senior Convertible Debentures due 2027 (the “Debentures”) and common stock, respectively. The combination of the proceeds from the public offerings of Debentures and common stock and approximately $130.0 million in cash and restricted cash (available for use as a result of the recapitalization) were utilized for the repayment, by means of a tender offer, of approximately $611.9 million in principal amount of outstanding notes previously issued by certain intermediate subsidiaries.
Available Sources of Liquidity
Year Ended December 31, 2007 vs. Year Ended December 31, 2006Cash and Cash Equivalents
NetCash 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 market value. As of December 31, 2009, we had unrestricted cash and cash equivalents of $434 million.
Short-Term Liquidity
We have credit facilities which are comprised of a $300 million revolving credit facility (the “Revolving Loan Facility”), a $320 million funded letter of credit facility (the “Funded L/C Facility”), and a $650 million term loan (the “Term Loan Facility”) (collectively referred to as the “Credit Facilities”). As of December 31, 2009, we had available credit for liquidity as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | Total
| | | | | | Outstanding Letters
| | | | |
| | Available
| | | | | | of Credit as of
| | | Available as of
| |
| | Under Facility | | | Maturing | | | December 31, 2009 | | | December 31, 2009 | |
|
Revolving Loan Facility(1) | | $ | 300,000 | | | | 2013 | | | $ | — | | | $ | 300,000 | |
Funded L/C Facility | | $ | 320,000 | | | | 2014 | | | $ | 272,469 | | | $ | 47,531 | |
| | |
(1) | | Up to $200 million of which may be utilized for letters of credit. |
2009 Supplementary Financial Information — Free Cash Flow (Non-GAAP Discussion)
To supplement our results prepared in accordance with United States generally accepted accounting principles (“GAAP”), we use the measure of Free Cash Flow, which is a non-GAAP measure as defined by the Securities and Exchange Commission. 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 their 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 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 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 businesses, such as amounts available to make acquisitions, invest in construction of new projects or make principal payments on debt. For additional discussion related to management’s use of non-GAAP measures, seeResults of Operations — 2009 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 for the year ended December 31, 2007 was $363.6 million, an increase2009 and 2008, reconciled for each such period to cash flow provided by operating activities.
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The following is a summary of $44.6 million from the prior year. The increase was primarily due to lower interest paid of $59.1 million resulting from the 2007 recapitalizationFree Cash Flow and from lower project debt balances.its primary uses (in thousands):
| | | | | | | | |
| | For the Years Ended
| |
| | December 31, | |
| | 2009 | | | 2008 | |
|
Cash flow provided by operating activities(A) | | $ | 397,238 | | | $ | 402,607 | |
Less: Maintenance capital expenditures(B) | | | (51,937 | ) | | | (60,639 | ) |
| | | | | | | | |
Free cash flow | | $ | 345,301 | | | $ | 341,968 | |
| | | | | | | | |
| | | | | | | | |
Selected Uses of Free Cash Flow: | | | | | | | | |
Principal payments on long-term debt | | $ | (6,591 | ) | | $ | (6,877 | ) |
Principal payments on project debt, net of restricted funds used(C) | | $ | (129,183 | ) | | $ | (166,225 | ) |
Distributions to partners of noncontrolling interests in subsidiaries | | $ | (11,004 | ) | | $ | (7,061 | ) |
Non-maintenance capital expenditures(D) | | $ | (21,682 | ) | | $ | (27,281 | ) |
Acquisition of businesses, net of cash acquired | | $ | (265,644 | ) | | $ | (73,393 | ) |
Acquisition of noncontrolling interests in subsidiary | | $ | (23,700 | ) | | $ | — | |
Purchase of equity interests | | $ | (8,938 | ) | | $ | (18,503 | ) |
Other investment activities, net | | $ | (15,339 | ) | | $ | (9,492 | ) |
| | | | | | | | |
Purchases of Property, Plant and Equipment: | | | | | | | | |
Maintenance capital expenditures(B) | | $ | (51,937 | ) | | $ | (60,639 | ) |
Pre-construction development projects(E) | | | (13,233 | ) | | | (1,208 | ) |
Capital expenditures associated with technology development(F) | | | (5,008 | ) | | | (5,882 | ) |
Capital expenditures associated with certain acquisitions(G) | | | (1,353 | ) | | | (17,126 | ) |
Capital expenditures associated with SEMASS fire(H) | | | (2,088 | ) | | | (3,065 | ) |
| | | | | | | | |
Total purchases of property, plant and equipment | | $ | (73,619 | ) | | $ | (87,920 | ) |
| | | | | | | | |
| | |
(A) | | Cash flow provided by operating activities was negatively affected by $4.6 million of payments made for acquisition-related costs related to acquisitions, primarily the Veolia EfW Acquisition, for the year ended December 31, 2009. |
(B) | | Capital Expenditures primarily to maintain existing facilities. Purchase of property, plant and equipment is also referred to as Capital Expenditures. |
(C) | | Principal payments on project debt are net of restricted funds held in trust used to pay debt principal of $54.6 million and $21.6 million for the years ended December 31, 2009 and 2008, respectively. Principal payments on project debt excludes a project debt refinancing transaction related to a domestic energy-from-waste facility in 2009 (63.7 million) and excludes principal repayments on working capital borrowings relating to the operations of our Indian facilities ($9.8 million). |
(D) | | Non-maintenance capital expenditures include certain capital expenditures made at our facilities described in notes E through H below. |
(E) | | Covanta has entered into definitive agreements for the development of a 1,700 metric tpd energy-from-waste project serving the City of Dublin, Ireland and surrounding communities. Construction commenced in the fourth quarter of 2009. Covanta incurred capital expenditures related to pre-construction activities, such as site preparation costs, for this project. |
(F) | | Capital Expenditures related to internal development efforts and/or agreements with multiple partners for the development, testing or licensing of new technologies related to the transformation of waste materials into renewable fuels, methods for the generation of alternative energy, and other development activity. |
(G) | | Capital Expenditures were incurred at four facilities that we acquired in 2008 and 2007 primarily to improve the productivity or environmental performance of those facilities. |
(H) | | Capital Expenditures were incurred that related to the repair and replacement of assets at the SEMASS energy-from-waste facility that were damaged by a fire on March 31, 2007. The cost of repair or replacement was insured under the terms of the applicable insurance policy, subject to deductibles. Settlement of the property damage insurance claim occurred in December 2008. |
Credit Agreement Financial Covenants
Net cash used The loan documentation under the Credit Facilities contains customary affirmative and negative covenants and financial covenants as discussedin investing activities for the year endedItem 8. Financial Statements And Supplementary Data — Note 11. Long-Term Debt. As of December 31, 2007 was $179.9 million, an increase2009, we were in compliance with the covenants under the Credit Facilities.
The financial covenants of $113.0 million from the prior year. The increase was primarily due toCredit Facilities, which are measured on a trailing four quarter period basis, include the following:
| | |
| • | higher purchasesmaximum Covanta Energy leverage ratio of property, plant3.75 to 1.00 for the four quarter period ended December 31, 2009, which measures Covanta Energy’s principal amount of consolidated debt less certain restricted funds dedicated to |
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| | |
| | repayment of project debt principal and equipmentconstruction costs (“Consolidated Adjusted Debt”) to its adjusted earnings before interest, taxes, depreciation and amortization, as calculated under the Credit Facilities (“Adjusted EBITDA”). The definition of $31.4 million, principally comprised of:Adjusted EBITDA in the Credit Facilities excludes certain non-cash charges, and for purposes of calculating the leverage ratio and interest coverage ratios is adjusted on a pro forma basis for acquisitions and dispositions made during the relevant period. The maximum Covanta Energy leverage ratio allowed under the Credit Facilities adjusts in future periods as follows: |
| | |
| • | $18.1 million relating3.75 to rebuilding at1.00 for each of the SEMASS facility following the fire;four quarter periods ended March 31, June 30 and September 30, 2010; |
| • | $12.1 million relating3.50 to our Central Valley biomass facilities and our Holliston transfer station businesses acquired during 2007;1.00 for each four quarter period thereafter; |
| | |
| • | themaximum Covanta Energy capital expenditures incurred to maintain existing operating businesses of $100 million per fiscal year, subject to adjustment due to an acquisition of businesses, net of cash acquired, of $110.5 million;by Covanta Energy; and |
| • | an equity investment in Sanfeng for $10.3 million;minimum Covanta Energy 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. |
For additional information on the calculation of Adjusted EBITDA, seeResults of Operations —2009 Supplementary Financial Information — Adjusted EBITDA (Non-GAAP Discussion) above.
Long-Term Debt
Long-term debt is as follows (in thousands):
| | | | | | | | |
| | As of December 31, | |
| | 2009 | | | 2008 | |
|
3.25% Cash Convertible Senior Notes due 2014 | | $ | 460,000 | | | $ | — | |
Debt discount related to Cash Convertible Senior Notes | | | (112,475 | ) | | | — | |
Cash conversion option derivative at fair value | | | 128,603 | | | | — | |
| | | | | | | | |
3.25% Cash Convertible Senior Notes, net | | | 476,128 | | | | — | |
| | | | | | | | |
1.00% Senior Convertible Debentures due 2027 | | | 373,750 | | | | 373,750 | |
Debt discount related to Convertible Debentures | | | (45,042 | ) | | | (64,369 | ) |
| | | | | | | | |
1.00% Senior Convertible Debentures, net | | | 328,708 | | | | 309,381 | |
| | | | | | | | |
Term Loan Facility due 2014 | | | 632,125 | | | | 638,625 | |
Other long-term debt | | | 745 | | | | 512 | |
| | | | | | | | |
Total | | | 1,437,706 | | | | 948,518 | |
Less: current portion | | | (7,027 | ) | | | (6,922 | ) |
| | | | | | | | |
Total long-term debt | | $ | 1,430,679 | | | $ | 941,596 | |
| | | | | | | | |
3.25% Cash Convertible Senior Notes due 2014
During the three months ended June 30, 2009, we issued $460 million aggregate principal amount of 3.25% Cash Convertible Senior Notes (the “Notes”) due 2014 in a private transaction exempt from registration under the Securities Act of 1933, as amended. The Notes are convertible by the holders into cash only (the “Cash Conversion Option”), based on an initial conversion rate of 53.9185 shares of our common stock per $1,000 principal amount of Notes (which represents an initial conversion price of approximately $18.55 per share) and only in certain limited circumstances. This Cash Conversion Option is an embedded derivative and is recorded at fair value quarterly in our consolidated balance sheets as a component of our long-term debt.
In order to reduce our exposure to potential cash payments in excess of the principal amount of the Notes resulting from the Cash Conversion Option, we entered into two separate privately negotiated transactions with affiliates of certain of the initial purchasers of the Notes (the “Option Counterparties”) for a net cash outflow of $58.4 million.
| | |
| • | partially offset by property insurance proceeds of $9.4We purchased, for $112.4 million, relatedcash-settled call options on our common stock (the “Note Hedge”) initially correlating to the firesame number of shares as those initially underlying the Notes subject to generally similar customary adjustments, which have economic characteristics similar to those of the Cash Conversion Option embedded in the Notes. The Note Hedge is a derivative which is recorded at fair value quarterly and is recorded in other noncurrent assets in our SEMASS energy-from-waste facilityconsolidated balance sheets. |
| • | We sold, for $54.0 million, warrants (the “Warrants”) correlating to the same number of shares as those initially underlying the Notes, which are net share settled and could have a dilutive effect to the acquisitionextent that the market price of a non-controlling interestour common stock exceeds the then effective strike price of the Warrants. The strike price of the Warrants is approximately $25.74 per share and is subject to customary adjustments. The Warrants are recorded at the amounts received net of expenses within additional paid-in capital in a subsidiary during 2006 of $27.5 million.our consolidated balance sheets. |
Net cash used in financing activities for the year ended December 31, 2007 was $268.3 million, an increase of $120.9 million from the prior year. This increase was primarily due to the 2007 recapitalization. The net proceeds from refinancing the previously existing credit facilities with the Credit Facilities was $5.6 million, net of transaction fees. Proceeds of approximately $364.4 million and $136.6 million, each net of underwriting discounts and commissions, were received during the year ended December 31, 2007 related to underwritten public offerings of Debentures and common stock, respectively. The combination of the proceeds from the public offerings of Debentures and common stock and approximately $130.0 million in cash and restricted cash (available for use as a result of the recapitalization) were utilized for the repayment, by means of a tender offer, of approximately $611.9 million in principal amount of outstanding notes previously issued by certain intermediate subsidiaries.
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When combined with the Note Hedge and the Warrants, we believe that the net financial impact upon maturity of the Notes will consist of cash payments of the face value of $460 million Notes and net share settlement of the Warrants to the extent that the stock price exceeds $25.74 at that time.
Net proceeds from the above transactions were $387.3 million, consisting of gross proceeds of $460.0 million from the Notes and $54.0 million of proceeds from the Warrants, less the $112.4 million purchase price for the Note Hedge and $14.3 million of purchase discounts and other offering expenses.
We have used and will use the net proceeds from the offering for general corporate purposes, which may include capital expenditures, potential permitted investments or permitted acquisitions.
The Notes constitute general unsecured senior obligations and rank equally in right of payment with our existing and future senior unsecured indebtedness. The Notes are effectively junior to our existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness. The Notes are not guaranteed by any of our subsidiaries and are effectively subordinated to all existing and future indebtedness and liabilities (including trade payables) of our subsidiaries.
For a detailed description of the terms of the Notes, the Note Hedge, the Cash Conversion Option, and the Warrants, seeItem 8. Financial Statements And Supplementary Data — Note 11. Long-Term Debt, Note 13. Financial Instruments and Note 14. Derivative Instruments.
Project Debt1.00% Senior Convertible Debentures due 2027
On January 31, 2007, we completed an underwritten public offering of $373.8 million aggregate principal amount of 1.00% Senior Convertible Debentures due 2027 (the “Debentures”), from which we received proceeds of approximately $364.4 million, net of underwriting discounts and commissions.
For specific criteria related to contingent interest, conversion or redemption features of the Debentures seeCapital Requirementsbelow andItem 8. Financial Statements And Supplementary Data — Note 11. Long-Term Debt, Note 13. Financial InstrumentsandNote 14. Derivative Instruments.
Project Debt
DomesticAmericas Project Debt
Financing for the energy-from-waste projects is generally accomplished through tax-exempt and taxable municipal revenue bonds issued by or on behalf of the municipal client. For such facilities that are owned by a subsidiary of ours, the municipal issuers of the bond loans the bond proceeds to our subsidiary to pay for facility construction. For such facilities, project-related debt is included as “Project debt” (short- and long-term) in our consolidated financial statements. Generally, such project debt is secured by the revenues generated by the project and other project assets including the related facility. The only potential recourse to us with respect to project debt arises under the operating performance guarantees described below underOther Commitments.
Certain subsidiaries had recourse liability for project debt which is recourse to a certain Covanta ARC Holdings, Inc. subsidiary,subsidiaries, but is non-recourse to us and as of December 31, 20082009 was as follows (in thousands):
| | | | |
Covanta Niagara, L.P. Series 2001 Bonds | | $ | 165,010 | |
Covanta Southeastern Connecticut Company Corporate Credit Bonds | | | 43,500 | |
Covanta Hempstead Company Corporate Credit Bonds | | | 42,670 | |
| | | | |
Total | | $ | 251,180 | |
| | | | |
On August 20, 2009, one of our client communities refinanced project debt ($63.7 million outstanding) and we terminated a related interest rate swap ($9.8 million liability) with the proceeds from new bonds and cash on hand. As a result of the refinancing, the client community issued $53.7 million tax exempt bonds bearing interest from 3% to 5% due 2019 in order to pay down the existing project debt and $12.7 million 4.67% taxable bonds due 2012 issued primarily to terminate the swap. SeeItem 8. Financial Statements And Supplementary Data — Note 14. Derivative Instrumentsfor additional information related to the termination of the interest rate swap. Consistent with other private, non-tip fee structures, the client community will pay us debt service revenue equivalent to the principal and interest on the bonds.
International Project Debt
Financing for projects in which we have an ownership or operating interest is generally accomplished through commercial loans from local lenders or financing arranged through international banks, bonds issued to institutional investors and from multilateral lending institutions based in the United States. Such debt is generally secured by the revenues generated by the project and other project assets and is without recourse to us. Project debt relating to two international
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projects in India is included as “Project debt (short- and long-term)” in our consolidated financial statements. In most 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.
Restricted Funds Held in Trust
Restricted funds held in trust are primarily amounts received by third-party trustees relating to certain projects we own which may be used only for specified purposes. We generally do not control these accounts. They primarily include debt service reserves for payment of principal and interest on project debt, and deposits of revenues received with respect to projects prior to their disbursement, as provided in the relevant indenture or other agreements. Such funds are invested principally in money market funds, bank deposits and certificates of deposit, United States treasury bills and notes, and United States government agency securities. Restricted fund balances are as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | As of December 31, | |
| | 2009 | | | 2008 | |
| | Current | | | Noncurrent | | | Current | | | Noncurrent | |
|
Debt service funds | | $ | 73,406 | | | $ | 101,376 | | | $ | 103,371 | | | $ | 97,761 | |
Revenue funds | | | 13,061 | | | | — | | | | 25,105 | | | | — | |
Other funds | | | 44,756 | | | | 45,153 | | | | 46,617 | | | | 52,057 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 131,223 | | | $ | 146,529 | | | $ | 175,093 | | | $ | 149,818 | |
| | | | | | | | | | | | | | | | |
Of the $277.8 million in total restricted funds as of December 31, 2009, approximately $165.9 million was designated for future payment of project debt principal.
Investments
Our insurance business requires both readily liquid assets and adequate capital to meet ongoing obligations to policyholders and claimants, as well as to pay ordinary operating expenses. Our insurance business meets both its short-term and long-term liquidity requirements through operating cash flows that include premium receipts, investment income and reinsurance recoveries. To the extent operating cash flows do not provide sufficient cash flow, the insurance business relies on the sale of invested assetsand/or contributions from us, as required. The investment policy guidelines for the insurance business require that all loss and loss adjustment expense (“LAE”) liabilities be matched by a comparable amount of investment grade assets. During the year ended December 31, 2008, we made a cash contribution of approximately $3 million to our insurance subsidiary to support their operating requirements. We believe that the resources of the insurance business has bothare adequate capital resources and sufficient reinsurance to meet its current operating requirements.
The insurance subsidiaries’ fixed maturity debt and equity securities portfolio are classified as “available-for-sale”“available-for-sale” and are carried at fair value. Investment securities that are traded on a national securities exchange are stated at
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the last reported sales price on the day of valuation.See Item 8. Financial Statements And Supplementary Data — Note 13. Financial Instruments.
The investment portfolio for our insurance business was as follows as of December 31, 20082009 (in thousands):
| | | | | | | | | | | | | | | | |
| | Amortized Cost | | Fair Value | | | Amortized Cost | | Fair Value | |
|
Investments by grade: | | | | | | | | | | | | | | | | |
Fixed maturities: | | | | | | | | | | | | | | | | |
U.S. Government/Agency | | $ | 17,897 | | | $ | 18,207 | | |
Mortgage-backed | | | 4,183 | | | | 4,184 | | |
U.S. government obligations and agencies | | | $ | 13,472 | | | $ | 13,726 | |
Residential mortgage-backed | | | | 5,150 | | | | 5,203 | |
Corporate (AAA to A) | | | 4,540 | | | | 4,346 | | | | 8,878 | | | | 9,213 | |
| | | | | | | | | | |
Total fixed maturities | | | 26,620 | | | | 26,737 | | | | 27,500 | | | | 28,142 | |
Equity securities | | | 760 | | | | 792 | | | | 732 | | | | 871 | |
| | | | | | | | | | |
Total | | $ | 27,380 | | | $ | 27,529 | | | $ | 28,232 | | | $ | 29,013 | |
| | | | | | | | | | |
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Capital Requirements
The following table summarizes our gross contractual obligations including project debt, leases and other obligations as of December 31, 20082009 (in thousands, Notethousands; references to Notes in the table are references to the Notes)Notes inItem 8. Financial Statements And Supplementary Data):
| | | | | | | | | | | | | | | | | | | | |
| | | | | Payments Due by Period | |
| | | | | | | | 2010 and
| | | 2012 and
| | | 2014 and
| |
| | Total | | | 2009 | | | 2011 | | | 2013 | | | Beyond | |
|
Domestic project debt (Note 7) | | $ | 1,006,087 | | | $ | 155,597 | | | $ | 265,324 | | | $ | 228,972 | | | $ | 356,194 | |
International project debt (Note 7) | | | 52,036 | | | | 34,550 | | | | 17,486 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total project debt (Note 7) | | | 1,058,123 | | | | 190,147 | | | | 282,810 | | | | 228,972 | | | | 356,194 | |
Term Loan Facility (Note 6) | | | 638,625 | | | | 6,500 | | | | 13,000 | | | | 13,000 | | | | 606,125 | |
Debentures(1) | | | 373,750 | | | | — | | | | — | | | | — | | | | 373,750 | |
Other long-term debt | | | 512 | | | | 422 | | | | 90 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total debt obligations(2) | | | 2,071,010 | | | | 197,069 | | | | 295,900 | | | | 241,972 | | | | 1,336,069 | |
Less: Non-recourse debt(3) | | | (1,058,635 | ) | | | (190,569 | ) | | | (282,900 | ) | | | (228,972 | ) | | | (356,194 | ) |
| | | | | | | | | | | | | | | | | | | | |
Total recourse debt | | $ | 1,012,375 | | | $ | 6,500 | | | $ | 13,000 | | | $ | 13,000 | | | $ | 979,875 | |
Operating leases | | | 366,032 | | | | 57,580 | | | | 89,950 | | | | 60,541 | | | | 157,961 | |
Less: Non-recourse rental payments | | | (213,722 | ) | | | (23,065 | ) | | | (46,933 | ) | | | (41,616 | ) | | | (102,108 | ) |
| | | | | | | | | | | | | | | | | | | | |
Total recourse rental payments | | $ | 152,310 | | | $ | 34,515 | | | $ | 43,017 | | | $ | 18,925 | | | $ | 55,853 | |
Interest payments(4) | | | 458,686 | | | | 82,002 | | | | 128,632 | | | | 101,266 | | | | 146,786 | |
Less: Non-recourse interest payments | | | (298,030 | ) | | | (61,586 | ) | | | (88,311 | ) | | | (61,628 | ) | | | (86,505 | ) |
| | | | | | | | | | | | | | | | | | | | |
Total recourse interest payments | | $ | 160,656 | | | $ | 20,416 | | | $ | 40,321 | | | $ | 39,638 | | | $ | 60,281 | |
Retirement plan obligations(5) | | $ | 30,830 | | | $ | 4,920 | | | $ | 9,970 | | | $ | 10,400 | | | $ | 5,540 | |
FIN 48 tax obligations(6) | | $ | 140,811 | | | $ | 22,721 | | | $ | 7,075 | | | $ | 3,747 | | | $ | 107,268 | |
| | | | | | | | | | | | | | | | | | | | |
Total obligations | | $ | 1,496,982 | | | $ | 89,072 | | | $ | 113,383 | | | $ | 85,710 | | | $ | 1,208,817 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | Payments Due by Period | |
| | | | | | | | 2011 and
| | | 2013 and
| | | 2015 and
| |
| | Total | | | 2010 | | | 2012 | | | 2014 | | | Beyond | |
|
Americas project debt | | $ | 909,477 | | | $ | 157,143 | | | $ | 260,805 | | | $ | 236,614 | | | $ | 254,915 | |
International project debt | | | 31,150 | | | | 27,827 | | | | 3,323 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total project debt (Note 12) | | | 940,627 | | | | 184,970 | | | | 264,128 | | | | 236,614 | | | | 254,915 | |
Term Loan Facility (Note 11) | | | 632,125 | | | | 6,500 | | | | 13,000 | | | | 612,625 | | | | — | |
3.25% Cash Convertible Senior Notes (Note 11)(1) | | | 460,000 | | | | — | | | | — | | | | 460,000 | | | | — | |
1.00% Senior Convertible Debentures (Note 11)(2) | | | 373,750 | | | | — | | | | 373,750 | | | | — | | | | — | |
Other long-term debt | | | 745 | | | | 527 | | | | 196 | | | | 22 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total debt obligations(3) | | | 2,407,247 | | | | 191,997 | | | | 651,074 | | | | 1,309,261 | | | | 254,915 | |
Less: Non-recourse debt(4) | | | (941,372 | ) | | | (185,497 | ) | | | (264,324 | ) | | | (236,636 | ) | | | (254,915 | ) |
| | | | | | | | | | | | | | | | | | | | |
Total recourse debt | | $ | 1,465,875 | | | $ | 6,500 | | | $ | 386,750 | | | $ | 1,072,625 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
Operating leases | | | 350,365 | | | | 42,640 | | | | 82,757 | | | | 59,618 | | | | 165,350 | |
Less: Non-recourse rental payments | | | (190,657 | ) | | | (23,362 | ) | | | (47,182 | ) | | | (30,429 | ) | | | (89,684 | ) |
| | | | | | | | | | | | | | | | | | | | |
Total recourse rental payments | | $ | 159,708 | | | $ | 19,278 | | | $ | 35,575 | | | $ | 29,189 | | | $ | 75,666 | |
| | | | | | | | | | | | | | | | | | | | |
Interest payments(5) | | | 443,522 | | | | 87,775 | | | | 171,685 | | | | 113,302 | | | | 70,760 | |
Less: Non-recourse interest payments | | | (223,843 | ) | | | (50,348 | ) | | | (73,437 | ) | | | (47,622 | ) | | | (52,436 | ) |
| | | | | | | | | | | | | | | | | | | | |
Total recourse interest payments | | $ | 219,679 | | | $ | 37,427 | | | $ | 98,248 | | | $ | 65,680 | | | $ | 18,324 | |
| | | | | | | | | | | | | | | | | | | | |
Retirement plan obligations(6) | | $ | 22,360 | | | $ | 6,110 | | | $ | 9,070 | | | $ | 2,060 | | | $ | 5,120 | |
Uncertainty in income tax obligations(7) | | $ | 139,552 | | | $ | 21,769 | | | $ | 7,002 | | | $ | 3,513 | | | $ | 107,268 | |
| | | | | | | | | | | | | | | | | | | | |
Total obligations | | $ | 2,007,174 | | | $ | 91,084 | | | $ | 536,645 | | | $ | 1,173,067 | | | $ | 206,378 | |
| | | | | | | | | | | | | | | | | | | | |
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(1) | | The Notes bear interest at a rate of 3.25% per year, payable semi-annually in arrears, on June 1 and December 1 of each year, commencing on December 1, 2009, and will mature on June 1, 2014. Under limited circumstances, the Notes are convertible by the holders thereof, at any time prior to March 1, 2014, into cash only, based on an initial conversion rate of 53.9185 shares of our common stock per $1,000 principal amount of Notes (which represents an initial conversion price of approximately $18.55 per share).See Item 8. Financial Statements And Supplementary Data — Note 11.Long-Term Debt. |
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(2) | | The Debentures bear interest at a rate of 1.00% per year, payable semi-annually in arrears, on February 1 and August 1 of each year, commencing on August 1, 2007 and will mature on February 1, 2027. In addition, beginning withAt our option, the six-month interest period commencingDebentures are subject to redemption at any time on or after February 1, 2012, we may be requiredin whole or in part, at a redemption price equal to pay contingent interest on100% of the principal amount of the Debentures calculated with referencebeing redeemed, plus accrued and unpaid interest. In addition, holders may require us to the tradingrepurchase their Debentures on February 1, 2012, February 1, 2017, and February 1, 2022, in whole or in part, for cash at a repurchase price equal to 100% of the Debentures. Asprincipal amount of December 31, 2008, the closing price of our common stock did not exceed the specified conversion price,Debentures being repurchased, plus accrued and therefore, forunpaid interest. For purposes of this Capital Requirements chart, we have assumed no conversions or redemptions ofthat the Debentures and no contingent interest relatedwill be repurchased pursuant to the Debentures.holders’ option on February 1, 2012. For information detailing the contingent interest, conversion or redemption features of the Debentures, seeItem 8. Financial Statements And Supplementary Data — Note 6.11. Long-Term Debt of the Notes.. |
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(2)(3) | | Excludes $20.2$18.7 million of unamortized debt premium. |
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(3)(4) | | Payment obligations for the project debt associated with owned energy-from-waste facilities are limited recourse to the operating subsidiarysubsidiaries and non-recourse to us, subject to operating performance guarantees and commitments. |
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(4)(5) | | Interest payments on the Term Loan Facility and letter of credit fees are estimated based on current LIBOR rates and are estimated assuming contractual principal repayments. Interest payments represent accruals for cash interest payments. |
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(5)(6) | | Retirement plan obligations are based on actuarial estimates for the pension plan obligations and post-retirement plan obligations as of December 31, 2008.2009. |
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(6)(7) | | Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertaintyuncertainty in Income Taxes, an interpretation of FASB Statement No. 109,” (“FIN 48”)income tax obligations are based upon the expected date of settlement taking into account all of our administrative rights including possible litigation. |
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Other Commitments
Other commitments as of December 31, 20082009 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Commitments Expiring by Period | | | Commitments Expiring by Period | |
| | | | Less Than
| | More Than
| | | | | Less Than
| | More Than
| |
| | Total | | One Year | | One Year | | | Total | | One Year | | One Year | |
|
Letters of credit | | $ | 300,415 | | | $ | 46,111 | | | $ | 254,304 | | | $ | 278,191 | | | $ | 6,550 | | | $ | 271,641 | |
Surety bonds | | | 64,086 | | | | — | | | | 64,086 | | | | 111,032 | | | | — | | | | 111,032 | |
| | | | | | | | | | | | | | |
Total other commitments — net | | $ | 364,501 | | | $ | 46,111 | | | $ | 318,390 | | | $ | 389,223 | | | $ | 6,550 | | | $ | 382,673 | |
| | | | | | | | | | | | | | |
The letters of credit were issued under various credit facilities (primarily the Funded L/C Facility) to secure our performance under various contractual undertakings related to the projects in our domesticAmericas and international projects,International segments, 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 these letters of credit, unreimbursed amounts would be treated under the Credit Facilities as additional term loans in the case of letters of credit issued under the Funded L/C Facility, or as revolving loans in the case of letters of credit issued under the Revolving Loan Facility.
The surety bonds listed on the table above relate primarily to performance obligations ($55.1100.2 million) and support for closure obligations of various energy projects when such projects cease operating ($9.010.8 million). 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 Debentures. These are:arise as follows:
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| • | holders may require us to repurchase their Debentures on February 1, 2012, February 1, 2017 and February 1, 2022; |
| • | holders may require us to repurchase their Debentures if a fundamental change occurs; and |
| • | holders may exercise their conversion rights upon the occurrence of certain events, which would require us to pay the conversion settlement amount in cashand/or our common stock. |
See Note 6. Long-Term Debt ofWe have certain contingent obligations related to the Notes forNotes. These arise as follows:
| | |
| • | holders may require us to repurchase their Notes if a fundamental change occurs; and |
| • | holders may exercise their conversion rights upon the occurrence of certain events, which would require us to pay the conversion settlement amount in cash. |
For specific criteria related to contingent interest, conversion or redemption features of the Debentures.Debentures or Notes, seeItem 8. Financial Statements And Supplementary Data — Note 11. Long-Term Debt.
As discussed in theOverview — AcquisitionsGrowth and Business Developmentdiscussion above, we are focused on developing new projects and making acquisitions to grow our business in the Americas, Europe and Asia. We are pursuing additional growth opportunities through the development and construction of new waste and energy facilities. Due to permitting and other regulatory factors, these projects generally evolve over lengthy periods and project financing is generally obtained at the time construction begins, at which time, we can more accurately determine our commitment for a development project.
To date, we have announced that we have entered into definitive agreements for the development of a 1,700 metric tpd energy-from-waste project serving the City of Dublin, Ireland and surrounding communities. The Dublin project is being developed and will be owned by Dublin Waste to Energy Limited, which we control and co-own
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with DONG Energy Generation A/S. Under the Dublin project agreements, several customary conditions must be satisfied before full construction can begin, including the issuance of all required licenses and permits and approvals. We are responsible for the design and construction of the project, which is estimated to cost approximately 350 million euros and will require 36 months to complete, once full construction commences. We and DONG Energy Generation A/S have committed to provide financing for all phases of the project, and we expect to arrange for project financing. The primary approvals and licenses for the project have been obtained, and any remaining consents and approvals necessary to begin full construction are expected to be obtained in due course. We have begun to perform preliminary site demolition work and expect to commence full construction during the second quarter of 2009.
We have issued or are party to performance guarantees and related contractual support obligations undertaken pursuant to agreements to construct and operate certain domesticAmericas and internationalInternational segment energy and waste facilities. For some projects, such performance guarantees include obligations to repay certain financial obligations if the project revenues are insufficient to do so, or to obtain or guarantee financing for a project. With respect to our domesticAmericas and internationalInternational segment 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 on 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 domestic and international 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 material. To date, we have not incurred material liabilities under such performance guarantees. SeeItem 1A. Risk Factors — We have provided guarantees and financial support in connection with our projects.
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Insurance Coverage
We periodically review our insurance programs to ensure that our coverage is appropriate for the risks attendant to our business. As part of this review, we assess whether we have adequate coverage for risk to our physical assets from extreme weather events. We have obtained insurance for our assets and operations that provides 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.
Off-Balance Sheet Arrangements
We are party to lease arrangements at our Union County, New Jersey, Alexandria, Virginia and Delaware County,Valley, Pennsylvania energy-from-waste facilities. At our Union County facility, we lease the facility from the Union County Utilities Authority, referred to as the “UCUA,” under a lease that expires in 2023, which we may extend for an additional five years. We guarantee a portion of the rent due under the lease. Rent under the lease is sufficient to allow the UCUA to repay tax exempt bonds issued by it to finance the facility and which mature in 2023.
At our Alexandria facility, we are a party to a lease which expires in 2025 related to certain pollution control equipment that was required in connection with the Clean Air Act amendments of 1990, and which was financed by the City of Alexandria and by Arlington County, Virginia. We own this facility, and the rent under this lease is sufficient to pay debt service on tax exempt bonds issued to finance such equipment and which mature in 2013.
Our Covanta Delaware Valley L.P. (“Delaware Valley”) facility is a party to a lease for the facility that expires in 2019. We are obligated to pay a portion of lease rent, designated as “Basic Rent B,” and could be liable to pay certain related contractually-specified amounts, referred to as “Stipulated Loss,” in the event of a default in the payment of rent under the Delaware Valley lease beyond the applicable grace period. The Stipulated Loss is similar to lease termination liability and is generally intended to provide the lessor with the economic value of the lease, for the remaining lease term, had the default in rent payment not occurred. The balance of rental and Stipulated Loss obligations are payable by a trust formed and collateralized by the project’s former operator in connection with the
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group including certain grantor trusts relating to the Mission Insurance Entities or increased to the extent of any new losses recorded.
The Internal Revenue Service (“IRS”) has not audited any of our tax returns for the years in which the losses giving rise to the NOLs were reported, and the IRS could challenge any past and future use of the NOLs.
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Loss Contingencies
As described inItem 8.Financial Statements And Supplementary Data — Note 21. Commitments and Contingencies of the Notes,, 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 with respect to these matters on an ongoing basis and when losses are considered probable and reasonably estimable, we record as a loss an estimate of the ultimate 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 and disclosure is made regarding the possibility of additional losses. We review such estimates on an ongoing basis as developments occur with respect to such matters and may in the future increase or decrease such estimates. There can be no assurance that our initial or adjusted estimates of losses will reflect the ultimate loss we may experience regarding such matters. Any inaccuracies could potentially have a material adverse effect on our consolidated financial condition.
Financial Instruments
Effective January 1, 2008, we adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115” (“SFAS 159”), but did not elect to apply the fair value option to any of our eligible financial assets and liabilities.
Effective January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. This statement did not require any new fair value measurements. FASB Staff PositionFAS 157-2, “Effective Date of FASB Statement No. 157,” which deferred the effective date of SFAS 157 for one year for all non-financial assets and non-financial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).
As described inItem 8.Financial Statements And Supplementary Data — Note 19.13. Financial Instruments of the Notes,, the estimated fair-value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that we would realize in a current market exchange.
For cash and cash equivalents, restricted cash, 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. The insurance subsidiaries’ fixed maturity debt and equity securities portfolio are classified as “available-for-sale”“available-for-sale” and are carried at fair value. Investment securities that are traded on a national securities exchange are stated at the last reported sales price on the day of valuation.
Fair values for debt were determined based on interest rates that are currently available to us for issuance of debt with similar terms and remaining maturities for debt issues that are not traded on quoted market prices. The fair value of project debt is estimatedthe Note Hedge and the Cash Conversion Option are determined using an option pricing model based on quoted market prices for the same or similar issues.
observable inputs such as implied volatility, risk free rate, and other factors. The fair value of our interest rate swap agreementthe Note Hedge is the estimated amount we would receive or payadjusted to terminate the agreementreflect counterparty risk of non-performance, and is based on the netcounterparty’s credit spread in the credit derivatives market. The contingent interest features related to the Debentures and the Notes are valued quarterly using the present value of expected cash flow models incorporating the futureprobabilities of the contingent events occurring.
Debentures
Effective January 1, 2009, we adopted a recent accounting standard related to accounting for convertible debt instruments. We are required to separately account for the liability and equity components of our convertible debt instruments with cash settlement features. The debt component was recognized at the present value of its cash flows as defined indiscounted using a 7.25% discount rate, our estimated borrowing rate at the agreement.date of the issuance of the Debentures for a similar debt instrument without the conversion feature.
Revenue Recognition
We earn fees to service project debt (principal and interest) where such fees are expressly included as a component of the service fee paid by the client community pursuant to applicable energy-from-waste service agreements. Regardless of the timing of amounts paid by client communities relating to project debt principal, we record service revenue with respect to this principal component on a levelized basis over the term of the applicable agreement. Unbilled service receivables related to energy-from-waste operations are discounted in recognizing the present value for services performed currently in order to service the principal component of the project debt. Fees for waste disposal are recognized in the period received. Revenue from electricity and steam sales are recorded when delivered at rates specified in the contracts. We also earn fees under fixed-price construction contracts, in which case revenue is accounted for using thepercentage-of-completion of services rendered. These contracts are typically signed in conjunction with agreements to operate the project constructed and are therefore multiple element arrangements. The contractual price of the undelivered service element has been determined to be its fair value.
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Pensions
Our pension and other postretirement benefit plans are accounted for in accordance with SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment to FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS 158”), which require costsCosts and the related obligations and assets arising from the pension and other postretirement benefit plans to beare accounted for based on actuarially-determined estimates. Upon the adoption of SFAS 158 in December 2006, we recognized a net gain of $2.5 million, $1.7 million net of deferred tax, in Accumulated Other Comprehensive Income (“AOCI”) to reflect the funded status of the pension and postretirement benefit obligations.
On an annual basis, management evaluateswe evaluate the assumed discount rate and expected return on assets used to determine pension benefit and other postretirement benefit obligations. The discount rate is determined based on the timing of future benefit payments and expected rates of return currently available on high quality fixed income securities whose cash flows match the timing and amount of future benefit payments of the plan. We record a pension plan liability equal to the amount by which the present value of the projected benefit obligations (using the discount rate) exceeded the fair value of pension assets.
| | |
| • | Based on this evaluation for the year ended December 31, 2007, we increased the discount rate assumption for benefit obligations from 5.75% as of December 31, 2006 to 6.50% as of December 31, 2007. We recorded a pension plan liability equal to the amount by which the present value of the projected benefit obligations (using a discount rate of 6.50%) exceeded the fair value of pension assets as of December 31, 2007. We recognized a net actuarial gain of $14.5 million, $9.4 million net of deferred tax, in AOCI during the year ended December 31, 2007. |
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| • | Based on this evaluation for the year ended December 31, 2008, we decreased the discount rate assumption for benefit obligations from 6.50% as of December 31, 2007 to 6.25% as of December 31, 2008. We recorded a pension plan liability equal to the amount by which the present value of the projected benefit obligations (using a discount rate of 6.25%) exceeded the fair value of pension assets as of December 31, 2008. We recognized a net actuarial loss of $20.0 million, $13.2 million net of deferred tax, in AOCI during the year ended December 31, 2008. |
The discount rate and net gain (loss) recognized are as follows:
| | | | | | | | | | | | |
| | | | Net Gain (Loss)
| | Net Gain (Loss),
|
| | Discount Rate | | Recognized in AOCI | | Net of Tax, Recognized in AOCI |
| | (dollars in millions) |
|
Year Ended December 31, 2009 | | | 6.00 | % | | $ | 14.6 | | | $ | 8.8 | |
Year Ended December 31, 2008 | | | 6.25 | % | | $ | (20.0 | ) | | $ | (13.2 | ) |
Year Ended December 31, 2007 | | | 6.50 | % | | $ | 14.5 | | | $ | 9.4 | |
Effective January 1, 2010, the defined benefit pension plan was amended to exclude future compensation increases received by eligible participants after December 31, 2009. SeeItem 8. Financial Statements And Supplementary Data — Note 16.17. Employee Benefit Plans of the Notes for additional information related to Ourour pension and other postretirement benefit plans.
Unpaid Losses and Loss Adjustment Expenses
Our insurance subsidiaries establish loss and loss adjustment expense (“LAE”) reserves that are estimates of amounts needed to pay claims and related expenses in the future for insured events that have already occurred. The process of estimating reserves involves a considerable degree of judgment by management and, as of any given date, is inherently uncertain.
Reserves are typically comprised of (1) case reserves for claims reported and (2) reserves for losses that have occurred but for which claims have not yet been reported, referred to as incurred but not reported (“IBNR”) reserves, which include a provision for expected future development on case reserves. Case reserves are estimated based on the experience and knowledge of claims staff regarding the nature and potential cost of each claim and are adjusted as additional information becomes known or payments are made. IBNR reserves are derived by subtracting paid loss and LAE and case reserves from estimates of ultimate loss and LAE. Actuaries estimate ultimate loss and LAE using various generally accepted actuarial methods applied to known losses and other relevant information. Like case reserves, IBNR reserves are adjusted as additional information becomes known or payments are made.
Our insurance subsidiaries use independent actuaries withon whom we significantly rely on to form a conclusion on reserve estimates. Those independent actuaries use several generally accepted actuarial methods to evaluate the insurance business loss reserves, each of which has its own strengths and weaknesses. The independent actuaries place more or less reliance on a particular method based on the facts and circumstances at the time the reserve estimates are made and through discussions with our insurance subsidiaries’ management.
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Recent Accounting Pronouncements
SeeItem 8. Financial Statements And Supplementary Data — Note 1. Organization and Summary of Significant Accounting PoliciesandNote 2. Recent Accounting Pronouncements of the Notes for a summary of additional accounting policies and new accounting pronouncements.
Related-Party Transactions
Employment Arrangements
See the descriptions of our employment agreements with Anthony J. Orlando, Mark A. Pytosh, John M. Klett, Timothy J. Simpson and Seth Myones which are incorporated by reference intoItem 11. Executive Compensationof this Annual Report onForm 10-K.
Affiliate Agreements
We hold a 26% investment in Quezon.Quezon Power, Inc. (“Quezon”). We are party to an agreement with Quezon in which we assumed responsibility for the operation and maintenance of Quezon’s coal-fired electricity generation facility. Accordingly, 26% of the net income of Quezon is reflected in our statementconsolidated statements of income and, as such 26% of the revenue earned under the terms of the operation and maintenance agreement is eliminated against Equityequity in Net Incomenet income from Unconsolidated Investments.unconsolidated investments. For the fiscal years ended December 31, 2009, 2008, 2007, and 2006,2007, we collected $40.6 million, $34.0 million, $35.4 million, and $26.9$35.4 million, respectively, for the operation and maintenance of the facility. As of December 31, 20082009 and 2007,2008, the net amount due to Quezon was $3.2$5.0 million and $1.1$3.2 million, respectively, which represents advance payments received from Quezon for operation and maintenance costs.
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As partOn June 30, 2009, we acquired a 30% owner-participant interest in the Detroit energy-from-waste facility. We are party to an operating and maintenance agreement with the owners of our acquisition of Covanta Energy in 2004 as part of its emergence from bankruptcy, we agreed to conduct a registered offering of our common stock to certain holders of Covanta Energy’s pre-petition secured debentures. On February 24, 2006, we completed this offering, in which 5,696,911 shares were issued in consideration for $20.8 million in gross proceeds, including 633,380 shares purchased by D.E. Shaw Laminar Portfolios, L.L.C. (“Laminar”)the Detroit facility, pursuant to which we operate, maintain and provide certain other services for the exerciseowners of rights held by Laminarthe Detroit energy-from-waste facility for a term of one year. Accordingly, 30% of the net income of the Detroit energy-from-waste facility is reflected in our consolidated statements of income and as a holdersuch, 30% of those debentures. At the timerevenue earned under the terms of this transaction, Laminar held more than 10% of our outstanding common stock.the operation and maintenance agreement is eliminated against equity in net income from unconsolidated investments. SeeItem 8. Financial Statements And Supplementary Data — Note 3. Acquisitions, Business Development and Dispositions.
Clayton Yeutter, a current director, is senior advisor to the law firm of Hogan & Hartson LLP. Hogan & Hartson has provided Covanta Energy with certain legal services for many years including 2008.2009. This relationship preceded our acquisition of Covanta Energy. Mr. Yeutter did not direct or have any direct or indirect involvement in the procurement, provision, oversight or billing of such legal services and does not directly or indirectly benefit from those fees. The Board of Directors has determined that such relationship does not interfere with Mr. Yeutter’s exercise of independent judgment as a director.
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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 commodity prices.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, 2008.2009. Further information is included inItem 8. Financial Statements And Supplementary Data — Note 19.13. Financial Instruments of the Notes.andNote 14. Derivative Instruments.
Commodity Price Risk and Contract Revenue Risk
We have not entered into futures, forward contracts, swaps or options to hedge purchase and sale commitments, fuel requirements, inventories or other commodities. Alternatively, we attempt to mitigate the risk of energy and fuel market fluctuations by structuring contracts related to our energy projects in the manner described above inItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation — Overview — Contract Structures.Fuel Price Risk
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Generally, we are protected against fluctuations in fuel (municipal waste) price risk in our domesticAmericas segment energy-from-waste business because most of our municipal waste is provided under long termlong-term contracts where we are paid for our fuel at fixed rates. At thirteen of our tip fee energy-from-waste facilities, differing amounts of waste disposal 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. Waste disposal fees declined slightly in 2009 primarily due to the ongoing global economic slowdown. The decline in waste disposal fees at our energy-from-waste facilities is offset by lower costs incurred by internalizing waste disposal by utilizing our network of transfer stations located throughout the northeast United States, where we have over one million tons of available capacity.
At our domestic biomass projects, we pay for our fuel (wood waste), and have exposure to fuel price risk because wood waste most often may be purchased only under short termshort-term arrangements. At our international independent power projects, we do not have material fuel cost risk because generally fuel costs are contractually included in our electricity revenues, or fuel is provided by our customers. In some of our international projects, the project entity (which in some cases is not our subsidiary) has entered into long-term fuel purchase contracts that protect the project from changes in fuel prices, provided counterparties to such contracts perform their commitments.
In addition, we sell, recover and recycle materials, principally ferrous metals, under short-term arrangements from most of our energy-from-waste projects in the Americas segment, and have exposure to market fluctuations with respect to such sales. During the second and third quarters of 2008, we experienced historically high recycled metal prices, which declined materially during the fourth quarter of 2008. Revenue from these materials is included within our waste services revenue.
We are protected against energy market fluctuations at mostrevenues in our consolidated statements of our projects, which have long-term contracts for the sale of energy output. At a few of our projects, we enter into shorter term arrangements for energy sales, or have market-based pricing and therefore, we have some exposure to energy market fluctuations.
In 2008, approximately 10% of our waste services revenue was subject to market-based pricing, and approximately 13% of our energy revenue was subject to market-based pricing.income.
Expiration of our contracts at energy-from-waste projects we own and at projects we operate will subject us to greater market risk in maintaining and enhancing our revenues. As the original waste disposal and operating contracts have approached the expiration dates of their initial term, we have renewed, extended or replaced these contracts on acceptable terms. Several more of these original waste disposal and operating contracts will expire at various dates through 2016, and weWe have risk in obtaining acceptable arrangements and associated revenue for such projects thereafter. As our remaining agreements at facilities we own near their expiration dates, we intend to seek replacement or additional contracts for waste supplies, and because project debt on these facilities will be paid off at such time, we expect to be able to offer disposal services at rates that will attract sufficient quantities of waste and provide acceptable revenues. As we seek to enter into extended or new contracts following these expiration dates, we expect that mediummedium- and long termlong-term contracts for waste supply, for a substantial portion of facility capacity, will be available on acceptable terms in the marketplace.
At our International segment independent power projects, we do not have material fuel cost risk because generally fuel costs are contractually included in our electricity revenues or fuel is provided by our customers. In some of our international
69
projects, the project entity (which in some cases is not our subsidiary) has entered into long-term fuel purchase contracts that protect the project from changes in fuel prices, provided counterparties to such contracts perform their commitments.
Energy Price Risk
We are protected against energy market fluctuations at most of our projects, which have long-term contracts for the sale of energy output. At some of our projects, we enter into short-term arrangements for energy sales, or have market-based pricing and therefore, we have some exposure to energy market fluctuations.
We also expect that it may be relatively more difficult to enter into mediummedium- and long termlong-term contracts for sales of energy.energy will be less available than in the past. As a result, following the expiration of these initial long termlong-term contracts, we expect to have on a relative basis more exposure to market risk, and therefore revenue fluctuations, in energy markets than in waste markets. By 2010,In the future, we expect approximately 50%may enter into futures, forward contracts, swaps or options to hedge our exposure to market risk in energy markets. At some of our domestic energyfacilities, where our long-term fixed price power contracts expire, we have an alternative to the current low market prices, by selling our electrical output at “avoided cost”. The “avoided cost” rate is established periodically by local power authorities and is used by power authorities both for purchasing power from companies like ours and also used to establish billing rates for end users of energy. The current “avoided cost” rate is generally lower than our previously established contract rate but is higher than spot market prices. We expect our use of avoided cost sales will reduce our market exposure and mitigate the revenue decline related to be sold at market rates unless contractual arrangements we put in place provide otherwise.the expiration of these initial long-term contracts.
We also will seekAt our biomass projects, we plan to bid competitively inmaximize profitability by curtailing operations of these facilities when the market for additional contracts to operate other facilities as similar contracts of other vendors expire.spread between wood fuel prices and electricity output prices is not favorable.
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, seeItem 8. Financial Statements And Supplementary Data — Note 6.11. Long-Term Debt of the Notes.. As of December 31, 2008,2009, the outstanding balance of the Term Loan was $638.6$632.1 million. We have not entered into any interest rate hedging arrangements against this balance. A hypothetical increase of 1.00% in the underlying December 31, 20082009 market interest rates would result in a potential reduction to twelve month future earnings of $6.4$6.3 million, pre-tax.
We have project debt outstanding at our International segment projects bearing interest at floating rates that could subject us to the risk of increased interest expense due to rising market interest rates, or an adverse change in fair value due to declining interest rates
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on fixed rate debt. Of our project debt, approximately $116.7$29.9 million was floating rate debt atas of December 31, 2008.2009. However, interest rate risk relating to the floating rate project debt is borne by the client communities because debt service is passed through to those clients under the contractual structure of their agreements.
Cash Conversion Option, Note Hedge and Contingent Interest related to the 3.25% Cash Convertible Senior Notes
During the three months ended June 30, 2009, we issued $460 million aggregate principal amount of 3.25% Cash Convertible Senior Notes (the “Notes”) due 2014. The Notes are convertible by the holders into cash only (the “Cash Conversion Option”), based on an initial conversion rate of 53.9185 shares of our common stock per $1,000 principal amount of Notes (which represents an initial conversion price of approximately $18.55 per share) and only in certain limited circumstances.
In order to reduce our exposure to potential cash payments in excess of the principal amount of the Notes resulting from the Cash Conversion Option, we entered into two separate privately negotiated transactions with affiliates of certain of the initial purchasers of the Notes (the “Option Counterparties”). We had only one interest rate swap relatingpurchased, for $112.4 million, cash settled call options on our common stock (the “Note Hedge”) initially correlating to projectthe same number of shares as those initially underlying the Notes subject to generally similar customary adjustments, which have economic characteristics similar to those of the Cash Conversion Option embedded in the Notes. We sold, for $54.0 million, warrants (the “Warrants”) correlating to the same number of shares as those initially underlying the Notes, which are net share settled and could have a dilutive effect to the extent that the market price of our common stock exceeds the then effective strike price of the Warrants. The strike price of the Warrants is approximately $25.74 per share and is subject to customary adjustments.
The Cash Conversion Option is a derivative instrument which is recorded at fair value quarterly with any change in fair value being recognized in our consolidated statements of income as non-cash convertible debt outstandingrelated expense. The fair value of the Cash Conversion Option was $128.6 million as of December 31, 20082009. The Note Hedge is accounted for as a derivative instrument and as such, is recorded at fair value quarterly with any change in fair value being recognized in our consolidated statements of income as non-cash convertible debt related expense. The fair value of the Note Hedge was $123.5 million as of
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December 31, 2009. The contingent interest features of the Notes are embedded derivative instruments. The fair value of the contingent interest features of the Notes was zero as of December 31, 2009.
We expect the gain or loss associated with changes to the valuation of the Note Hedge transactions to offset the gain or loss associated with changes to the valuation of the Cash Conversion Option. However, they will not be completely offsetting as a result of changes in the notional amountcredit spreads of $68.2 millionthe Option Counterparties. Our most significant credit exposure arises from the Note Hedge. The fair value of the Note Hedge reflects the maximum loss that would be incurred should the Option Counterparties fail to perform according to the terms of the Note Hedge agreement.
The Option Counterparties to our cash convertible note hedge transactions are financial institutions or affiliates of financial institutions, and we are subject to risks that these Option Counterparties default under these transactions. Our exposure to counterparty credit risk is not secured by any collateral.
For additional information related to floating rate project debt. Gainsthe Notes, Cash Conversion Option, and losses, however, on this swap are for the account of the client community Note Hedge, seeItem 8. Financial Statements And Supplementary Data — Note 11. Long-Term Debtand are not borne by us.Note 14. Derivative Instruments.
Contingent Interest related to the 1.00% Debentures
On January 31, 2007, we completed an underwritten public offering of $373.8 million aggregate principal amount of 1.00% Senior Convertible Debentures due 2027 (the “Debentures”). The Debentures bear interest at a rate of 1.00% per year, payable semi-annually in arrears, on February 1 and August 1 of each year, commencing on August 1, 2007 and will mature on February 1, 2027. Beginning with the six-month interest period commencing February 1, 2012, we will pay contingent interest on the Debentures during any six-month interest period in which the trading price of the Debentures measured over a specified number of trading days is 120% or more of the principal amount of the Debentures. When applicable, the contingent interest payable per $1,000 principal amount of Debentures will equal 0.25% of the average trading price of $1,000 principal amount of Debentures during the five trading days ending on the second trading day immediately preceding the first day of the applicable six-month interest period. The contingent interest feature in the Debentures is an embedded derivative instrument. The first contingent cash interest payment period does not commence until February 1, 2012 and as such, the fair market value for the embedded derivative was zero as of December 31, 2008.2009. For additional information related to the Credit Facilities, seeItem 8. Financial Statements And Supplementary Data — Note 6.11. Long-Term Debt of the Notes andItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — 2007 RecapitalizationNote 14. Derivative Instruments.
Foreign Currency Exchange Rate Risk
We have investments in energy projects in various foreign countries,markets, including the Philippines, China, India and Bangladesh, and to a much lesser degree, Canada, United Kingdom, Ireland, Italy and Costa Rica. We do notAs we grow our business in other countries and enter intonew 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 transactionshedging strategies we may implement, may impact the amount we are required to hedgeinvest in new projects and the financial returns on these projects, as well our exposure to fluctuations in currency exchange rates.reported results. At some projects, we have mitigated our currency risks by structuring our project contracts so that our revenues are adjusted in line with corresponding changes in currency rates. Therefore, only working capital and project debt denominated in other than a project entity’s functional currency are exposed to currency risks. At other projects, particularly at long-term construction projects, such as in Dublin, we have exposure to fluctuations in currency exchange rates, such as the Euro.
As of December 31, 2008,2009, we had $52.0$31.1 million of project debt related to two heavy fuel-oil projects in India. For $46.2$27.9 million of the debt (related to project entities whose functional currency is the Indian rupee), exchange rate fluctuations were recorded as translation adjustments in other comprehensive income within stockholders’in equity in our consolidated balance sheets. The remaining $5.8$3.2 million of debt was denominated in U.S. dollars.
The potential loss in fair value for such financial instruments from a 10% adverse change in December 31, 20082009 quoted foreign currency exchange rates would be approximately $4.6$2.8 million, pre-tax.
As of December 31, 2008,2009, we also had net investments in foreign subsidiaries and projects. SeeItem 8. Financial Statements And Supplementary Data — Note 8. Equity Method Investments of the Notes for further discussion.
Risk Related to the Investment Portfolio
With respect to our insurance business, the objectives in managing the investment portfolio held by our insurance subsidiary are to maintain necessary liquidity and maximize investment income and investment returns while minimizing overall market risk. Investment strategies are developed based on many factors including duration of liabilities, underwriting results, overall tax position, regulatory requirements, and fluctuations in interest rates. Investment decisions are made by management, in consultation with an independent investment advisor, and approved by our insurance subsidiary’s board of
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directors. Market risk represents the potential for loss due to adverse changes in the fair value of securities. The market risks related to the fixed maturity portfolio are primarily credit risk, interest rate risk, reinvestment risk and prepayment risk. The market risk related to the equity portfolio is price risk.
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Fixed Maturities
With respect to our insurance business, interest rate risk is the price sensitivity of fixed maturities to changes in interest rate.rates. We view these potential changes in price within the overall context of asset and liability matching. We estimate the payout patterns of the liabilities, primarily loss reserves, of our insurance subsidiary to determine their duration. Duration targets are set for the fixed income portfolio after consideration of the duration of the liabilities that we believe mitigate the overall interest rate risk. Our exposure to interest rate risk is mitigated by the relative short-term nature of our insurance and other liabilities. The effective duration of the portfolio was 2.3 years and 1.6 years as of December 31, 20082009 and 2007.2008. We believe that the portfolio duration is appropriate given the relative short-tail nature of the auto programs and projected run-off of all other lines of business. A hypothetical 100 basis point increase in market interest rates would cause an approximate 1.7%2.2% decrease in the fair value of the portfolio while a hypothetical 100 basis point decrease would cause an approximate 1.3%1.0% increase in fair value. Credit risk is the price sensitivity of fixed maturities to changes in the credit quality of such investment. Our exposure to credit risk is mitigated by our investment in high quality fixed income alternatives.
Fixed maturities held by our insurance subsidiary include $5.2 million and $4.2 million and $5.7 million of residential mortgage-backed securities and collateralized mortgage obligations, collectively (“MBS”) as of December 31, 20082009 and 2007,2008, respectively. All MBS held by our insurance subsidiary were issued by the Federal National Mortgage Association (“FNMA”) or, the Federal Home Loan Mortgage Corporation (“FHLMC”), or the Government National Mortgage Association (“GNMA”) all of which are both rated AAA by Moody’s Investors Services.
One of the risks associated with MBS is the timing of principal payments on the mortgages underlying the securities. We attempt to limit repayment risk by purchasing MBS whose cost is below or does not significantly exceed par, and by primarily purchasing structured securities with repayment protection which provides more certain cash flow to the investor such as MBS with sinking fund schedules known as Planned Amortization Classes (“PAC”) and Targeted Amortization Classes (“TAC”). The structures of PACs and TACs attempt to increase the certainty of the timing of prepayment and thereby minimize the prepayment and interest rate risk. In 2008, our insurance subsidiary recognized $0.02 million in gains on sales of fixed maturities.
Equity Securities
Our insurance subsidiary’s investments in equity securities are generally limited to Fortune 500 companies with strong balance sheets, along with a history of dividend growth and price appreciation. As of December 31, 2008,2009, equity securities represented 2.9%3% of our insurance company’s total investment portfolio. During 2008,2009, the insurance subsidiary permanently impaired 53 equity securities for a total of $0.16$0.03 million. The impaired equity securities were primarily in the financial services sector.
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Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
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Financial Statement Schedule: | | | | |
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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, 20082009 and 2007,2008, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008.2009. 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, 20082009 and 2007,2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008,2009, 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 92, the Company retroactively adopted an accounting standard relating to noncontrolling interests in consolidated financial statements and an accounting standard related to convertible debt instruments that may be settled in cash upon conversion. On January 1, 2009, the Company adopted the revised accounting standard for business combinations which is discussed in Note 1 to the consolidated financial statements, effective January 1, 2007 the Company adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes.”statements.
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, 2008,2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 200922, 2010 expressed an unqualified opinion thereon.
MetroPark, New Jersey
February 25, 200922, 2010
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COVANTA HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, | | | For the Years Ended December 31, | |
| | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | |
| | (In thousands, except per share amounts) | | | (In thousands, except per share amounts) | |
|
OPERATING REVENUES: | | | | | | | | | | | | | | | | | | | | | | | | |
Waste and service revenues | | $ | 934,527 | | | $ | 864,396 | | | $ | 817,633 | | | $ | 919,604 | | | $ | 934,527 | | | $ | 864,396 | |
Electricity and steam sales | | | 660,616 | | | | 498,877 | | | | 433,834 | | | | 580,248 | | | | 660,616 | | | | 498,877 | |
Other operating revenues | | | 69,110 | | | | 69,814 | | | | 17,069 | | | | 50,615 | | | | 69,110 | | | | 69,814 | |
| | | | | | | | | | | | | | |
Total operating revenues | | | 1,664,253 | | | | 1,433,087 | | | | 1,268,536 | | | | 1,550,467 | | | | 1,664,253 | | | | 1,433,087 | |
| | | | | | | | | | | | | | |
OPERATING EXPENSES: | | | | | | | | | | | | | | | | | | | | | | | | |
Plant operating expenses | | | 999,674 | | | | 801,560 | | | | 712,156 | | | | 946,166 | | | | 999,674 | | | | 801,560 | |
Depreciation and amortization expense | | | 199,488 | | | | 196,970 | | | | 193,217 | | | | 202,872 | | | | 199,488 | | | | 196,970 | |
Net interest expense on project debt | | | 53,734 | | | | 54,579 | | | | 60,210 | | | | 48,391 | | | | 53,734 | | | | 54,579 | |
General and administrative expenses | | | 97,016 | | | | 82,729 | | | | 73,599 | | | | 109,235 | | | | 97,016 | | | | 82,729 | |
Insurance recoveries, net of write-down of assets | | | (8,325 | ) | | | — | | | | — | | | | — | | | | (8,325 | ) | | | — | |
Other operating expenses | | | 66,701 | | | | 60,639 | | | | 2,594 | | | | 47,968 | | | | 66,701 | | | | 60,639 | |
| | | | | | | | | | | | | | |
Total operating expenses | | | 1,408,288 | | | | 1,196,477 | | | | 1,041,776 | | | | 1,354,632 | | | | 1,408,288 | | | | 1,196,477 | |
| | | | | | | | | | | | | | |
Operating income | | | 255,965 | | | | 236,610 | | | | 226,760 | | | | 195,835 | | | | 255,965 | | | | 236,610 | |
| | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | |
Investment income | | | 5,717 | | | | 10,578 | | | | 11,770 | | | | 4,007 | | | | 5,717 | | | | 10,578 | |
Interest expense | | | (46,804 | ) | | | (67,104 | ) | | | (109,507 | ) | | | (38,116 | ) | | | (46,804 | ) | | | (67,104 | ) |
Non-cash convertible debt related expense | | | | (24,290 | ) | | | (17,979 | ) | | | (15,377 | ) |
Loss on extinguishment of debt | | | — | | | | (32,071 | ) | | | (6,795 | ) | | | — | | | | — | | | | (32,071 | ) |
| | | | | | | | | | | | | | |
Total other expenses | | | (41,087 | ) | | | (88,597 | ) | | | (104,532 | ) | | | (58,399 | ) | | | (59,066 | ) | | | (103,974 | ) |
| | | | | | | | | | | | | | |
Income before income tax expense, minority interests and equity in net income from unconsolidated investments | | | 214,878 | | | | 148,013 | | | | 122,228 | | |
Income before income tax expense and equity in net income from unconsolidated investments | | | | 137,436 | | | | 196,899 | | | | 132,636 | |
Income tax expense | | | (92,227 | ) | | | (31,040 | ) | | | (38,465 | ) | | | (50,044 | ) | | | (84,561 | ) | | | (24,483 | ) |
Minority interests | | | (6,961 | ) | | | (8,656 | ) | | | (6,610 | ) | |
Equity in net income from unconsolidated investments | | | 23,583 | | | | 22,196 | | | | 28,636 | | | | 23,036 | | | | 23,583 | | | | 22,196 | |
| | | | | | | | | | | | | | |
NET INCOME | | $ | 139,273 | | | $ | 130,513 | | | $ | 105,789 | | | | 110,428 | | | | 135,921 | | | | 130,349 | |
| | | | | | | | |
Less: Net income attributable to noncontrolling interests in subsidiaries | | | | (8,783 | ) | | | (6,961 | ) | | | (8,656 | ) |
| | | | | | | | |
NET INCOME ATTRIBUTABLE TO COVANTA HOLDING CORPORATION | | | $ | 101,645 | | | $ | 128,960 | | | $ | 121,693 | |
| | | | | | | | | | | | | | |
| | |
Weighted Average Common Shares Outstanding: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 153,345 | | | | 152,653 | | | | 145,663 | | | | 153,694 | | | | 153,345 | | | | 152,653 | |
| | | | | | | | | | | | | | |
Diluted | | | 154,732 | | | | 153,997 | | | | 147,030 | | | | 154,994 | | | | 154,732 | | | | 153,997 | |
| | | | | | | | | | | | | | |
Earnings Per Share: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 0.91 | | | $ | 0.85 | | | $ | 0.73 | | | $ | 0.66 | | | $ | 0.84 | | | $ | 0.80 | |
| | | | | | | | | | | | | | |
Diluted | | $ | 0.90 | | | $ | 0.85 | | | $ | 0.72 | | | $ | 0.66 | | | $ | 0.83 | | | $ | 0.79 | |
| | | | | | | | | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
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COVANTA HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | | | | | | |
| | As of December 31, | | | As of December 31, | |
| | 2008 | | 2007 | | | 2009 | | 2008 | |
| | (In thousands, except per share amounts) | | | (In thousands, except per share amounts) | |
|
ASSETS | ASSETS | ASSETS |
Current: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 192,393 | | | $ | 149,406 | | | $ | 433,683 | | | $ | 192,393 | |
Marketable securities available for sale | | | 300 | | | | 2,495 | | |
Restricted funds held in trust | | | 175,093 | | | | 187,951 | | | | 131,223 | | | | 175,093 | |
Receivables (less allowances of $3,437 and $4,353) | | | 243,791 | | | | 252,114 | | |
Receivables (less allowances of $2,978 and $3,437) | | | | 306,631 | | | | 243,791 | |
Unbilled service receivables | | | 49,468 | | | | 59,232 | | | | 37,692 | | | | 49,468 | |
Deferred income taxes | | | — | | | | 29,873 | | | | 9,509 | | | | — | |
Prepaid expenses and other current assets | | | 123,214 | | | | 113,927 | | | | 126,139 | | | | 123,514 | |
| | | | | | | | | | |
Total Current Assets | | | 784,259 | | | | 794,998 | | | | 1,044,877 | | | | 784,259 | |
Property, plant and equipment, net | | | 2,530,035 | | | | 2,620,507 | | | | 2,582,841 | | | | 2,530,035 | |
Investments in fixed maturities at market (cost: $26,620 and $26,338, respectively) | | | 26,737 | | | | 26,260 | | |
Investments in fixed maturities at market (cost: $27,500 and $26,620, respectively) | | | | 28,142 | | | | 26,737 | |
Restricted funds held in trust | | | 149,818 | | | | 191,913 | | | | 146,529 | | | | 149,818 | |
Unbilled service receivables | | | 44,298 | | | | 56,685 | | | | 37,389 | | | | 44,298 | |
Waste, service and energy contracts, net | | | 223,397 | | | | 268,353 | | | | 380,359 | | | | 223,397 | |
Other intangible assets, net | | | 83,331 | | | | 88,954 | | | | 84,610 | | | | 83,331 | |
Goodwill | | | 195,617 | | | | 127,027 | | | | 202,996 | | | | 195,617 | |
Investments in investees and joint ventures | | | 102,953 | | | | 81,248 | | | | 120,173 | | | | 102,953 | |
Other assets | | | 139,544 | | | | 112,554 | | | | 306,366 | | | | 139,544 | |
| | | | | | | | | | |
Total Assets | | $ | 4,279,989 | | | $ | 4,368,499 | | | $ | 4,934,282 | | | $ | 4,279,989 | |
| | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |
LIABILITIES AND EQUITY | | LIABILITIES AND EQUITY |
Current: | | | | | | | | | | | | | | | | |
Current portion of long-term debt | | $ | 6,922 | | | $ | 6,898 | | | $ | 7,027 | | | $ | 6,922 | |
Current portion of project debt | | | 198,034 | | | | 195,625 | | | | 191,993 | | | | 198,034 | |
Accounts payable | | | 24,470 | | | | 29,916 | | | | 27,831 | | | | 24,470 | |
Deferred revenue | | | 15,202 | | | | 25,114 | | | | 60,256 | | | | 15,202 | |
Accrued expenses and other current liabilities | | | 215,046 | | | | 234,000 | | | | 217,721 | | | | 215,046 | |
| | | | | | | | | | |
Total Current Liabilities | | | 459,674 | | | | 491,553 | | | | 504,828 | | | | 459,674 | |
Long-term debt | | | 1,005,965 | | | | 1,012,534 | | | | 1,430,679 | | | | 941,596 | |
Project debt | | | 880,336 | | | | 1,084,650 | | | | 767,371 | | | | 880,336 | |
Deferred income taxes | | | 466,468 | | | | 440,723 | | | | 571,122 | | | | 493,919 | |
Waste and service contracts | | | 114,532 | | | | 130,464 | | | | 101,353 | | | | 114,532 | |
Other liabilities | | | 165,881 | | | | 141,740 | | | | 141,760 | | | | 165,881 | |
| | | | | | | | | | |
Total Liabilities | | | 3,092,856 | | | | 3,301,664 | | | | 3,517,113 | | | | 3,055,938 | |
| | | | | | | | | | |
| | |
Commitments and Contingencies (Note 21) | | | | | | | | | | | | | | | | |
| | |
Minority Interests | | | 35,014 | | | | 40,773 | | |
| | | | | | |
Stockholders’ Equity: | | | | | | | | | |
Equity: | | | | | | | | | |
Covanta Holding Corporation stockholders’ equity: | | | | | | | | | |
Preferred stock ($0.10 par value; authorized 10,000 shares; none issued and outstanding) | | | — | | | | — | | | | — | | | | — | |
Common stock ($0.10 par value; authorized 250,000 shares; issued 154,797 and 154,281 shares; outstanding 154,280 and 153,922 shares) | | | 15,480 | | | | 15,428 | | |
Common stock ($0.10 par value; authorized 250,000 shares; issued 155,615 and 154,797 shares; outstanding 154,936 and 154,280 shares) | | | | 15,562 | | | | 15,480 | |
Additional paid-in capital | | | 776,544 | | | | 765,287 | | | | 909,205 | | | | 832,595 | |
Accumulated other comprehensive (loss) income | | | (8,205 | ) | | | 16,304 | | |
Accumulated other comprehensive income (loss) | | | | 7,443 | | | | (8,205 | ) |
Accumulated earnings | | | 368,352 | | | | 229,079 | | | | 450,864 | | | | 349,219 | |
Treasury stock, at par | | | (52 | ) | | | (36 | ) | | | (68 | ) | | | (52 | ) |
| | | | | | | | | | |
Total Stockholders’ Equity | | | 1,152,119 | | | | 1,026,062 | | |
Total Covanta Holding Corporation stockholders’ equity | | | | 1,383,006 | | | | 1,189,037 | |
| | | | | | | | | | |
Total Liabilities and Stockholders’ Equity | | $ | 4,279,989 | | | $ | 4,368,499 | | |
Noncontrolling interests in subsidiaries | | | | 34,163 | | | | 35,014 | |
| | | | | | | | | | |
Total Equity | | | | 1,417,169 | | | | 1,224,051 | |
| | | | | | |
Total Liabilities and Equity | | | $ | 4,934,282 | | | $ | 4,279,989 | |
| | | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
76
COVANTA HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, | | | For the Years Ended December 31, | |
| | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | |
| | (In thousands) | | | | | (In thousands) | | | |
|
OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | $ | 139,273 | | | $ | 130,513 | | | $ | 105,789 | | | $ | 110,428 | | | $ | 135,921 | | | $ | 130,349 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | | | | | |
Depreciation and amortization expense | | | 199,488 | | | | 196,970 | | | | 193,217 | | | | 202,872 | | | | 199,488 | | | | 196,970 | |
Revenue contract levelization | | | (586 | ) | | | (555 | ) | | | 3,419 | | | | (664 | ) | | | (586 | ) | | | (555 | ) |
Amortization of long-term debt deferred financing costs | | | 3,684 | | | | 3,841 | | | | 3,858 | | | | 5,272 | | | | 3,684 | | | | 3,841 | |
Amortization of debt premium and discount | | | (10,707 | ) | | | (14,857 | ) | | | (22,506 | ) | |
Amortization of debt premium | | | | (8,537 | ) | | | (10,707 | ) | | | (14,857 | ) |
Non-cash convertible debt related expense | | | | 24,290 | | | | 17,979 | | | | 15,377 | |
Loss on extinguishment of debt | | | — | | | | 32,071 | | | | 6,795 | | | | — | | | | — | | | | 32,071 | |
Provision for doubtful accounts | | | 1,839 | | | | 1,184 | | | | 2,251 | | | | 2,249 | | | | 1,839 | | | | 1,184 | |
Stock-based compensation expense | | | 14,750 | | | | 13,448 | | | | 6,887 | | | | 14,220 | | | | 14,750 | | | | 13,448 | |
Equity in net income from unconsolidated investments | | | (23,583 | ) | | | (22,196 | ) | | | (28,636 | ) | | | (23,036 | ) | | | (23,583 | ) | | | (22,196 | ) |
Dividends from unconsolidated investments | | | 19,459 | | | | 24,250 | | | | 19,375 | | | | 11,310 | | | | 19,459 | | | | 24,250 | |
Minority interests | | | 6,961 | | | | 8,656 | | | | 6,610 | | |
Deferred income taxes | | | 70,826 | | | | 5,869 | | | | 20,908 | | | | 32,126 | | | | 63,160 | | | | (688 | ) |
Other, net | | | 3,809 | | | | (1,801 | ) | | | 6,872 | | | | 6,859 | | | | 3,809 | | | | (1,801 | ) |
Change in operating assets and liabilities, net of effects of acquisitions: | | | | | | | | | | | | | |
Change in restricted funds held in trust | | | 29,481 | | | | 5,493 | | | | 7,790 | | | | 17,823 | | | | 29,481 | | | | 5,493 | |
Change in operating assets and liabilities, net of effects of acquisitions: | | | | | | | | | | | | | |
Receivables | | | 4,138 | | | | (36,084 | ) | | | (8,577 | ) | | | (2,922 | ) | | | 4,138 | | | | (36,084 | ) |
Unbilled service receivables | | | 14,020 | | | | 19,403 | | | | 17,294 | | | | 18,620 | | | | 14,020 | | | | 19,403 | |
Accounts payable and accrued expenses | | | (38,450 | ) | | | 22,880 | | | | 2,351 | | | | 3,974 | | | | (38,450 | ) | | | 22,880 | |
Unpaid losses and loss adjustment expenses | | | (3,235 | ) | | | (4,984 | ) | | | (8,848 | ) | |
Other, net | | | (28,560 | ) | | | (20,510 | ) | | | (15,860 | ) | | | (17,646 | ) | | | (31,795 | ) | | | (25,494 | ) |
| | | | | | | | | | | | | | |
Net cash provided by operating activities | | | 402,607 | | | | 363,591 | | | | 318,989 | | | | 397,238 | | | | 402,607 | | | | 363,591 | |
| | | | | | | | | | | | | | |
INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
Acquisition of businesses, net of cash acquired | | | (73,393 | ) | | | (110,465 | ) | | | — | | | | (265,644 | ) | | | (73,393 | ) | | | (110,465 | ) |
Proceeds from the sale of investment securities | | | 20,295 | | | | 15,057 | | | | 10,615 | | | | 6,838 | | | | 20,295 | | | | 15,057 | |
Purchase of investment securities | | | (18,577 | ) | | | (622 | ) | | | (774 | ) | | | (8,008 | ) | | | (18,577 | ) | | | (622 | ) |
Acquisition of non-controlling interest in subsidiary | | | — | | | | — | | | | (27,500 | ) | |
Purchase of equity interest | | | (18,503 | ) | | | (11,199 | ) | | | — | | |
Acquisition of noncontrolling interest in subsidiary | | | | (23,700 | ) | | | — | | | | — | |
Purchase of equity interests | | | | (8,938 | ) | | | (18,503 | ) | | | (11,199 | ) |
Purchase of property, plant and equipment | | | (87,920 | ) | | | (85,748 | ) | | | (54,267 | ) | | | (73,619 | ) | | | (87,920 | ) | | | (85,748 | ) |
Property insurance proceeds | | | 16,215 | | | | 9,441 | | | | — | | | | — | | | | 16,215 | | | | 9,441 | |
Acquisition of land use rights | | | (16,727 | ) | | | — | | | | — | | | | — | | | | (16,727 | ) | | | — | |
Loans issued to client community to fund certain facility improvements | | | (8,233 | ) | | | — | | | | — | | |
Loans issued to client community to fund certain facility improvements, net of repayments | | | | (11,191 | ) | | | (8,233 | ) | | | — | |
Other, net | | | (2,465 | ) | | | 3,626 | | | | 5,022 | | | | (2,978 | ) | | | (2,465 | ) | | | 3,626 | |
| | | | | | | | | | | | | | |
Net cash used in investing activities | | | (189,308 | ) | | | (179,910 | ) | | | (66,904 | ) | | | (387,240 | ) | | | (189,308 | ) | | | (179,910 | ) |
| | | | | | | | | | | | | | |
FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | |
Proceeds from the issuance of common stock, net | | | — | | | | 135,757 | | | | — | | |
Proceeds from rights offerings, net | | | — | | | | — | | | | 20,498 | | |
Proceeds from the exercise of options for common stock, net | | | 262 | | | | 812 | | | | 1,126 | | |
Proceeds from borrowings on long-term debt | | | — | | | | 949,907 | | | | 97,619 | | | | 460,000 | | | | — | | | | 949,907 | |
Financings of insurance premiums, net | | | 1,381 | | | | 7,927 | | | | — | | |
Proceeds from issuance of warrants | | | | 53,958 | | | | — | | | | — | |
Proceeds from borrowings on project debt | | | 8,278 | | | | 3,506 | | | | 6,868 | | | | 74,194 | | | | 8,278 | | | | 3,506 | |
Proceeds from borrowings on revolving credit facility | | | — | | | | 30,000 | | | | — | | | | — | | | | — | | | | 30,000 | |
Proceeds from the issuance of common stock, net | | | | — | | | | — | | | | 135,757 | |
Principal payments on long-term debt | | | (6,877 | ) | | | (1,181,130 | ) | | | (140,638 | ) | | | (6,591 | ) | | | (6,877 | ) | | | (1,181,130 | ) |
Principal payments on project debt | | | (187,800 | ) | | | (164,167 | ) | | | (151,095 | ) | | | (257,331 | ) | | | (187,800 | ) | | | (164,167 | ) |
Payments of borrowings on revolving credit facility | | | — | | | | (30,000 | ) | | | — | | | | — | | | | — | | | | (30,000 | ) |
Payments of long-term debt deferred financing costs | | | — | | | | (18,324 | ) | | | (2,129 | ) | | | (14,275 | ) | | | — | | | | (18,324 | ) |
Purchase of convertible note hedge | | | | (112,378 | ) | | | — | | | | — | |
Payment of interest rate swap termination costs | | | | (11,144 | ) | | | — | | | | — | |
Payments of tender premiums on debt extinguishment | | | — | | | | (33,016 | ) | | | (1,952 | ) | | | — | | | | — | | | | (33,016 | ) |
Increase in holding company restricted funds | | | — | | | | 6,660 | | | | — | | | | — | | | | — | | | | 6,660 | |
Decrease in restricted funds held in trust | | | 21,575 | | | | 31,432 | | | | 31,583 | | | | 54,616 | | | | 21,575 | | | | 31,432 | |
Distributions to minority partners | | | (7,061 | ) | | | (7,699 | ) | | | (9,263 | ) | |
Other, net | | | — | | | | — | | | | (37 | ) | |
Proceeds from the exercise of options for common stock, net | | | | 560 | | | | 262 | | | | 812 | |
Financings of insurance premiums, net | | | | 345 | | | | 1,381 | | | | 7,927 | |
Distributions to partners of noncontrolling interests in subsidiaries | | | | (11,004 | ) | | | (7,061 | ) | | | (7,699 | ) |
| | | | | | | | | | | | | | |
Net cash used in financing activities | | | (170,242 | ) | | | (268,335 | ) | | | (147,420 | ) | |
Net cash provided by (used in) financing activities | | | | 230,950 | | | | (170,242 | ) | | | (268,335 | ) |
| | | | | | | | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | | (70 | ) | | | 618 | | | | 221 | | | | 342 | | | | (70 | ) | | | 618 | |
| | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 42,987 | | | | (84,036 | ) | | | 104,886 | | | | 241,290 | | | | 42,987 | | | | (84,036 | ) |
Cash and cash equivalents at beginning of period | | | 149,406 | | | | 233,442 | | | | 128,556 | | | | 192,393 | | | | 149,406 | | | | 233,442 | |
| | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 192,393 | | | $ | 149,406 | | | $ | 233,442 | | | $ | 433,683 | | | $ | 192,393 | | | $ | 149,406 | |
| | | | | | | | | | | | | | |
| | |
Cash Paid for Interest and Income Taxes: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest | | $ | 114,207 | | | $ | 146,677 | | | $ | 205,807 | | | $ | 90,559 | | | $ | 114,207 | | | $ | 146,677 | |
Income taxes | | $ | 22,979 | | | $ | 24,122 | | | $ | 17,398 | | |
Income taxes, net of refunds | | | $ | 8,737 | | | $ | 20,934 | | | $ | 19,856 | |
The accompanying notes are an integral part of the consolidated financial statements.
77
COVANTA HOLDING CORPORATION
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Accumulated
| | | | | | | | | | | | | | | | | Accumulated
| | | | | | | | | | | |
| | | | | | Additional
| | | | Other
| | Accumulated
| | | | | | | | | | | | | Additional
| | Other
| | | | | | | | Noncontrolling
| | | |
| | Common Stock | | Paid-In
| | Unearned
| | Comprehensive
| | Earnings
| | Treasury Stock | | | | | Common Stock | | Paid-In
| | Comprehensive
| | Accumulated
| | Treasury Stock | | Interests in
| | | |
| | Shares | | Amount | | Compensation | | Compensation | | (Loss) Income | | (Deficit) | | Shares | | Amount | | Total | | | Shares | | Amount | | Capital | | Income (Loss) | | Earnings | | Shares | | Amount | | Subsidiaries | | Total | |
| | (In thousands) | | | | | | | | | | | (In thousands) | | | | | | | | | |
|
Balance as of December 31, 2005 | | | 141,246 | | | $ | 14,125 | | | $ | 594,186 | | | $ | (4,583 | ) | | $ | 535 | | | $ | (5,014 | ) | | | 80 | | | $ | (8 | ) | | $ | 599,241 | | |
Reclass of unearned compensation upon adoption of SFAS 123R | | | | | | | | | | | (4,583 | ) | | | 4,583 | | | | | | | | | | | | | | | | | | | | — | | |
Shares issued in rights offering | | | 5,697 | | | | 570 | | | | 19,928 | | | | | | | | | | | | | | | | | | | | | | | | 20,498 | | |
Stock-based compensation expense | | | | | | | | | | | 6,887 | | | | | | | | | | | | | | | | | | | | | | | | 6,887 | | |
Tax benefit related to exercise of stock options and vesting of restricted stock | | | | | | | | | | | 2,242 | | | | | | | | | | | | | | | | | | | | | | | | 2,242 | | |
Shares forfeited for terminated employees | | | | | | | | | | | (30 | ) | | | | | | | | | | | | | | | 77 | | | | (8 | ) | | | (38 | ) | |
Exercise of options to purchase common stock | | | 178 | | | | 18 | | | | 1,108 | | | | | | | | | | | | | | | | | | | | | | | | 1,126 | | |
Shares issued in non-vested stock award | | | 536 | | | | 53 | | | | (53 | ) | | | | | | | | | | | | | | | | | | | | | | | — | | |
Comprehensive income, net of income taxes: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | | | | | | | | | 105,789 | | | | | | | | | | | | 105,789 | | |
Foreign currency translation | | | | | | | | | | | | | | | | | | | 986 | | | | | | | | | | | | | | | | 986 | | |
Minimum pension liability adjustment | | | | | | | | | | | | | | | | | | | 100 | | | | | | | | | | | | | | | | 100 | | |
Net unrealized gain on available-for-sale securities | | | | | | | | | | | | | | | | | | | 559 | | | | | | | | | | | | | | | | 559 | | |
Net unrealized gain on derivative instruments | | | | | | | | | | | | | | | | | | | 112 | | | | | | | | | | | | | | | | 112 | | |
| | | | | | | | |
Total comprehensive income | | | | | | | | | | | | | | | | | | | 1,757 | | | | 105,789 | | | | | | | | | | | | 107,546 | | |
| | | | | | | | |
Adjustment for unrecognized net gain upon | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
adoption of SFAS 158 | | | | | | | | | | | | | | | | | | | 1,650 | | | | | | | | | | | | | | | | 1,650 | | |
| | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2006 | | | 147,657 | | | | 14,766 | | | | 619,685 | | | | — | | | | 3,942 | | | | 100,775 | | | | 157 | | | | (16 | ) | | | 739,152 | | | | 147,657 | | | $ | 14,766 | | | $ | 619,685 | | | $ | 3,942 | | | $ | 100,775 | | | | 157 | | | $ | (16 | ) | | $ | 42,681 | | | $ | 781,833 | |
Shares issued in equity offering, net of costs | | | 6,118 | | | | 612 | | | | 135,143 | | | | | | | | | | | | | | | | | | | | | | | | 135,755 | | | | 6,118 | | | | 612 | | | | 135,143 | | | | | | | | | | | | | | | | | | | | | | | | 135,755 | |
Stock-based compensation expense | | | | | | | | | | | 13,448 | | | | | | | | | | | | | | | | | | | | | | | | 13,448 | | | | | | | | | | | | 13,448 | | | | | | | | | | | | | | | | | | | | | | | | 13,448 | |
Effect of FIN 48 adoption | | | | | | | | | | | | | | | | | | | | | | | (2,209 | ) | | | | | | | | | | | (2,209 | ) | |
Effect of adoption of accounting standard related to tax liabilities for uncertain tax positions | | | | | | | | | | | | | | | | | | | | (2,209 | ) | | | | | | | | | | | | | | | (2,209 | ) |
Effect of adoption of accounting standard related to convertible debt instruments that may be settled in cash upon conversion | | | | | | | | | | | | 56,051 | | | | | | | | | | | | | | | | | | | | | | | | 56,051 | |
Tax benefit related to exercise of stock options and vesting of restricted stock | | | | | | | | | | | 200 | | | | | | | | | | | | | | | | | | | | | | | | 200 | | | | | | | | | | | | 200 | | | | | | | | | | | | | | | | | | | | | | | | 200 | |
Shares forfeited for terminated employees | | | | | | | | | | | 3 | | | | | | | | | | | | | | | | 27 | | | | (3 | ) | | | — | | | | | | | | | | | | 3 | | | | | | | | | | | | 27 | | | | (3 | ) | | | | | | | — | |
Shares repurchased for tax withholdings for vested stock awards | | | | | | | | | | | (3,954 | ) | | | | | | | | | | | | | | | 175 | | | | (17 | ) | | | (3,971 | ) | | | | | | | | | | | (3,954 | ) | | | | | | | | | | | 175 | | | | (17 | ) | | | | | | | (3,971 | ) |
Exercise of options to purchase common stock | | | 113 | | | | 11 | | | | 801 | | | | | | | | | | | | | | | | | | | | | | | | 812 | | | | 113 | | | | 11 | | | | 801 | | | | | | | | | | | | | | | | | | | | | | | | 812 | |
Shares issued in non-vested stock award | | | 393 | | | | 39 | | | | (39 | ) | | | | | | | | | | | | | | | | | | | | | | | — | | | | 393 | | | | 39 | | | | (39 | ) | | | | | | | | | | | | | | | | | | | | | | | — | |
Sale of noncontrolling interests in subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (5,656 | ) | | | (5,656 | ) |
Distributions to partners of noncontrolling interests in subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (7,704 | ) | | | (7,704 | ) |
Comprehensive income, net of income taxes: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | | | | | | | | | 130,513 | | | | | | | | | | | | 130,513 | | | | | | | | | | | | | | | | | | | | 121,693 | | | | | | | | | | | | 8,656 | | | | 130,349 | |
Foreign currency translation | | | | | | | | | | | | | | | | | | | 4,388 | | | | | | | | | | | | | | | | 4,388 | | | | | | | | | | | | | | | | 4,388 | | | | | | | | | | | | | | | | 2,796 | | | | 7,184 | |
SFAS 158 unrecognized net gain | | | | | | | | | | | | | | | | | | | 9,446 | | | | | | | | | | | | | | | | 9,446 | | |
Minimum pension liability adjustment | | | | | | | | | | | | | | | | | | | (59 | ) | | | | | | | | | | | | | | | (59 | ) | |
Net unrealized gain on available-for-sale securities | | | | | | | | | | | | | | | | | | | 712 | | | | | | | | | | | | | | | | 712 | | |
Net unrealized gain on derivative instruments | | | | | | | | | | | | | | | | | | | (2,125 | ) | | | | | | | | | | | | | | | (2,125 | ) | |
Pension and other postretirement plan unrecognized net gain, net of income tax expense of $5,100 | | | | | | | | | | | | | | | | 9,446 | | | | | | | | | | | | | | | | | | | | 9,446 | |
Minimum pension liability adjustment, net of income tax benefit of $32 | | | | | | | | | | | | | | | | (59 | ) | | | | | | | | | | | | | | | | | | | (59 | ) |
Net unrealized gain onavailable-for-sale securities, net of income tax expense of $383 | | | | | | | | | | | | | | | | 712 | | | | | | | | | | | | | | | | | | | | 712 | |
Net unrealized loss on derivative instruments, net of income tax benefit of $1,144 | | | | | | | | | | | | | | | | (2,125 | ) | | | | | | | | | | | | | | | | | | | (2,125 | ) |
| | | | | | | | | | | | | | | | |
Total comprehensive income | | | | | | | | | | | | | | | | | | | 12,362 | | | | 130,513 | | | | | | | | | | | | 142,875 | | | | | | | | | | | | | | | | 12,362 | | | | 121,693 | | | | | | | | | | | | 11,452 | | | | 145,507 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2007 | | | 154,281 | | | | 15,428 | | | | 765,287 | | | | — | | | | 16,304 | | | | 229,079 | | | | 359 | | | | (36 | ) | | | 1,026,062 | | | | 154,281 | | | | 15,428 | | | | 821,338 | | | | 16,304 | | | | 220,259 | | | | 359 | | | | (36 | ) | | | 40,773 | | | | 1,114,066 | |
Stock-based compensation expense | | | | | | | | | | | 14,750 | | | | | | | | | | | | | | | | | | | | | | | | 14,750 | | | | | | | | | | | | 14,750 | | | | | | | | | | | | | | | | | | | | | | | | 14,750 | |
Shares forfeited for terminated employees | | | | | | | | | | | 2 | | | | | | | | | | | | | | | | 21 | | | | (2 | ) | | | — | | | | | | | | | | | | 2 | | | | | | | | | | | | 21 | | | | (2 | ) | | | | | | | — | |
Shares repurchased for tax withholdings for vested stock awards | | | | | | | | | | | (3,705 | ) | | | | | | | | | | | | | | | 137 | | | | (14 | ) | | | (3,719 | ) | | | | | | | | | | | (3,705 | ) | | | | | | | | | | | 137 | | | | (14 | ) | | | | | | | (3,719 | ) |
Exercise of options to purchase common stock | | | 22 | | | | 2 | | | | 260 | | | | | | | | | | | | | | | | | | | | | | | | 262 | | | | 22 | | | | 2 | | | | 260 | | | | | | | | | | | | | | | | | | | | | | | | 262 | |
Shares issued in non-vested stock award | | | 494 | | | | 50 | | | | (50 | ) | | | | | | | | | | | | | | | | | | | | | | | — | | | | 494 | | | | 50 | | | | (50 | ) | | | | | | | | | | | | | | | | | | | | | | | — | |
Deferred tax for noncontrolling interests in subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 374 | | | | 374 | |
Distributions to partners of noncontrolling interests in subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (7,062 | ) | | | (7,062 | ) |
Comprehensive income, net of income taxes: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | | | | | | | | | 139,273 | | | | | | | | | | | | 139,273 | | | | | | | | | | | | | | | | | | | | 128,960 | | | | | | | | | | | | 6,961 | | | | 135,921 | |
Foreign currency translation | | | | | | | | | | | | | | | | | | | (10,481 | ) | | | | | | | | | | | | | | | (10,481 | ) | | | | | | | | | | | | | | | (10,481 | ) | | | | | | | | | | | | | | | (6,032 | ) | | | (16,513 | ) |
SFAS 158 unrecognized net loss | | | | | | | | | | | | | | | | | | | (13,218 | ) | | | | | | | | | | | | | | | (13,218 | ) | |
Minimum pension liability adjustment | | | | | | | | | | | | | | | | | | | (403 | ) | | | | | | | | | | | | | | | (403 | ) | |
Net unrealized loss on available-for-sale securities | | | | | | | | | | | | | | | | | | | (407 | ) | | | | | | | | | | | | | | | (407 | ) | |
Pension and other postretirement plan unrecognized net loss, net of income tax benefit of $6,800 | | | | | | | | | | | | | | | | (13,218 | ) | | | | | | | | | | | | | | | | | | | (13,218 | ) |
Minimum pension liability adjustment, net of income tax benefit of $217 | | | | | | | | | | | | | | | | (403 | ) | | | | | | | | | | | | | | | | | | | (403 | ) |
Net unrealized loss onavailable-for-sale securities, net of income tax benefit of $219 | | | | | | | | | | | | | | | | (407 | ) | | | | | | | | | | | | | | | | | | | (407 | ) |
| | | | | | | | | | | | | | | | |
Total comprehensive loss | | | | | | | | | | | | | | | | | | | (24,509 | ) | | | 139,273 | | | | | | | | | | | | 114,764 | | |
Total comprehensive (loss) income | | | | | | | | | | | | | | | | (24,509 | ) | | | 128,960 | | | | | | | | | | | | 929 | | | | 105,380 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2008 | | | 154,797 | | | $ | 15,480 | | | $ | 776,544 | | | $ | — | | | $ | (8,205 | ) | | $ | 368,352 | | | | 517 | | | $ | (52 | ) | | $ | 1,152,119 | | | | 154,797 | | | | 15,480 | | | | 832,595 | | | | (8,205 | ) | | | 349,219 | | | | 517 | | | | (52 | ) | | | 35,014 | | | | 1,224,051 | |
Stock-based compensation expense | | | | | | | | | | | | 14,220 | | | | | | | | | | | | | | | | | | | | | | | | 14,220 | |
Issuance of Warrants | | | | | | | | | | | | 53,846 | | | | | | | | | | | | | | | | | | | | | | | | 53,846 | |
Shares forfeited for terminated employees | | | | | | | | | | | | 2 | | | | | | | | | | | | 22 | | | | (2 | ) | | | | | | | — | |
Shares repurchased for tax withholdings for vested stock awards | | | | | | | | | | | | (1,909 | ) | | | | | | | | | | | 140 | | | | (14 | ) | | | | | | | (1,923 | ) |
Exercise of options to purchase common stock | | | | 76 | | | | 8 | | | | 552 | | | | | | | | | | | | | | | | | | | | | | | | 560 | |
Shares issued in non-vested stock award | | | | 742 | | | | 74 | | | | (74 | ) | | | | | | | | | | | | | | | | | | | | | | | — | |
Purchase price allocation for noncontrolling interests | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 33,428 | | | | 33,428 | |
Acquisition of noncontrolling interests in subsidiaries | | | | | | | | | | | | 9,973 | | | | | | | | | | | | | | | | | | | | (33,492 | ) | | | (23,519 | ) |
Distributions to partners of noncontrolling interests in subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (11,004 | ) | | | (11,004 | ) |
Comprehensive income, net of income taxes: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | | | | | | 101,645 | | | | | | | | | | | | 8,783 | | | | 110,428 | |
Foreign currency translation | | | | | | | | | | | | | | | | 5,892 | | | | | | | | | | | | | | | | 1,434 | | | | 7,326 | |
Pension and other postretirement plan unrecognized net gain, net of income tax expense of $5,800 | | | | | | | | | | | | | | | | 8,754 | | | | | | | | | | | | | | | | | | | | 8,754 | |
Minimum pension liability adjustment, net of income tax expense of $96 | | | | | | | | | | | | | | | | 178 | | | | | | | | | | | | | | | | | | | | 178 | |
Net unrealized gain onavailable-for-sale securities, net of income tax expense of $444 | | | | | | | | | | | | | | | | 824 | | | | | | | | | | | | | | | | | | | | 824 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income | | | | | | | | | | | | | | | | 15,648 | | | | 101,645 | | | | | | | | | | | | 10,217 | | | | 127,510 | |
| | | | | | | | | | | | | | | | | | | | |
Balance as of December 31, 2009 | | | | 155,615 | | | $ | 15,562 | | | $ | 909,205 | | | $ | 7,443 | | | $ | 450,864 | | | | 679 | | | $ | (68 | ) | | $ | 34,163 | | | $ | 1,417,169 | |
| | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
78
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
NoteNOTE 1. | Organization and Summary of Significant Accounting PoliciesORGANIZATION 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 Corporation and its subsidiaries.
Organization
We are a leading developer, owner and operator of infrastructure for the conversion of waste to energy (known as “energy-from-waste”), as well as other waste disposal and renewable energy production businesses in the Americas, Europe and Asia. We are organized as a holding company which was incorporated in Delaware on April 16, 1992. Our predominant business is the waste and energy services business. We also have investments in subsidiaries engaged in insurance operations in California primarily in property and casualty insurance.
We conduct all of our operations through subsidiaries which are engaged predominantly in the businesses of waste and energy services. We also engage in the independent power production business outside the Americas. We own, haveAs of December 31, 2009, we owned, had equity investments in,and/or operate 6064 energy generation facilities, 5056 of which are in the United StatesAmericas and 10eight of which are located outside the United States.Americas. Our energy generation facilities use a variety of fuels, including municipal solid waste, wood waste (biomass), landfill gas, water (hydroelectric), natural gas, coal, and heavy fuel-oil. We also own or operate several businesses that are associated with our energy-from-waste business, including a waste procurement business, a biomass procurement business, four landfills, which we use primarily for ash disposal, and several waste transfer stations. We have twoOur reportable segments Domesticare Americas (formerly referred to as “Domestic”) and International, which areInternational. The Americas segment is comprised of our domestic and international waste and energy services operations respectively.primarily in the United States and Canada. The International segment is comprised of international waste and energy services.
Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements reflect the results of our operations, cash flows and financial position and of our majority-owned or controlled subsidiaries. All intercompany accounts and transactions have been eliminated.
Equity Method of Investments
We use the equity method to account for our investments for which we have the ability to exercise significant influence over the operating and financial policies of the investee. Consolidated net income includes our proportionate share of the net income or loss of these companies. Such amounts are classified as “equity in net income from unconsolidated investments” in our consolidated financial statements. Investments in companies in which we do not have the ability to exercise significant influence are carried at the lower of cost or estimated realizable value. We monitor investments for other than temporaryother-than-temporary declines in value and make reductions when appropriate.
RevenuesRevenue Recognition
Waste and Service Revenues
— Revenues from waste and service agreements consist of the following:
1) Fees earned under contract to operate and maintain energy-from-waste and independent power facilities are recognized as revenue when services are rendered, regardless of the period they are billed;
2) Fees earned to service project debt (principal and interest) where such fees are expressly included as a component on the service fee paid by the client community pursuant to applicable energy-from-waste service agreements. Regardless of the timing of amounts paid by client communities relating to project debt principal, we record service revenue with respect to this principal component on a levelized basis over the term of the agreement. Unbilled service receivables related to energy-from-waste operations
| | |
| 1) | Fees earned under contract to operate and maintain energy-from-waste and independent power facilities are recognized as revenue when services are rendered, regardless of the period they are billed; |
| 2) | Fees earned to service project debt (principal and interest) where such fees are expressly included as a component on the service fee paid by the client community pursuant to applicable energy-from-waste service agreements. Regardless of the timing of amounts paid by client communities relating to project debt principal, we record service revenue with respect to this principal component on a levelized basis over the term of the agreement. Unbilled service receivables related to energy-from-waste operations are discounted in recognizing the present value for services performed currently in order to service the principal component of the project debt; |
| 3) | Fees earned for processing waste in excess of contractual requirements are recognized as revenue beginning in the period when we process the excess waste. Some of our contracts include stated fixed fees earned by us for processing waste up to certain base contractual amounts during specified periods. These contracts also set forth the per-ton fees that are payable if we accept waste in excess of the base contractual amounts; |
| 4) | Tipping fees earned under waste disposal agreements are recognized as revenue in the period the waste is received; and |
| 5) | Other miscellaneous fees, such as revenue for ferrous and non-ferrous metal recovered and recycled, are generally recognized as revenue when ferrous and non-ferrous metal is sold. |
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COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —– (Continued)
are discounted in recognizing the present value for services performed currently in order to service the principal component of the project debt;
3) Fees earned for processing waste in excess of contractual requirements are recognized as revenue beginning in the period when we process the excess waste. Some of our contracts include stated fixed fees earned by us for processing waste up to certain base contractual amounts during specified periods. These contracts also set forth the per-ton fees that are payable if we accept waste in excess of the base contractual amounts;
4) Tipping fees earned under waste disposal agreements are recognized as revenue in the period the waste is received; and
5) Other miscellaneous fees, such as revenue for ferrous and non-ferrous metal recovered and recycled, are generally recognized as revenue when ferrous and non-ferrous metal is sold.
Electricity and Steam Sales
— Revenue from the sale of electricity and steam are earned and recorded based upon output delivered and capacity provided at rates specified under contract terms or prevailing market rates net of amounts due to client communities under applicable service agreements. We account for certain long-term power contracts in accordance with Emerging Issues Task Force (“EITF”)No. 91-6, “Revenue Recognitionaccounting standards for revenue recognition of Long-Term Power Sales Contracts” and EITFNo. 96-17, “Revenue Recognition under Long-Term Power Sales Contracts That Contain both Fixed and Variable Pricing Terms”long-term power sales contracts which require that power revenues under these contracts be recognized as the lesser of (a) amounts billable under the respective contracts; or (b) an amount determinable by the kilowatt hours made available during the period multiplied by the estimated average revenue per kilowatt hour over the term of the contract. The determination of the lesser amount is to be made annually based on the cumulative amounts that would have been recognized had each method been applied consistently from the beginning of the contract. The difference between the amount billed and the amount recognized is included in other long-term liabilities.
Construction Revenues
— Revenues under fixed-price construction contracts are recognized using thepercentage-of-completion method, measured by thecost-to-cost method. Under this method, total contract costs are estimated, and the ratio of costs incurred to date to the estimated total costs on the contract is used to determine thepercentage-of-completion. This method is used because we consider the costs incurred to be the best available measure of progress on these contracts. Contracts to manage, supervise, or coordinate the construction activity of others are recognized using the percentage-of-completion method, measured by the efforts-expended method. Under this method revenue is earned based on the ratio of hours incurred to the total estimated hours required by the contract. We consider measuring the work on labor hours to be the best available measure of progress on these contracts. Construction revenues are recorded as other operating revenues in the consolidated statements of income. These contracts are typically signed in conjunction with agreements to operate the project constructed and are therefore multiple element arrangements. The contractual price of the undelivered service element has been determined to be its fair value.
Renewable Energy Credits
Renewable Energy Credits (“REC”) represent saleable and tradable environmental commodities. One REC represents the renewable energy attributes created when one megawatt hour of electricity is produced from an eligible renewable energy source. The REC is recognized at fair value as a reduction to plant operating expense in the consolidated statements of income and as an intangible asset within other current assets in the consolidated balance sheets on the date the renewable energy is generated. The fair value amount recognized is reduced by a valuation allowance for those RECs which management believes will ultimately be sold at below market or depressed market prices. As the RECs are delivered, the intangible asset is relieved. Fair values for the RECs are based on prices established by executed contracts, pending contracts or management estimates of current market prices.
Pass Through Costs
Pass through costs are costs for which we receive a direct contractually committed reimbursement from the municipal client which sponsors an energy-from-waste 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, 2009, 2008 and 2007 and 2006 were $70.2$72.1 million, $63.5$65.6 million, and $59.3$63.1 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
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COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
During the periods covered by the consolidated financial statements, we filed a consolidated Federal income tax return, which included all eligible United States subsidiary companies. Foreign subsidiaries were taxed according to regulations existing in the countries in which they do business. Our subsidiary, Covanta Lake II, Inc. has not been a member of any consolidated tax group since February 20, 2004.2004, however the income taxes recorded for this subsidiary are recorded in our consolidated financial statements. Our federal consolidated income tax return also includes the taxable results of certain grantor trusts, which are excluded from our consolidated financial statements.
We adopted and apply the permanent reinvestment exception under Accounting Principles Board (“APB”) Opinion No. 23, “Accounting for Income Taxes — Special Areas” (“APB 23”)statements, however certain related tax attributes are recorded in 2006 and Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretationour consolidated financial statements since they are part of FASB Statement No. 109,” (“FIN 48”) in 2007.our federal tax return. For additional information, related to the impact of applying these provisions, see Note 9.16. Income Taxes.
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COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Stock-Based Compensation
Stock-based compensation is accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payments” (“SFAS 123R”). SFAS 123R focuses primarily on accounting standards for share-based awards to employees in exchange for services, and itwhich requires entities to recognize compensation expense for these awards. The cost for equity-based stock awards is expensed based on their grant date fair value. For additional information, see Note 17.18. 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 market value.
Investments
Effective January 1, 2008, we adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115” (“SFAS 159”), but did not elect to apply the fair value option to any of our eligible financial assets and liabilities.
Effective January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements.
The insurance subsidiaries’ fixed maturity debt and equity securities portfolio are classified as“available-for-sale” and are carried at fair value. Investment securities that are traded on a national securities exchange are stated at the last reported sales price on the day of valuation. Changes in fair value are credited or charged directly to Accumulated Other Comprehensive Income (“AOCI”) in the consolidated statements of stockholders’ equity as unrealized gains or losses, respectively. Investment gains or losses realized on the sale of securities are determined using the specific identification method. Realized gains and losses are recognized in the consolidated statements of income based on the amortized cost of fixed maturities and cost basis for equity securities on the date of trade, subject to any previous adjustments for “other than temporary”other-than-temporary declines. For additional information, see Note 13. Investments.
“Other than temporary” declines in fair value are recorded as realized losses in the consolidated statements of income and the cost basis of the security is reduced. We consider the following factors in determining whether declines in the fair value of securities are “other than temporary”:
| | |
| • | the significance of the decline in fair value compared to the cost basis; |
| • | the time period during which there has been a significant decline in fair value; |
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COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | |
| • | whether the unrealized loss is credit-driven or a result of changes in market interest rates; |
| • | a fundamental analysis of the business prospects and financial condition of the issuer; and |
| • | our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value. |
Other investments, such as investments in companies in which we do not have the ability to exercise significant influence, are carried at the lower of cost or estimated realizable value. For additional information, see Note 13. Financial Instruments.
Restricted Funds Held in Trust
Restricted funds held in trust are primarily amounts received by third party trustees relating to certain projects we own which may be used only for specified purposes. We generally do not control these accounts. They primarily include debt service reserves for payment of principal and interest on project debt, and deposits of revenues received with respect to projects prior to their disbursement, as provided in the relevant indenture or other agreements. Such funds are invested principally in money market funds, bank deposits and certificates of deposit, United States Treasurytreasury bills and notes, and United States government agency securities. Restricted fund balances are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, | | | As of December 31, | |
| | 2008 | | 2007 | | | 2009 | | 2008 | |
| | Current | | Noncurrent | | Current | | Noncurrent | | | Current | | Noncurrent | | Current | | Noncurrent | |
|
Debt service funds | | $ | 103,371 | | | $ | 97,761 | | | $ | 111,193 | | | $ | 142,098 | | | $ | 73,406 | | | $ | 101,376 | | | $ | 103,371 | | | $ | 97,761 | |
Revenue funds | | | 25,105 | | | | — | | | | 22,253 | | | | — | | | | 13,061 | | | | — | | | | 25,105 | | | | — | |
Other funds | | | 46,617 | | | | 52,057 | | | | 54,505 | | | | 49,815 | | | | 44,756 | | | | 45,153 | | | | 46,617 | | | | 52,057 | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 175,093 | | | $ | 149,818 | | | $ | 187,951 | | | $ | 191,913 | | | $ | 131,223 | | | $ | 146,529 | | | $ | 175,093 | | | $ | 149,818 | |
| | | | | | | | | | | | | | | | | | |
Restricted Funds for Emergence Costs— Other
As of December 31, 20082009 and 2007,2008, we had $26.3 million and $20.4 million, and $20.0 million, respectively, in cash held in restricted accounts to pay for certain taxes which may be due relating to Covanta Energy’s bankruptcy, which occurred prior to its acquisition by us, and that are estimated to be paid in the future. Cashfuture and for surety and bail bond collateral related to our insurance subsidiary. Such funds are invested principally in money market funds, bank deposits and certificates of deposit. Funds held in suchthese restricted accounts isare not available for general corporate purposes.
Deferred Financing Costs
As of December 31, 20082009 and 2007,2008, we had $13.7$24.1 million and $17.7$13.7 million, respectively, of net deferred financing costs recorded on the consolidated balance sheets. These costs were incurred in connection with our various financing arrangements. These costs are being amortized using the effective interest rate method over the expected period that the related financing wasis to be outstanding. See Note 6. Long-Term Debt — 2007 Recapitalization.
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COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Deferred Revenue
Deferred revenue consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, | | | As of December 31, | |
| | 2008 | | 2007 | | | 2009 | | 2008 | |
| | Current | | Noncurrent | | Current | | Noncurrent | | | Current | | Noncurrent | | Current | | Noncurrent | |
|
Advance billings to municipalities | | $ | 8,333 | | | $ | — | | | $ | 11,610 | | | $ | — | | | $ | 10,265 | | | $ | — | | | $ | 8,333 | | | $ | — | |
Unearned insurance premiums | | | 1,587 | | | | — | | | | 896 | | | | — | | | | 2,105 | | | | — | | | | 1,587 | | | | — | |
Other | | | 5,282 | | | | 4,345 | | | | 12,608 | | | | 4,931 | | | | 47,886 | | | | 3,681 | | | | 5,282 | | | | 4,345 | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 15,202 | | | $ | 4,345 | | | $ | 25,114 | | | $ | 4,931 | | | $ | 60,256 | | | $ | 3,681 | | | $ | 15,202 | | | $ | 4,345 | |
| | | | | | | | | | | | | | | | | | |
Advance billings to various customers are billed one or two months prior to performance of service and are recognized as income in the period the service is provided. Other current deferred revenue related primarily to pre-construction billings for the expansion project at our Honolulu, Hawaii energy-from-waste facility. Noncurrent deferred revenue relates to electricity contract levelization and is included in other noncurrent liabilities in the consolidated balance sheets.
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COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Property, Plant and Equipment
Property, plant, and equipment acquired from acquisitions were recorded at our estimate of their fair values 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 remaining useful lives of the assets, which range up to 3736 years for energy-from-waste facilities. The original useful lives generally range from three years for computer equipment to 50 years for components of energy-from-waste facilities. Leaseholds improvements are depreciated over the remaining life of the lease or the asset, whichever is shorter. Upon retirement or disposal of assets, the cost and related accumulated depreciation are removed from the consolidated balance sheetsheets and any gain or loss is reflected in the consolidated statements of income.
Asset Retirement Obligations
In accordance with SFAS No. 143, “Accountingaccounting standards for Asset Retirement Obligations” (“SFAS 143”),asset retirement obligations, we recognize a legal liability for asset retirement obligations when it is incurred —which is generally upon acquisition, construction, or development. Our legal 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 recognizeperiod-to-period changes in the liability resulting from revisions to the timing or the amount of the original estimate of the undiscounted cash flows. Any changes are incorporated into the carrying amount of the liability and will result in an adjustment to the amount of asset retirement cost allocated to expense in subsequent periods. Our asset retirement obligation is presented as follows (in thousands):
| | | | | | | | |
| | As of December 31, | |
| | 2008 | | | 2007 | |
|
Beginning of period asset retirement obligation | | $ | 25,520 | | | $ | 26,517 | |
Accretion expense | | | 1,998 | | | | 2,091 | |
Deductions(1) | | | (1,565 | ) | | | (5,290 | ) |
Additions(2) | | | 1,576 | | | | 2,202 | |
| | | | | | | | |
End of period asset retirement obligation | | $ | 27,529 | | | $ | 25,520 | |
Less: current portion | | | (1,618 | ) | | | (964 | ) |
| | | | | | | | |
Asset retirement obligation | | $ | 25,911 | | | $ | 24,556 | |
| | | | | | | | |
| | | | | | | | |
| | As of December 31, | |
| | 2009 | | | 2008 | |
|
Beginning of period asset retirement obligation | | $ | 27,529 | | | $ | 25,520 | |
Accretion expense | | | 2,184 | | | | 1,998 | |
Deductions(1) | | | (595 | ) | | | (1,565 | ) |
Additions(2) | | | 212 | | | | 1,576 | |
| | | | | | | | |
End of period asset retirement obligation | | $ | 29,330 | | | $ | 27,529 | |
Less: current portion | | | (3,254 | ) | | | (1,618 | ) |
| | | | | | | | |
Asset retirement obligation | | $ | 26,076 | | | $ | 25,911 | |
| | | | | | | | |
| | |
(1) | | Deductions in 20082009 and 20072008 related to expenditures and settlements of the asset retirement obligation liability, and net revisions based on current estimates of the liability and revised expected cash flows and life of the liability. |
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(2) | | Additions in 2009 related primarily to foreign currency translation adjustments for asset retirement obligations for one of our Indian facilities and purchase price allocations for asset retirement obligations for an energy-from-waste facility acquired in Pennsylvania in 2009. Additions in 2008 related primarily to purchase price allocations for asset retirement |
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| | |
| | obligations for the ash landfill acquired in Massachusetts in 2008, offset by purchase price allocation adjustments for the two biomass energy facilities acquired in California in 2007. Additions in 2007 related primarily to purchase price allocations for asset retirement obligations for the two biomass energy facilities acquired in California in 2007. See Note 3. Acquisitions, Business Development and Dispositions. |
Amortization of Waste, Service and Energy Contracts and Intangible Assets
The vast majority of ourOur waste, service and energy contracts were valued in March 2004 and June 2005are intangible assets related to the acquisitions of Covanta Energy and Covanta ARC Holdings, Inc. (“ARC Holdings”), respectively.long-term operating contracts at acquired facilities. Intangible assets and liabilities, as well as lease interest, renewable energy credits and other indefinite-lived assets, are
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recorded at their estimated fair market values based primarily upon discounted cash flows in accordance with SFAS No. 141, “Business Combinations” (“SFAS 141”).
Amortization for the “above market” waste, service and energy contracts and “below market” waste and energy contracts was calculated using the straight-line method. The remaining weighted-average contract life is approximately 9 years for both the “above market” waste, service and energy contracts and “below market” waste and energy contracts.accounting standards related to business combinations. See Note 10.6. Amortization of Waste, Service and Energy Contracts.Contracts and Note 7. Other Intangible Assets and Goodwill.
Impairment of Goodwill, Other Intangibles and Long-Lived Assets
We evaluate goodwill and indefinite-lived intangible assets not subject to amortization for impairment on an annual basis, or more frequently if events occur or circumstances change indicating that the fair value of a reporting unit may be below its carrying amount, in accordance with SFAS No. 142, “Goodwillaccounting standards related to goodwill and Other Intangible Assets” (“SFAS 142”). other intangible assets. Fair value is generally determined utilizing a discounted cash flow approach, based on management’s best estimate of the highest and best use of future waste and service revenues, electricity revenues and operating expenses, discounted at an appropriate market participant risk adjusted rate.
The evaluation 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. If the carrying value of the reporting unit exceeds the fair value, of that reporting unit, then the reporting unit’s carrying value of goodwill is compared to its implied value of goodwill. If the carrying value of the reporting unit’s goodwill exceeds the implied value, of goodwill, this difference will be recorded as an adjustmentimpairment charge is recognized to reduce the carrying value to the goodwill balance, resulting in an impairment charge. The fair value was determined using a discounted cash flow approach based on forward-looking information regarding market share and costs for each reporting unit as well as an appropriate discount rate. implied value.
For indefinite-lived intangible assets, the evaluation requires a comparison of the estimated fair value of the asset which is generally estimated using a discounted future net cash flow projection, to the carrying value of the asset.value. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, as generally estimated using a discounted future net cash flow projection, thenan impairment charge is recognized to reduce the carrying value of the asset is reduced to its fair value.
Intangible and other long-lived assets such as property, plant and equipment and purchased intangible assets with finite lives, are evaluated for impairment whenever events or changes in circumstances indicate its carrying value may not be recoverable over their estimated useful life in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”life. In reviewing for impairment, we compare the carrying value of the relevant assets to thetheir estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition.flows. When the estimated undiscounted future cash flows are less than their carrying amount, an impairment losscharge is recognized equalto reduce the asset’s carrying value to their fair value.
There were no impairment charges recognized related to our evaluation of goodwill, indefinite-lived intangible assets, intangible assets or other long-lived assets for the years ended December 31, 2009, 2008 and 2007.
Business Combinations
In accordance with accounting standards in effect prior to December 31, 2008, we allocated acquisition purchase prices to identified intangibles assets and tangible assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition, with any residual amounts allocated to goodwill. Any excess of the net fair value of assets acquired and liabilities assumed over the purchase price was applied on a pro-rata basis to reduce the carrying value of certain assets acquired.
We adopted recent accounting standards for business combinations which were effective for business combinations for which the acquisition date is on or after January 1, 2009. We recognize and measure the assets acquired and liabilities assumed in the transaction including any noncontrolling interest of the acquired entity; recognize and measure any goodwill acquired or gain resulting from a bargain purchase; 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. Other significant changes include: we expense direct transaction costs 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 difference betweenacquired company are included in the asset’s fair value and its carrying value. To determine fair value, we principally use internal discounted cash flow estimates, but also use quoted market prices when available and independent appraisals as appropriate to determine fair value. Cash flow estimates are derived from historical experience and internalpost-combination results of operations. Tax adjustments for business plans with an appropriate discount rate applied.combinations, if any, previously recorded will be recognized in the results of operations.
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Accumulated Other Comprehensive Income
AOCI, in the statementconsolidated statements of stockholders’ equity, includes unrealized gains and losses excluded from the consolidated statements of income. These unrealized gains and losses consist of unrecognized gains or losses on our pension and other postretirement benefit obligations, foreign currency translation adjustments, unrealized gains or losses on securities classified asavailable-for-sale, and net unrealized gains and losses on interest rate swaps.
Interest Rate Swap AgreementsDerivative Instruments
We used derivative financial instruments to manage risk from changes in interest rates pursuant to the requirements under one of our debt agreement in existence as of December 31, 2006. We recognize derivative instruments on the balance sheet at their fair value. Changes in the fair value of a derivative that is highly effective as, and that is designated and qualifies as, a cash flow hedge are included in the consolidated statements of stockholders’ equity as a component of AOCI until the hedged cash flows impact earnings. Any hedge ineffectiveness is included in current-period earnings. For additional information, regarding derivative financial instruments, see Note 19. Financial14. Derivative Instruments.
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Foreign Currency Translation
For foreign operations, assets and liabilities are translated at year-end exchange rates and revenues and expenses are translated at the average exchange rates during the year. Gains and losses resulting from foreign currency translation are included in the consolidated statements of stockholders’ equity as a component of AOCI. Currency transaction gains and losses are recorded in Other Operating Expensesother operating expenses in the consolidated statements of income.
Pension and Postretirement Benefit Obligations
Our pension and other postretirement benefit plans are accounted for in accordance with SFAS No. 158, “Employer’s Accountingaccounting standards for Defined Benefit Pensiondefined benefit pension and Other Postretirement Plans — an amendment to FASB Statements No. 87, 88, 106 and 132(R)” (“SFAS 158”),other postretirement plans which require costs and the related obligations and assets arising from the pension and other postretirement benefit plans to be accounted for based on actuarially-determined estimates. For additional information, see Note 16.17. Employee Benefit Plans.
Unpaid Losses and Loss Adjustment Expenses
Unpaid losses and loss adjustment expenses (“LAE”) are based on estimates of reported losses and historical experience for incurred but unreported claims, including losses reported by other insurance companies for reinsurance assumed, and estimates of expenses for investigating and adjusting all incurred and unadjusted claims. We believe that the provisions for unpaid losses and LAE are adequate to cover the cost of losses and LAE incurred to date. However, such liability is based upon estimates which may change and there can be no assurance that the ultimate liability will not exceed such estimates. Unpaid losses and LAE are continually monitored and reviewed, and as settlements are made or reserves adjusted, differences are included in current operations.
The following table summarizes the activity in the insurance subsidiaries’ liability for unpaid losses and LAE (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, | | | As of December 31, | |
| | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | |
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Net unpaid losses and LAE at beginning of year | | $ | 22,400 | | | $ | 25,712 | | | $ | 32,082 | | | $ | 20,207 | | | $ | 22,400 | | | $ | 25,712 | |
Incurred, net, related to: | | | | | | | | | | | | | | | | | | | | | | | | |
Current year | | | 7,272 | | | | 6,398 | | | | 7,579 | | | | 12,364 | | | | 7,272 | | | | 6,398 | |
Prior years | | | 1,818 | | | | 1,492 | | | | 297 | | | | 3,271 | | | | 1,818 | | | | 1,492 | |
| | | | | | | | | | | | | | |
Total net incurred | | | 9,090 | | | | 7,890 | | | | 7,876 | | | | 15,635 | | | | 9,090 | | | | 7,890 | |
Paid, net, related to: | | | | | | | | | | | | | | | | | | | | | | | | |
Current year | | | (4,361 | ) | | | (3,905 | ) | | | (4,085 | ) | | | (6,996 | ) | | | (4,361 | ) | | | (3,905 | ) |
Prior years | | | (6,982 | ) | | | (7,357 | ) | | | (10,221 | ) | | | (5,370 | ) | | | (6,982 | ) | | | (7,357 | ) |
| | | | | | | | | | | | | | |
Total net paid | | | (11,343 | ) | | | (11,262 | ) | | | (14,306 | ) | | | (12,366 | ) | | | (11,343 | ) | | | (11,262 | ) |
Plus: Increase in allowance for reinsurance recoverable on unpaid losses | | | 60 | | | | 60 | | | | 60 | | | | 60 | | | | 60 | | | | 60 | |
Less: Effect of deconsolidation of subsidiary | | | | (1,169 | ) | | | — | | | | — | |
| | | | | | | | | | | | | | |
Net unpaid losses and LAE at end of year | | | 20,207 | | | | 22,400 | | | | 25,712 | | | | 22,367 | | | | 20,207 | | | | 22,400 | |
Plus: Reinsurance recoverable on unpaid losses | | | 9,155 | | | | 10,036 | | | | 12,308 | | | | 12,325 | | | | 9,155 | | | | 10,036 | |
| | | | | | | | | | | | | | |
Gross unpaid losses and LAE at end of year | | $ | 29,362 | | | $ | 32,436 | | | $ | 38,020 | | | $ | 34,692 | | | $ | 29,362 | | | $ | 32,436 | |
| | | | | | | | | | | | | | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include useful lives of long-lived assets, asset retirement obligations, unbilled service receivables, renewable energy credits, stock-based compensation, purchase accounting allocations, cash flows and taxable income from future operations, unpaid losses and LAE, allowances for uncollectible receivables, and liabilities related to pension obligations, and for workers’ compensation, severance and certain litigation.
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Reclassifications
Certain prior period amounts have been reclassified in the financial statements to conform to the current period presentation.
During the first quarter See Note 23. Adoption of 2008, we revised our presentation of the condensed consolidated statements of cash flows to present changes in restricted funds held in trust relating to operating activities as a component of cash flow from operating activities and changes in restricted funds held in trust relating to financing activities (debt principal related) as a component of cash flow from financing activities; previously we included all changes in restricted funds held in trust as a component of cash flow from financing activities. For the years ended December 31, 2007 and 2006, we have reclassified approximately $5.5 million and $7.8 million, respectively, as a component of cash flow from operating activities in order to conform to the current period presentation on the consolidated statements of cash flows.New Accounting Pronouncements.
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NoteNOTE 2. | Recent Accounting PronouncementsRECENT ACCOUNTING PRONOUNCEMENTS |
In June 2008,The following is a summary of recent accounting standards issued by the FASB issued FASB Staff PositionFinancial Accounting Standards Board (“FSP”FASB”)No. EITF 03-6-1, “Determining Whether Instruments Granted:
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Subject | | Summary | | Effect of Adoption |
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Multiple Deliverable Element Arrangements — effective January 1, 2011 | | Provides amendments to criteria for separating consideration in multiple element arrangements. As a result, multiple deliverable arrangements will be separate in more circumstances than in existing U.S. GAAP. | | We are currently evaluating the potential effects of this standard on our consolidated financial statements. |
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Redeemable Equity Instruments — effective January 1, 2010 | | Preferred securities that are redeemable for cash or other assets are to be classified outside of permanent equity if they are redeemable at a fixed or determinable price on a fixed or determinable date, at the option of the holder, or upon the occurrence of an event that is not solely within the control of the issuer. | | No expected impact. |
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Consolidation of Variable Interest Entities — effective January 1, 2010 | | Requires an analysis to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity. This standard also requires an ongoing reassessment of the primary beneficiary of the variable interest entity and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary. | | No expected impact. |
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The following is a summary of the effects of new accounting pronouncements adopted in Share-Based Payment Transactions Are Participating Securities” (“FSPEITF 03-6-1”). The FSP, which is effective for us on2009:
Effective January 1, 2009, addresses whether instruments grantedwe adopted an accounting standard related to noncontrolling interests in share-based payment transactions are participating securities prior to vesting and, therefore, need to be includedconsolidated financial statements. The primary effect of the adoption of this standard was the presentation of minority interests (now called “noncontrolling interests in subsidiaries”) in the earnings allocation in computing earnings per share under the two-class method described in FASB Statement No. 128, “Earnings per Share”.The restricted stock awards granted under our Equity Award Plans are not participating securities. The adoption of FSPEITF 03-6-1 will not have any impact on our consolidated financial statements.statements for all years presented.
In May 2008, the FASB issued FSP No. APB14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB14-1”). The FSP requires the issuer ofEffective January 1, 2009, we adopted an accounting standard related to convertible debt instruments withthat may be settled in cash settlement featuresupon conversion. This accounting standard was effective for our Debentures and required retrospective application as of and for the years ended December 31, 2008 and 2007. The primary effect of the adoption of this standard was to separately account for the liability and equity components of the instrument. The debt component should be recognized at the present value of its cash flows discounted using the issuer’s nonconvertible debt borrowing rate. The equity component should be recognized as the difference between the proceeds from the issuance of the noteinstrument and the fair value of the liability, net of deferred taxes. FSP APB14-1 also requires an accretion ofaccrete the resultant debt discount over the expected life of the debt. FSP APB14-1, effective for us on January 1, 2009 for our 1.00% Senior Convertible Debentures (“Debentures”), requires retrospective application for all periods presented, and does not grandfather existing instruments. We estimate that the pre-tax increase in non-cash interest expense to be recognized on our consolidated statements of income using a 7.25% discount rate, our nonconvertible debt borrowing rate at the date of the bond’s issuance, would be as follows (in millions):
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| | 2007 | | 2008 | | 2009 | | 2010 | | 2011 | | 2012-2027 | | Total |
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Pre-tax increase in non-cash interest expense | | $ | 5.2 | | | $ | 6.1 | | | $ | 6.5 | | | $ | 7.0 | | | $ | 7.6 | | | $ | 213.9 | | | $ | 246.3 | |
In April 2008, the FASB issued FSP FASBNo. 142-3, “Determining the Useful Life of Intangible Assets,” (“FSP FASB142-3”) which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141 (revised 2007), “Business Combinations”, and other U.S. generally accepted accounting principles (GAAP). This FSP permits us to use our own assumptions about whether a renewal or extension of a lease or service agreement in a business combination will occur. If we expect a renewal or extension, costs expected for the renewal or extension can be considered part of the cost of the asset and the life of the asset will include the renewal or extension period. FSP FASB142-3 is effective for us on January 1, 2009. We do not expect the adoption of FSP FASB142-3 to have a material impact on our existing intangible assets.Debentures. See Note 11. Long-Term Debt.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —– (Continued)
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative InstrumentsThe consolidated statements of income and Hedging Activities” (“SFAS 161”), which is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand the effects on an entity’s financial position, financial performance, and cash flows. SFAS 161 was effective for us on January 1, 2009. We do not expect the adoption of SFAS 161 to resultconsolidated balance sheets were retroactively restated as follows (amounts in additional financial reporting disclosures.thousands, except per share amounts):
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| | For the Years Ended | |
| | December 31, 2008 | | | December 31, 2007 | |
| | As Reported | | | As Adjusted | | | As Reported | | | As Adjusted | |
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Non-cash convertible debt interest expense | | $ | — | | | $ | (17,979 | ) | | $ | — | | | $ | (15,377 | ) |
Total other expenses | | $ | (41,087 | ) | | $ | (59,066 | ) | | $ | (88,597 | ) | | $ | (103,974 | ) |
Income before income tax expense and equity in net income from unconsolidated investments | | $ | 214,878 | | | $ | 196,899 | | | $ | 148,013 | | | $ | 132,636 | |
Income tax expense | | $ | (92,227 | ) | | $ | (84,561 | ) | | $ | (31,040 | ) | | $ | (24,483 | ) |
NET INCOME | | $ | 139,273 | | | $ | 135,921 | | | $ | 130,513 | | | $ | 130,349 | |
NET INCOME ATTRIBUTABLE TO COVANTA HOLDING CORPORATION | | | N/A | | | $ | 128,960 | | | | N/A | | | $ | 121,693 | |
Earnings Per Share: | | | | | | | | | | | | | | | | |
Basic | | $ | 0.91 | | | $ | 0.84 | | | $ | 0.85 | | | $ | 0.80 | |
Diluted | | $ | 0.90 | | | $ | 0.83 | | | $ | 0.85 | | | $ | 0.79 | |
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to establish accounting and reporting for the noncontrolling (minority) interests in a subsidiary and the deconsolidation of a subsidiary. Moreover, SFAS 160 eliminates the diversity that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. SFAS 160 was effective for us on January 1, 2009. We do not expect the adoption of SFAS 160 to have a material impact on our consolidated financial statements.
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| | As of December 31, 2008 | |
| | As Reported | | | As Adjusted | |
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Long-term debt — noncurrent | | $ | 1,005,965 | | | $ | 941,596 | |
Deferred income taxes | | $ | 466,468 | | | $ | 493,919 | |
Total Liabilities | | $ | 3,092,856 | | | $ | 3,055,938 | |
Additional paid-in capital | | $ | 776,544 | | | $ | 832,595 | |
Accumulated earnings | | $ | 368,352 | | | $ | 349,219 | |
Total Stockholders’ Equity | | $ | 1,152,119 | | | | N/A | |
Total Covanta Holding Corporation stockholders’ equity | | | N/A | | | $ | 1,189,037 | |
Total Equity | | | N/A | | | $ | 1,224,051 | |
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and requirements for the acquiring entity in a business combination to: recognize and measure the assets acquired and liabilities assumed in the transaction including any noncontrolling interest of the acquired entity; recognize and measure any goodwill acquired or gain resulting from a bargain purchase; establish the acquisition-date fair value as the measurement objective; and disclose to investors and other users of financial statements all of the information they need to evaluate and understand the nature and financial effect of the business combination. Other significant changes include: expensing of direct transaction costs as incurred; capitalizing in-process research and development costs; and recording a liability for contingent consideration at the measurement date with subsequent remeasurement recognized in the results of operations. SFAS 141R also requires that any costs for business restructuring and exit activities related to the acquired company will be included in the post-combination results of operations. SFAS 141R also requires that any tax adjustments for business combinations previously recorded under SFAS 141 be recognized in the results of operations. SFAS 141R was effective for us on January 1, 2009 and may have a material impact on our consolidated financial statements, depending on the specific business combination transaction.
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NoteNOTE 3. | Acquisitions, Business Development and DispositionsACQUISITIONS, BUSINESS DEVELOPMENT AND DISPOSITIONS |
Our growth strategy includes the acquisition of waste and energy related businesses located in markets with significant growth opportunities and the development of new projects and expansion of existing projects. We will also consider acquiring or developing new technologies and businesses that are complementary with our existing renewable energy and waste services business. Acquisitions are accountedWe adopted recent accounting standards for underbusiness combinations which were effective for business combinations for which the purchase method of accounting.acquisition date was on or after January 1, 2009. The results of operations reflect the period of ownership of the acquired businesses, business development projects and dispositions. 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.
We allocate acquisition purchase prices to identified intangibles assets and tangible assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition, with any residual amounts allocated to goodwill, in accordance with SFAS 141, which is effective through December 31, 2008. Effective January 1, 2009, all business combinations will be accounted for in accordance with SFAS 141R. See Note 2. Recent Accounting Pronouncements.
Acquisitions and Business Development
DomesticAmericas
Honolulu Energy-from-Waste Facility
We operate and maintain the energy-from-waste facility located in and owned by the City and County of Honolulu, Hawaii. In December 2009, we entered into agreements with the City and County of Honolulu to expand the facilities waste processing capacity from 2,160 tons per day (“tpd”) to 3,060 tpd and to increase gross electricity capacity from 57 megawatts (“MW”) to 90 MW. The agreements also extend the contract term by 20 years. The $302 million expansion project is a fixed-price construction contract which will be funded and owned by the City and County of Honolulu. Environmental and other project-related permits have been received and expansion construction has commenced.
Veolia Energy-from-Waste Businesses
In August 2009, we acquired six energy-from-waste businesses and one transfer station business from Veolia Environmental Services North America Corp. (“Veolia EfW Acquisition”). The acquired businesses have a combined capacity of 6,600 tpd and are located in New York, Pennsylvania, California and Canada. Each of the operations acquired includes a long-term operating contract with the respective municipal client. Five of the energy-from-waste facilities and the transfer station are publicly-owned facilities. In August 2009, we also acquired a majority ownership stake in one of the
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energy-from-waste facilities and on November 24, 2009, we completed the acquisition of the remaining ownership stake in that facility for cash consideration of $23.7 million.
The six energy-from-waste businesses and one transfer station business acquired in August 2009 were purchased for $259.3 million, including $11.2 million of cash and cash equivalents. In August 2009, we paid cash consideration of $245.3 million and in December 2009, we paid the remaining cash consideration of $14.0 million, which was held in escrow, pending final resolution of certain tax withholding matters. The consideration is subject to certain post-closing adjustments. The preliminary purchase price allocation included $138.9 million of property, plant and equipment, $199.3 million of intangible assets related to long-term operating contracts at each acquired Veolia business except for the facility we now own 100% and $70.6 million of assumed debt. The acquired intangible assets will be amortized over an average remaining useful facility life of 29 years. The preliminary purchase price allocation of the businesses acquired in August 2009, which included no goodwill, was based on estimates and assumptions, any changes to which could affect the reported amounts of assets and liabilities resulting from this acquisition.
In addition, we completed the acquisition transaction with Veolia Environmental Services North America Corp. by acquiring the 3,000 tpd energy-from-waste business in Miami-Dade, Florida in February 2010. This acquired business includes a long-term operating contract for this publicly-owned energy-from-waste facility with the Miami-Dade County in Florida. See Note 23. Subsequent Events.
Detroit Michigan Energy-from-Waste Facility
On June 30, 2009, our long-term operating contract with the Greater Detroit Resource Recovery Authority (“GDRRA”) to operate the 2,832 tpd energy-from-waste facility located in Detroit, Michigan (the “Detroit Facility”) expired. Effective June 30, 2009, we entered into the following transactions, which extended our interest in the Detroit Facility:
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| • | A newly-formed Covanta subsidiary purchased an undivided 30% owner-participant interest in the Detroit Facility and final working capital for total cash consideration of $7.9 million. |
| • | We entered into an operating and maintenance agreement with owners of the Detroit Facility, pursuant to which we will operate, maintain and provide certain other services for a term of one year. Under this agreement, we will earn a fixed fee and pass through to the owners of the Detroit Facility (or pay from the project revenues) all expenses associated with operations and maintenance of the facility. After paying all expenses, excess net revenues flow to the owners. |
| • | The project company entered into a waste disposal agreement with GDRRA pursuant to which we will dispose of the waste of the City of Detroit for a term of at least one year. The term of the waste disposal agreement will automatically renew for successive one year terms unless either party provides advance written notice of termination in accordance with the provisions thereof. In addition, as an owner-participant we have the right, on one or more occasions, to call upon GDRRA to deliver the waste of the City of Detroit to the Detroit Facility at market-based rates. The call right continues for the duration of the agreements which expire in 2035. |
We have entered into a new short-term steam agreement for the Detroit Facility which expires in February 2010 while negotiations continue regarding a long-term steam agreement. Securing a long-term steam agreement with appropriate pricing is important for the long-term economic viability of the Detroit Facility.
Stanislaus County, California Energy-from-Waste Facility
On May 18, 2009, our service fee contract with Stanislaus County was extended from 2010 to 2016.
Philadelphia Transfer Stations
On May 1, 2009, we acquired two waste transfer stations with combined capacity of 4,500 tpd in Philadelphia, Pennsylvania for cash consideration of $17.5 million, inclusive of final working capital adjustments. The final purchase price allocation included $5.9 million of identifiable intangible assets related primarily to customer relationships and goodwill of $1.3 million.
Maine Biomass Energy Facilities
On December 22, 2008, we acquired Indeck Maine, LLC from co-owners Ridgewood Maine, L.L.C. and Indeck Energy Services, Inc. Indeck Maine, LLCwhich owned and operated two biomass energy facilities. The two nearly identical facilities, located in West Enfield and Jonesboro, Maine, added a total of 49 MW to our renewable energy portfolio. We sell the electric output and renewable energy credits from these facilities into the New England market.
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identical facilities, located in West Enfield and Jonesboro, Maine, added a total of 49 gross megawatts (“MW”) to our renewable energy portfolio. We have begun to sell the electric output and intend to sell renewable energy credits from these facilities into the New England market. We acquired these two facilities for cash consideration of approximately $53.3$53.4 million, net of cash acquired, subject toinclusive of final working capital adjustments. The preliminaryThere were no amounts allocated to goodwill or other intangible assets in the final purchase price allocation, which includes no goodwill, is based on estimates and assumptions, any changes to which could affect the reported amounts of assets, liabilities and expenses resulting from this acquisition.allocation.
Wallingford, Connecticut Energy-from-Waste Facility
On December 17, 2008, we entered into new tip fee contracts which will supply waste to the Wallingford, Connecticut facility, following the expiration of the existing service fee contract in 2010. These contracts in total are expected to supply waste utilizing most or all of the facility’s capacity through 2020.
Kent County, Michigan Energy-from-Waste Facility
On December 4, 2008, we entered into a new tip fee contract with Kent County, in Michigan which commenced on January 1, 2009 and extended the existing contract from 2010 to 2023. This contract is expected to supply waste utilizing most or all of the facility’s capacity. Previously this was a service fee contract.
Pasco County, Florida Energy-from-Waste Facility
On September 23, 2008, we entered into a new service fee contract with the Pasco County, Commission in Florida which commenced on January 1, 2009 and extended the existing contract from 2011 to 2016.
Indianapolis Energy-from-Waste Facility
On July 25, 2008, we entered into a new tip fee contract with the City of Indianapolis, Indiana for a term of 10 years which commenced upon expiration of the existing service fee contract in December 2008. This contract represents approximately 50% of the facility’s capacity.
Tulsa Energy-from-Waste Facility
On June 2, 2008, we acquired an energy-from-waste facility in Tulsa, Oklahoma from The CIT Group/Equipment Financing, Inc. for cash consideration of approximately $12.7 million. The design capacity of the facility is 1,125 tons per day (“tpd”)tpd of waste and gross electric capacity of 16.5 MW. This facility was shut down by the prior owner in the summer of 2007 and we returned two of the facility’s three boilers to service in November 2008,2008. In 2009, we entered into a new tip fee agreement with the City of Tulsa which expires in 2012 and plan to return its third boiler to service during 2009. During the year ended December 31, 2008, we have invested approximately $4.9 milliona new steam contract for a term of 10 years which expires in capital improvements to restore the operational performance of the facility.2019.
Peabody Landfill
On May 20, 2008, we acquired a landfill for the disposal of ash in Peabody, Massachusetts from Peabody Monofill Associates, Inc. and others for cash consideration of approximately $7.4 million.
Alternative Energy Technology Development
We have entered into various agreements with multiple partners to invest in the development, testing or licensing of new technologies related to the transformation of waste materials into renewable fuels or the generation of energy. Initial licensingLicensing fees and demonstration unit purchases approximatedaggregated $4.7 million and $6.5 million during the yearyears ended December 31, 2008.2009 and 2008, respectively.
Harrisburg Energy-from-Waste Facility
In February 2008, we entered into a ten year agreement to maintain and operate an 800 tpd energy-from-waste facility located in Harrisburg, Pennsylvania. Under the agreement, we have a right of first refusal to purchase the facility. We also have agreed to provide construction management services and to advance up to $25.5 million in funding for certain facility improvements required to enhance facility performance, thewhich are expected to be completed during 2010. The repayment of this funding is guaranteed by the City of Harrisburg, but is otherwise unsecured, and is junior to project bondholders’ rights. We have advanced $20.7 million, of which $19.4 million is outstanding as of December 31, 2009 under this funding arrangement. Current installment repayments of the advance have been received. However, due to the precarious financial condition of the City of Harrisburg, its substantial obligations, and its reported consideration of various future options (including seeking bankruptcy protection), we intend to closely monitor the situation and work with the City of Harrisburg and other stakeholders, to maintain our position in the project and recover our advance.
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guaranteed by the City of Harrisburg. As of December 31, 2008, we have advanced $8.2 million under this funding arrangement. The facility improvements are expected to be completed by mid 2009.
Lee County Energy-from-Waste Facility
In December 2007, we completed the expansion and commenced the operation of the expandedenergy-from-waste facility located in and owned by Lee County, in Florida. We expanded waste processing capacity from 1,200 tpd to 1,836 tpd and increased gross electricity capacity from 36.9 MW to 57.3 MW. As part of the agreement to implement this expansion, we received a long-term operating contract extension expiring in 2024.
Pacific Ultrapower Chinese Station, California
On October 18, 2007, we acquired an additional 5% ownership interest in our subsidiary Pacific Ultrapower Chinese Station, a biomass energy facility located in California for less than $1 million in cash, increasing our ownership interest to a majority interest of 55%. Although we have acquired majority interest, we do not have the ability to exercise control over the operating and financial policies of the investee and therefore, we continue to account for this investment under the equity method.
Massachusetts Energy-from-Waste Facilities and Transfer Stations
On October 1, 2007, we acquired the operating businesses of EnergyAnswers Corporation for cash consideration of approximately $41 million. We also assumed net debt of $21 million ($23 million of consolidated indebtedness net of $2 million of restricted funds held in trust). These businesses include a 400 tpd energy-from-waste facility in Springfield, Massachusetts and a 240 tpd energy-from-waste facility in Pittsfield, Massachusetts. Approximately 75% of waste revenues are contracted for these facilities. We subsequently sold certain assets acquired in this transaction for a total consideration of $5.8 million during the fourth quarter of 2007 and the first quarter of 2008. The purchase price allocation included $9.6 million of goodwill.
Westchester Transfer Stations
On October 1, 2007, we acquired two waste transfer stations in Westchester County, New York from Regus Industries, LLC for cash consideration of approximately $7.3 million. The purchase price allocation included $1.5 million of goodwill.
California Biomass Energy Facilities
On July 16, 2007, we acquired Central Valley Biomass Holdings, LLC (“Central Valley”) from The AES Corporation.. Under the terms of the purchase agreement, we paid cash consideration of $51 million plus approximately $5 million in cash related to post-closing adjustments and transaction costs. Central Valley owns two biomass energy facilities and a biomass energy fuel management business, which are all located in California. In addition, we invested approximately $8 million prior to December 31, 2007, and approximately $11 million during the year ended December 31, 2008 in capital improvements to significantly increase the facilities’ productivity and improve environmental performance. As ofThese capital improvements were completed by September 30, 2008, these capital improvements have been completed.2008. The purchase price allocation included $23.2 million of goodwill.
Holliston Transfer Station
On April 30, 2007, we acquired a waste transfer station in Holliston, Massachusetts from Casella Waste Systems Inc. for cash consideration of approximately $7.5 million. In addition, we invested approximately $4.2 million prior to December 31, 2007 and approximately $1.0 million during the year ended December 31, 2008 in capital improvements to enhance the environmental and operational performance of the transfer station.
Hempstead Energy-from-Waste Facility
We entered into a new tip fee contract with the Town of Hempstead, in New York for a term of 25 years commencingwhich commenced upon expiration of the existingprevious contract in August 2009. This contract provides approximately 50% of
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the facility’s waste capacity. We also entered into new tip fee contracts with other customers that expire between February 2011 and December 2014. These contracts provide an additional 40% of the facility’s waste capacity.
Hillsborough County Energy-from-Waste Facility
We designed, constructed, and now operate and maintain the 1,200 tpd mass-burn energy-from-waste facility located in and owned by Hillsborough County, in Florida. Due to the growth in the amount of municipal solid waste generated in Hillsborough County, Hillsborough County informed us of its desire to expand the facility’s waste processing and electricity generation capacities. In August 2005, we entered into agreements with Hillsborough County to implement a
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600 tpd expansion of this expansion,energy-from-waste facility, and to extend the agreement under which we operate the facility through 2027. EnvironmentalDuring the third quarter of 2009, acceptance testing was successfully completed and other project related permits have been secured and the expansion construction commenced on December 29, 2006. Completion of the expansion, and commencement of thecommercial operation of the expanded project, is expected in 2009.
Covanta Onondaga Limited Partnership
On December 27, 2006, for cash consideration of $27.5 million, we acquired the limited partnership interests held by unaffiliated entities in Covanta Onondaga Limited Partnership, our subsidiary which owns and operates an energy-from-waste facility in Onondaga County, New York.commenced.
International
China Joint Ventures and Energy-from-Waste Facilities
On March 24, 2009, Taixing Covanta Yanjiang Cogeneration Co., Ltd. of which we own 85%, entered into a 25 year concession agreement and waste supply agreements to build, own and operate a 350 metric tpd energy-from-waste facility for Taixing Municipality, in Jiangsu Province, People’s Republic of China. The project, which will be built on the site of our existing coal-fired facility in Taixing, will supply steam to an adjacent industrial park under short-term arrangements. We will continue to operate our existing coal-fired facility. The project company has obtained Rmb 165 million in project financing which, together with available cash from existing operations will fund construction costs. The Taixing project commenced construction in late 2009.
On April 2, 2008, our project joint venture with Chongqing Iron & Steel Company (Group) Limited received an award to build, own, and operate an 1,800 metric tpd energy-from-waste facility for Chengdu Municipality, in Sichuan Province, People’s Republic of China. On June 25, 2008, the project’s 25 year waste concession agreement was executed. In connection with this project, we invested $17.1 million for a 49% equity interest in the project joint venture company. The Chengdu projectConstruction of the facility has commenced and operation is expected to commence constructionbegin in early 2009,2011. The project company has obtained financing for Rmb 480 million for the project, of which 49% is guaranteed by us and commence51% is guaranteed by Chongqing Iron & Steel Company (Group) Limited, until the project has been constructed and for one year after operations in 2011.
In December 2007, we entered into a joint venture with Guangzhou Development Power Investment Co., Ltd. through which we intend to develop energy-from-waste projects in Guangdong Province, People’s Republic of China. We hold a 40% equity interest in the joint venture entity, Guangzhou Development Covanta Environmental Energy Co., Ltd (“GDC Environmental Energy”), and on June 6, 2008, we invested $1.5 million in the joint venture.commence.
On April 25, 2007, we purchased a 40% equity interest in Chongqing Sanfeng Environmental Industry Co., Ltd. (“Sanfeng”), a company located in Chongqing Municipality, People’s Republic of China. The company, which was renamed Chongqing Sanfeng Covanta Environmental Industry Co., Ltd., owns minority equity interests in two 1,200 metric tpd 24 MW mass-burn energy-from-waste projects (Fuzhou project and Tongqing project). We made an initial cash payment of approximately $10 million in connection with our investment in Sanfeng. In December 2008, we entered into an agreement with Beijing Baoluo Investment Co., Ltd. to purchase a direct 58% equity interest in the Fuzhou project for approximately $14 million. This purchase is conditional upon various regulatory and other conditions precedent and is expected to close in early 2009.
Dublin Joint Venture
On September 6, 2007, we entered into definitive agreements to build, own, and operate a 1,700 metric tpd energy-from-waste project serving the City of Dublin, Ireland and surrounding communities.communities at an estimated cost of €350 million. The Dublin project is being developed and will be owned by Dublin Waste to Energy Limited, which we control and co-own with DONG Energy Generation A/S. Project construction, which is expected to start in mid 2009, is estimated to cost approximately 350 million euros and is expected to require 36 months to complete, once full construction commences. Dublin Waste to Energy Limited has a25-year 25 year tip fee type contract to provide disposal service for approximately 320,000 metric tons of waste annually. The project is expected to sell electricity into the local electricity grid under short-term arrangements.grid. A portion of the electricity is expected to be eligible for a preferential renewable tariff. We and DONG Energy Generation A/S have committed to provide
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financing for all phases of the project, and weproject. We expect to arrange forfund construction through existing sources of liquidity, and effect project financing.financing as the project progresses. The primary approvals and licenses for the project have been obtained and any remaining consents and approvals necessary to begin full construction are expected to be obtainedcommenced in due course. We have begun to perform preliminary site demolition work and expect to commence full construction during the second quarter ofDecember 2009.
Dispositions
In December 2007, we entered into a joint venture with Guangzhou Development Power Investment Co., Ltd. (“GDPI”) which develops energy-from-waste projects in Guangdong Province, People’s Republic of China. We held a 40% equity interest in the joint venture entity, Guangzhou Development Covanta Environmental Energy Co., Ltd (“GDC Environmental Energy”). In December 2009, we completed the termination of the joint venture with GDPI and sold our 40% equity interest in the joint venture entity, GDC Environmental Energy, at book value to an affiliate of GDPI for $1.2 million.
On September 13, 2007, we completed the sale of the Linan coal facility in China for $2.3 million and recorded a pre-tax gain of approximately $1.7 million in other operating income in our consolidated statements of income.
On June 10, 2006, we completed the sale of the Huantai coal facility in China for $3.6 million and recorded a pre-tax gain of approximately $1.2 million in other operating income in our consolidated statements of income.
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NOTE 4. | EARNINGS PER SHARE AND EQUITY |
Note 4. Earnings Per Share and Stockholders’ Equity
Earnings Per Share
Per share data is based on the weighted average number of outstanding shares of our common stock, par value $0.10 per share, during the relevant period. Basic earnings per share are calculated using only the weighted average number of
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outstanding shares of common stock. 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, rights and rightswarrants whether or not currently exercisable. Diluted earnings per share for all the periods presented does not include securities if their effect was anti-dilutive (in thousands, except per share amounts).
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, | | | For the Years Ended December 31, | |
| | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | |
|
Net income | | $ | 139,273 | | | $ | 130,513 | | | $ | 105,789 | | |
Net income attributable to Covanta Holding Corporation | | | $ | 101,645 | | | $ | 128,960 | | | $ | 121,693 | |
| | | | | | | | | | | | | | |
Basic earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average basic common shares outstanding | | | 153,345 | | | | 152,653 | | | | 145,663 | | | | 153,694 | | | | 153,345 | | | | 152,653 | |
| | | | | | | | | | | | | | |
Basic earnings per share | | $ | 0.91 | | | $ | 0.85 | | | $ | 0.73 | | | $ | 0.66 | | | $ | 0.84 | | | $ | 0.80 | |
| | | | | | | | | | | | | | |
Diluted earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average basic common shares outstanding | | | 153,345 | | | | 152,653 | | | | 145,663 | | | | 153,694 | | | | 153,345 | | | | 152,653 | |
Dilutive effect of stock options | | | 649 | | | | 620 | | | | 557 | | | | 433 | | | | 649 | | | | 620 | |
Dilutive effect of restricted stock | | | 738 | | | | 724 | | | | 402 | | | | 867 | | | | 738 | | | | 724 | |
Dilutive effect of rights | | | — | | | | — | | | | 408 | | |
Dilutive effect of convertible debentures | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Dilutive effect of warrants | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | |
Weighted average diluted common shares outstanding | | | 154,732 | | | | 153,997 | | | | 147,030 | | | | 154,994 | | | | 154,732 | | | | 153,997 | |
| | | | | | | | | | | | | | |
Diluted earnings per share | | $ | 0.90 | | | $ | 0.85 | | | $ | 0.72 | | | $ | 0.66 | | | $ | 0.83 | | | $ | 0.79 | |
| | | | | | | | | | | | | | |
Stock options excluded from the weighted average dilutive common shares outstanding because their inclusion would have been antidilutive | | | 1,983 | | | | 1,745 | | | | 50 | | | | 1,975 | | | | 1,983 | | | | 1,745 | |
| | | | | | | | | | | | | | |
Restricted stock awards excluded from the weighted average dilutive common shares outstanding because their inclusion would have been antidilutive | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | |
Warrants excluded from the weighted average dilutive common shares outstanding because their inclusion would have been antidilutive | | | | 24,803 | | | | — | | | | — | |
| | | | | | | | |
On May 22, 2009, we entered into privately negotiated warrant transactions in connection with the issuance of 3.25% Cash Convertible Senior Notes due 2014 (“Notes”). These warrants could have a dilutive effect to the extent that the price of our common stock exceeds the applicable strike price of the warrants. As of December 31, 2009, the warrants did not have a dilutive effect on earnings per share. See Note 11. Long-Term Debt for a description of the Notes.
On January 31, 2007, we issued 1.00% Senior Convertible Debentures due 2027 (“Debentures”), which are convertible under certain circumstances if the closing sale price of our common stock exceeds a specified conversion price before February 1, 2025. As of December 31, 2008, theThe Debentures did not have a dilutive effect on earnings per share.share for any of the years ended December 31, 2009, 2008 and 2007. See Note 6.11. Long-Term Debt for a description of the Debentures.
Equity
During the year ended December 31, 2009, we granted 742,003 restricted stock awards. For information related to stock-based award plans, see Note 18. Stock-Based Award Plans.
During the year ended December 31, 2009 and 2008, we repurchased 139,762 shares and 137,015 shares, respectively, of our common stock in connection with tax withholdings for vested stock awards.
As of December 31, 2009, there were 155,615,165 shares of common stock issued of which 154,936,092 were outstanding; the remaining 679,073 shares of common stock issued but not outstanding were held as treasury stock as of December 31, 2009.
The following represents shares of common stock reserved for future issuance:
| | | | |
| | As of December 31,
| |
| | 2009 | |
|
Shares available for issuance under equity plans | | | 9,082,570 | |
As of December 31, 2009, there were 10,000,000 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.
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Stockholders’ Equity
OnIn September 22, 2008, we announced that our Board of Directors authorized the purchase of up to $30 million of our common stock in order to respond opportunistically to volatile market conditions. The share repurchases, if any, may take place from time to time based on market conditions and other factors. The authorization is expected to continue only for so long as recent volatile market conditions persist. During the year ended December 31, 2009 and 2008, we did not repurchase shares of our common stock under this program.
During the year ended December 31, 2008 and 2007, we repurchased 137,015 shares and 174,999 shares, respectively, of our common stock in connection with tax withholdings for vested stock awards.
As of December 31, 2008, there were 154,796,601 shares of common stock issued of which 154,279,306 were outstanding; the remaining 517,295 shares of common stock issued but not outstanding were held as treasury stock as of December 31, 2008.
The following represents shares of common stock reserved for future issuance:
| | | | |
| | As of December 31,
| |
| | 2008 | |
|
Shares available for issuance under equity plans | | | 9,907,333 | |
As of December 31, 2008, there were 10,000,000 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.
During the year ended December 31, 2008, we granted 494,105 restricted stock awards and 250,000 options to purchase our common stock. For information related to stock-based award plans, see Note 17. Stock-Based Award Plans.
On January 31, 2007, we completed an underwritten public offering of 5.32 million shares of our common stock. Proceeds received in these offerings were approximately $136.6 million, net of underwriting discounts and commissions. Additional information is contained in Note 6. Long-Term Debt.
Effective January 1, 2007, we adopted the provisions of FIN 48. The impact of applying the provisions of this interpretation decreased our opening balance retained earnings by $2.2 million in 2007. See Note 9. Income Taxes for additional information.
On February 24, 2006, we completed a rights offering in which 5,696,911 shares were issued in consideration for $20.8 million in gross proceeds. See Note 20. Related-Party Transactions.
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NoteNOTE 5. | Financial Information by Business SegmentsFINANCIAL INFORMATION BY BUSINESS SEGMENTS |
We have twoOur reportable segments are Americas and International. The Americas segment was formerly referred to as the “Domestic” segment. We acquired an energy-from-waste project in Canada as part of the Veolia EfW Acquisition and have renamed the Domestic and International,segment to Americas, which areis comprised of our domestic and international waste and energy services operations respectively.primarily in the United States and Canada. The International segment is comprised of waste and energy services operations in other markets, currently the United Kingdom, Ireland, Italy, China, The Philippines, India, and Bangladesh. The results of our reportable segments are as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | Reportable Segments | | | | | | | |
| | Domestic | | | International | | | All Other(1) | | | Total | |
|
Year Ended December 31, 2008: | | | | | | | | | | | | | | | | |
Operating revenues | | $ | 1,371,431 | | | $ | 279,966 | | | $ | 12,856 | | | $ | 1,664,253 | |
Depreciation and amortization | | | 190,659 | | | | 8,751 | | | | 78 | | | | 199,488 | |
Operating income (loss) | | | 255,007 | | | | 3,061 | | | | (2,103 | ) | | | 255,965 | |
| | | | | | | | | | | | | | | | |
As of December 31, 2008: | | | | | | | | | | | | | | | | |
Total assets (includes goodwill of $195.6 million) | | $ | 3,975,740 | | | $ | 239,582 | | | $ | 64,667 | | | $ | 4,279,989 | |
Capital additions | | | 85,770 | | | | 2,082 | | | | 68 | | | | 87,920 | |
| | | | | | | | | | | | | | | | |
Year Ended December 31, 2007: | | | | | | | | | | | | | | | | |
Operating revenues | | $ | 1,245,617 | | | $ | 177,217 | | | $ | 10,253 | | | $ | 1,433,087 | |
Depreciation and amortization | | | 187,875 | | | | 8,998 | | | | 97 | | | | 196,970 | |
Operating income (loss) | | | 220,092 | | | | 20,183 | | | | (3,665 | ) | | | 236,610 | |
| | | | | | | | | | | | | | | | |
As of December 31, 2007: | | | | | | | | | | | | | | | | |
Total assets (includes goodwill of $127.0 million) | | $ | 4,007,621 | | | $ | 257,481 | | | $ | 103,397 | | | $ | 4,368,499 | |
Capital additions | | | 84,983 | | | | 528 | | | | 237 | | | | 85,748 | |
| | | | | | | | | | | | | | | | |
Year Ended December 31, 2006: | | | | | | | | | | | | | | | | |
Operating revenues | | $ | 1,117,927 | | | $ | 136,868 | | | $ | 13,741 | | | $ | 1,268,536 | |
Depreciation and amortization | | | 184,921 | | | | 8,193 | | | | 103 | | | | 193,217 | |
Operating income | | | 206,483 | | | | 19,839 | | | | 438 | | | | 226,760 | |
| | | | | | | | | | | | | | | | |
As of December 31, 2006: | | | | | | | | | | | | | | | | |
Total assets (includes goodwill of $91.3 million) | | $ | 4,097,310 | | | $ | 216,518 | | | $ | 123,992 | | | $ | 4,437,820 | |
Capital additions | | | 53,651 | | | | 599 | | | | 17 | | | | 54,267 | |
| | | | | | | | | | | | | | | | |
| | Reportable Segments | | | | |
| | Americas | | International | | All Other(1) | | Total |
|
Year Ended December 31, 2009: | | | | | | | | | | | | | | | | |
Operating revenues | | $ | 1,346,217 | | | $ | 184,773 | | | $ | 19,477 | | | $ | 1,550,467 | |
Depreciation and amortization | | | 194,925 | | | | 7,834 | | | | 113 | | | | 202,872 | |
Operating income (loss) | | | 194,753 | | | | 5,305 | | | | (4,223 | ) | | | 195,835 | |
As of December 31, 2009: | | | | | | | | | | | | | | | | |
Total assets (includes goodwill of $203.0 million in the Americas segment) | | $ | 4,480,484 | | | $ | 249,143 | | | $ | 204,655 | | | $ | 4,934,282 | |
Capital additions | | | 59,958 | | | | 13,483 | | | | 178 | | | | 73,619 | |
Year Ended December 31, 2008: | | | | | | | | | | | | | | | | |
Operating revenues | | $ | 1,371,431 | | | $ | 279,966 | | | $ | 12,856 | | | $ | 1,664,253 | |
Depreciation and amortization | | | 190,659 | | | | 8,751 | | | | 78 | | | | 199,488 | |
Operating income (loss) | | | 255,007 | | | | 3,061 | | | | (2,103 | ) | | | 255,965 | |
As of December 31, 2008: | | | | | | | | | | | | | | | | |
Total assets (includes goodwill of $195.6 million in the Americas segment) | | $ | 3,975,740 | | | $ | 239,582 | | | $ | 64,667 | | | $ | 4,279,989 | |
Capital additions | | | 85,770 | | | | 2,082 | | | | 68 | | | | 87,920 | |
Year Ended December 31, 2007: | | | | | | | | | | | | | | | | |
Operating revenues | | $ | 1,245,617 | | | $ | 177,217 | | | $ | 10,253 | | | $ | 1,433,087 | |
Depreciation and amortization | | | 187,875 | | | | 8,998 | | | | 97 | | | | 196,970 | |
Operating income (loss) | | | 220,092 | | | | 20,183 | | | | (3,665 | ) | | | 236,610 | |
As of December 31, 2007: | | | | | | | | | | | | | | | | |
Total assets (includes goodwill of $127.0 million in the Americas segment) | | $ | 4,007,621 | | | $ | 257,481 | | | $ | 103,397 | | | $ | 4,368,499 | |
Capital additions | | | 84,983 | | | | 528 | | | | 237 | | | | 85,748 | |
| | |
(1) | | All other is comprised of our insurance subsidiaries’ operations and the financial results of the holding company. |
Our operations are principally in the United States. Operations outside of the United States are primarily in Asia, with some projects in Europe and Latin America. See the list of projects for the Americas segment and International segment inItem 1. Business.A summary of revenues and total assets by geographic area is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | United States | | India | | Other International | | Total | | | Americas | | India | | Other International | | Total |
|
Operating Revenues: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2009 | | | $ | 1,365,694 | | | $ | 163,403 | | | $ | 21,370 | | | $ | 1,550,467 | |
Year Ended December 31, 2008 | | $ | 1,384,287 | | | $ | 259,923 | | | $ | 20,043 | | | $ | 1,664,253 | | | $ | 1,384,287 | | | $ | 259,923 | | | $ | 20,043 | | | $ | 1,664,253 | |
Year Ended December 31, 2007 | | $ | 1,255,870 | | | $ | 157,405 | | | $ | 19,812 | | | $ | 1,433,087 | | | $ | 1,255,870 | | | $ | 157,405 | | | $ | 19,812 | | | $ | 1,433,087 | |
Year Ended December 31, 2006 | | $ | 1,131,667 | | | $ | 108,150 | | | $ | 28,719 | | | $ | 1,268,536 | | |
Total Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2009 | | | $ | 4,596,531 | | | $ | 60,352 | | | $ | 277,399 | | | $ | 4,934,282 | |
As of December 31, 2008 | | $ | 3,975,365 | | | $ | 65,766 | | | $ | 238,858 | | | $ | 4,279,989 | | | $ | 3,975,365 | | | $ | 65,766 | | | $ | 238,858 | | | $ | 4,279,989 | |
As of December 31, 2007 | | $ | 4,079,552 | | | $ | 91,710 | | | $ | 197,237 | | | $ | 4,368,499 | | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| |
NOTE 6. | 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 at their estimated fair market values based upon discounted cash flows. Intangible assets and liabilities are amortized using the straight line method over their remaining useful lives, which average approximately 19 years for the waste, service and energy intangible contract assets and 8 years for the waste and service intangible contract liabilities.
Waste, Service and Energy contracts consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | As of December 31, 2009 | | | As of December 31, 2008 | |
| | | | | Gross
| | | | | | | | | Gross
| | | | | | | |
| | Useful
| | | Carrying
| | | Accumulated
| | | | | | Carrying
| | | Accumulated
| | | | |
| | Life | | | Amount | | | Amortization | | | Net | | | Amount | | | Amortization | | | Net | |
|
Waste, service and energy contracts (asset) | | | 1 — 38 years | | | $ | 608,122 | | | $ | 227,763 | | | $ | 380,359 | | | $ | 406,556 | | | $ | 183,159 | | | $ | 223,397 | |
Waste and service contracts (liability) | | | 1 — 13 years | | | $ | (156,705 | ) | | $ | (55,352 | ) | | $ | (101,353 | ) | | $ | (156,705 | ) | | $ | (42,173 | ) | | $ | (114,532 | ) |
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, 2009 included or expected to be included in our statements of income for each of the years indicated (in thousands):
| | | | | | | | |
| | Waste, Service and
| | | Waste and Service
| |
| | Energy Contracts
| | | Contracts
| |
| | (Amortization Expense) | | | (Contra-Expense) | |
|
Year ended December 31, 2009 | | $ | 44,604 | | | $ | (13,179 | ) |
| | | | | | | | |
2010 | | $ | 36,870 | | | $ | (12,721 | ) |
2011 | | | 33,747 | | | | (12,408 | ) |
2012 | | | 31,654 | | | | (12,412 | ) |
2013 | | | 28,043 | | | | (12,390 | ) |
2014 | | | 25,479 | | | | (12,500 | ) |
Thereafter | | | 224,566 | | | | (38,922 | ) |
| | | | | | | | |
Total | | $ | 380,359 | | | $ | (101,353 | ) |
| | | | | | | | |
| |
NOTE 7. | OTHER INTANGIBLE ASSETS AND GOODWILL |
Other Intangible Assets
Other intangible assets consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | As of December 31, 2009 | | | As of December 31, 2008 | |
| | | | Gross
| | | | | | | | | Gross
| | | | | | | |
| | | | Carrying
| | | Accumulated
| | | | | | Carrying
| | | Accumulated
| | | | |
| | Useful Life | | Amount | | | Amortization | | | Net | | | Amount | | | Amortization | | | Net | |
|
Lease interest and other | | 9 — 20 years | | $ | 79,338 | | | $ | 13,994 | | | $ | 65,344 | | | $ | 73,848 | | | $ | 10,739 | | | $ | 63,109 | |
Landfill | | 4 years | | | 17,985 | | | | 9,460 | | | | 8,525 | | | | 17,985 | | | | 7,329 | | | | 10,656 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Total amortizable intangible assets | | | | | 97,323 | | | | 23,454 | | | | 73,869 | | | | 91,833 | | | | 18,068 | | | | 73,765 | |
Other intangibles | | Indefinite | | | 10,741 | | | | — | | | | 10,741 | | | | 9,566 | | | | — | | | | 9,566 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Intangible assets, net | | | | $ | 108,064 | | | $ | 23,454 | | | $ | 84,610 | | | $ | 101,399 | | | $ | 18,068 | | | $ | 83,331 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
The following table details the amount of the actual/estimated amortization expense associated with other intangible assets as of December 31, 2009 included or expected to be included in our statements of income for each of the years indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | Thereafter | | | Total | |
|
Annual Remaining Amortization | | $ | 5,484 | | | $ | 5,484 | | | $ | 5,484 | | | $ | 5,484 | | | $ | 3,353 | | | $ | 48,580 | | | $ | 73,869 | |
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COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —– (Continued)
Amortization Expense related to other intangible assets was $5.4 million, $5.3 million and $5.2 million for the years ended December 31, 2009, 2008 and 2007, respectively. Lease interest amortization is recorded as rent expense in plant operating expenses and was $3.0 million for each of the years ended December 31, 2009, 2008, and 2007.
Goodwill
Goodwill was $203.0 million and $195.6 million as of December 31, 2009 and 2008, respectively. 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. We performed the required annual impairment review of our recorded goodwill for reporting units using a discounted cash flow approach as of October 1, 2009 and determined that goodwill was not impaired. As of December 31, 2009, goodwill of approximately $22.1 million is deductible for federal income tax purposes.
The following table details the changes in carrying value of goodwill for the years ended December 31, 2009 and 2008 (in thousands):
| | | | |
| | Total | |
|
Balance as of December 31, 2007 | | $ | 127,027 | |
Increase to net deferred tax liabilities related to the deferred tax impact recognized on tax liquidation of ARC Holdings partnerships (Note 16) | | | 67,929 | |
Purchase price adjustment related to the Central Valley acquisition | | | 269 | |
Purchase price adjustment related to the Westchester County transfer stations acquired | | | 578 | |
Purchase price adjustment related to the EnergyAnswers acquisition | | | (186 | ) |
| | | | |
Balance as of December 31, 2008 | | $ | 195,617 | |
| | | | |
Purchase price adjustment related to the ARC Holdings acquisition | | | 6,060 | |
Goodwill related to the Pennsylvania transfer stations acquisition (See Note 3) | | | 1,319 | |
| | | | |
Balance as of December 31, 2009 | | $ | 202,996 | |
| | | | |
No goodwill was associated with the preliminary purchase price allocation of the businesses acquired in 2009 for the Veolia EfW Acquisition. We concluded the Veolia EfW Acquisition by acquiring the 3,000 tpd energy-from-waste business in Miami-Dade, Florida in February 2010. We plan to record the preliminary purchase price allocation for this acquisition in the first quarter of 2010 which is expected to include working capital, an intangible asset related to a long-term operating contract, goodwill and assumed debt. See Note 23. Subsequent Events.
We increased goodwill and current liabilities by $6.1 million during 2009 to recognize a liability due to one of our municipal clients that should have been recognized in the purchase price allocation relating to the ARC Holdings acquisition of June 2005.
| |
Note 6.NOTE 8. | Long-Term DebtEQUITY METHOD INVESTMENTS |
Long-Term Debt
Long-term debt isOur subsidiaries are party to joint venture agreements through which we have equity investments in several operating projects. The joint venture agreements generally provide for the sharing of operational control as follows (in thousands):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 income.
94
| | | | | | | | |
| | As of December 31, | |
| | 2008 | | | 2007 | |
|
1.00% Senior Convertible Debentures due 2027 | | $ | 373,750 | | | $ | 373,750 | |
Term loan due 2014 | | | 638,625 | | | | 645,125 | |
Other long-term debt | | | 512 | | | | 557 | |
| | | | | | | | |
Total | | | 1,012,887 | | | | 1,019,432 | |
Less: current portion | | | (6,922 | ) | | | (6,898 | ) |
| | | | | | | | |
Total long-term debt | | $ | 1,005,965 | | | $ | 1,012,534 | |
| | | | | | | | |
Short-Term LiquidityCOVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of December 31, 2009 and 2008, we had available creditinvestments in investees and joint ventures accounted for liquidityunder the equity method were as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | Total
| | | | Outstanding Letters
| | |
| | Available
| | | | of Credit as of
| | Available as of
|
| | Under Facility | | Maturing | | December 31, 2008 | | December 31, 2008 |
|
Revolving Loan Facility(1) | | $ | 300,000 | | | | 2013 | | | $ | — | | | $ | 300,000 | |
Funded L/C Facility | | $ | 320,000 | | | | 2014 | | | $ | 292,144 | | | $ | 27,856 | |
| | | | | | | | | | | | |
| | Ownership
| | | | | Ownership
| | | |
| | Interest as of
| | | | | Interest as of
| | | |
| | December 31,
| | | | | December 31,
| | | |
| | 2009 | | 2009 | | | 2008 | | 2008 | |
|
Pacific Ultrapower Chinese Station Plant (U.S.)(1) | | 55% | | $ | 3,685 | | | 55% | | $ | 4,446 | |
South Fork Plant (U.S.) | | 50% | | | 1,017 | | | 50% | | | 1,098 | |
Koma Kulshan Plant (U.S.) | | 50% | | | 5,883 | | | 50% | | | 5,976 | |
Detroit EfW Facility (U.S.)(1) | | 30% | | | 4,973 | | | — | | | — | |
Ambiente 2000 (Italy) | | 40% | | | 1,025 | | | 40% | | | 658 | |
Haripur Barge Plant (Bangladesh) | | 45% | | | 16,741 | | | 45% | | | 16,061 | |
Quezon Power (Philippines) | | 26% | | | 53,498 | | | 26% | | | 45,439 | |
Sanfeng (China) | | 40% | | | 13,786 | | | 40% | | | 12,217 | |
Guangzhou (China)(1) | | — | | | — | | | 40% | | | 1,328 | |
Chengdu (China)(1) | | 49% | | | 19,004 | | | 49% | | | 15,730 | |
Mauritius (Africa) | | 35% | | | 561 | | | — | | | — | |
| | | | | | | | | | | | |
Total investments | | | | $ | 120,173 | | | | | $ | 102,953 | |
| | | | | | | | | | | | |
| | |
(1) | (1) | UpSee Note 3. Acquisitions, Business Development and Dispositions for a discussion related to $200 million of which may be utilized for letters of credit.these equity investments. |
UnderThe unaudited combined results of operations and financial position of our Revolving Loan Facility, weequity method investments are summarized below (in thousands):
| | | | | | | | | | | | |
| | 2009 | | 2008 | | 2007 |
|
Condensed Statements of Operations for the Years Ended December 31: | | | | | | | | | | | | |
Revenues | | $ | 387,817 | | | $ | 376,780 | | | $ | 331,230 | |
Operating income | | | 161,417 | | | | 150,296 | | | | 153,981 | |
Net income | | | 77,064 | | | | 68,940 | | | | 57,472 | |
Company’s share of net income | | | 23,036 | | | | 23,583 | | | | 22,196 | |
Condensed Balance Sheets as of December 31: | | | | | | | | | | | | |
Current assets | | $ | 218,458 | | | $ | 214,295 | | | | | |
Noncurrent assets | | | 776,389 | | | | 790,157 | | | | | |
Total assets | | | 994,847 | | | | 1,004,452 | | | | | |
Current liabilities | | | 130,671 | | | | 119,551 | | | | | |
Noncurrent liabilities | | | 331,810 | | | | 432,658 | | | | | |
Total liabilities | | | 462,481 | | | | 552,209 | | | | | |
| |
NOTE 9. | PROPERTY, PLANT AND EQUIPMENT, NET |
Property, plant and equipment consisted of the following (in thousands):
| | | | | | | | | | | | |
| | | | | As of December 31, | |
| | Useful Lives | | | 2009 | | | 2008 | |
|
Land | | | | | | $ | 27,113 | | | $ | 22,999 | |
Facilities and equipment | | | 3-36 years | | | | 3,263,144 | | | | 3,043,124 | |
Landfills | | | 3-39 years | | | | 42,957 | | | | 42,091 | |
Construction in progress | | | | | | | 31,455 | | | | 36,858 | |
| | | | | | | | | | | | |
Total | | | | | | | 3,364,669 | | | | 3,145,072 | |
Less: accumulated depreciation and amortization | | | | | | | (781,828 | ) | | | (615,037 | ) |
| | | | | | | | | | | | |
Property, plant, and equipment — net | | | | | | $ | 2,582,841 | | | $ | 2,530,035 | |
| | | | | | | | | | | | |
Depreciation and amortization expense related to property, plant and equipment was $169.0 million, $164.1 million and $162.0 million for the years ended December 31, 2009, 2008 and 2007, respectively.
Leases are primarily operating leases for leaseholds on energy-from-waste facilities and independent power projects, as well as for trucks and automobiles, office space and machinery and equipment. Some of these operating leases have pro rata funding commitments from a large consortium of banks, including a 6.8% pro rata commitment from Lehman Brothers Commercial Bank. Lehman Brothers Commercial Bankrenewal options. Expense under operating leases was $32.3 million, $30.9 million and $29.8 million for the years ended December 31, 2009, 2008 and 2007, respectively.
95
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following is a subsidiaryschedule, by year, of Lehman Brothers Holdings, Inc., which filed for bankruptcy protectionfuture minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in September 2008. We believe that neither the Lehman Brothers Holdings, Inc. bankruptcy, nor the abilityexcess of Lehman Brothers Commercial Bank (which is not currently partone year as of such bankruptcy proceeding) to fund its pro rata share of any draw request we may make, will have a material effect on our liquidity.December 31, 2009 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | Thereafter | | | Total | |
|
Future Minimum Rental Payments | | $ | 42,640 | | | $ | 44,088 | | | $ | 38,669 | | | $ | 32,665 | | | $ | 26,953 | | | $ | 165,350 | | | $ | 350,365 | |
Non-Recourse Portion of Future Minimum Rental Payments | | $ | 23,362 | | | $ | 23,571 | | | $ | 23,611 | | | $ | 18,005 | | | $ | 12,424 | | | $ | 89,684 | | | $ | 190,657 | |
Future minimum rental payment obligations include $190.7 million of future non-recourse rental payments that relate to energy-from-waste facilities. Of this amount $110.7 million is supported by third-party commitments to provide sufficient service revenues to meet such obligations. The remaining $80.0 million is related to an energy-from-waste facility at which we serve as the operator and directly market one half of the facility’s disposal capacity. This facility currently generates sufficient revenues from short-, medium-, and long-term contracts to meet rental payments. We anticipate renewing the contracts or entering into new contracts to generate sufficient revenues to meet remaining future rental payments.
Covanta Delaware Valley, L.P. (“Delaware Valley”) leases a facility pursuant to an operating lease that expires in July 2019. In certain default circumstances under such lease, Delaware Valley becomes obligated to pay a contractually specified “stipulated loss” value that declines over time and was approximately $107.9 million as of December 31, 2009.
Electricity and steam sales include lease income of approximately $143.4 million, $240.2 million and $139.6 million for the years ended December 31, 2009, 2008, and 2007, respectively, related to two Indian power projects that were deemed to be operating lease arrangements under accounting standards for determining whether an arrangement contains a lease. These amounts represent contingent rentals because the lease payments for each facility depend on a factor directly related to the future use of the leased property. The output deliverable and capacity provided by our two Indian facilities have each been purchased by a single party under long-term power purchase agreements which expire in 2016.
Property, plant and equipment accounted for as leased to others consisted of the following (in thousands):
| | | | | | | | |
| | As of December 31, | |
| | 2009 | | | 2008 | |
|
Land | | $ | 29 | | | $ | 24 | |
Energy facilities | | | 64,510 | | | | 61,077 | |
Buildings, machinery and improvements | | | 6,397 | | | | 5,961 | |
| | | | | | | | |
Total | | | 70,936 | | | | 67,062 | |
Less: accumulated depreciation and amortization | | | (34,961 | ) | | | (23,222 | ) |
| | | | | | | | |
Property, plant, and equipment — net | | $ | 35,975 | | | $ | 43,840 | |
| | | | | | | | |
Credit Facilities
We have the ability to make investments in our business and to take advantage of opportunities to grow our business through investments and acquisitions, both domestically and internationally, by utilizing Credit Facilities (as defined below under2007 Recapitalizationwhich are comprised of:
| | |
| • | a $300 million revolving loan facility due 2013, which includes a $200 millionsub-facility for the issuance of letters of credit (the “Revolving Loan Facility”); |
| • | a $320 million funded letter of credit facility due 2014 (the “Funded L/C Facility”); and |
| • | a term loan facility, due 2014, in the initial amount of $650 million and of which $638.6$632 million was outstanding as of December 31, 20082009 (the “Term Loan Facility”). |
As of December 31, 2009, we had available credit for liquidity as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | Total
| | | | | | Outstanding Letters
| | | | |
| | Available
| | | | | | of Credit as of
| | | Available as of
| |
| | Under Facility | | | Maturing | | | December 31, 2009 | | | December 31, 2009 | |
|
Revolving Loan Facility(1) | | $ | 300,000 | | | | 2013 | | | $ | — | | | $ | 300,000 | |
Funded L/C Facility | | $ | 320,000 | | | | 2014 | | | $ | 272,469 | | | $ | 47,531 | |
| | |
| (1) | Up to $200 million of which may be utilized for letters of credit. |
96
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Amortization Terms
The Credit Facilities include mandatory annual amortization of the Term Loan Facility to be paid in quarterly installments beginning June 30, 2007, through the date of maturity as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | Total | |
|
Annual Remaining Amortization | | $ | 6,500 | | | $ | 6,500 | | | $ | 6,500 | | | $ | 6,500 | | | $ | 6,500 | | | $ | 606,125 | | | $ | 638,625 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | Total | |
|
Annual Remaining Amortization | | $ | 6,500 | | | $ | 6,500 | | | $ | 6,500 | | | $ | 6,500 | | | $ | 606,125 | | | $ | 632,125 | |
Under the Credit Facilities, we are obligated to apply a portion of excess cash from operations on an annual basis (calculated pursuant to the credit agreement), as well as specified other sources, to repay borrowings under the
94
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Term Loan Facility. The portion of excess cash (as defined in the credit agreement) to be used for this purpose is 50%, 25%, or 0%, based on measurement of the leverage ratio under the financial covenants.
Interest and Fee Terms
Loans under the Credit Facilities are designated, at our election, as Eurodollar rate loans or base rate loans. Eurodollar loans bear interest at a reserve adjusted British Bankers Association Interest Settlement Rate, commonly referred to as “LIBOR,” for deposits in dollars plus a borrowing margin as described below. Interest on Eurodollar rate loans is payable at the end of the applicable interest period of one, two, three or six months (and at the end of every three months in the case of six month Eurodollar loans). Base rate loans bear interest at (a) a rate per annum equal to the greater of (1) the “prime rate” designated in the relevant facility or (2) the Federal Funds rate plus 0.5% per annum, plus (b) a borrowing margin as described below.
Letters of credit that may be issued in the future under the Revolving Loan Facility will accrue fees at the then effective borrowing margins on Eurodollar rate loans (described below), plus a fee on each issued letter of credit payable to the issuing bank. Letter of credit availability under the Funded L/C Facility accrues fees (whether or not letters of credit are issued thereunder) at the then effective borrowing margin for Eurodollar rate loans times the total availability for issuing letters of credit (whether or not then utilized), plus a fee on each issued letter of credit payable to the issuing bank. In addition, we have agreed to pay to the participants under the Funded L/C Facility a fee equal to 0.10% times the average daily amount of the credit linked deposit paid by such participants for their participation under the Funded L/C Facility.
The borrowing margins referred to above for the Credit Facilities are as follows:
| | | | | | | | | | | | | | | | |
| | | | | | Borrowing Margin
| | Borrowing Margin
|
| | | | | | for Term Loans,
| | for Term Loans,
|
| | | | | | Funded Letters of
| | Funded Letters of
|
| | | | | | Credit and
| | Credit and
|
| | Borrowing Margin
| | Borrowing Margin
| | Credit-Linked
| | Credit-Linked
|
| | for Revolving Loans
| | for Revolving Loans
| | Deposits
| | Deposits
|
Leverage Ratio | | (Eurodollar Loans) | | (Base Rate Loans) | | (Eurodollar Loans) | | (Base Rate Loans) |
|
³ 4.00:1.00 | | | 2.00 | % | | | 1.00 | % | | | 1.75 | % | | | 0.75 | % |
< 4.00:1.00 and³ 3.25:1.00 | | | 1.75 | % | | | 0.75 | % | | | 1.50 | % | | | 0.50 | % |
< 3.25:1.00 and³ 2.75:1.00 | | | 1.50 | % | | | 0.50 | % | | | 1.50 | % | | | 0.50 | % |
< 2.75:1.00 | | | 1.25 | % | | | 0.25 | % | | | 1.50 | % | | | 0.50 | % |
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, 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 foreign subsidiaries which are directly owned, in each case to the extent not otherwise pledged.
Credit AgreementFacilities Financial Covenants
The loan documentation under the Credit Facilities contains customary affirmative and negative covenants and financial covenants. We were in compliance with all required covenants as of December 31, 2008.2009.
The affirmative covenants of the Credit Facilities include covenants relating to the following:
| | |
| • | financial statements and other reports; |
| • | continued existence; |
| • | payment of taxes and claims; |
97
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | |
| • | maintenance of properties; |
| • | insurance coverage; |
| • | inspections by lenders (subject to frequency and cost reimbursement limitations); |
95
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | |
| • | lenders meetings; |
| • | compliance with laws; |
| • | environmental matters; |
| • | additional material real estate assets; |
| • | designation of subsidiaries; and |
| • | post-closing matters. |
The negative covenants of the Credit Facilities include limitations on the following:
| | |
| • | indebtedness (including guarantee obligations); |
| • | liens; |
| • | negative pledge clauses; |
| • | restricted junior payments; |
| • | clauses restricting subsidiary distributions; |
| • | investments; |
| • | fundamental changes; |
| • | disposition of assets; |
| • | acquisitions; |
| • | conduct of business; |
| • | amendments or waivers of certain agreements; |
| • | changes in fiscal year; and |
| • | hedge agreements. |
The financial covenants of the Credit Facilities, which are measured on a trailing four quarter period basis, include the following:
| | |
| • | maximum Covanta Energy leverage ratio of 4.003.75 to 1.00 for the four quarter period ended December 31, 2008,2009, which measures Covanta Energy’s principal amount of 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 under the Credit Facilities (“Adjusted EBITDA”). The definition of Adjusted EBITDA in the Credit Facilities excludes certain non-cash charges.charges, and for purposes of calculating the leverage ratio and interest coverage ratios is adjusted on a pro forma basis for acquisitions and dispositions made during the relevant period. The maximum Covanta Energy leverage ratio allowed under the Credit Facilities adjusts in future periods as follows: |
| | |
| • | 4.00 to 1.00 for each of the four quarter periods ended March 31, June 30 and September 30, 2009; |
| • | 3.75 to 1.00 for each of the four quarter periods ended December 31, 2009, March 31, June 30 and September 30, 2010; |
| • | 3.50 to 1.00 for each four quarter period thereafter; |
| | |
| • | maximum Covanta Energy capital expenditures incurred to maintain existing operating businesses of $100 million per fiscal year, subject to adjustment due to an acquisition by Covanta Energy; and |
| • | minimum Covanta Energy 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. |
Defaults under the Credit Facilities include:
| | |
| • | non-payment of principal when due; |
| • | non-payment of any amount payable to an issuing bank in reimbursement of any drawing under a letter of credit when due; |
| • | non-payment of interest, fees or other amounts after a grace period of five days; |
| • | cross-default to material indebtedness; |
| • | violation of a covenant (subject, in the case of certain affirmative covenants, to a grace period of thirty days); |
| • | material inaccuracy of a representation or warranty when made; |
96
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | |
| • | bankruptcy events with respect to us, Covanta Energy or any material subsidiary or group of subsidiaries of Covanta Energy; |
| • | material judgments; |
| • | certain material ERISA events; |
| • | change of control (subject to exceptions for certain of our existing owners); |
| • | failure of subordination; and |
| • | actual or asserted invalidity of any guarantee or security document. |
98
2007 RecapitalizationCOVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
During
Long-Term Debt
Long-term debt is as follows (in thousands):
| | | | | | | | |
| | As of December 31, | |
| | 2009 | | | 2008 | |
|
3.25% Cash Convertible Senior Notes due 2014 | | $ | 460,000 | | | $ | — | |
Debt discount related to Cash Convertible Senior Notes | | | (112,475 | ) | | | — | |
Cash conversion option derivative at fair value | | | 128,603 | | | | — | |
| | | | | | | | |
3.25% Cash Convertible Senior Notes, net | | | 476,128 | | | | — | |
| | | | | | | | |
1.00% Senior Convertible Debentures due 2027 | | | 373,750 | | | | 373,750 | |
Debt discount related to Convertible Debentures | | | (45,042 | ) | | | (64,369 | ) |
| | | | | | | | |
1.00% Senior Convertible Debentures, net | | | 328,708 | | | | 309,381 | |
| | | | | | | | |
Term Loan Facility due 2014 | | | 632,125 | | | | 638,625 | |
Other long-term debt | | | 745 | | | | 512 | |
| | | | | | | | |
Total | | | 1,437,706 | | | | 948,518 | |
Less: current portion | | | (7,027 | ) | | | (6,922 | ) |
| | | | | | | | |
Total long-term debt | | $ | 1,430,679 | | | $ | 941,596 | |
| | | | | | | | |
3.25% Cash Convertible Senior Notes due 2014
On May 22, 2009, we issued $400 million aggregate principal amount of the first quarterNotes due in 2014 in a private transaction exempt from registration under the Securities Act of 2007,1933, as amended. On June 15, 2009, we completedissued an additional $60 million aggregate principal amount of Notes upon exercise in full of an over-allotment option we granted as part of the private offering. We have used and will use the net proceeds from the offering for general corporate purposes, which may include capital expenditures, potential permitted investments or permitted acquisitions.
The Notes constitute general unsecured senior obligations and rank equally in right of payment with our existing and future senior unsecured indebtedness. The Notes are effectively junior to our existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness. The Notes are not guaranteed by any of our subsidiaries and are effectively subordinated to all existing and future indebtedness and liabilities (including trade payables) of our subsidiaries.
The Notes bear interest at a comprehensive recapitalization utilizingrate of 3.25% per year, payable semi-annually in arrears, on June 1 and December 1 of each year, commencing on December 1, 2009, and will mature on June 1, 2014. Under limited circumstances, we may be required to pay contingent interest on the Notes as a seriesresult of equityfailure to comply with the reporting obligations in the indenture, failure to file required Securities and debt financings includingExchange Commission (“SEC”) documents and reports or if the holders cannot freely trade the Notes. When applicable, the contingent interest payable per $1,000 principal amount of Notes ranges from 0.25% to 0.50% per annum over the applicable term as provided under the indenture for the Notes. The contingent interest features of the Notes are embedded derivative instruments. The fair value of the contingent interest features of the Notes was zero as of December 31, 2009.
Under limited circumstances described below, the Notes are convertible by the holders thereof into cash only, based on an initial conversion rate of 53.9185 shares of our common stock per $1,000 principal amount of Notes (which represents an initial conversion price of approximately $18.55 per share) subject to certain customary adjustments as provided in the indenture for the Notes. We will not deliver common stock (or any other securities) upon conversion under any circumstances. Holders may convert their Notes only under the following transactions:circumstances:
| | |
| • | prior to March 1, 2014, on any date during any fiscal quarter commencing at any time after June 30, 2009 and only during such fiscal quarter if the refinancingclosing sale price of our previously existing credit facilities with new credit facilities, comprisedcommon stock for at least 20 trading days during the period of a $300 million revolving credit facility, a $320 million funded letter30 consecutive trading days ending on the last trading day of credit facility, and a $650 million term loan (collectively referredthe immediately preceding fiscal quarter is greater than or equal to as130% of the “Credit Facilities”);then effective conversion price; or |
| • | an underwritten public offeringupon the occurrence of 6.118 million shares of our common stock, from which we received proceeds of approximately $136.6 million, net of underwriting discounts and commissions;specified corporate transactions (as provided in the indenture for the Notes); or |
| • | an underwritten public offering of approximately $373.8 million aggregate principal amount of Debentures, fromupon certain fundamental changes (as defined in the indenture for the Notes in which we received proceeds of approximately $364.4 million, net of underwriting discounts and commissions; andcase the conversion rate will be increased as provided in the indenture); or |
| • | during the repayment, by meansfive consecutive business day period following any five consecutive trading day period in which the trading price for the Notes for each day during such five day period was less than 95% of a tender offer and redemptions,the product of approximately $611.9 million in aggregate principal amount of outstanding notes previously issued by certainthe closing sale price of our intermediate subsidiaries.common stock on such day multiplied by the then effective conversion rate; or |
| • | at any time on or after March 1, 2014. |
99
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Notes are also subject to repurchase by us, at the holder’s option, if a fundamental change occurs, for cash at a repurchase price equal to 100% of the principal amount of the Notes, plus accrued and unpaid interest (including contingent interest, if any).
The Notes are recognized as long-term debt in our consolidated financial statements. The difference between the face value of the Notes ($460.0 million as of the date of issuance of the Notes) and the amount recognized in the financial statements ($335.6 million as of the date of the issuance of the Notes) is the debt discount ($124.4 million as of the date of the issuance of the Notes) which is accreted to the Notes over their life and recognized as non-cash convertible debt related expense. For the year ended December 31, 2009, the pre-tax non-cash convertible debt related expense recognized in our consolidated statements of income related to the Notes was $12.0 million.
The Notes are convertible into cash only, and therefore the cash conversion option that is part of the Notes is accounted for as a derivative. The initial valuation of the cash conversion option (the “Cash Conversion Option”) is an embedded derivative of $124.4 million, which is recognized as long-term debt in our consolidated financial statements. The Cash Conversion Option is recorded at fair value quarterly with any change in fair value being recognized in our consolidated statements of income as non-cash convertible debt related expense. As of December 31, 2009, the fair value of the Cash Conversion Option was $128.6 million. See Note 13. Financial Instruments and Note 14. Derivative Instruments for additional information regarding the Cash Conversion Option.
In connection with the 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 Notes (the “Option Counterparties”) that are expected to reduce our exposure to potential cash payments in excess of the principal amount of the Notes that may be required to be made by us upon the cash conversion of the Notes. The Note Hedge consisted of our purchase for $112.4 million of cash settled call options on our common stock (initially correlating to the same number of shares as those initially underlying the Notes subject to generally similar customary adjustments) that have economic characteristics similar to those of the Cash Conversion Option embedded in the Notes. The Note Hedge was recorded as a noncurrent asset in our consolidated financial statements for $112.4 million. The Note Hedge is also accounted for as a derivative instrument and as such, is recorded at fair value quarterly with any change in fair value being recognized in our consolidated statements of income as non-cash convertible debt related expense. As of December 31, 2009, the fair value of the Note Hedge was $123.5 million. See Note 13. Financial Instruments and Note 14. Derivative Instruments for additional information regarding the Note Hedge.
We expect the gain or loss associated with changes to the valuation of the Note Hedge to substantially offset the gain or loss associated with changes to the valuation of the Cash Conversion Option. However, they will not be completely offsetting as a result of changes in the recapitalization, we recognized a loss on extinguishment of debt of approximately $32.1 million, pre-tax, which was comprisedcredit spreads of the write-downOption Counterparties.
In connection with the Notes offering, we also sold warrants (the “Warrants”) to the Option Counterparties, in privately negotiated transactions, initially correlating to the same number of deferred financing costs, tender premiums paidshares as those initially underlying the Notes, which could have a dilutive effect to the extent that the market price of our common stock exceeds the then effective strike price of the Warrants. The Warrants were sold for aggregate proceeds of $54.0 million. The strike price of the Warrants is approximately $25.74 per share and is subject to customary adjustments. The Warrants are exercisable only at expiration in equal tranches over 60 days beginning on September 2, 2014 and ending on November 26, 2014. The Warrants are only net share settled which means that, with respect to any exercise date, we will deliver to the Warrant holders a number of shares for each warrant equal to the excess (if any) of the volume weighted average price of the shares on the exercise date over the then effective strike price of the Warrants, divided by such volume weighted average price of the shares, with a cash payment in lieu of fractional shares. Accordingly, the Warrants have been recorded as additional paid-in capital in our consolidated financial statements for $54.0 million. The Warrant transactions also meet the definition of a derivative under current accounting principles. However, because the Warrant transactions are indexed to our common stock and are recorded in equity in our consolidated balance sheets, the Warrant transactions are exempt from the scope and fair value provisions of accounting principles related to accounting for derivative instruments.
Net proceeds from the above transactions were $387.3 million, consisting of gross proceeds of $460.0 million from the Notes and $54.0 million of proceeds from the Warrants, less the $112.4 million purchase price for the intermediate subsidiary debt,Note Hedge and a call premium paid in connection$14.3 million of purchase discounts and other offering expenses.
The Note Hedge transactions and the Warrant transactions are separate transactions, each of which we have entered into with previously existing financing arrangements. These amounts were partially offset by the write-downOption Counterparties, and are not part of unamortized premiums relatingthe terms of the Notes and will not affect any rights of holders’ under the Notes. Holders of the Notes do not have any rights with respect to the intermediate subsidiary debt and a gain associated with the settlement of our interest rate swap agreements.Note Hedge transactions or Warrant transactions.
100
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
1.00% Senior Convertible Debentures due 2027
On January 31, 2007, we completed an underwritten public offering of $373.8 million aggregate principal amount of Debentures. This offering included Debentures sold pursuant to an over-allotment option which was exercised by the underwriters. The Debentures constitute our general unsecured senior obligations and will rank equally in right of payment with any future senior unsecured indebtedness. The Debentures are effectively junior to our existing and future secured indebtedness, including the Credit Facilities, to the extent of the value of the assets securing such indebtedness. The Debentures are not guaranteed by any of our subsidiaries and are effectively subordinated to all existing and future indebtedness and liabilities (including trade payables) of our subsidiaries.
The Debentures bear interest at a rate of 1.00% per year, payable semi-annually in arrears, on February 1 and August 1 of each year, commencing on August 1, 2007 and will mature on February 1, 2027. Beginning with thesix-month six month interest period commencing February 1, 2012, we will pay contingent interest on the Debentures during any six-monthsix month interest period in which the trading price of the Debentures measured over a specified number of trading days is 120% or more of the principal amount of the Debentures. When applicable, the contingent interest payable per $1,000 principal amount of Debentures will equal 0.25% of the average trading price of $1,000 principal amount of Debentures during the five trading days ending on the second trading day immediately preceding the first day of the applicable six-monthsix month interest period. The contingent interest feature in the Debentures is an embedded derivative instrument. The first contingent cash interest payment period does not commence until February 1, 2012, and the fair market value for the embedded derivative was zero as of December 31, 2008.2009.
Under limited circumstances, prior to February 1, 2025, the Debentures are convertible by the holders into cash and shares of our common stock, if any, initially based on a conversion rate of 35.4610 shares of our common stock per $1,000 principal amount of Debentures, (which represents an initial conversion price of approximately $28.20
97
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
per share). Additionally, the terms of the Debentures require that under certain circumstances, such as an acquisition of us by a third party, the payment by us of a cash dividend on our common stock, or where a cash tender offer is made for our common stock, we are obligated to adjust the conversion rate applicable to the Debentures. This adjustment requirement constitutes a “contingent beneficial conversion feature” that is part of the Debentures. If such an adjustment were to occur, (i) the amount of the contingent beneficial conversion feature would be bifurcated from the Debentures, (ii) the liability recorded in our financial statements with respect to the Debentures would be reduced by the amount bifurcated, and (iii) the amount bifurcated would be recorded as a charge to interest expense and accreted to the Debenture liability over the remaining term of the Debentures, or the conversion date of the Debentures, if earlier. In no event will the total number of shares of our common stock issuable upon conversion exceed 42.5531 per $1,000 principal amount of Debentures, or a maximum of 15,904,221 shares issuable.
At our option, the Debentures are subject to redemption at any time on or after February 1, 2012, in whole or in part, at a redemption price equal to 100% of the principal amount of the Debentures being redeemed, plus accrued and unpaid interest (including contingent interest, if any). In addition, holders may require us to repurchase their Debentures on February 1, 2012, February 1, 2017 and February 1, 2022, in whole or in part, for cash at a repurchase price equal to 100% of the principal amount of the Debentures being repurchased, plus accrued and unpaid interest (including contingent interest, if any). The Debentures are also subject to repurchase by us, at the holder’s option, if a fundamental change occurs, for cash at a repurchase price equal to 100% of the principal amount of the Debentures, plus accrued and unpaid interest (including contingent interest, if any).
The $373.8 million aggregate principal amount of the Debentures were recorded in accordance to accounting standards for convertible debt instruments that may be settled in cash upon conversion. The principal amount of the Debentures was bifurcated for the liability component ($276.0 million as of the date of the issuance of the Debentures) and equity component ($97.8 million as of the date of the issuance of the Debentures) of the instrument. The debt component was recognized at the present value of its cash flows discounted using a 7.25% discount rate, our borrowing rate at the date of the issuance of the Debentures for a similar debt instrument without the conversion feature. The equity component, recorded as additional paid-in capital, was $56.1 million, which represents the difference between the proceeds from the issuance of the Debentures and the fair value of the liability, net of deferred taxes of $41.7 million as of the date of the issuance of the Debentures. The resultant debt discount is accreted over the expected life of the Debentures, which is February 1, 2007 to February 1, 2012, the first permitted redemption date of the Debentures.
101
2006 RefinancingCOVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In May 2006,Debt Discount for the Debentures and the Notes
The debt discount related to the Debentures and the debt discount related to the Notes is accreted over their respective terms and recognized as non-cash convertible debt related expense. The accretion of debt discount expected to be included in our consolidated financial statements is as follows for each of the periods indicated (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended | |
| | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | |
|
Non-cash convertible debt discount expense for the Debentures | | $ | 20.8 | | | $ | 22.3 | | | $ | 1.9 | | | $ | — | | | $ | — | |
Non-cash convertible debt discount expense for the Notes | | $ | 21.3 | | | $ | 23.5 | | | $ | 26.0 | | | $ | 28.8 | | | $ | 12.9 | |
Loss on Extinguishment of Debt
During the first quarter of 2007, we completed a comprehensive recapitalization utilizing a series of equity and debt financings. As a result of amendments to our financing arrangements existing at that time,the recapitalization, we recognized a loss on extinguishment of debt of $6.8approximately $32.1 million, pre-tax, which was comprised of the write-down of deferred financing costs, tender premiums paid for the intermediate subsidiary debt, and a call premium paid on extinguishment. On June 30, 2006, we utilizedin connection with previously existing financing arrangements. These amounts were partially offset by the write-down of unamortized premiums relating to the intermediate subsidiary debt and a new term loan commitmentgain associated with the settlement of $140 million on the first lien term loan facility to prepay $140 million under the second lien term loan facility.our interest rate swap agreements.
Financing Costs
All deferred financing costs are amortized to interest expense over the life of the related debt using the effective interest method. Amortization of deferred financing costs is included as a component of interest expense and was $5.3 million, $3.7 million, $3.8 million, and $3.9$3.8 million for the years ended December 31, 2009, 2008, and 2007, respectively.
Project debt is presented below (in thousands):
| | | | | | | | |
| | As of December 31, | |
| | 2009 | | | 2008 | |
|
Project debt related to Service Fee structures | | | | | | | | |
3.00-6.25% serial revenue bonds due 2010 through 2019 | | $ | 249,205 | | | $ | 173,252 | |
3.0-7.0% term revenue bonds due 2010 through 2022 | | | 181,973 | | | | 186,413 | |
Adjustable-rate revenue bonds due 2010 through 2019 | | | — | | | | 68,220 | |
7.322% other debt obligations due 2010 through 2022 | | | 20,619 | | | | 38,053 | |
| | | | | | | | |
Subtotal | | | 451,797 | | | | 465,938 | |
Unamortized debt premium, net | | | 10,332 | | | | 8,168 | |
| | | | | | | | |
Total Service Fee structure related project debt | | | 462,129 | | | | 474,106 | |
| | | | | | | | |
Project debt related to Tip Fee structures | | | | | | | | |
4.875-6.70% serial revenue bonds due 2010 through 2016 | | | 191,055 | | | | 272,250 | |
5.00-8.375% term revenue bonds due 2010 through 2019 | | | 266,625 | | | | 267,900 | |
| | | | | | | | |
Subtotal | | | 457,680 | | | | 540,150 | |
Unamortized debt premium, net | | | 8,405 | | | | 12,078 | |
| | | | | | | | |
Total Tip Fee structure related project debt | | | 466,085 | | | | 552,228 | |
| | | | | | | | |
International project debt | | | 31,150 | | | | 52,036 | |
| | | | �� | | | | |
Total project debt | | | 959,364 | | | | 1,078,370 | |
Less current project debt (includes $7,024 and $7,887 of unamortized premium) | | | (191,993 | ) | | | (198,034 | ) |
| | | | | | | | |
Noncurrent project debt | | $ | 767,371 | | | $ | 880,336 | |
| | | | | | | | |
On August 20, 2009, one of our client communities refinanced project debt ($63.7 million outstanding) and 2006, respectively.we terminated a related interest rate swap ($9.8 million liability) with the proceeds from new bonds and cash on hand. As a result of the refinancing, the client community issued two separate fixed rate bonds, $53.7 million tax exempt bonds bearing interest from 3% to 5% due 2019 in order to pay down the existing project debt and $12.7 million 4.67% taxable bonds due
98102
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —– (Continued)
2012 issued primarily to terminate the swap agreement. Consistent with other private, non-tip fee structures, the client community will pay us debt service revenue equivalent to the principal and interest on the bonds.
ProjectThe maturities of long-term project debt is presented belowas of December 31, 2009 are as follows (in thousands):
| | | | | | | | |
| | As of December 31, | |
| | 2008 | | | 2007 | |
|
Project debt related to Service Fee structures | | | | | | | | |
5.125-6.75% serial revenue bonds due 2009 through 2015 | | $ | 173,252 | | | $ | 219,236 | |
3.0-7.0% term revenue bonds due 2009 through 2022 | | | 186,413 | | | | 204,702 | |
Adjustable-rate revenue bonds due 2009 through 2019 | | | 68,220 | | | | 100,610 | |
7.322% other debt obligations due 2009 through 2020 | | | 38,053 | | | | 54,345 | |
| | | | | | | | |
Subtotal | | | 465,938 | | | | 578,893 | |
Unamortized debt premium, net | | | 8,168 | | | | 14,385 | |
| | | | | | | | |
Total Service Fee structure related project debt | | | 474,106 | | | | 593,278 | |
| | | | | | | | |
Project debt related to Tip Fee structures | | | | | | | | |
4.875-6.70% serial revenue bonds due 2009 through 2016 | | | 272,250 | | | | 330,420 | |
5.00-8.375% term revenue bonds due 2010 through 2019 | | | 267,900 | | | | 269,095 | |
| | | | | | | | |
Subtotal | | | 540,150 | | | | 599,515 | |
Unamortized debt premium, net | | | 12,078 | | | | 16,568 | |
| | | | | | | | |
Total Tip Fee structure related project debt | | | 552,228 | | | | 616,083 | |
| | | | | | | | |
International project debt | | | 52,036 | | | | 70,914 | |
| | | | | | | | |
Total project debt | | | 1,078,370 | | | | 1,280,275 | |
Less current project debt (includes $7,887 and $10,711 of unamortized premium) | | | (198,034 | ) | | | (195,625 | ) |
| | | | | | | | |
Noncurrent project debt | | $ | 880,336 | | | $ | 1,084,650 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | Total
| |
| | | | | | | | | | | | | | | | | | | | | | | Less:
| | | Noncurrent
| |
| | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | Thereafter | | | Total | | | Current Portion | | | Project Debt | |
|
Debt | | $ | 184,969 | | | $ | 130,775 | | | $ | 133,353 | | | $ | 118,505 | | | $ | 118,110 | | | $ | 254,915 | | | $ | 940,627 | | | $ | (184,969 | ) | | $ | 755,658 | |
Premium | | | 7,024 | | | | 4,360 | | | | 3,163 | | | | 2,035 | | | | 1,241 | | | | 914 | | | | 18,737 | | | | (7,024 | ) | | | 11,713 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 191,993 | | | $ | 135,135 | | | $ | 136,516 | | | $ | 120,540 | | | $ | 119,351 | | | $ | 255,829 | | | $ | 959,364 | | | $ | (191,993 | ) | | $ | 767,371 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Project debt associated with the financing of energy-from-waste facilities is arranged by municipal entities through the issuance of tax-exempt and taxable revenue bonds or other borrowings. For those facilities we own, that project debt is recorded as a liability on our consolidated financial statements. Generally, debt service for project debt related to Service Fee Structures is the primary responsibility of municipal entities, whereas debt service for project debt related to Tip Fee structures is paid by our project subsidiary from project revenue expected to be sufficient to cover such expense.
Payment obligations for our project debt associated with energy-from-waste facilities are limited recourse to the operating subsidiary and non-recourse to us, subject to operating performance guarantees and commitments. These obligations are secured by the revenues pledged under various indentures and are collateralized principally by a mortgage lien and a security interest in each of the respective energy-from-waste facilities and related assets. As of December 31, 2008,2009, such revenue bonds were collateralized by property, plant and equipment with a net carrying value of $2.2$2.1 billion and restricted funds held in trust of approximately $306$256.5 million.
The interest rates on adjustable-rate revenue bonds are adjusted periodically based on current municipal-based interest rates. The average adjustable rate for such revenue bonds was 0.27% and 3.40% as of December 31, 2008 and 2007, respectively, and the average adjustable rate for such revenue bonds was 2.76% and 3.55% during 2008 and 2007 for the full year, respectively.
International project debt includes the following obligations as of December 31, 2008:2009:
| | |
| • | $28.918.5 million due to financial institutions, of which $5.8$3.2 million is denominated in U.S. dollars and $23.1$15.3 million is denominated in Indian rupees, relating to the construction of a heavy fuel-oil fired diesel engine power plant in India and working capital debt relating to the operations of the project. The U.S. dollar debt bears a coupon rate at the three-month LIBOR, plus 4.5% (8.26%(4.79% as of December 31, 2008)2009). The outstanding Indian rupee debt borrowed for construction of the power plant is serviced at a floating rate of |
99
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | |
| | 11% 9.75% as of December 31, 2008.2009. The average coupon rate on the working capital debt was 12.3%11.88% in 2008.2009. The construction related debt extends through 2011. The entire debt is non-recourse to us,the project, and is secured by the project assets. The power off-taker failed to fund the escrow account or post the letter of credit required under the energy contract which failure constitutes a technical default under the project finance documents. The project lenders have not declared an event of default due to this matter and have permitted continued distributions of project dividends. |
| | |
| • | $23.112.7 million due to financial institutions relating to the construction of a second heavy fuel-oil fired diesel engine power plant in India and working capital debt relating to the operations of the project. The entire debt is denominated in Indian rupees. The construction related debt bears coupon rates ranging from 8.5% to 12.5% in 20082009 and the average coupon rate on the working capital debt was 12%12.6% in 2008.2009. The construction related debt extends through 2010. The entire debt is non-recourse to usthe project and is secured by the project assets. The power off-taker failed to fund the escrow account or post the letter of credit required under the energy contract which failure constitutes a technical default under the project finance documents. The project lenders have not declared an event of default due to this matter and have permitted continued distributions of project dividends. |
As of December 31, 2008, we had one interest rate swap agreement related to domestic project debt that economically fixes the interest rate on certain adjustable-rate revenue bonds. For additional information related to this interest rate swap, see Note 19. Financial Instruments.
The maturities of long-term project debt as of December 31, 2008 are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | Total
| |
| | | | | | | | | | | | | | | | | | | | | | | Less:
| | | Noncurrent
| |
| | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | Thereafter | | | Total | | | Current Portion | | | Project Debt | |
|
Debt | | $ | 190,147 | | | $ | 161,770 | | | $ | 121,040 | | | $ | 120,608 | | | $ | 108,364 | | | $ | 356,194 | | | $ | 1,058,123 | | | $ | (190,147 | ) | | $ | 867,976 | |
Premium | | | 7,887 | | | | 5,325 | | | | 2,945 | | | | 1,952 | | | | 1,171 | | | | 967 | | | | 20,247 | | | | (7,887 | ) | | | 12,360 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 198,034 | | | $ | 167,095 | | | $ | 123,985 | | | $ | 122,560 | | | $ | 109,535 | | | $ | 357,161 | | | $ | 1,078,370 | | | $ | (198,034 | ) | | $ | 880,336 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
Note 8.NOTE 13. | Equity Method InvestmentsFINANCIAL INSTRUMENTS |
Our subsidiaries are party to joint venture 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 income.Fair Value Measurements
AsThe following methods and assumptions were used to estimate the fair value of December 31, 2008 and 2007, investments in investees and joint ventures accountedeach class of financial instruments for under the equity method were as follows (in thousands):
| | | | | | | | | | | | |
| | Ownership
| | | | | Ownership
| | | |
| | Interest as of
| | | | | Interest as of
| | | |
| | December 31,
| | | | | December 31,
| | | |
| | 2008 | | 2008 | | | 2007 | | 2007 | |
|
Ultrapower Chinese Station Plant (U.S.)(1) | | 55% | | $ | 4,446 | | | 55% | | $ | 4,880 | |
South Fork Plant (U.S.) | | 50% | | | 1,098 | | | 50% | | | 1,141 | |
Koma Kulshan Plant (U.S.) | | 50% | | | 5,976 | | | 50% | | | 6,059 | |
Ambiente 2000 (Italy) | | 40% | | | 658 | | | 40% | | | 757 | |
Haripur Barge Plant (Bangladesh) | | 45% | | | 16,061 | | | 45% | | | 13,982 | |
Quezon Power (Philippines) | | 26% | | | 45,439 | | | 26% | | | 43,159 | |
Sanfeng (China) | | 40% | | | 12,217 | | | 40% | | | 11,270 | |
Guangzhou (China)(1) | | 40% | | | 1,328 | | | — | | | — | |
Chengdu (China)(1) | | 49% | | | 15,730 | | | — | | | — | |
| | | | | | | | | | | | |
Total investments | | | | $ | 102,953 | | | | | $ | 81,248 | |
| | | | | | | | | | | | |
which it is practicable to estimate that value:
| | |
(1) | • | See Note 3. Acquisitions, Business DevelopmentFor cash and Dispositions forcash equivalents, restricted funds, and marketable securities, the carrying value of these amounts is a discussion related to these equity investments. |
100
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The unaudited combined results of operations and financial position of our equity method investments are summarized below (in thousands):
| | | | | | | | |
| | 2008 | | | 2007 | |
|
Condensed Statements of Operations for the Years Ended December 31: | | | | | | | | |
Revenues | | $ | 376,780 | | | $ | 331,230 | |
Operating income | | | 150,296 | | | | 153,981 | |
Net income | | | 68,940 | | | | 57,472 | |
Company’s share of net income | | | 23,583 | | | | 22,196 | |
Condensed Balance Sheets as of December 31: | | | | | | | | |
Current assets | | $ | 214,295 | | | $ | 208,795 | |
Noncurrent assets | | | 790,157 | | | | 792,166 | |
Total assets | | | 1,004,452 | | | | 1,000,961 | |
Current liabilities | | | 119,551 | | | | 158,201 | |
Noncurrent liabilities | | | 432,658 | | | | 441,914 | |
Total liabilities | | | 552,209 | | | | 600,115 | |
| 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 of the Note 9. | Income TaxesHedge and the Cash Conversion Option are determined using an option pricing model based on observable inputs such as implied volatility, risk free rate, and other factors. The fair value of the Note |
We file a federal consolidated income tax return with our eligible subsidiaries. Covanta Lake II, Inc. files outside of the consolidated return group. 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 thousands):
| | | | | | | | | | | | |
| | For the Years Ended December 31, | |
| | 2008 | | | 2007 | | | 2006 | |
|
Current: | | | | | | | | | | | | |
Federal | | $ | (1,445 | ) | | $ | 3,373 | | | $ | (4,889 | ) |
State | | | 17,189 | | | | 15,186 | | | | 15,196 | |
Foreign | | | 5,657 | | | | 6,612 | | | | 7,250 | |
| | | | | | | | | | | | |
Total current | | | 21,401 | | | | 25,171 | | | | 17,557 | |
Deferred: | | | | | | | | | | | | |
Federal | | | 72,834 | | | | 8,793 | | | | 29,819 | |
State | | | (1,884 | ) | | | (3,038 | ) | | | 1,530 | |
Foreign | | | (124 | ) | | | 114 | | | | (10,441 | ) |
| | | | | | | | | | | | |
Total deferred | | | 70,826 | | | | 5,869 | | | | 20,908 | |
| | | | | | | | | | | | |
Total income tax expense | | $ | 92,227 | | | $ | 31,040 | | | $ | 38,465 | |
| | | | | | | | | | | | |
Domestic and foreign pre-tax income was as follows (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended December 31, | |
| | 2008 | | | 2007 | | | 2006 | |
|
Domestic | | $ | 197,596 | | | $ | 125,890 | | | $ | 102,944 | |
Foreign | | | 17,282 | | | | 22,123 | | | | 19,284 | |
| | | | | | | | | | | | |
Total | | $ | 214,878 | | | $ | 148,013 | | | $ | 122,228 | |
| | | | | | | | | | | | |
The effective income tax rate was 42.9% and 21.0% for the year ended December 31, 2008 and 2007, respectively. The increase in the effective tax rate for the year ended December 31, 2008, compared to the year ended December 31, 2007, is primarily related to taxes associated with the wind down of the grantor trusts and additional liability for uncertain tax positions in 2008, and the tax benefit resulting from the release of valuation allowance from previously unrecognized federal and state net operating loss carryforwards (“NOLs”) in 2007.
101
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We recognize benefits from a foreign tax holiday in India. The Samalpatti and Madurai project companies began taking advantage of a tax holiday under Indian law in April of 2005. The Indian tax holiday permits the companies to use the alternative tax rate, currently approximately 11%, for a 10 year period.
The aggregate benefit and affect on diluted earnings per share was as follows (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended December 31, | |
| | 2008 | | | 2007 | | | 2006 | |
|
Aggregate benefit | | $ | 3,257 | | | $ | 4,433 | | | $ | 4,092 | |
Affect on diluted EPS | | $ | 0.02 | | | $ | 0.03 | | | $ | 0.03 | |
A reconciliation of our income tax expense at the federal statutory income tax rate of 35% to income tax expense at the effective tax rate is as follows (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended December 31, | |
| | 2008 | | | 2007 | | | 2006 | |
|
Income tax expense at the federal statutory rate | | $ | 75,207 | | | $ | 51,805 | | | $ | 42,780 | |
State and other tax expense | | | 11,300 | | | | 8,972 | | | | 12,296 | |
Change in valuation allowance | | | 10,610 | | | | (34,968 | ) | | | (10,319 | ) |
Grantor trust (loss) income | | | (104,443 | ) | | | 5,580 | | | | 6,210 | |
Subpart F income and foreign dividends | | | 1,491 | | | | 90 | | | | 2,328 | |
Taxes on foreign earnings | | | (524 | ) | | | (1,132 | ) | | | (9,531 | ) |
Production tax credits | | | (8,529 | ) | | | (4,525 | ) | | | (3,158 | ) |
Expiration of tax attributes | | | — | | | | 5,977 | | | | — | |
Liability for uncertain tax positions | | | 107,156 | | | | 898 | | | | — | |
Other, net | | | (41 | ) | | | (1,657 | ) | | | (2,141 | ) |
| | | | | | | | | | | | |
Total income tax expense | | $ | 92,227 | | | $ | 31,040 | | | $ | 38,465 | |
| | | | | | | | | | | | |
We had consolidated federal NOLs estimated to be approximately $591 million for federal income tax purposes as of the end of 2008. These consolidated federal NOLs will expire, if not used, in the following amounts in the following years (in thousands):
| | | | |
| | Amount of
| |
| | Carryforward
| |
| | Expiring | |
|
2009 | | $ | 18,435 | |
2010 | | | 23,600 | |
2011 | | | 19,755 | |
2012 | | | 38,255 | |
2019 | | | 33,635 | |
2022 | | | 26,931 | |
2023 | | | 108,331 | |
2024 | | | 212 | |
2025 | | | 203 | |
2026 | | | 260 | |
2027 | | | 391 | |
2028 | | | 321,449 | |
| | | | |
| | $ | 591,457 | |
| | | | |
In addition to the consolidated federal NOLs, we have state NOL carryforwards of $119.7 million, which expire between 2012 and 2027, capital loss carryforwards of $69.0 million expiring in 2009, additional federal credit carryforwards of $32.7 million, and state credit carryforwards of $0.8 million. These deferred tax assets are offset by a valuation allowance of $34.3 million.
102
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of December 31, 2008, we had a valuation allowance of $44.1 million on deferred tax assets. During 2008, we increased our valuation allowance by $10.6 million related to capital losses, state NOLs, and a deferred tax asset established for certain deductions from the grantor trust. As of December 31, 2007, the reduction in the valuation allowance of $35.0 million primarily included a $31.4 million adjustment related to NOLs that were due to expire and were able to be utilized as a reduction to income tax expense. The remaining reduction in 2007 of the valuation allowance of $3.6 million related to previously unrecognized federal and state NOLs for our unconsolidated subsidiary Covanta Lake II, Inc.
During 2006, we reduced our valuation allowance by $22.8 million. The reduction primarily included a net $13.0 million adjustment to the goodwill associated with the acquisition of ARC Holdings, since the facts and circumstances associated with these items existed as of the date of the ARC Holdings acquisition, and if not for the ARC Holdings acquisition we would not have been able to make the conclusion that it was “more likely than not” that these deferred tax assets would be realized, and $10.3 million that was a reduction to income tax expense.
The tax effects of temporary differences that give rise to the deferred tax assets and liabilities are presented as follows (in thousands):
| | | | | | | | |
| | As of December 31, | |
| | 2008 | | | 2007 | |
|
Deferred Tax Assets: | | | | | | | | |
Loss reserve discounting | | $ | (1,568 | ) | | $ | 926 | |
Capital loss carryforward | | | 24,149 | | | | 24,048 | |
Net operating loss carryforwards | | | 104,730 | | | | 101,466 | |
Accrued expenses | | | 30,601 | | | | 37,844 | |
Tax basis in bond and other costs | | | 16,725 | | | | 10,819 | |
Deferred tax assets attributable to Covanta Lake II, Inc. | | | 5,259 | | | | 5,713 | |
Deferred tax assets attributable to pass-through entities | | | 9,869 | | | | 84,368 | |
Other | | | 5,535 | | | | 18,115 | |
AMT and other credit carryforwards | | | 32,750 | | | | 23,055 | |
| | | | | | | | |
Total gross deferred tax asset | | | 228,050 | | | | 306,354 | |
Less: valuation allowance | | | (44,089 | ) | | | (33,246 | ) |
| | | | | | | | |
Total deferred tax asset | | | 183,961 | | | | 273,108 | |
| | | | | | | | |
Deferred Tax Liabilities: | | | | | | | | |
Unbilled accounts receivable | | | 5,713 | | | | 24,779 | |
Property, plant and equipment | | | 465,027 | | | | 553,359 | |
Intangible assets | | | 68,593 | | | | 35,583 | |
Deferred tax liabilities attributable to pass-through entities | | | 104,564 | | | | 43,382 | |
Capitalized interest | | | 16,502 | | | | 7,617 | |
Other, net | | | 7,782 | | | | 19,238 | |
| | | | | | | | |
Total gross deferred tax liability | | | 668,181 | | | | 683,958 | |
| | | | | | | | |
Net deferred tax liability | | $ | (484,220 | ) | | $ | (410,850 | ) |
| | | | | | | | |
Deferred tax liabilities were increased by approximately $68 million in 2008 associated with the purchase of ARC Holdings in 2005 for certain tax effects identified during the tax liquidation of the underlying partnership interests, accordingly the offset was reflected as an adjustment to goodwill. Deferred tax assets were increased by approximately $65 million in 2008 associated with the tax basis step-up resulting from the purchase in 2006 of the minority interests in Covanta Onondaga, L.P. The offset to this was reflected as a reduction to property, plant and equipment.
During 2006, we adopted the permanent reinvestment exception under APB 23 whereby we will no longer provide for deferred taxes on the undistributed earnings of our international subsidiaries. We intend to permanently reinvest our international earnings outside of the United States in our existing international operations and in any
103
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —– (Continued)
| | |
| | Hedge is adjusted to reflect counterparty risk of non-performance, and is based on the counterparty’s credit spread in the credit derivatives market. The contingent interest features related to the Debentures and the Notes are valued quarterly using the present value of expected cash flow models incorporating the probabilities of the contingent events occurring. |
new international business which may be developed or acquired. As a result
The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the adoption of APB 23,amounts that we recognizedwould realize in a benefit of $10.0 million in 2006 associated with the reversal of deferred taxes accruedcurrent market exchange. The fair-value estimates presented herein are based on unremitted earnings of international affiliates in prior periods. This policy resulted in an unrecognized deferred tax liability of approximately $32.7 million and $24.7 millionpertinent information available to us as of December 31, 20082009. However, such amounts have not been comprehensively revalued for purposes of these financial statements since December 31, 2009, and 2007, respectively. Cumulative undistributed foreign earnings for which United States taxes were not provided were included in consolidated retained earnings incurrent estimates of fair value may differ significantly from the amountamounts presented herein.
The following table presents information about the fair value measurement of approximately $94.8 millionour assets and $71.9 millionliabilities as of December 31, 2008 and 2007, respectively.2009:
Deferred tax assets relating to tax benefits of employee stock option grants have been reduced to reflect exercises in the calendar year ended December 31, 2007. Some exercises resulted in tax deductions in excess of previously recorded benefits based on the option value at the time of grant (a “windfall”). Although these additional tax benefits or windfalls were reflected in the NOLs, pursuant to SFAS 123R, the additional tax benefit associated with the windfall is not recognized until the deduction reduces taxes payable. Accordingly, since the tax benefit does not reduce our current taxes payable in 2008 due to the NOLs, these windfall tax benefits were not reflected in our NOLs in the deferred tax assets for 2008 and 2007. Windfalls included in NOLs but not reflected in deferred tax assets were $14.4 million and $10.0 million for 2008 and 2007, respectively.
Effective January 1, 2007, we adopted the provisions of FIN 48. This interpretation is intended to increase the relevancy and comparability of financial reporting by clarifying the way companies account for uncertainty in income taxes. FIN 48 prescribes a consistent recognition threshold and measurement attribute, as well as clear criteria for subsequently recognizing, derecognizing and measuring such tax positions for financial statement purposes. The cumulative effect of applying the provisions of this interpretation was a $2.2 million decrease to our opening balance retained earnings in 2007, which was comprised of an increase of $5.5 million to the liability for uncertain tax positions, a $16.4 million increase to deferred tax assets, and a $13.1 million decrease to property, plant and equipment.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
| | | | |
Balance as of January 1, 2007 | | $ | 24,483 | |
Additions based on tax positions related to the current year | | | 500 | |
Additions for tax positions of prior years | | | 398 | |
Reductions for tax positions of prior years | | | — | |
Settlements | | | — | |
| | | | |
Balance at December 31, 2007 | | $ | 25,381 | |
| | | | |
Additions based on tax positions related to the current year | | | 109,956 | |
Additions for tax positions of prior years | | | 717 | |
Reductions for lapse in applicable statute of limitations | | | (280 | ) |
Reductions for tax positions of prior years | | | (3,237 | ) |
| | | | |
Balance at December 31, 2008 | | $ | 132,537 | |
| | | | |
The liability for uncertain tax positions, exclusive of interest and penalties, was $132.5 million and $25.4 million as of December 31, 2008 and 2007, respectively. Included in the balance of uncertain tax benefits as of December 31, 2008 and 2007 are potential benefits of $114.8 million and $2.5 million, respectively, that, if recognized, would affect the effective tax rate. The liability for uncertain tax positions may decrease by approximately $22.7 million in the next 12 months with respect to the expiration of statutes.
We record interest accrued on liabilities for uncertain tax positions and penalties as part of the tax provision under FIN 48. For the year ended December 31, 2008 and 2007, we recognized $0.5 million and $0.9 million, respectively, of interest on liabilities for uncertain tax positions. As of December 31, 2008 and 2007, we had accrued interest and penalties associated with liabilities for uncertain tax positions of $8.1 million and $7.6 million, respectively.
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Fair Value Measurements at Reporting Date Using | |
| | | | | | | | Quoted Prices in
| | | | | | Significant
| |
| | As of December 31, 2009 | | | Active Markets for
| | | Significant Other
| | | Unobservable
| |
Financial Instruments Recorded at Fair Value
| | Carrying
| | | Estimated
| | | Identical Assets
| | | Observable Inputs
| | | Inputs
| |
on a Recurring Basis: | | Amount | | | Fair Value | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| | | | | | | | (In thousands) | | | | | | | |
|
Assets: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents: | | | | | | | | | | | | | | | | | | | | |
Bank deposits and certificates of deposit | | $ | 81,458 | | | $ | 81,458 | | | $ | 81,458 | | | $ | — | | | $ | — | |
Money market funds | | | 352,225 | | | | 352,225 | | | | 352,225 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total cash and cash equivalents: | | | 433,683 | | | | 433,683 | | | | 433,683 | | | | — | | | | — | |
Restricted funds held in trust: | | | | | | | | | | | | | | | | | | | | |
Bank deposits and certificates of deposit | | | 32,765 | | | | 32,765 | | | | 32,765 | | | | — | | | | — | |
Money market funds | | | 152,571 | | | | 152,569 | | | | 152,569 | | | | — | | | | — | |
U.S. Treasury/Agency obligations(a) | | | 35,382 | | | | 35,388 | | | | 35,388 | | | | — | | | | — | |
State and municipal obligations | | | 8,582 | | | | 8,582 | | | | 8,582 | | | | — | | | | — | |
Commercial paper/Guaranteed investment contracts/Repurchase agreements | | | 48,452 | | | | 48,469 | | | | 48,469 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total restricted funds held in trust: | | | 277,752 | | | | 277,773 | | | | 277,773 | | | | — | | | | — | |
Restricted funds — other: | | | | | | | | | | | | | | | | | | | | |
Bank deposits and certificates of deposit | | | 20,243 | | | | 20,243 | | | | 20,243 | | | | — | | | | — | |
Money market funds | | | 6,106 | | | | 6,106 | | | | 6,106 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total restricted funds other: | | | 26,349 | | | | 26,349 | | | | 26,349 | | | | — | | | | — | |
Investments: | | | | | | | | | | | | | | | | | | | | |
Marketable securities available for sale | | | 300 | | | | 300 | | | | 300 | | | | — | | | | — | |
Mutual and bond funds | | | 1,802 | | | | 2,105 | | | | 2,105 | | | | — | | | | — | |
Investments available for sale: | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury/Agency obligations | | | 13,726 | | | | 13,726 | | | | 13,726 | | | | — | | | | — | |
Residential mortgage-backed securities | | | 5,203 | | | | 5,203 | | | | 5,203 | | | | — | | | | — | |
Corporate investments | | | 9,213 | | | | 9,213 | | | | 9,213 | | | | — | | | | — | |
Equity securities | | | 871 | | | | 871 | | | | 871 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total investments: | | | 31,115 | | | | 31,418 | | | | 31,418 | | | | — | | | | — | |
Derivative Asset — Note Hedge | | | 123,543 | | | | 123,543 | | | | — | | | | 123,543 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total assets: | | $ | 892,442 | | | $ | 892,766 | | | $ | 769,223 | | | $ | 123,543 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
104
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —– (Continued)
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Fair Value Measurements at Reporting Date Using | |
| | | | | | | | Quoted Prices in
| | | | | | Significant
| |
| | As of December 31, 2009 | | | Active Markets for
| | | Significant Other
| | | Unobservable
| |
Financial Instruments Recorded at Fair Value
| | Carrying
| | | Estimated
| | | Identical Assets
| | | Observable Inputs
| | | Inputs
| |
on a Recurring Basis: | | Amount | | | Fair Value | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| | | | | | | | (In thousands) | | | | | | | |
|
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Derivative Liability — Cash Conversion Option | | $ | 128,603 | | | $ | 128,603 | | | $ | — | | | $ | 128,603 | | | $ | — | |
Derivative Liabilities — Contingent interest features of the Debentures and Notes | | | 0 | | | | 0 | | | | — | | | | 0 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total liabilities: | | $ | 128,603 | | | $ | 128,603 | | | $ | — | | | $ | 128,603 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
Financial Instruments Recorded at Carrying Amount: | | | | | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | |
Accounts receivables | | $ | 336,876 | | | $ | 336,876 | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Long-term debt (excluding Cash Conversion Option) | | $ | 1,309,103 | | | $ | 1,314,264 | | | | | | | | | | | | | |
Project debt | | $ | 959,364 | | | $ | 983,474 | | | | | | | | | | | | | |
As issues
| | |
(a) | | 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. |
Investments
Our insurance subsidiaries’ fixed maturity debt and equity securities portfolio are examined by the Internal Revenue Service (“IRS”)classified as“available-for-sale” and state auditors, we may decide to adjust the existing FIN 48 liability for issuesare carried at fair value. Equity securities that were not deemed an exposureare traded on a national securities exchange are stated at the time we adopted FIN 48. Accordingly, we will continuelast reported sales price on the day of valuation. Debt securities values are determined by third party matrix pricing based on the last days trading activity. Changes in fair values are credited or charged directly to monitorAOCI in the resultsconsolidated statements of auditsequity as unrealized gains or losses, respectively. Investment gains or losses realized on the sale of securities are determined using the specific identification method. Realized gains and adjustlosses are recognized in the liabilityconsolidated statements of income based on the amortized cost of fixed maturities and the cost basis for equity securities on the date of trade, subject to any previous adjustments forother-than-temporary declines.Other-than-temporary declines in fair value are recorded as needed. Federalrealized losses in the consolidated statements of income tax returns for Covanta Energy are closed for the years through 2003. However, to the extent NOLsthey relate to credit losses, and to AOCI to the extent they are utilized from earlier years, federal income tax returns for Covanta Holding Corporation, formerly known as Danielson Holding Corporation, are still open. The tax returns of our subsidiary ARC Holdings are open for federal audit for the tax return years of 2004 and forward, and are currently the subject of an IRS examination. This examination is related to ARC Holdings’ refund requests related to NOL carryback claims from tax years prior to our acquisition of ARC Holdings in 2005 that require Joint Committee approval. State income tax returns are generally subject to examination for a period of three to five years after the filingother factors. The cost basis of the respective 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 tosecurity is also reduced. We consider the states. We have various state income tax returnsfollowing factors in determining whether declines in the processfair value of examination, administrative appeals or litigation.securities areother-than-temporary:
Our NOLs predominantly arose from our predecessor insurance entities (which were subsidiaries of our predecessor, which was 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.
| | |
| • | the significance of the decline in fair value compared to the cost basis; |
| • | the time period during which there has been a significant decline in fair value; |
| • | whether the unrealized loss is credit-driven or a result of changes in market interest rates; |
| • | a fundamental analysis of the business prospects and financial condition of the issuer; and |
| • | our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in fair value. |
In January 2006, we executed agreements with the California Commissioner of Insurance (the “California Commissioner”), who administers the majority of the grantor trusts, regarding the final administration and conclusion ofOther investments, such trusts. The agreements,as investments in companies in which were approved by the California state court overseeing the Mission insolvency proceedings (the “Mission Court”), settle matters that had been in dispute regarding the historic rights and obligations relating to the conclusion of the grantor trusts. These include the treatment of certain claims against the grantor trusts which are entitled to distributions of an aggregate of 1,572,625 shares of our common stock issued to the California Commissioner in 1990 under existing agreements entered into at the inception of the Mission insurance entities’ reorganization. In connection with these agreements and in order to facilitate the orderly conclusion of the grantor trust estates, the distribution of such stock and the settlement of the related disputes, we paid an aggregate amount equal to approximately $9.14 million to the California Commissioner. Additionally, we reimbursed an additional $1.175 million to the California Commissioner’s Conservation and Liquidation Office in 2006 related to expenses associated with these agreements.
Pursuant to a claims evaluation process that we administered pursuant to such agreements with, and overseen by, the Conservation and Liquidation Office, all claim holders entitled to receive distributions of shares of our common stock from the California Commissioner were identified. As a result of this process, approximately $1.135 billion in claims were approved pursuant to orders of the Mission Court. As part of the wind down process and final claims evaluation by the Conservation and Liquidation Office, and in accordance with the parties’ contractual obligations and the requirements of the Internal Revenue Code governing such exchanges of stock for debt, the California Commissioner distributed shares of our common stock in settlement of these claims. This distribution, which is among the final steps necessary to conclude the insolvency cases relating to the trusts being administered by the California Commissioner, was conducted in December 2008 pursuant to orders of the Mission Court. These events resulted in our recognition of $515 million of additional NOLs in 2008, or a deferred tax asset of $180 million. Of this $180 million deferred tax asset, $111 million was previously recognized on the balance sheet either in December 2006 or September 2008.
We have discussed with the Director of the Division of Insurance of the State of Missouri (the “Missouri Director”), who administers the balance of the grantor trusts relating to the Mission Insurance entities, similar arrangements for distribution of the remaining 154,756 shares of our common stock by the Missouri Director to claimants of the Missouri grantor trusts. Given the claims activity relating to the Missouri grantor trusts, and the lack of disputed matters with the Missouri Director, we do not expecthave the ability to enter into additionalexercise significant influence, are carried at the lower of cost or amended contractual arrangements with the Missouri Director with respect to the final administration of the Missouri grantor trusts or the related distribution by the Missouri Director of shares of our common stock.estimated realizable value.
105
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —– (Continued)
While we cannot predict with certainty what amounts, if any, may be includable in taxable income as a result ofThe cost or amortized cost, unrealized gains, unrealized losses and 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 nor the final administration by the Missouri Director will result in a material reduction in available NOLs.
| |
Note 10. | Amortization of Waste, Service and Energy Contracts |
Waste, Service and Energy Contracts
The vast majorityfair value of our waste, service and energy contractsinvestments categorized by type of security, were valued in March 2004 and June 2005 related to the acquisitions of Covanta Energy and ARC Holdings, respectively. Intangible assets and liabilities are recorded at their estimated fair market values based upon discounted cash flows.
Amortization for the “above market” waste, service and energy contracts and “below market” waste and energy contracts was calculated using the straight-line method. The remaining weighted-average contract life is approximately 9 years for both the “above market” waste, service and energy contracts and “below market” waste and energy contracts.
Waste, Service and Energy contracts consisted of the followingas follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | As of December 31, 2008 | | As of December 31, 2007 |
| | | | Gross
| | | | | | Gross
| | | | |
| | Useful
| | Carrying
| | Accumulated
| | | | Carrying
| | Accumulated
| | |
| | Life | | Amount | | Amortization | | Net | | Amount | | Amortization | | Net |
|
Waste, service and energy contracts (asset) | | | 1 — 20 years | | | $ | 406,556 | | | $ | 183,159 | | | $ | 223,397 | | | $ | 405,794 | | | $ | 137,441 | | | $ | 268,353 | |
Waste and service contracts (liability) | | | 1 — 14 years | | | $ | (156,705 | ) | | $ | (42,173 | ) | | $ | (114,532 | ) | | $ | (159,575 | ) | | $ | (29,111 | ) | | $ | (130,464 | ) |
| | | | | | | | | | | | | | | | |
| | As of December 31, 2009 | |
| | Cost or
| | | Unrealized
| | | Unrealized
| | | Fair
| |
| | Amortized Cost | | | Gain | | | Loss | | | Value | |
|
Current investments: | | | | | | | | | | | | | | | | |
Fixed maturities | | $ | 300 | | | $ | — | | | $ | — | | | $ | 300 | |
Equity securities — insurance business | | | 732 | | | | 150 | | | | 11 | | | | 871 | |
| | | | | | | | | | | | | | | | |
Total current investments | | $ | 1,032 | | | $ | 150 | | | $ | 11 | | | $ | 1,171 | |
| | | | | | | | | | | | | | | | |
Noncurrent investments: | | | | | | | | | | | | | | | | |
Fixed maturities — insurance business: | | | | | | | | | | | | | | | | |
U.S. government obligations | | $ | 315 | | | $ | 6 | | | $ | — | | | $ | 321 | |
U.S. government agencies | | | 13,157 | | | | 257 | | | | 9 | | | | 13,405 | |
Residential mortgage-backed | | | 5,150 | | | | 74 | | | | 21 | | | | 5,203 | |
Corporate | | | 8,878 | | | | 337 | | | | 2 | | | | 9,213 | |
| | | | | | | | | | | | | | | | |
Total fixed maturities — insurance business | | | 27,500 | | | | 674 | | | | 32 | | | | 28,142 | |
Mutual and bond funds | | | 1,802 | | | | 303 | | | | — | | | | 2,105 | |
| | | | | | | | | | | | | | | | |
Total noncurrent investments | | $ | 29,302 | | | $ | 977 | | | $ | 32 | | | $ | 30,247 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | As of December 31, 2008 | |
| | Cost or
| | | Unrealized
| | | Unrealized
| | | Fair
| |
| | Amortized Cost | | | Gain | | | Loss | | | Value | |
|
Current investments: | | | | | | | | | | | | | | | | |
Fixed maturities | | $ | 300 | | | $ | — | | | $ | — | | | $ | 300 | |
Equity securities — insurance business | | | 760 | | | | 62 | | | | 30 | | | | 792 | |
| | | | | | | | | | | | | | | | |
Total current investments | | $ | 1,060 | | | $ | 62 | | | $ | 30 | | | $ | 1,092 | |
| | | | | | | | | | | | | | | | |
Noncurrent investments: | | | | | | | | | | | | | | | | |
Fixed maturities — insurance business: | | | | | | | | | | | | | | | | |
U.S. government obligations | | $ | 565 | | | $ | 22 | | | $ | — | | | $ | 587 | |
U.S. government agencies | | | 17,332 | | | | 307 | | | | 19 | | | | 17,620 | |
Residential mortgage-backed | | | 4,183 | | | | 27 | | | | 26 | | | | 4,184 | |
Corporate | | | 4,540 | | | | — | | | | 194 | | | | 4,346 | |
| | | | | | | | | | | | | | | | |
Total fixed maturities — insurance business | | | 26,620 | | | | 356 | | | | 239 | | | | 26,737 | |
Mutual and bond funds | | | 1,404 | | | | — | | | | 433 | | | | 971 | |
| | | | | | | | | | | | | | | | |
Total noncurrent investments | | $ | 28,024 | | | $ | 356 | | | $ | 672 | | | $ | 27,708 | |
| | | | | | | | | | | | | | | | |
The following table details the amountsets forth a summary of temporarily impaired investments held by our insurance subsidiary (in thousands):
| | | | | | | | | | | | | | | | |
| | As of December 31, 2009 | | | As of December 31, 2008 | |
| | Fair
| | | Unrealized
| | | Fair
| | | Unrealized
| |
Description of Investments | | Value | | | Losses | | | Value | | | Losses | |
|
U.S. Treasury and other direct U.S. Government obligations | | $ | 341 | | | $ | 9 | | | $ | 2,841 | | | $ | 19 | |
Federal agency mortgage-backed securities | | | 1,503 | | | | 21 | | | | 1,547 | | | | 26 | |
Corporate bonds | | | 100 | | | | 2 | | | | 3,996 | | | | 194 | |
| | | | | | | | | | | | | | | | |
Total fixed maturities | | | 1,944 | | | | 32 | | | | 8,384 | | | | 239 | |
Equity securities | | | 94 | | | | 11 | | | | 307 | | | | 30 | |
| | | | | | | | | | | | | | | | |
Total temporarily impaired investments | | $ | 2,038 | | | $ | 43 | | | $ | 8,691 | | | $ | 269 | |
| | | | | | | | | | | | | | | | |
The number of U.S. Treasury and federal agency obligations, mortgage-backed securities, and corporate bonds temporarily impaired are 1, 6, and 1, respectively. As of December 31, 2009, all of the actual/estimated amortization expensetemporarily impaired fixed maturity investments with a fair value of $1.9 million had maturities greater than 12 months.
Our fixed maturities held by our insurance subsidiary include mortgage-backed securities and contra-expense associated with these intangible assetscollateralized mortgage obligations, collectively (“MBS”) representing 18.7%, and liabilities15.6% of the total fixed maturities as of December 31, 2009 and 2008, includedrespectively. Our MBS holdings are issued by the Federal National Mortgage Association (“FNMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”), or expected to be included in our statementsthe Government National Mortgage Association (“GNMA”) all of income for each of the years indicated (in thousands):
| | | | | | | | |
| | Waste, Service and
| | | | |
| | Energy Contracts
| | | Waste and Service
| |
| | (Amortization
| | | Contracts
| |
| | Expense) | | | (Contra-Expense) | |
|
Year ended December 31, 2008 | | $ | 45,718 | | | $ | (13,062 | ) |
| | | | | | | | |
2009 | | $ | 42,302 | | | $ | (13,178 | ) |
2010 | | | 29,864 | | | | (12,721 | ) |
2011 | | | 26,740 | | | | (12,408 | ) |
2012 | | | 24,647 | | | | (12,412 | ) |
2013 | | | 21,037 | | | | (12,390 | ) |
Thereafter | | | 78,807 | | | | (51,423 | ) |
| | | | | | | | |
Total | | $ | 223,397 | | | $ | (114,532 | ) |
| | | | | | | | |
which
106
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —– (Continued)
| |
Note 11. | Other Intangible Assets and Goodwill |
Other Intangible Assetsare rated “AAA” by Moody’s Investors Services. MBS and callable bonds, in contrast to other bonds, are more sensitive to market value declines in a rising interest rate environment than to market value increases in a declining interest rate environment.
Other intangible assets consistedThe expected maturities of fixed maturity securities, by amortized cost and fair value are shown below (in thousands):
| | | | | | | | |
| | As of December 31, 2009 | |
| | Amortized Cost | | | Fair Value | |
|
Available-for-sale: | | | | | | | | |
One year or less | | $ | 9,461 | | | $ | 9,627 | |
Over one year to five years | | | 15,734 | | | | 16,232 | |
Over five years to ten years | | | 1,955 | | | | 1,942 | |
More than ten years | | | 350 | | | | 341 | |
| | | | | | | | |
Total fixed maturities | | $ | 27,500 | | | $ | 28,142 | |
| | | | | | | | |
The following reflects the change in net unrealized gain (loss) onavailable-for-sale securities included as a separate component of AOCI in equity (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
|
Fixed maturities, net | | $ | 414 | | | $ | 195 | | | $ | 747 | |
Equity securities, net | | | 107 | | | | (169 | ) | | | (59 | ) |
Mutual and bond funds | | | 303 | | | | (433 | ) | | | 24 | |
| | | | | | | | | | | | |
Change in net unrealized gain (loss) on investments | | $ | 824 | | | $ | (407 | ) | | $ | 712 | |
| | | | | | | | | | | | |
The components of net unrealized gain (loss) onavailable-for-sale securities consist of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | As of December 31, 2008 | | | As of December 31, 2007 | | | | | | | |
| | | | Gross
| | | | | | | | | Gross
| | | | | | | | | | | | | |
| | | | Carrying
| | | Accumulated
| | | | | | Carrying
| | | Accumulated
| | | | | | | | | | |
| | Useful Life | | Amount | | | Amortization | | | Net | | | Amount | | | Amortization | | | Net | | | | | | | |
|
Lease interest and other | | 10 — 21 years | | $ | 73,848 | | | $ | 10,739 | | | $ | 63,109 | | | $ | 72,235 | | | $ | 7,598 | | | $ | 64,637 | | | | | | | | | |
Landfill | | 5 years | | | 17,985 | | | | 7,329 | | | | 10,656 | | | | 17,985 | | | | 5,198 | | | | 12,787 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total amortizable intangible assets | | | | | 91,833 | | | | 18,068 | | | | 73,765 | | | | 90,220 | | | | 12,796 | | | | 77,424 | | | | | | | | | |
Other intangibles | | Indefinite | | | 9,566 | | | | — | | | | 9,566 | | | | 11,530 | | | | — | | | | 11,530 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Intangible assets, net | | | | $ | 101,399 | | | $ | 18,068 | | | $ | 83,331 | | | $ | 101,750 | | | $ | 12,796 | | | $ | 88,954 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | For the Years Ended
| |
| | December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
|
Net unrealized holding gain (loss) onavailable-for-sale securities arising during the period | | $ | 797 | | | $ | (543 | ) | | $ | 698 | |
Reclassification adjustment for net realized losses (gains) onavailable-for-sale securities included in net income | | | 27 | | | | 136 | | | | 14 | |
| | | | | | | | | | | | |
Net unrealized gain (loss) onavailable-for-sale securities | | $ | 824 | | | $ | (407 | ) | | $ | 712 | |
| | | | | | | | | | | | |
The following table details the amount of the actual/estimated amortization expense associated with other intangible assetsNet realized investment loss is as of December 31, 2008 included or expected to be included infollows for our statements of income for each of the years indicatedinsurance subsidiary (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | 2010 | | 2011 | | 2012 | | 2013 | | Thereafter | | Total |
|
Annual Remaining Amortization | | $ | 5,231 | | | $ | 5,231 | | | $ | 5,231 | | | $ | 5,231 | | | $ | 5,231 | | | $ | 47,610 | | | $ | 73,765 | |
Amortization Expense related to other intangible assets was $5.3 million, $5.2 million and $5.7 million for the years ended December 31, 2008, 2007 and 2006. Lease interest amortization is recorded as rent expense in plant operating expenses and was $3.0 million for each of the years ended December 31, 2008, 2007, and 2006.
Goodwill
Goodwill was $195.6 million and $127.0 million as of December 31, 2008 and 2007, respectively. 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 in accordance with the provisions of SFAS 142. Goodwill has an indefinite life and is not amortized but is to be reviewed for impairment under the provisions of SFAS 142. We performed the required annual impairment review of our recorded goodwill for reporting units using a discounted cash flow approach as of October 1, 2007 and determined that no goodwill was impaired. As of December 31, 2008, goodwill of approximately $25.4 million is deductible for federal income tax purposes.
The following table details the changes in carrying value of goodwill for the years ended December 31, 2008 and 2007 (in thousands):
| | | | |
| | Total | |
|
Balance as of December 31, 2006 | | $ | 91,282 | |
Decrease to federal tax receivable associated with opening balance sheet adjustments for the ARC Holdings acquisition | | | 2,127 | |
Goodwill related to the Central Valley acquisition | | | 22,889 | |
Goodwill related to the Westchester County transfer stations acquired | | | 896 | |
Goodwill related to the EnergyAnswers acquisition | | | 9,833 | |
| | | | |
Balance as of December 31, 2007 | | $ | 127,027 | |
| | | | |
Increase to net deferred tax liabilities related to the deferred tax impact recognized on tax liquidation of ARC Holdings partnerships (Note 9) | | | 67,929 | |
Purchase price adjustment related to the Central Valley acquisition | | | 269 | |
Purchase price adjustment related to the Westchester County transfer stations acquired | | | 578 | |
Purchase price adjustment related to the EnergyAnswers acquisition | | | (186 | ) |
| | | | |
Balance as of December 31, 2008 | | $ | 195,617 | |
| | | | |
| | | | | | | | | | | | |
| | For the Years Ended
| |
| | December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
|
Fixed maturities | | $ | 2 | | | $ | 22 | | | $ | (75 | ) |
Equity securities | | | (29 | ) | | | (158 | ) | | | 61 | |
| | | | | | | | | | | | |
Net realized investment loss | | $ | (27 | ) | | $ | (136 | ) | | $ | (14 | ) |
| | | | | | | | | | | | |
107
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —– (Continued)
Net investment income earned on our fixed maturity and equity securities portfolio was as follows (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended
| |
| | December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
|
Holding Company: | | | | | | | | | | | | |
Fixed maturities | | $ | — | | | $ | — | | | $ | — | |
Short-term investments | | | 301 | | | | 481 | | | | 4,360 | |
| | | | | | | | | | | | |
Net investment income — holding company | | $ | 301 | | | $ | 481 | | | $ | 4,360 | |
| | | | | | | | | | | | |
Insurance business: | | | | | | | | | | | | |
Fixed maturities | | $ | 1,040 | | | $ | 936 | | | $ | 1,196 | |
Dividend income | | | 41 | | | | 46 | | | | 61 | |
Other, net | | | 24 | | | | 196 | | | | 371 | |
| | | | | | | | | | | | |
Total investment income | | | 1,105 | | | | 1,178 | | | | 1,628 | |
Less: investment expense | | | 162 | | | | 177 | | | | 172 | |
| | | | | | | | | | | | |
Net investment income — insurance business | | $ | 943 | | | $ | 1,001 | | | $ | 1,456 | |
| | | | | | | | | | | | |
| |
Note 12.NOTE 14. | Supplementary Financial InformationDERIVATIVE 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 income.
| | | | | | | | | | |
Derivative Instruments Not Designated
| | | | Fair Value as of December 31, | |
As Hedging Instruments | | Balance Sheet Location | | 2009 | | | 2008 | |
| | | | (In thousands) | |
|
Asset Derivatives: | | | | | | | | | | |
Interest rate swap receivable | | Other noncurrent assets | | $ | — | | | $ | 13,984 | |
Note Hedge | | Other noncurrent assets | | $ | 123,543 | | | $ | — | |
Liability Derivatives: | | | | | | | | | | |
Cash Conversion Option | | Long-term debt | | $ | 128,603 | | | $ | — | |
Contingent interest features of the Debentures and Notes | | Other noncurrent liabilities | | $ | 0 | | | $ | 0 | |
Interest rate swap payable | | Other noncurrent liabilities | | $ | — | | | $ | 13,984 | |
| | | | | | | | | | |
| | | | Amount of Gain or (Loss) Recognized In Income
| |
Effect on Income of
| | Location of Gain or (Loss)
| | on Derivative
| |
Derivative Instruments Not Designated
| | Recognized in Income on
| | For the Years Ended December 31, | |
As Hedging Instruments | | Derivatives | | 2009 | | | 2008 | |
| | | | (In thousands) | |
|
Note Hedge | | Non-cash convertible debt related expense | | $ | 11,165 | | | $ | — | |
Cash Conversion Option | | Non-cash convertible debt related expense | | | (4,172 | ) | | | — | |
Contingent interest features of the Debentures and Notes | | Non-cash convertible debt related expense | | | — | | | | — | |
Interest rate swap | | Non-cash convertible debt related expense | | | — | | | | — | |
| | | | | | | | | | |
Effect on income of derivative instruments not designated as hedging instruments | | | | $ | 6,993 | | | $ | — | |
| | | | | | | | | | |
Cash Conversion Option, Note Hedge and Contingent Interest features related to the 3.25% Cash Convertible Senior Notes
The Cash Conversion Option is a derivative instrument which is recorded at fair value quarterly with any change in fair value being recognized in our consolidated statements of income as non-cash convertible debt related expense. The fair value of the Cash Conversion Option was $128.6 million as of December 31, 2009. The Note Hedge is accounted for as a derivative instrument and as such, is recorded at fair value quarterly with any change in fair value being recognized in our consolidated statements of income as non-cash convertible debt related expense. The fair value of the Note Hedge was $123.5 million as of
108
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
December 31, 2009. The contingent interest features of the Notes are embedded derivative instruments. The fair value of the contingent interest features of the Notes was zero as of December 31, 2009.
We expect the gain or loss associated with changes to the valuation of the Note Hedge to substantially offset the gain or loss associated with changes to the valuation of the Cash Conversion Option. However, they will not be completely offsetting as a result of changes in the credit spreads of the Option Counterparties. Our most significant credit exposure arises from the Note Hedge. The fair value of the Note Hedge reflects the maximum loss that would be incurred should the Option Counterparties fail to perform according to the terms of the Note Hedge agreement. See Note 11. Long-Term Debt for specific details related to the Cash Conversion Option, Note Hedge and contingent interest features of the Notes.
Contingent Interest feature of the 1.00% Senior Convertible Debentures
The contingent interest feature in the Debentures is an embedded derivative instrument. The first contingent cash interest payment period would not commence until February 1, 2012, and the fair value for the embedded derivative was zero as of December 31, 2009. See Note 11. Long-Term Debt for specific details related to the contingent interest features of the Notes.
Interest Rate Swaps
On August 20, 2009, one of our client communities refinanced project debt ($63.7 million outstanding) and we terminated a related interest rate swap ($9.8 million liability) with the proceeds from new bonds and cash on hand. Prior to this refinancing, we had an interest rate swap agreement related to the existing project debt that economically fixed the interest rate on the adjustable-rate revenue bonds. Any payments made or received under the swap agreement, including amounts upon termination, were included as an explicit component of the client community’s obligation under the related service agreement. Therefore, all payments made or received under the swap agreement were a pass through to the client community. The swap agreement resulted in increased debt service expense, which is a pass through to the client community, of $2.1 million, $2.1 million, and $1.2 million for the years ended December 31, 2009, 2008 and 2007, respectively.
We were required, under financing arrangements in effect from June 24, 2005 to February 9, 2007, to enter into hedging arrangements with respect to a portion of our exposure to interest rate changes with respect to our borrowing under the previously existing credit facilities. In connection with the refinancing of our previously existing credit facilities, the interest rate swap agreements were settled on February 9, 2007. We recognized a gain associated with the settlement of our interest rate swap agreements of $3.4 million, pre-tax, for the year ended December 31, 2007.
| |
NOTE 15. | SUPPLEMENTARY FINANCIAL INFORMATION |
Revenues and Unbilled Service Receivables
The following table summarizes the components of waste and service revenues for the periods presented below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, | | | For the Years Ended December 31, | |
| | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | |
|
Waste and service revenues unrelated to project debt | | $ | 836,115 | | | $ | 764,560 | | | $ | 711,832 | | | $ | 840,352 | | | $ | 836,115 | | | $ | 764,560 | |
Revenue earned explicitly to service project debt-principal | | | 72,229 | | | | 69,163 | | | | 69,097 | | | | 56,986 | | | | 72,229 | | | | 69,163 | |
Revenue earned explicitly to service project debt-interest | | | 26,183 | | | | 30,673 | | | | 36,704 | | | | 22,266 | | | | 26,183 | | | | 30,673 | |
| | | | | | | | | | | | | | |
Total waste and service revenues | | $ | 934,527 | | | $ | 864,396 | | | $ | 817,633 | | | $ | 919,604 | | | $ | 934,527 | | | $ | 864,396 | |
| | | | | | | | | | | | | | |
Under some of our service agreements, we bill municipalities fees to service project debt (principal and interest). The amounts billed are based on the actual principal amortization schedule for the project bonds. Regardless of the amounts billed to client communities relating to project debt principal, we recognize revenue earned explicitly to service project debt principal on a levelized basis over the term of the applicable agreement. In the beginning of the agreement, principal billed is less than the amount of levelized revenue recognized related to principal and we record an unbilled service receivable asset. At some point during the agreement, the amount we bill will exceed the levelized revenue and the unbilled service receivable begins to reduce, and ultimately becomes nil at the end of the contract.
In the final year(s) of a contract, cash is utilized from debt service reserve accounts to pay remaining principal amounts due to project bondholders and such amounts are no longer billed to or paid by municipalities. Generally, therefore, in the last
109
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
year of the applicable agreement, little or no cash is received from municipalities relating to project debt, while our levelized service revenue continues to be recognized until the expiration date of the term of the agreement.
During the quarter ended December 31, 2008, Stanislaus County, California, our client community at our Stanislaus energy-from-waste facility, redeemed the remaining outstanding project debt associated with that facility for $21.3 million ($7.4 million was payable in January 2009 and $13.9 million was payable in January 2010). The payment was made from the debt service reserve fund, amounts restricted for debt service and the additional funds received from the municipality.
Other Operating Expenses
The components of other operating expenses are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, | | | For the Years Ended December 31, | |
| | 2008 | | 2007 | | 2006 | | | 2009 | | 2008 | | 2007 | |
|
Construction costs | | $ | 50,611 | | | $ | 55,675 | | | $ | 2,476 | | | $ | 26,707 | | | $ | 50,611 | | | $ | 55,675 | |
Insurance subsidiary operating expenses(1) | | | 12,641 | | | | 10,699 | | | | 10,435 | | | | 21,258 | | | | 12,641 | | | | 10,699 | |
Proceeds related to insurance recoveries | | | (3,934 | ) | | | (1,909 | ) | | | (4,855 | ) | |
Insurance recoveries | | | | (276 | ) | | | (3,934 | ) | | | (1,909 | ) |
Loss on the retirement of fixed assets | | | 7,475 | | | | 1,940 | | | | 305 | | | | 1,040 | | | | 7,475 | | | | 1,940 | |
Unrealized/realized foreign exchange loss (gain) | | | 1,899 | | | | (1,719 | ) | | | (587 | ) | |
Proceeds received for distributions and settlements related to the reorganization of Covanta Energy | | | — | | | | — | | | | (2,600 | ) | |
Foreign exchange (gain) loss | | | | (9 | ) | | | 1,899 | | | | (1,719 | ) |
Other | | | (1,991 | ) | | | (4,047 | ) | | | (2,580 | ) | | | (752 | ) | | | (1,991 | ) | | | (4,047 | ) |
| | | | | | | | | | | | | | |
Total other operating expenses | | $ | 66,701 | | | $ | 60,639 | | | $ | 2,594 | | | $ | 47,968 | | | $ | 66,701 | | | $ | 60,639 | |
| | | | | | | | | | | | | | |
| | |
| (1) | Insurance subsidiary operating expenses are primarily comprised of increased incurred but not reported loss reserves, loss adjustment expenses and policy acquisition costs. |
Semass Fire
On March 31, 2007, our SEMASS energy-from-waste facility located in Rochester, Massachusetts experienced a fire in the front-end receiving portion of the facility. Damage was extensive to this portion of
108
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the facility and operations at the facility were suspended completely for approximately 20 days. As a result of this loss, we recorded an asset impairment of $17.3 million, pre-tax, which represented the net book value of the assets destroyed.
The cost of repair or replacement, and business interruption losses, are insured under the terms of applicable insurance policies, subject to deductibles. Insurance recoveries were recorded as insurance recoveries, net of write-down of assets where such recoveries relate to repair and reconstruction costs, or as a reduction to plant operating expenses where such recoveries relate to other costs or business interruption losses. We recorded insurance recoveries in our consolidated statements of income and received cash proceeds in settlement of these claims as follows (in millions):
| | | | | | | | | | | | | | | | |
| | Insurance Recoveries
| | | | |
| | Recorded | | | Cash Proceeds Received | |
| | For the Years Ended December 31, | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | |
|
Repair and reconstruction costs (Insurance recoveries, net of write-down of assets) | | $ | 8.3 | | | $ | 17.3 | | | $ | 16.2 | | | $ | 9.4 | |
Clean-up costs (reduction to Plant operating expenses) | | $ | — | | | $ | 2.7 | | | $ | — | | | $ | 2.7 | |
Business interruption losses (reduction to Plant operating expenses) | | $ | 5.2 | | | $ | 2.0 | | | $ | 7.2 | | | $ | — | |
Non-cash convertible debt related expense
The components of non-cash convertible debt related expense are as follows (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
|
Debt discount accretion related to the Debentures | | $ | 19,327 | | | $ | 17,979 | | | $ | 15,377 | |
Debt discount accretion related to the Notes | | | 11,956 | | | | — | | | | — | |
Fair value changes related to the Note Hedge | | | (11,165 | ) | | | — | | | | — | |
Fair value changes related to the Cash Conversion Option | | | 4,172 | | | | — | | | | — | |
| | | | | | | | | | | | |
Total non-cash convertible debt related expense | | $ | 24,290 | | | $ | 17,979 | | | $ | 15,377 | |
| | | | | | | | | | | | |
110
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Selected Supplementary Balance Sheet Information
Selected supplementary balance sheet information is as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | As of December 31, | | | As of December 31, | |
| | 2008 | | 2007 | | | 2009 | | 2008 | |
|
Interest rate swap (Note 19) | | $ | 13,984 | | | $ | 8,913 | | |
Interest rate swap (Note 14) | | | $ | — | | | $ | 13,984 | |
Contract acquisition costs | | | 10,351 | | | | 8,569 | | | | 13,762 | | | | 10,351 | |
Reinsurance recoverable on unpaid losses | | | 9,155 | | | | 10,035 | | |
Reinsurance recoverable on unpaid losses (Note 1) | | | | 12,325 | | | | 9,155 | |
Deferred financing costs | | | 10,191 | | | | 14,143 | | | | 17,737 | | | | 10,191 | |
Note Hedge (Note 11) | | | | 123,543 | | | | — | |
Spare parts | | | 16,631 | | | | 16,048 | | | | 16,490 | | | | 16,631 | |
Other noncurrent receivables | | | 21,121 | | | | 14,838 | | | | 32,705 | | | | 21,121 | |
Restricted funds for pre-petition tax liabilities | | | 20,419 | | | | 19,997 | | |
Restricted funds for pre-petition tax liabilities (Note 1) | | | | 20,243 | | | | 20,419 | |
Prepaid expenses | | | 27,655 | | | | 11,131 | | | | 58,745 | | | | 27,655 | |
Other | | | 10,037 | | | | 8,880 | | | | 10,816 | | | | 10,037 | |
| | | | | | | | | | |
Total Other Noncurrent Assets | | $ | 139,544 | | | $ | 112,554 | | | $ | 306,366 | | | $ | 139,544 | |
| | | | | | | | | | |
Interest payable | | $ | 16,328 | | | $ | 20,676 | | | $ | 15,783 | | | $ | 16,328 | |
Deferred income taxes | | | 17,752 | | | | — | | | | — | | | | 17,752 | |
Payroll and payroll taxes | | | 33,840 | | | | 29,853 | | | | 37,758 | | | | 33,840 | |
Accrued liabilities to client communities | | | 46,245 | | | | 75,528 | | | | 35,836 | | | | 46,245 | |
Operating expenses | | | 68,420 | | | | 79,135 | | | | 86,011 | | | | 68,420 | |
Other | | | 32,461 | | | | 28,808 | | | | 42,333 | | | | 32,461 | |
| | | | | | | | | | |
Total Accrued Expenses and Other Current Liabilities | | $ | 215,046 | | | $ | 234,000 | | | $ | 217,721 | | | $ | 215,046 | |
| | | | | | | | | | |
Deferred revenue | | $ | 4,345 | | | $ | 4,931 | | | $ | 3,681 | | | $ | 4,345 | |
Interest rate swap (Note 19) | | | 13,984 | | | | 8,913 | | |
Benefit obligations (Note 16) | | | 35,110 | | | | 17,360 | | |
Interest rate swap (Note 14) | | | | — | | | | 13,984 | |
Benefit obligations (Note 17) | | | | 16,014 | | | | 35,110 | |
Asset retirement obligations (Note 1) | | | 25,911 | | | | 24,556 | | | | 26,076 | | | | 25,911 | |
Tax liabilities for uncertain tax positions (Note 9) | | | 33,965 | | | | 33,041 | | |
Tax liabilities for uncertain tax positions (Note 16) | | | | 32,991 | | | | 33,965 | |
Insurance loss and loss adjustment reserves (Note 1) | | | 29,362 | | | | 32,436 | | | | 34,692 | | | | 29,362 | |
Other | | | 23,204 | | | | 20,503 | | | | 28,306 | | | | 23,204 | |
| | | | | | | | | | |
Total Other Noncurrent Liabilities | | $ | 165,881 | | | $ | 141,740 | | | $ | 141,760 | | | $ | 165,881 | |
| | | | | | | | | | |
109
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
Note 13.NOTE 16. | InvestmentsINCOME TAXES |
Effective January 1, 2008, we adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115” (“SFAS 159”), but did not elect to apply the fair value option to any ofWe file a federal consolidated income tax return with our eligible financial assets and liabilities.
Effective January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This statement did not require any new fair value measurements.subsidiaries. Covanta Lake II, Inc. files outside of the consolidated return group. Our federal consolidated income tax return also includes the taxable results of certain grantor trusts described below.
The insurance subsidiaries’ fixed maturity debt and equity securities portfolio are classified as “available-for-sale” and are carried at fair value. Investment securities that are traded on a national securities exchange are stated at the last reported sales price on the day of valuation. Changes in fair value are credited or charged directly to AOCI in the consolidated statements of stockholders’ equity as unrealized gains or losses, respectively. Investment gains or losses realized on the sale of securities are determined using the specific identification method. Realized gains and losses are recognized in the consolidated statementscomponents of income based on the amortized cost of fixed maturities and cost basis for equity securities on the date of trade, subject to any previous adjustments for “other than temporary” declines. Other investments, such as investments in companies in which we do not have the ability to exercise significant influence, are carried at the lower of cost or estimated realizable value. See Note 1. Organization and Summary of Significant Accounting Policies and Note 19. Financial Instruments for a summary of related accounting policies.
The cost or amortized cost, unrealized gains, unrealized losses and fair value of our investments categorized by type of security,tax expense were as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | As of December 31, 2008 | |
| | Cost or
| | | Unrealized
| | | Unrealized
| | | Fair
| |
| | Amortized Cost | | | Gain | | | Loss | | | Value | |
|
Current investments: | | | | | | | | | | | | | | | | |
Fixed maturities | | $ | 300 | | | $ | — | | | $ | — | | | $ | 300 | |
Equity securities — insurance business | | | 760 | | | | 62 | | | | 30 | | | | 792 | |
| | | | | | | | | | | | | | | | |
Total current investments | | $ | 1,060 | | | $ | 62 | | | $ | 30 | | | $ | 1,092 | |
| | | | | | | | | | | | | | | | |
Noncurrent investments: | | | | | | | | | | | | | | | | |
Fixed maturities — insurance business: | | | | | | | | | | | | | | | | |
U.S. government/Agency | | $ | 17,897 | | | $ | 329 | | | $ | 19 | | | $ | 18,207 | |
Mortgage-backed | | | 4,183 | | | | 27 | | | | 26 | | | | 4,184 | |
Corporate | | | 4,540 | | | | — | | | | 194 | | | | 4,346 | |
| | | | | | | | | | | | | | | | |
Total fixed maturities — insurance business | | | 26,620 | | | | 356 | | | | 239 | | | | 26,737 | |
Investment at cost — international business | | | 3,437 | | | | — | | | | — | | | | 3,437 | |
Mutual and bond funds | | | 1,404 | | | | — | | | | 433 | | | | 971 | |
| | | | | | | | | | | | | | | | |
Total noncurrent investments | | $ | 31,461 | | | $ | 356 | | | $ | 672 | | | $ | 31,145 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | For the Years Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
|
Current: | | | | | | | | | | | | |
Federal | | $ | (1,221 | ) | | $ | (1,445 | ) | | $ | 3,373 | |
State | | | 10,204 | | | | 17,189 | | | | 15,186 | |
Foreign | | | 8,935 | | | | 5,657 | | | | 6,612 | |
| | | | | | | | | | | | |
Total current | | | 17,918 | | | | 21,401 | | | | 25,171 | |
Deferred: | | | | | | | | | | | | |
Federal | | | 18,789 | | | | 67,282 | | | | 3,411 | |
State | | | 14,303 | | | | (3,998 | ) | | | (4,213 | ) |
Foreign | | | (966 | ) | | | (124 | ) | | | 114 | |
| | | | | | | | | | | | |
Total deferred | | | 32,126 | | | | 63,160 | | | | (688 | ) |
| | | | | | | | | | | | |
Total income tax expense | | $ | 50,044 | | | $ | 84,561 | | | $ | 24,483 | |
| | | | | | | | | | | | |
110
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | |
| | As of December 31, 2007 | |
| | Cost or
| | | Unrealized
| | | Unrealized
| | | Fair
| |
| | Amortized Cost | | | Gain | | | Loss | | | Value | |
|
Current investments: | | | | | | | | | | | | | | | | |
Fixed maturities | | $ | 2,495 | | | $ | — | | | $ | — | | | $ | 2,495 | |
Equity securities — insurance business | | | 909 | | | | 231 | | | | 30 | | | | 1,110 | |
| | | | | | | | | | | | | | | | |
Total current investments | | $ | 3,404 | | | $ | 231 | | | $ | 30 | | | $ | 3,605 | |
| | | | | | | | | | | | | | | | |
Noncurrent investments: | | | | | | | | | | | | | | | | |
Fixed maturities — insurance business: | | | | | | | | | | | | | | | | |
U.S. government/Agency | | $ | 14,750 | | | $ | 70 | | | $ | 7 | | | $ | 14,813 | |
Mortgage-backed | | | 5,707 | | | | 3 | | | | 140 | | | | 5,570 | |
Corporate | | | 5,881 | | | | 8 | | | | 12 | | | | 5,877 | |
| | | | | | | | | | | | | | | | |
Total fixed maturities — insurance business | | | 26,338 | | | | 81 | | | | 159 | | | | 26,260 | |
Investment at cost — international business | | | 3,437 | | | | — | | | | — | | | | 3,437 | |
Mutual and bond funds | | | 2,225 | | | | 24 | | | | — | | | | 2,249 | |
| | | | | | | | | | | | | | | | |
Total noncurrent investments | | $ | 32,000 | | | $ | 105 | | | $ | 159 | | | $ | 31,946 | |
| | | | | | | | | | | | | | | | |
The following table sets forth a summary of temporarily impaired investments held by our insurance subsidiary (in thousands):
| | | | | | | | | | | | | | | | |
| | As of December 31,
| | | As of December 31,
| |
| | 2008 | | | 2007 | |
| | Fair
| | | Unrealized
| | | Fair
| | | Unrealized
| |
Description of Investments | | Value | | | Losses | | | Value | | | Losses | |
|
U.S. Treasury and other direct U.S. Government obligations | | $ | 2,841 | | | $ | 19 | | | $ | 4,718 | | | $ | 7 | |
Federal agency mortgage backed securities | | | 1,547 | | | | 26 | | | | 5,419 | | | | 140 | |
Corporate bonds | | | 3,996 | | | | 194 | | | | 4,148 | | | | 12 | |
| | | | | | | | | | | | | | | | |
Total fixed maturities | | | 8,384 | | | | 239 | | | | 14,285 | | | | 159 | |
Equity securities | | | 307 | | | | 30 | | | | 240 | | | | 30 | |
| | | | | | | | | | | | | | | | |
Total temporarily impaired investments | | $ | 8,691 | | | $ | 269 | | | $ | 14,525 | | | $ | 189 | |
| | | | | | | | | | | | | | | | |
Of the fixed maturity investments noted above, 16% were acquired between June 30, 2002 and December 31, 2004 during an historic low interest rate environment and are investment grade securities rated A or better. The number of U.S. Treasury and federal agency obligations, mortgage backed securities, and corporate bonds temporarily impaired are 2, 4, and 5 respectively. As of December 31, 2008, all of the temporarily impaired fixed maturity investments with a fair value of $8.4 million had maturities greater than 12 months.
Our fixed maturities held by our insurance subsidiary include mortgage-backed securities and collateralized mortgage obligations, collectively (“MBS”) representing 15.6%, and 21.6% of the total fixed maturities at years ended December 31, 2008 and 2007, respectively. Our MBS holdings are issued by the Federal National Mortgage Association (“FNMA”) or the Federal Home Loan Mortgage Corporation (“FHLMC”), both of which are rated “AAA” by Moody’s Investors Services. MBS and callable bonds, in contrast to other bonds, are more sensitive to market value declines in a rising interest rate environment than to market value increases in a declining interest rate environment.
111
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —– (Continued)
The expected maturities of noncurrent fixed maturity securities held by our insurance subsidiary, by amortized costDomestic and fair value are shown belowforeign pre-tax income was as follows (in thousands):
| | | | | | | | |
| | As of December 31, 2008 | |
| | Amortized Cost | | | Fair Value | |
|
Available-for-sale: | | | | | | | | |
One year or less | | $ | 4,624 | | | $ | 4,648 | |
Over one year to five years | | | 21,845 | | | | 21,939 | |
Over five years to ten years | | | 151 | | | | 150 | |
More than ten years | | | — | | | | — | |
| | | | | | | | |
Total fixed maturities | | $ | 26,620 | | | $ | 26,737 | |
| | | | | | | | |
| | | | | | | | | | | | |
| | For the Years Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
|
Domestic | | $ | 116,486 | | | $ | 179,617 | | | $ | 110,513 | |
Foreign | | | 20,950 | | | | 17,282 | | | | 22,123 | |
| | | | | | | | | | | | |
Total | | $ | 137,436 | | | $ | 196,899 | | | $ | 132,636 | |
| | | | | | | | | | | | |
The following reflectseffective income tax rate was 36.4%, 42.9% and 18.5% for the changeyears ended December 31, 2009, 2008, and 2007, respectively. The decrease in the effective tax rate for the year ended December 31, 2009, compared to the year ended December 31, 2008, is primarily related to lower pre-tax income combined with an increase in production tax credits, and changes in the valuation allowance. The increase in the effective tax rate for the year ended December 31, 2008, compared to the year ended December 31, 2007, is primarily related to taxes associated with the wind down of the grantor trusts and additional liability for uncertain tax positions in 2008, and the tax benefit resulting from the release of valuation allowance from previously unrecognized federal and state net unrealized (loss) gainoperating loss carryforwards (“NOLs”) in 2007. See rate reconciliation table below for further details.
We recognize benefits from a foreign tax holiday in India. Our two Indian power project companies began taking advantage of a tax holiday under Indian law in April of 2005. The Indian tax holiday permits the companies to use the alternative tax rate, currently approximately 17%, for a 10 year period.
The aggregate benefit and affect on available-for-sale securities includeddiluted earnings per share was as a separate component of accumulated AOCI in stockholders’ equityfollows (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended
| |
| | December 31, | |
| | 2008 | | | 2007 | | | 2006 | |
|
Fixed maturities, net | | $ | 195 | | | $ | 747 | | | $ | 331 | |
Equity securities, net | | | (169 | ) | | | (59 | ) | | | 130 | |
Mutual and bond funds | | | (433 | ) | | | 24 | | | | 98 | |
| | | | | | | | | | | | |
Change in net unrealized (loss) gain on investments | | $ | (407 | ) | | $ | 712 | | | $ | 559 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | For the Years Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
|
Aggregate benefit | | $ | 2,954 | | | $ | 3,257 | | | $ | 4,433 | |
Affect on diluted EPS | | $ | 0.02 | | | $ | 0.02 | | | $ | 0.03 | |
The componentsA reconciliation of net unrealized (loss) gain on available-for-sale securities consistour income tax expense at the federal statutory income tax rate of 35% to income tax expense at the followingeffective tax rate is as follows (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended
| |
| | December 31, | |
| | 2008 | | | 2007 | | | 2006 | |
|
Net unrealized holding (loss) gain on available-for-sale securities arising during the period | | $ | (543 | ) | | $ | 698 | | | $ | 777 | |
Reclassification adjustment for net realized losses (gains) on available-for-sale securities included in net income | | | 136 | | | | 14 | | | | (218 | ) |
| | | | | | | | | | | | |
Net unrealized (loss) gain on available-for-sale securities | | $ | (407 | ) | | $ | 712 | | | $ | 559 | |
| | | | | | | | | | | | |
Net realized investment (losses) gains are as follows for our insurance subsidiary (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended
| |
| | December 31, | |
| | 2008 | | | 2007 | | | 2006 | |
|
Net realized investment (loss) gain | | | | | | | | | | | | |
Fixed maturities | | $ | 22 | | | $ | (75 | ) | | $ | (96 | ) |
Equity securities | | | (158 | ) | | | 61 | | | | 314 | |
| | | | | | | | | | | | |
Net realized investment (loss) gain | | $ | (136 | ) | | $ | (14 | ) | | $ | 218 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | For the Years Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
|
Income tax expense at the federal statutory rate | | $ | 48,103 | | | $ | 68,915 | | | $ | 46,423 | |
State and other tax expense | | | 16,818 | | | | 9,926 | | | | 7,797 | |
Change in valuation allowance | | | (4,780 | ) | | | 10,610 | | | | (34,968 | ) |
Grantor trust income(loss) | | | 896 | | | | (104,443 | ) | | | 5,580 | |
Subpart F income and foreign dividends | | | 2,204 | | | | 1,491 | | | | 90 | |
Taxes on foreign earnings | | | 526 | | | | (524 | ) | | | (1,132 | ) |
Production tax credits | | | (13,389 | ) | | | (8,529 | ) | | | (4,525 | ) |
Expiration of tax attributes | | | — | | | | — | | | | 5,977 | |
Liability for uncertain tax positions | | | (1,361 | ) | | | 107,156 | | | | 898 | |
Other, net | | | 1,027 | | | | (41 | ) | | | (1,657 | ) |
| | | | | | | | | | | | |
Total income tax expense | | $ | 50,044 | | | $ | 84,561 | | | $ | 24,483 | |
| | | | | | | | | | | | |
112
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —– (Continued)
Net investmentWe had consolidated federal NOLs estimated to be approximately $544.9 million for federal income earnedtax purposes as of the end of 2009. These consolidated federal NOLs will expire, if not used, in the following amounts in the following years (in thousands):
| | | | |
| | Amount of
| |
| | Carryforward
| |
| | Expiring | |
|
2010 | | $ | — | |
2011 | | | 3,330 | |
2012 | | | 38,255 | |
2019 | | | 33,635 | |
2022 | | | 26,931 | |
2023 | | | 108,331 | |
2024 | | | 212 | |
2025 | | | 203 | |
2026 | | | 260 | |
2027 | | | 391 | |
2028 | | | 333,372 | |
| | | | |
| | $ | 544,920 | |
| | | | |
In addition to the consolidated federal NOLs, we have state NOL carryforwards of $264.7 million, which expire between 2011 and 2027, capital loss carryforwards of $0.2 million expiring in 2013, and additional federal credit carryforwards of $47.5 million. These deferred tax assets are offset by a valuation allowance of $20.5 million.
As of December 31, 2009, we had a valuation allowance of $20.5 million on deferred tax assets. During 2009, we decreased our fixed maturityvaluation allowance by $23.6 million related to the expiration of capital losses. During 2008, we increased our valuation allowance by $10.6 million related to capital losses, state NOLs, and equity securities portfolio wasa deferred tax asset established for certain deductions from the grantor trust. As of December 31, 2007, the reduction in the valuation allowance of $35.0 million primarily included a $31.4 million adjustment related to NOLs that were due to expire and were able to be utilized as a reduction to income tax expense. The remaining reduction in 2007 of the valuation allowance of $3.6 million related to previously unrecognized federal and state NOLs for our unconsolidated subsidiary Covanta Lake II, Inc.
The tax effects of temporary differences that give rise to the deferred tax assets and liabilities are presented as follows (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended
| |
| | December 31, | |
| | 2008 | | | 2007 | | | 2006 | |
|
Holding Company | | | | | | | | | | | | |
Fixed maturities | | $ | — | | | $ | — | | | $ | — | |
Short-term investments | | | 481 | | | | 4,360 | | | | 2,318 | |
| | | | | | | | | | | | |
Net investment income — holding company | | $ | 481 | | | $ | 4,360 | | | $ | 2,318 | |
| | | | | | | | | | | | |
Insurance business | | | | | | | | | | | | |
Fixed maturities | | $ | 936 | | | $ | 1,196 | | | $ | 1,582 | |
Dividend income | | | 46 | | | | 61 | | | | 81 | |
Other, net | | | 196 | | | | 371 | | | | 183 | |
| | | | | | | | | | | | |
Total investment income | | | 1,178 | | | | 1,628 | | | | 1,846 | |
Less: investment expense | | | 177 | | | | 172 | | | | 211 | |
| | | | | | | | | | | | |
Net investment income — insurance business | | $ | 1,001 | | | $ | 1,456 | | | $ | 1,635 | |
| | | | | | | | | | | | |
| | | | | | | | |
| | As of December 31, | |
| | 2009 | | | 2008 | |
|
Deferred Tax Assets: | | | | | | | | |
Loss reserve discounting | | $ | 1,082 | | | $ | (1,568 | ) |
Capital loss carryforward | | | 90 | | | | 24,149 | |
Net operating loss carryforwards | | | 97,337 | | | | 109,989 | |
Accrued expenses | | | 19,294 | | | | 30,601 | |
Tax basis in bond and other costs | | | 21,470 | | | | 16,725 | |
Deferred tax assets attributable to pass-through entities | | | 9,869 | | | | 9,869 | |
Other | | | 866 | | | | 5,535 | |
AMT and other credit carryforwards | | | 47,462 | | | | 32,750 | |
| | | | | | | | |
Total gross deferred tax asset | | | 197,470 | | | | 228,050 | |
Less: valuation allowance | | | (20,461 | ) | | | (44,089 | ) |
| | | | | | | | |
Total deferred tax asset | | | 177,009 | | | | 183,961 | |
| | | | | | | | |
Deferred Tax Liabilities: | | | | | | | | |
Unbilled accounts receivable | | | 33,833 | | | | 5,713 | |
Property, plant and equipment | | | 486,414 | | | | 465,027 | |
Intangible assets | | | 87,802 | | | | 68,593 | |
Deferred tax liabilities attributable to pass-through entities | | | 57,996 | | | | 93,346 | |
Capitalized interest | | | 52,566 | | | | 43,953 | |
Prepaid expenses | | | 13,281 | | | | 11,218 | |
Other, net | | | 6,729 | | | | 7,782 | |
| | | | | | | | |
Total gross deferred tax liability | | | 738,621 | | | | 695,632 | |
| | | | | | | | |
Net deferred tax liability | | $ | (561,612 | ) | | $ | (511,671 | ) |
| | | | | | | | |
The insurance business, in compliance with state insurance laws and regulations, had securities with a fair value of approximately $16.7 million and $17.1 million as of the years ended December 31, 2008 and 2007, respectively, on deposit with various states or governmental regulatory authorities. In addition, as of the years ended December 31, 2008 and 2007, the insurance business had investments with a fair value of $9.0 million and $6.6 million, respectively, held in trust or as collateral under the terms of certain reinsurance treaties and letters of credit.
| |
Note 14. | Property, Plant and Equipment, net |
Property, plant and equipment consisted of the following (in thousands):
| | | | | | | | | | | | |
| | | | | As of December 31, | |
| | Useful Lives | | | 2008 | | | 2007 | |
|
Land | | | | | | $ | 22,999 | | | $ | 23,967 | |
Facilities and equipment | | | 3-37 years | | | | 3,043,124 | | | | 2,999,718 | |
Landfills | | | | | | | 42,091 | | | | 26,574 | |
Construction in progress | | | | | | | 36,858 | | | | 46,850 | |
| | | | | | | | | | | | |
Total | | | | | | | 3,145,072 | | | | 3,097,109 | |
Less: accumulated depreciation and amortization | | | | | | | (615,037 | ) | | | (476,602 | ) |
| | | | | | | | | | | | |
Property, plant, and equipment — net | | | | | | $ | 2,530,035 | | | $ | 2,620,507 | |
| | | | | | | | | | | | |
Depreciation and amortization expense related to property, plant and equipment amounted to $164.1 million, $162.0 million, and $156.9 million for the years ended December 31, 2008, 2007 and 2006, respectively.
Leases are primarily operating leases for leaseholds on energy-from-waste facilities and independent power projects, as well as for trucks and automobiles, and machinery and equipment. Some of these operating leases have renewal options. Expense under operating leases was $30.9 million, $29.8 million, and $26.8 million for the years ended December 31, 2008, 2007 and 2006, respectively.
113
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —– (Continued)
The following is a schedule, by year,We adopted the permanent reinvestment exception whereby we will no longer provide for deferred taxes on the undistributed earnings 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, 2008 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | Thereafter | | | Total | |
|
Future Minimum Rental Payments | | $ | 57,580 | | | $ | 49,506 | | | $ | 40,444 | | | $ | 33,390 | | | $ | 27,151 | | | $ | 157,961 | | | $ | 366,032 | |
Non-Recourse Portion of Future Minimum Rental Payments | | $ | 23,065 | | | $ | 23,362 | | | $ | 23,571 | | | $ | 23,611 | | | $ | 18,005 | | | $ | 102,108 | | | $ | 213,722 | |
Future minimum rental payment obligations include $213.7 million of future non-recourse rental payments that relateour international subsidiaries. We intend to energy-from-waste facilities. Of this amount $126.7 million is supported by third-party commitments to provide sufficient service revenues to meet such obligations. The remaining $87.0 million is related to an energy-from-waste facility at which we serve as the operator and directly market one halfpermanently reinvest our international earnings outside of the facility’s disposal capacity.United States in our existing international operations and in any new international business which may be developed or acquired. This facility currently generates sufficient revenues from short-, medium-,policy resulted in an unrecognized deferred tax liability of approximately $39.7 million and long-term contracts to meet rental payments. We anticipate renewing the contracts or entering into new contracts to generate sufficient revenues to meet remaining future rental payments.
Covanta Delaware Valley, L.P. (“Delaware Valley”) leases a facility pursuant to an operating lease that expires in July 2019. In certain default circumstances under such lease, Delaware Valley becomes obligated to pay a contractually specified “stipulated loss” value that declines over time and was approximately $134.4$32.7 million as of December 31, 2008.2009 and 2008, respectively. Cumulative undistributed foreign earnings for which United States taxes were not provided were included in consolidated retained earnings in the amount of approximately $114.9 million and $94.8 million as of December 31, 2009 and 2008, respectively.
Electricity and steam sales include lease incomeDeferred tax assets relating to tax benefits of approximately $240.2 million, $139.6 million, and $95.9 million foremployee stock option grants have been reduced to reflect exercises in the yearscalendar year ended December 31, 2007. Some exercises resulted in tax deductions in excess of previously recorded benefits based on the option value at the time of grant (a “windfall”). Although these additional tax benefits or windfalls were reflected in the NOLs, the additional tax benefit associated with the windfall is not recognized until the deduction reduces taxes payable. Accordingly, since the tax benefit does not reduce our current taxes payable in 2008 2007, and 2006, respectively, related to two Indian and one Chinese power project that were deemed to be operating lease arrangements under EITFNo. 01-08, “Determining Whether an Arrangement Contains a Lease”(“EITF 01-08”). These amounts represent contingent rentals because the lease payments for each facility depend on a factor directly relateddue to the future useNOLs, these windfall tax benefits were not reflected in our NOLs in the deferred tax assets for 2009 and 2008. Windfalls included in NOLs but not reflected in deferred tax assets were $11.4 million and $14.4 million for 2009 and 2008, respectively.
A reconciliation of the leased property. The output deliverablebeginning and capacity provided by our two Indian facilities have each been purchased by a single party under long-term power purchase agreements which expire in 2016. The electric power and steam off-take arrangements and maintenance agreement for oneending amount of our Chinese coal facilities were also with a single party. In June 2006, we sold our ownership interest in this Chinese coal facility.
Property, plant and equipment accounted forunrecognized tax benefits is as leased to others underEITF 01-08 consisted of the followingfollows (in thousands):
| | | | | | | | |
| | As of December 31, | |
| | 2008 | | | 2007 | |
|
Land | | $ | 24 | | | $ | 43 | |
Energy facilities | | | 61,077 | | | | 91,207 | |
Buildings, machinery and improvements | | | 5,961 | | | | 9,362 | |
| | | | | | | | |
Total | | | 67,062 | | | | 100,612 | |
Less: accumulated depreciation and amortization | | | (23,222 | ) | | | (35,994 | ) |
| | | | | | | | |
Property, plant, and equipment — net | | $ | 43,840 | | | $ | 64,618 | |
| | | | | | | | |
| | | | |
Balance as of January 1, 2007 | | $ | 24,483 | |
Additions based on tax positions related to the current year | | | 500 | |
Additions for tax positions of prior years | | | 398 | |
Reductions for tax positions of prior years | | | — | |
Settlements | | | — | |
| | | | |
Balance at December 31, 2007 | | $ | 25,381 | |
| | | | |
Additions based on tax positions related to the current year | | | 109,956 | |
Additions for tax positions of prior years | | | 717 | |
Reductions for lapse in applicable statute of limitations | | | (280 | ) |
Reductions for tax positions of prior years | | | (3,237 | ) |
| | | | |
Balance at December 31, 2008 | | $ | 132,537 | |
| | | | |
Additions based on tax positions related to the current year | | $ | — | |
Additions for tax positions of prior years | | | 976 | |
Reductions for lapse in applicable statute of limitations | | | (2,337 | ) |
Reductions for tax positions of prior years | | | — | |
| | | | |
Balance at December 31, 2009 | | $ | 131,176 | |
| | | | |
The liability for uncertain tax positions, exclusive of interest and penalties, was $131.2 million and $132.5 million as of December 31, 2009 and 2008, respectively. Included in the balance of uncertain tax benefits as of December 31, 2009 and 2008 are potential benefits of $114.7 million and $114.8 million, respectively, that, if recognized, would affect the effective tax rate. The liability for uncertain tax positions may decrease by approximately $5.8 million in the next 12 months with respect to the expiration of statutes.
We record interest accrued on liabilities for uncertain tax positions and penalties as part of the tax provision. For the year ended December 31, 2009 and 2008, we recognized $0.1 million and $0.9 million, respectively, of interest on liabilities for uncertain tax positions. As of December 31, 2009 and 2008, we had accrued interest and penalties associated with liabilities for uncertain tax positions of $8.4 million and $8.1 million, respectively.
As issues are examined by the Internal Revenue Service (“IRS”) and state auditors, we may decide to adjust the existing FIN 48 liability for issues that were not deemed an exposure at the time we adopted accounting standards related to the accounting for uncertainty in income taxes. Accordingly, we will continue to monitor the results of audits and adjust the liability as needed. Federal income tax returns for Covanta Energy are closed for the years through 2003. However, to the extent NOLs are utilized from earlier years, federal income tax returns for Covanta Holding Corporation, formerly known as Danielson Holding Corporation, are still open. The tax returns of our subsidiary ARC Holdings had been under an IRS examination for 2004 and 2005. This examination was related to ARC Holdings’ refund requests related to NOL carryback claims from tax years prior to our acquisition of ARC Holdings in 2005 that required the approval of the Joint Committee. The audit was concluded with no change and the Joint Committee approved the refund, which we received during the third
114
Note 16. Employee Benefit PlansCOVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
quarter of 2009. State income tax returns are generally subject to examination for a period of three to five years after the filing of the respective 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 (which were subsidiaries of our predecessor, which was 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.
In January 2006, we executed agreements with the California Commissioner of Insurance (the “California Commissioner”), who administers the majority of the grantor trusts, regarding the final administration and conclusion of such trusts. The agreements, which were approved by the California state court overseeing the Mission insolvency proceedings (the “Mission Court”), settle matters that had been in dispute regarding the historic rights and obligations relating to the conclusion of the grantor trusts. These include the treatment of certain claims against the grantor trusts which are entitled to distributions of an aggregate of 1,572,625 shares of our common stock issued to the California Commissioner in 1990 under existing agreements entered into at the inception of the Mission insurance entities’ reorganization.
Pursuant to a claims evaluation process that we administered pursuant to such agreements with, and overseen by, the Conservation and Liquidation Office, all claim holders entitled to receive distributions of shares of our common stock from the California Commissioner were identified. As a result of this process, approximately $1.135 billion in claims were approved pursuant to orders of the Mission Court. As part of the wind down process and final claims evaluation by the Conservation and Liquidation Office, and in accordance with the parties’ contractual obligations and the requirements of the Internal Revenue Code governing such exchanges of stock for debt, the California Commissioner distributed shares of our common stock in settlement of these claims. This distribution, which is among the final steps necessary to conclude the insolvency cases relating to the trusts being administered by the California Commissioner, was conducted in December 2008 pursuant to orders of the Mission Court. These events resulted in our recognition of $515 million of additional NOLs in 2008, or a deferred tax asset of $180 million. Of this $180 million deferred tax asset, $111 million was previously recognized on the balance sheet either in December 2006 or September 2008.
We have discussed with the Director of the Division of Insurance of the State of Missouri (the “Missouri Director”), who administers the balance of the grantor trusts relating to the Mission Insurance entities, similar arrangements for distribution of the remaining 154,756 shares of our common stock by the Missouri Director to claimants of the Missouri grantor trusts. Given the claims activity relating to the Missouri grantor trusts, and the lack of disputed matters with the Missouri Director, we do not expect to enter into additional or amended contractual arrangements with the Missouri Director with respect to the final administration of the Missouri grantor trusts or the related distribution by the Missouri Director of shares of our common stock.
While we cannot predict with certainty 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 nor the final administration by the Missouri Director will result in a material reduction in available NOLs.
| |
NOTE 17. | EMPLOYEE BENEFIT PLANS |
We sponsor various retirement plans covering the majority of our domestic employees and retirees in the United States, as well as other post-retirementpostretirement benefit plans for a small number of domestic retirees in the United States that include healthcare benefits and life insurance coverage. Domestic employeesEmployees 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.
114
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Defined Contribution Plans
Substantially all of our domestic 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 all defined contribution
115
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
plans were $14.5 million, $13.0 million, $12.2 million and $11.0$12.2 million for the years ended December 31, 2009, 2008, 2007 and 2006,2007, respectively.
Pension and Postretirement Benefit Obligations
Effective December 31, 2005, we froze service accruals in the defined benefit pension plan for domestic employees in the Untied States who do not participate in retirement plans offered by collective bargaining units. All active employees who were eligible participants in the defined benefit pension plan, as of December 31, 2005, became 100% vested and have a non-forfeitable right to these benefits as of such date. Effective January 1, 2010, the defined benefit pension plan was further amended to exclude future compensation increases received by eligible participants after December 31, 2009.
Our pension and other postretirement benefit plans are accounted for in accordance with SFAS 158, which require costsAssumptions
Costs and the related obligations and assets arising from the pension and other postretirement benefit plans to beare accounted for based on actuarially-determined estimates. Upon the adoption of SFAS 158 in December 2006, we recognized a net gain of $2.5 million, $1.7 million net of deferred tax, in AOCI to reflect the funded status of the pension and postretirement benefit obligations.
On an annual basis, we evaluate the assumed discount rate and expected return on assets used to determine pension benefit and other postretirement benefit obligations. The discount rate is determined based on the timing of future benefit payments and expected rates of return currently available on high quality fixed income securities whose cash flows match the timing and amount of future benefit payments of the plan. We record a pension plan liability equal to the amount by which the present value of the projected benefit obligations (using the discount rate) exceeded the fair value of pension assets.
| | |
| • | Based on this evaluation for the year ended December 31, 2007, we increased the discount rate assumption for benefit obligations from 5.75% as of December 31, 2006 to 6.50% as of December 31, 2007. We recorded a pension plan liability equal to the amount by which the present value of the projected benefit obligations (using a discount rate of 6.50%) exceeded the fair value of pension assets as of December 31, 2007. We recognized a net actuarial gain of $14.5 million, $9.4 million net of deferred tax, in AOCI during the year ended December 31, 2007. |
| • | Based on this evaluation for the year ended December 31, 2008, we decreased the discount rate assumption for benefit obligations from 6.50% as of December 31, 2007 to 6.25% as of December 31, 2008. We recorded a pension plan liability equal to the amount by which the present value of the projected benefit obligations (using a discount rate of 6.25%) exceeded the fair value of pension assets as of December 31, 2008. We recognized a net actuarial loss of $20.0 million, $13.2 million net of deferred tax, in AOCI during the year ended December 31, 2008. |
The discount rate and net gain (loss) recognized are as follows:
| | | | | | | | | | | | |
| | | | Net Gain (Loss)
| | Net Gain (Loss),
|
| | Discount Rate | | Recognized in AOCI | | Net of Tax, Recognized in AOCI |
| | (dollars in millions) |
|
Year Ended December 31, 2009 | | | 6.00 | % | | $ | 14.6 | | | $ | 8.8 | |
Year Ended December 31, 2008 | | | 6.25 | % | | $ | (20.0 | ) | | $ | (13.2 | ) |
Year Ended December 31, 2007 | | | 6.50 | % | | $ | 14.5 | | | $ | 9.4 | |
An annual rate of increase of 9.5% in the per capita cost of health care benefits was assumed for 2009 for covered employees. The rate was assumed to decrease gradually to 5.5% in 2017 and remain at that level. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage point change in the assumed health care trend rate would have the following effects (in thousands):
| | | | | | | | |
| | One-Percentage
| | One-Percentage
|
| | Point Increase | | Point Decrease |
|
Effect on total service and interest cost components | | $ | 28 | | | $ | (25 | ) |
Effect on postretirement benefit obligation | | $ | 466 | | | $ | (411 | ) |
115116
COVANTA HOLDING CORPORATION
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 defined benefit pension and other postretirement benefit plans, the funded status (using a December 31 measurement date) of the plans and the related amounts recognized in our consolidated balance sheets (in thousands, except percentages as noted):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits | | | Pension Benefits | | Other Benefits |
| | For the Year
| | For the Year
| | For the Year
| | For the Year
| | | For the Year
| | For the Year
| | For the Year
| | For the Year
|
| | Ended
| | Ended
| | Ended
| | Ended
| | | Ended
| | Ended
| | Ended
| | Ended
|
| | December 31,
| | December 31,
| | December 31,
| | December 31,
| | | December 31,
| | December 31,
| | December 31,
| | December 31,
|
| | 2008 | | 2007 | | 2008 | | 2007 | | | 2009 | | 2008 | | 2009 | | 2008 |
|
Change in benefit obligation: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Benefit obligation | | $ | 72,895 | | | $ | 80,145 | | | $ | 8,810 | | | $ | 13,851 | | |
Benefit obligation at beginning of year | | | $ | 77,352 | | | $ | 72,895 | | | $ | 8,161 | | | $ | 8,810 | |
Service cost | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Interest cost | | | 4,705 | | | | 4,582 | | | | 549 | | | | 768 | | | | 4,786 | | | | 4,705 | | | | 490 | | | | 549 | |
Amendments | | | 663 | | | | — | | | | — | | | | — | | | | (11,066 | ) | | | 663 | | | | — | | | | — | |
Actuarial loss (gain) | | | 541 | | | | (10,023 | ) | | | (143 | ) | | | (4,726 | ) | | | 1,532 | | | | 541 | | | | 403 | | | | (143 | ) |
Benefits paid | | | (1,452 | ) | | | (1,810 | ) | | | (1,055 | ) | | | (1,083 | ) | | | (1,371 | ) | | | (1,452 | ) | | | (809 | ) | | | (1,055 | ) |
| | | | | | | | | | | | | | | | | | |
Benefit obligation at end of year | | $ | 77,352 | | | $ | 72,894 | | | $ | 8,161 | | | $ | 8,810 | | | $ | 71,233 | | | $ | 77,352 | | | $ | 8,245 | | | $ | 8,161 | |
| | | | | | | | | | | | | | | | | | |
Change in plan assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Plan assets at fair value | | $ | 61,639 | | | $ | 55,211 | | | $ | — | | | $ | — | | |
Plan assets at fair value at beginning of year | | | $ | 50,756 | | | $ | 61,639 | | | $ | — | | | $ | — | |
Actual return on plan assets | | | (13,596 | ) | | | 4,035 | | | | — | | | | — | | | | 9,641 | | | | (13,596 | ) | | | — | | | | — | |
Contributions | | | 4,165 | | | | 4,203 | | | | 1,055 | | | | 1,082 | | | | 5,226 | | | | 4,165 | | | | 809 | | | | 1,055 | |
Benefits paid | | | (1,452 | ) | | | (1,810 | ) | | | (1,055 | ) | | | (1,082 | ) | | | (1,371 | ) | | | (1,452 | ) | | | (809 | ) | | | (1,055 | ) |
| | | | | | | | | | | | | | | | | | |
Plan assets at fair value at end of year | | $ | 50,756 | | | $ | 61,639 | | | $ | — | | | $ | — | | | $ | 64,252 | | | $ | 50,756 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | |
Reconciliation of accrued benefit liability and net amount recognized: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Funded status of the plan | | $ | (26,596 | ) | | $ | (11,255 | ) | | $ | (8,161 | ) | | $ | (8,810 | ) | | $ | (6,981 | ) | | $ | (26,596 | ) | | $ | (8,245 | ) | | $ | (8,161 | ) |
Unrecognized net gain | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | |
Net amount recognized | | $ | (26,596 | ) | | $ | (11,255 | ) | | $ | (8,161 | ) | | $ | (8,810 | ) | | $ | (6,981 | ) | | $ | (26,596 | ) | | $ | (8,245 | ) | | $ | (8,161 | ) |
| | | | | | | | | | | | | | | | | | |
Accumulated other comprehensive loss (income) recognized under SFAS 158: | | | | | | | | | | | | | | | | | |
Accumulated other comprehensive (income) loss recognized: | | | | | | | | | | | | | |
Net actuarial loss (gain) | | $ | 4,681 | | | $ | (14,644 | ) | | $ | (2,360 | ) | | $ | (2,371 | ) | | $ | 634 | | | $ | 4,681 | | | $ | (1,807 | ) | | $ | (2,360 | ) |
Net prior service cost | | | 663 | | | | — | | | | — | | | | — | | |
Net prior service (credit) cost | | | | (10,478 | ) | | | 663 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | |
Total as of December 31, 2008 | | $ | 5,344 | | | $ | (14,644 | ) | | $ | (2,360 | ) | | $ | (2,371 | ) | |
Total as of December 31, 2009 | | | $ | (9,844 | ) | | $ | 5,344 | | | $ | (1,807 | ) | | $ | (2,360 | ) |
| | | | | | | | | | | | | | | | | | |
Weighted average assumptions used to determine net periodic benefit expense for years ending December 31: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Discount rate | | | 6.50 | % | | | 5.75 | % | | | 6.50 | % | | | 5.75 | % | | | 6.25 | % | | | 6.50 | % | | | 6.25 | % | | | 6.50 | % |
Expected return on plan assets | | | 7.50 | % | | | 8.00 | % | | | N/A | | | | N/A | | | | 7.50 | % | | | 7.50 | % | | | N/A | | | | N/A | |
Rate of compensation increase | | | 4.00 | % | | | 4.00 | % | | | N/A | | | | N/A | | | | 4.00 | % | | | 4.00 | % | | | N/A | | | | N/A | |
Weighted average assumptions used to determine projected benefit obligations as of December 31: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Discount rate | | | 6.25 | % | | | 6.50 | % | | | 6.25 | % | | | 6.50 | % | | | 6.00 | % | | | 6.25 | % | | | 6.00 | % | | | 6.25 | % |
Rate of compensation increase | | | 4.00 | % | | | 4.00 | % | | | N/A | | | | N/A | | | | N/A | | | | 4.00 | % | | | N/A | | | | N/A | |
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 $71.2 million, $71.2 million and $64.3 million, respectively as of December 31, 2009 and $77.4 million, $65.6 million, and $50.8 million, respectively as of December 31, 2008.
We estimate that the future benefits payable for the retirement and postretirement plans in place are as follows (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, | |
| | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 - 2019 | |
|
Pension Benefits | | $ | 1,715 | | | $ | 1,988 | | | $ | 2,611 | | | $ | 2,923 | | | $ | 3,059 | | | $ | 17,723 | |
Other Benefits (Net of Medicare Part D Subsidy) | | $ | 667 | | | $ | 695 | | | $ | 700 | | | $ | 715 | | | $ | 725 | | | $ | 2,992 | |
Attributable to Medicare Part D Subsidy | | $ | (37 | ) | | $ | (38 | ) | | $ | (40 | ) | | $ | (40 | ) | | $ | (41 | ) | | $ | (166 | ) |
116117
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —– (Continued)
Pension costs for our defined benefit plans and other post-retirement benefit plans included the following components (in thousands):
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | | Other Benefits | |
| | For the Year
| | | For the Year
| | | For the Year
| | | For the Year
| |
| | Ended
| | | Ended
| | | Ended
| | | Ended
| |
| | December 31,
| | | December 31,
| | | December 31,
| | | December 31,
| |
| | 2009 | | | 2008 | | | 2009 | | | 2008 | |
|
Components of Net Periodic Benefit Cost: | | | | | | | | | | | | | | | | |
Service cost | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Interest cost | | | 4,786 | | | | 4,705 | | | | 490 | | | | 549 | |
Expected return on plan assets | | | (3,900 | ) | | | (4,728 | ) | | | — | | | | — | |
Amortization of net prior service cost | | | 76 | | | | — | | | | — | | | | — | |
Amortization of net actuarial gain | | | (184 | ) | | | (524 | ) | | | (150 | ) | | | (154 | ) |
| | | | | | | | | | | | | | | | |
Net periodic benefit cost | | | 778 | | | | (547 | ) | | | 340 | | | | 395 | |
Settlement cost | | | 21 | | | | 65 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Final net periodic benefit cost | | $ | 799 | | | $ | (482 | ) | | $ | 340 | | | $ | 395 | |
| | | | | | | | | | | | | | | | |
Plan Assets
Plan assets had a fair value of $50.8$64.3 million and $61.6$50.8 million as of December 31, 20082009 and 2007,2008, respectively. The allocation of plan assets was as follows:
| | | | | | | | | | | | | | |
| | As of December 31, | | | As of December 31, |
| | 2008 | | 2007 | | | 2009 | | 2008 |
|
Total Equities | | | 45 | % | | | 52 | % | | | 61 | % | | | 45 | % |
Total Debt Securities | | | 49 | % | | | 42 | % | | | 36 | % | | | 49 | % |
Other | | | 6 | % | | | 6 | % | | | 3 | % | | | 6 | % |
| | | | | | | | | | |
Total | | | 100 | % | | | 100 | % | | | 100 | % | | | 100 | % |
| | | | | | | | | | |
Our expected return on plan assets assumption is based on historical experience and by evaluating input from the trustee managing the plansplan assets. The expected return on the plan assets is also impacted by the target allocation of assets, which is based on our goal of earning the highest rate of return while maintaining risk at acceptable levels. The plan strives to have assets sufficiently diversified so that adverse or unexpected results from one security class will not have an unduly detrimental impact on the entire portfolio. The target ranges of allocation of assets are as follows:
| | | | |
Total Equities | | | 40 — 75 | % |
Total Debt Securities | | | 20 — 60 | % |
Other | | | 0 — 10 | % |
We anticipate that the long-term asset allocation on average will approximate the targeted allocation. Actual asset allocations are reviewed and the pension plans’ investments are rebalanced to reflect the targeted allocation when considered appropriate.
An annual rate of increase of 9.5% in the per capita cost of health care benefits was assumed for 2008 for covered employees. The rate was assumed to decrease gradually to 5.5% in 2017 and remain at that level.
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 $77.4 million, $65.6 million, and $50.8 million, respectively as of December 31, 2008 and $72.9 million, $57.5 million, and $61.6 million, respectively as of December 31, 2007.
We estimate that the future benefits payable for the retirement and post-retirement plans in place are as follows (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, | |
| | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 - 2018 | |
|
Pension Benefits | | $ | 1,590 | | | $ | 1,869 | | | $ | 2,227 | | | $ | 2,859 | | | $ | 3,167 | | | $ | 17,783 | |
Other Benefits (Net of Medicare Part D Subsidy) | | $ | 650 | | | $ | 666 | | | $ | 692 | | | $ | 712 | | | $ | 728 | | | $ | 3,043 | |
Attributable to Medicare Part D Subsidy | | $ | (38 | ) | | $ | (40 | ) | | $ | (41 | ) | | $ | (42 | ) | | $ | (42 | ) | | $ | (174 | ) |
117118
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —– (Continued)
Pension costsThe following sets forth the types of assets measured at fair value and a brief description of the valuation technique for our defined benefit plans and other post-retirement benefit plans included the following components (in thousands):each asset type:
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | | Other Benefits | |
| | For the Year
| | | For the Year
| | | For the Year
| | | For the Year
| |
| | Ended
| | | Ended
| | | Ended
| | | Ended
| |
| | December 31,
| | | December 31,
| | | December 31,
| | | December 31,
| |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | |
|
Components of Net Periodic Benefit Cost: | | | | | | | | | | | | | | | | |
Service cost | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Interest cost | | | 4,705 | | | | 4,582 | | | | 549 | | | | 768 | |
Expected return on plan assets | | | (4,728 | ) | | | (4,430 | ) | | | — | | | | — | |
Amortization of net actuarial (gain) loss | | | (524 | ) | | | — | | | | (154 | ) | | | 105 | |
| | | | | | | | | | | | | | | | |
Net periodic benefit cost | | | (547 | ) | | | 152 | | | | 395 | | | | 873 | |
SFAS 88 settlement cost(1) | | | 65 | | | | 18 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Final net periodic benefit cost | | $ | (482 | ) | | $ | 170 | | | $ | 395 | | | $ | 873 | |
| | | | | | | | | | | | | | | | |
| | | | |
Type of Fund | | Types of Investments | | Valuation Technique |
|
|
U.S. Stock Funds | | Funds comprised of domestic equity securities. | | Securities are typically priced using the closing price from the applicable exchange, such as the NYSE, NASDAQ, etc. |
|
|
U.S. Bond Funds | | Funds comprised of domestic fixed income securities. | | Securities are priced by a third-party evaluation service using inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads. |
|
|
International Stock Funds | | Funds comprised of international equity securities. | | Securities are priced using the closing price from the local international stock exchange, such as the International Stock Index. |
|
|
Real Estate Funds | | Comprised of real estate investments either directly owned or through partnership interests and mortgage and other loans on income producing real estate. | | The fair value of real estate properties is determined quarterly through an independent appraisal process utilizing traditional real estate valuation methodologies. |
|
|
Short-Term Funds | | Portfolios comprised of short-term securities. | | Securities are valued initially at cost and thereafter adjusted for amortization of any discount or premium, i.e. amortized cost, which approximates fair value. |
|
|
The fair value of pension plan assets, by asset category, is as follows:
| | | | | | | | | | | | | | | | |
| | Fair Value Measurements as of December 31, 2009 | |
| | | | | Quoted Market
| | | | | | | |
| | | | | Prices in Active
| | | | | | Significant
| |
| | | | | Markets for
| | | Significant Other
| | | Unobservable
| |
| | | | | Identical Assets
| | | Observable Inputs
| | | Inputs
| |
| | Total | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
|
Equity securities: | | | | | | | | | | | | | | | | |
U.S. companies(a) | | $ | 32,226 | | | $ | — | | | $ | 32,226 | | | $ | — | |
International companies(b) | | | 6,859 | | | | — | | | | 6,859 | | | | — | |
U.S. Bonds(c) | | | 23,179 | | | | — | | | | 23,179 | | | | — | |
Real estate(d) | | | 1,736 | | | | — | | | | 1,736 | | | | — | |
Short-term securities | | | 252 | | | | — | | | | 252 | | | | — | |
| | | | | | | | | | | | | | | | |
Total pension plan assets, at fair value | | $ | 64,252 | | | $ | — | | | $ | 64,252 | | | $ | — | |
| | | | | | | | | | | | | | | | |
| | |
(1)(a) | | SFAS No. 88, “Employers’ Accounting for SettlementsApproximately 50% of the pension plan assets are in U.S. Stock Funds held in trusts, which are comprised of a well diversified portfolio of U.S. large-cap and Curtailmentsmid-cap companies. |
(b) | | Approximately 11% of Defined Benefit Pension Plansthe pension plan assets are in International Equity Funds held in trusts, of which approximately 55% is invested in equity securities of foreign companies primarily located in the United Kingdom and for Termination Benefits” (“SFAS 88”).Europe. The remaining 45% is invested in equity securities of foreign companies primarily in growth markets located in the United Kingdom and Europe or emerging markets in Asia and Latin America. |
(c) | | Approximately 36% of the pension plan assets are in U.S. Bond Funds held in trusts, which are primarily invested in U.S. Government obligations, U.S. Agency securities and corporate debt securities with an investment grade of A or better. |
(d) | | Approximately 3% of the pension plan assets are in Real Estate Funds held in trusts, which are comprised primarily of real estate investments either directly owned or through partnership interests and mortgage and other loans on income producing real estate. |
119
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage point change in the assumed health care trend rate would have the following effects (in thousands):COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| | | | | | | | |
| | One-Percentage
| | | One-Percentage
| |
| | Point Increase | | | Point Decrease | |
|
Effect on total service and interest cost components | | $ | 34 | | | $ | (24 | ) |
Effect on postretirement benefit obligation | | $ | 454 | | | $ | (401 | ) |
| |
Note 17.NOTE 18. | Stock-Based Award PlansSTOCK-BASED AWARD PLANS |
Stock-Based Compensation
We recognize stock-based compensation expense in accordance with the provisions of SFAS 123R. Stock-based compensation expenseaccounting standards for all stock-based compensation awards granted after December 31, 2005 is based onin effect at the grant date fair value estimated in accordance with the provisions of SFAS 123R. For stock-based compensation awards granted prior to, but not yet vested as of December 31, 2005, stock-based compensation expense is based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation.”grant.
We received $0.6 million, $0.3 million, $0.8 million, and $1.1$0.8 million from the exercise of non-qualified stock options in the years ended December 31, 2009, 2008, 2007, and 20062007 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 20082009 and 20072008 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.
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 and restricted stock awards expected to vest by using an estimate of expected forfeitures. TheWe review the forfeiture rates at least annually and revise compensation expense, if necessary. Prior to the fourth quarter of 2009, the range fromfor forfeiture rates was 8% to 15% depending. During the fourth quarter of 2009, we reviewed the forfeiture rates and modified the rate to 10%. The cumulative effect of the change in the forfeiture rate to compensation expense did not have a material effect on the typeour financial results of award and the vesting period.
118
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)operations.
Stock-Based Award Plans
We adopted the Covanta Holding Corporation Equity Award Plan for Employees and Officers (the “Employees Plan”) and the Covanta Holding Corporation Equity Award Plan for Directors (the “Directors Plan”) (collectively, the “Award Plans”), effective with stockholder approval on October 5, 2004. On July 25, 2005, our Board of Directors approved and on September 19, 2005, our stockholders approved the amendment to the Employees Plan to authorize the issuance of an additional 2,000,000 shares. The 1995 Stock and Incentive Plan (the “1995 Plan”) was terminated with respect to any future awards under such plan on October 5, 2004 upon stockholder approval of the Award Plans. The 1995 Plan will remain in effect until all awards have been satisfied or expired. On February 21, 2008, our Board of Directors approved and on May 1, 2008, our stockholders approved the amendment to the Employees Plan and Directors Plan to authorize the issuance of an additional 6,000,000 shares and 300,000 shares of common stock, respectively. On February 26, 2009, our Board of Directors approved and on May 7, 2009, our stockholders approved the amendment to the Employees Plan and Directors Plan to permit us to issue additional types of long-term incentive performance awards under the Award Plans in the form of restricted stock units, performance shares and performance units.
The purpose of the Award Plans 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 Award Plans provide for awards to be made in the form of (a) shares of restricted stock, (b) restricted stock units, (c) incentive stock options, (c)(d) non-qualified stock options, (d)(e) stock appreciation rights, (e)(f) performance awards, or (f)(g) other stock-based awards which relate to or serve a similar function to the awards described above. Awards may be made on a stand alone, combination or tandem basis. The maximum aggregate number of shares of common stock available for issuance is 12,000,000 under the Employees Plan and 700,000 under the Directors Plan.
Restricted Stock AwardsInterest Rate Swaps
Restricted stock awards that have been issuedOn August 20, 2009, one of our client communities refinanced project debt ($63.7 million outstanding) and we terminated a related interest rate swap ($9.8 million liability) with the proceeds from new bonds and cash on hand. Prior 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 rightthis refinancing, we had an interest rate swap agreement related to the stock (“nonvested”) untilexisting project debt that economically fixed the requisiteinterest rate on the adjustable-rate revenue bonds. Any payments made or received under the swap agreement, including amounts upon termination, were included as an explicit component of the client community’s obligation under the related service period has been renderedagreement. Therefore, all payments made or received under the required financial performance factor has been reached for each pre-determined vesting date. A percentageswap agreement were a pass through to the client community. The swap agreement resulted in increased debt service expense, which is a pass through to the client community, of each employee restricted stock awards granted have financial performance factors. 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$2.1 million, $2.1 million, and $1.2 million for the respective vesting period.years ended December 31, 2009, 2008 and 2007, respectively.
Restricted stock awardsWe were required, under financing arrangements in effect from June 24, 2005 to employeesFebruary 9, 2007, to enter into hedging arrangements with respect to a portion of our exposure to interest rate changes with respect to our borrowing under the previously existing credit facilities. In connection with the refinancing of our previously existing credit facilities, the interest rate swap agreements were settled on February 9, 2007. We recognized a gain associated with the settlement of our interest rate swap agreements of $3.4 million, pre-tax, for the year ended December 31, 2007.
| |
NOTE 15. | SUPPLEMENTARY FINANCIAL INFORMATION |
Revenues and Unbilled Service Receivables
The following table summarizes the components of waste and service revenues for the periods presented below (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
|
Waste and service revenues unrelated to project debt | | $ | 840,352 | | | $ | 836,115 | | | $ | 764,560 | |
Revenue earned explicitly to service project debt-principal | | | 56,986 | | | | 72,229 | | | | 69,163 | |
Revenue earned explicitly to service project debt-interest | | | 22,266 | | | | 26,183 | | | | 30,673 | |
| | | | | | | | | | | | |
Total waste and service revenues | | $ | 919,604 | | | $ | 934,527 | | | $ | 864,396 | |
| | | | | | | | | | | | |
Under some of our service agreements, we bill municipalities fees to service project debt (principal and interest). The amounts billed are subject to forfeiture if the employee is not employed on the vesting date. Restricted stock awards issued to directors prior to 2006 were subject to the same forfeiture restrictions as are applicable to employees. Restricted stock awards issued to directors in 2006 and thereafter 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 assumed 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 or to receive dividends, when issued). Commencing with share-based stock awards granted in 2007, we calculated the fair value of share-based stock awards based on the closing priceactual principal amortization schedule for the project bonds. Regardless of the amounts billed to client communities relating to project debt principal, we recognize revenue earned explicitly to service project debt principal on a levelized basis over the term of the applicable agreement. In the beginning of the agreement, principal billed is less than the amount of levelized revenue recognized related to principal and we record an unbilled service receivable asset. At some point during the agreement, the amount we bill will exceed the levelized revenue and the unbilled service receivable begins to reduce, and ultimately becomes nil at the end of the contract.
In the final year(s) of a contract, cash is utilized from debt service reserve accounts to pay remaining principal amounts due to project bondholders and such amounts are no longer billed to or paid by municipalities. Generally, therefore, in the last
109
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
year of the applicable agreement, little or no cash is received from municipalities relating to project debt, while our levelized service revenue continues to be recognized until the expiration date of the awardterm of the agreement.
Other Operating Expenses
The components of other operating expenses are as follows (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
|
Construction costs | | $ | 26,707 | | | $ | 50,611 | | | $ | 55,675 | |
Insurance subsidiary operating expenses(1) | | | 21,258 | | | | 12,641 | | | | 10,699 | |
Insurance recoveries | | | (276 | ) | | | (3,934 | ) | | | (1,909 | ) |
Loss on the retirement of fixed assets | | | 1,040 | | | | 7,475 | | | | 1,940 | |
Foreign exchange (gain) loss | | | (9 | ) | | | 1,899 | | | | (1,719 | ) |
Other | | | (752 | ) | | | (1,991 | ) | | | (4,047 | ) |
| | | | | | | | | | | | |
Total other operating expenses | | $ | 47,968 | | | $ | 66,701 | | | $ | 60,639 | |
| | | | | | | | | | | | |
| | |
| (1) | Insurance subsidiary operating expenses are primarily comprised of increased incurred but not reported loss reserves, loss adjustment expenses and policy acquisition costs. |
Semass Fire
On March 31, 2007, our SEMASS energy-from-waste facility located in Rochester, Massachusetts experienced a fire in the front-end receiving portion of the facility. Damage was granted. Priorextensive to 2007,this portion of the facility and operations at the facility were suspended completely for approximately 20 days. As a result of this loss, we calculatedrecorded an asset impairment of $17.3 million, pre-tax, which represented the fairnet book value of the assets destroyed.
The cost of repair or replacement, and business interruption losses, are insured under the terms of applicable insurance policies, subject to deductibles. Insurance recoveries were recorded as insurance recoveries, net of write-down of assets where such recoveries relate to repair and reconstruction costs, or as a reduction to plant operating expenses where such recoveries relate to other costs or business interruption losses. We recorded insurance recoveries in our share-based stock awards based on the averageconsolidated statements of income and received cash proceeds in settlement of these claims as follows (in millions):
| | | | | | | | | | | | | | | | |
| | Insurance Recoveries
| | | | |
| | Recorded | | | Cash Proceeds Received | |
| | For the Years Ended December 31, | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | |
|
Repair and reconstruction costs (Insurance recoveries, net of write-down of assets) | | $ | 8.3 | | | $ | 17.3 | | | $ | 16.2 | | | $ | 9.4 | |
Clean-up costs (reduction to Plant operating expenses) | | $ | — | | | $ | 2.7 | | | $ | — | | | $ | 2.7 | |
Business interruption losses (reduction to Plant operating expenses) | | $ | 5.2 | | | $ | 2.0 | | | $ | 7.2 | | | $ | — | |
Non-cash convertible debt related expense
The components of non-cash convertible debt related expense are as follows (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
|
Debt discount accretion related to the Debentures | | $ | 19,327 | | | $ | 17,979 | | | $ | 15,377 | |
Debt discount accretion related to the Notes | | | 11,956 | | | | — | | | | — | |
Fair value changes related to the Note Hedge | | | (11,165 | ) | | | — | | | | — | |
Fair value changes related to the Cash Conversion Option | | | 4,172 | | | | — | | | | — | |
| | | | | | | | | | | | |
Total non-cash convertible debt related expense | | $ | 24,290 | | | $ | 17,979 | | | $ | 15,377 | |
| | | | | | | | | | | | |
110
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Selected Supplementary Balance Sheet Information
Selected supplementary balance sheet information is as follows (in thousands):
| | | | | | | | |
| | As of December 31, | |
| | 2009 | | | 2008 | |
|
Interest rate swap (Note 14) | | $ | — | | | $ | 13,984 | |
Contract acquisition costs | | | 13,762 | | | | 10,351 | |
Reinsurance recoverable on unpaid losses (Note 1) | | | 12,325 | | | | 9,155 | |
Deferred financing costs | | | 17,737 | | | | 10,191 | |
Note Hedge (Note 11) | | | 123,543 | | | | — | |
Spare parts | | | 16,490 | | | | 16,631 | |
Other noncurrent receivables | | | 32,705 | | | | 21,121 | |
Restricted funds for pre-petition tax liabilities (Note 1) | | | 20,243 | | | | 20,419 | |
Prepaid expenses | | | 58,745 | | | | 27,655 | |
Other | | | 10,816 | | | | 10,037 | |
| | | | | | | | |
Total Other Noncurrent Assets | | $ | 306,366 | | | $ | 139,544 | |
| | | | | | | | |
Interest payable | | $ | 15,783 | | | $ | 16,328 | |
Deferred income taxes | | | — | | | | 17,752 | |
Payroll and payroll taxes | | | 37,758 | | | | 33,840 | |
Accrued liabilities to client communities | | | 35,836 | | | | 46,245 | |
Operating expenses | | | 86,011 | | | | 68,420 | |
Other | | | 42,333 | | | | 32,461 | |
| | | | | | | | |
Total Accrued Expenses and Other Current Liabilities | | $ | 217,721 | | | $ | 215,046 | |
| | | | | | | | |
Deferred revenue | | $ | 3,681 | | | $ | 4,345 | |
Interest rate swap (Note 14) | | | — | | | | 13,984 | |
Benefit obligations (Note 17) | | | 16,014 | | | | 35,110 | |
Asset retirement obligations (Note 1) | | | 26,076 | | | | 25,911 | |
Tax liabilities for uncertain tax positions (Note 16) | | | 32,991 | | | | 33,965 | |
Insurance loss and loss adjustment reserves (Note 1) | | | 34,692 | | | | 29,362 | |
Other | | | 28,306 | | | | 23,204 | |
| | | | | | | | |
Total Other Noncurrent Liabilities | | $ | 141,760 | | | $ | 165,881 | |
| | | | | | | | |
We file a federal consolidated income tax return with our eligible subsidiaries. Covanta Lake II, Inc. files outside of the high and low price onconsolidated return group. Our federal consolidated income tax return also includes the day prior to the grant date.taxable results of certain grantor trusts described below.
DuringThe components of income tax expense were as follows (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
|
Current: | | | | | | | | | | | | |
Federal | | $ | (1,221 | ) | | $ | (1,445 | ) | | $ | 3,373 | |
State | | | 10,204 | | | | 17,189 | | | | 15,186 | |
Foreign | | | 8,935 | | | | 5,657 | | | | 6,612 | |
| | | | | | | | | | | | |
Total current | | | 17,918 | | | | 21,401 | | | | 25,171 | |
Deferred: | | | | | | | | | | | | |
Federal | | | 18,789 | | | | 67,282 | | | | 3,411 | |
State | | | 14,303 | | | | (3,998 | ) | | | (4,213 | ) |
Foreign | | | (966 | ) | | | (124 | ) | | | 114 | |
| | | | | | | | | | | | |
Total deferred | | | 32,126 | | | | 63,160 | | | | (688 | ) |
| | | | | | | | | | | | |
Total income tax expense | | $ | 50,044 | | | $ | 84,561 | | | $ | 24,483 | |
| | | | | | | | | | | | |
111
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Domestic and foreign pre-tax income was as follows (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
|
Domestic | | $ | 116,486 | | | $ | 179,617 | | | $ | 110,513 | |
Foreign | | | 20,950 | | | | 17,282 | | | | 22,123 | |
| | | | | | | | | | | | |
Total | | $ | 137,436 | | | $ | 196,899 | | | $ | 132,636 | |
| | | | | | | | | | | | |
The effective income tax rate was 36.4%, 42.9% and 18.5% for the years ended December 31, 2009, 2008, and 2007, respectively. The decrease in the effective tax rate for the year ended December 31, 2009, compared to the year ended December 31, 2008, is primarily related to lower pre-tax income combined with an increase in production tax credits, and changes in the valuation allowance. The increase in the effective tax rate for the year ended December 31, 2008, compared to the year ended December 31, 2007, is primarily related to taxes associated with the wind down of the grantor trusts and additional liability for uncertain tax positions in 2008, and the tax benefit resulting from the release of valuation allowance from previously unrecognized federal and state net operating loss carryforwards (“NOLs”) in 2007. See rate reconciliation table below for further details.
We recognize benefits from a foreign tax holiday in India. Our two Indian power project companies began taking advantage of a tax holiday under Indian law in April of 2005. The Indian tax holiday permits the companies to use the alternative tax rate, currently approximately 17%, for a 10 year period.
The aggregate benefit and affect on diluted earnings per share was as follows (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
|
Aggregate benefit | | $ | 2,954 | | | $ | 3,257 | | | $ | 4,433 | |
Affect on diluted EPS | | $ | 0.02 | | | $ | 0.02 | | | $ | 0.03 | |
A reconciliation of our income tax expense at the federal statutory income tax rate of 35% to income tax expense at the effective tax rate is as follows (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
|
Income tax expense at the federal statutory rate | | $ | 48,103 | | | $ | 68,915 | | | $ | 46,423 | |
State and other tax expense | | | 16,818 | | | | 9,926 | | | | 7,797 | |
Change in valuation allowance | | | (4,780 | ) | | | 10,610 | | | | (34,968 | ) |
Grantor trust income(loss) | | | 896 | | | | (104,443 | ) | | | 5,580 | |
Subpart F income and foreign dividends | | | 2,204 | | | | 1,491 | | | | 90 | |
Taxes on foreign earnings | | | 526 | | | | (524 | ) | | | (1,132 | ) |
Production tax credits | | | (13,389 | ) | | | (8,529 | ) | | | (4,525 | ) |
Expiration of tax attributes | | | — | | | | — | | | | 5,977 | |
Liability for uncertain tax positions | | | (1,361 | ) | | | 107,156 | | | | 898 | |
Other, net | | | 1,027 | | | | (41 | ) | | | (1,657 | ) |
| | | | | | | | | | | | |
Total income tax expense | | $ | 50,044 | | | $ | 84,561 | | | $ | 24,483 | |
| | | | | | | | | | | | |
112
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We had consolidated federal NOLs estimated to be approximately $544.9 million for federal income tax purposes as of the end of 2009. These consolidated federal NOLs will expire, if not used, in the following amounts in the following years (in thousands):
| | | | |
| | Amount of
| |
| | Carryforward
| |
| | Expiring | |
|
2010 | | $ | — | |
2011 | | | 3,330 | |
2012 | | | 38,255 | |
2019 | | | 33,635 | |
2022 | | | 26,931 | |
2023 | | | 108,331 | |
2024 | | | 212 | |
2025 | | | 203 | |
2026 | | | 260 | |
2027 | | | 391 | |
2028 | | | 333,372 | |
| | | | |
| | $ | 544,920 | |
| | | | |
In addition to the consolidated federal NOLs, we awardedhave state NOL carryforwards of $264.7 million, which expire between 2011 and 2027, capital loss carryforwards of $0.2 million expiring in 2013, and additional federal credit carryforwards of $47.5 million. These deferred tax assets are offset by a valuation allowance of $20.5 million.
As of December 31, 2009, we had a valuation allowance of $20.5 million on deferred tax assets. During 2009, we decreased our valuation allowance by $23.6 million related to the expiration of capital losses. During 2008, we increased our valuation allowance by $10.6 million related to capital losses, state NOLs, and a deferred tax asset established for certain employees 453,605deductions from the grantor trust. As of December 31, 2007, the reduction in the valuation allowance of $35.0 million primarily included a $31.4 million adjustment related to NOLs that were due to expire and were able to be utilized as a reduction to income tax expense. The remaining reduction in 2007 of the valuation allowance of $3.6 million related to previously unrecognized federal and state NOLs for our unconsolidated subsidiary Covanta Lake II, Inc.
The tax effects of temporary differences that give rise to the deferred tax assets and liabilities are presented as follows (in thousands):
| | | | | | | | |
| | As of December 31, | |
| | 2009 | | | 2008 | |
|
Deferred Tax Assets: | | | | | | | | |
Loss reserve discounting | | $ | 1,082 | | | $ | (1,568 | ) |
Capital loss carryforward | | | 90 | | | | 24,149 | |
Net operating loss carryforwards | | | 97,337 | | | | 109,989 | |
Accrued expenses | | | 19,294 | | | | 30,601 | |
Tax basis in bond and other costs | | | 21,470 | | | | 16,725 | |
Deferred tax assets attributable to pass-through entities | | | 9,869 | | | | 9,869 | |
Other | | | 866 | | | | 5,535 | |
AMT and other credit carryforwards | | | 47,462 | | | | 32,750 | |
| | | | | | | | |
Total gross deferred tax asset | | | 197,470 | | | | 228,050 | |
Less: valuation allowance | | | (20,461 | ) | | | (44,089 | ) |
| | | | | | | | |
Total deferred tax asset | | | 177,009 | | | | 183,961 | |
| | | | | | | | |
Deferred Tax Liabilities: | | | | | | | | |
Unbilled accounts receivable | | | 33,833 | | | | 5,713 | |
Property, plant and equipment | | | 486,414 | | | | 465,027 | |
Intangible assets | | | 87,802 | | | | 68,593 | |
Deferred tax liabilities attributable to pass-through entities | | | 57,996 | | | | 93,346 | |
Capitalized interest | | | 52,566 | | | | 43,953 | |
Prepaid expenses | | | 13,281 | | | | 11,218 | |
Other, net | | | 6,729 | | | | 7,782 | |
| | | | | | | | |
Total gross deferred tax liability | | | 738,621 | | | | 695,632 | |
| | | | | | | | |
Net deferred tax liability | | $ | (561,612 | ) | | $ | (511,671 | ) |
| | | | | | | | |
113
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We adopted the permanent reinvestment exception whereby we will no longer provide for deferred taxes on the undistributed earnings of our international subsidiaries. We intend to permanently reinvest our international earnings outside of the United States in our existing international operations and in any new international business which may be developed or acquired. This policy resulted in an unrecognized deferred tax liability of approximately $39.7 million and $32.7 million as of December 31, 2009 and 2008, respectively. Cumulative undistributed foreign earnings for which United States taxes were not provided were included in consolidated retained earnings in the amount of approximately $114.9 million and $94.8 million as of December 31, 2009 and 2008, respectively.
Deferred tax assets relating to tax benefits of employee stock option grants have been reduced to reflect exercises in the calendar year ended December 31, 2007. Some exercises resulted in tax deductions in excess of previously recorded benefits based on the option value at the time of grant (a “windfall”). Although these additional tax benefits or windfalls were reflected in the NOLs, the additional tax benefit associated with the windfall is not recognized until the deduction reduces taxes payable. Accordingly, since the tax benefit does not reduce our current taxes payable in 2008 due to the NOLs, these windfall tax benefits were not reflected in our NOLs in the deferred tax assets for 2009 and 2008. Windfalls included in NOLs but not reflected in deferred tax assets were $11.4 million and $14.4 million for 2009 and 2008, respectively.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
| | | | |
Balance as of January 1, 2007 | | $ | 24,483 | |
Additions based on tax positions related to the current year | | | 500 | |
Additions for tax positions of prior years | | | 398 | |
Reductions for tax positions of prior years | | | — | |
Settlements | | | — | |
| | | | |
Balance at December 31, 2007 | | $ | 25,381 | |
| | | | |
Additions based on tax positions related to the current year | | | 109,956 | |
Additions for tax positions of prior years | | | 717 | |
Reductions for lapse in applicable statute of limitations | | | (280 | ) |
Reductions for tax positions of prior years | | | (3,237 | ) |
| | | | |
Balance at December 31, 2008 | | $ | 132,537 | |
| | | | |
Additions based on tax positions related to the current year | | $ | — | |
Additions for tax positions of prior years | | | 976 | |
Reductions for lapse in applicable statute of limitations | | | (2,337 | ) |
Reductions for tax positions of prior years | | | — | |
| | | | |
Balance at December 31, 2009 | | $ | 131,176 | |
| | | | |
The liability for uncertain tax positions, exclusive of interest and penalties, was $131.2 million and $132.5 million as of December 31, 2009 and 2008, respectively. Included in the balance of uncertain tax benefits as of December 31, 2009 and 2008 are potential benefits of $114.7 million and $114.8 million, respectively, that, if recognized, would affect the effective tax rate. The liability for uncertain tax positions may decrease by approximately $5.8 million in the next 12 months with respect to the expiration of statutes.
We record interest accrued on liabilities for uncertain tax positions and penalties as part of the tax provision. For the year ended December 31, 2009 and 2008, we recognized $0.1 million and $0.9 million, respectively, of interest on liabilities for uncertain tax positions. As of December 31, 2009 and 2008, we had accrued interest and penalties associated with liabilities for uncertain tax positions of $8.4 million and $8.1 million, respectively.
As issues are examined by the Internal Revenue Service (“IRS”) and state auditors, we may decide to adjust the existing FIN 48 liability for issues that were not deemed an exposure at the time we adopted accounting standards related to the accounting for uncertainty in income taxes. Accordingly, we will continue to monitor the results of audits and adjust the liability as needed. Federal income tax returns for Covanta Energy are closed for the years through 2003. However, to the extent NOLs are utilized from earlier years, federal income tax returns for Covanta Holding Corporation, formerly known as Danielson Holding Corporation, are still open. The tax returns of our subsidiary ARC Holdings had been under an IRS examination for 2004 and 2005. This examination was related to ARC Holdings’ refund requests related to NOL carryback claims from tax years prior to our acquisition of ARC Holdings in 2005 that required the approval of the Joint Committee. The audit was concluded with no change and the Joint Committee approved the refund, which we received during the third
114
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
quarter of 2009. State income tax returns are generally subject to examination for a period of three to five years after the filing of the respective 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 (which were subsidiaries of our predecessor, which was 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.
In January 2006, we executed agreements with the California Commissioner of Insurance (the “California Commissioner”), who administers the majority of the grantor trusts, regarding the final administration and conclusion of such trusts. The agreements, which were approved by the California state court overseeing the Mission insolvency proceedings (the “Mission Court”), settle matters that had been in dispute regarding the historic rights and obligations relating to the conclusion of the grantor trusts. These include the treatment of certain claims against the grantor trusts which are entitled to distributions of an aggregate of 1,572,625 shares of restrictedour common stock awards. The restricted stock awards will be expensed overissued to the requisite service period, subject to an assumed 10% percent forfeiture rate. The termsCalifornia Commissioner in 1990 under existing agreements entered into at the inception of the restrictedMission insurance entities’ reorganization.
Pursuant to a claims evaluation process that we administered pursuant to such agreements with, and overseen by, the Conservation and Liquidation Office, all claim holders entitled to receive distributions of shares of our common stock awards include two vesting provisions; one based onfrom the California Commissioner were identified. As a performance factor and continued service (applicableresult of this process, approximately $1.135 billion in claims were approved pursuant to 66%orders of the award) and one based solely on continued service (applicable to 34%Mission Court. As part of the award). If all performancewind down process and service criteria are satisfied,final claims evaluation by the awards vest during March of 2009, 2010Conservation and 2011.
On May 1, 2008,Liquidation Office, and in accordance with our existing programthe parties’ contractual obligations and the requirements of the Internal Revenue Code governing such exchanges of stock for annual director compensation, we awarded 40,500debt, the California Commissioner distributed shares of restrictedour common stock underin settlement of these claims. This distribution, which is among the Directors Plan. final steps necessary to conclude the insolvency cases relating to the trusts being administered by the California Commissioner, was conducted in December 2008 pursuant to orders of the Mission Court. These events resulted in our recognition of $515 million of additional NOLs in 2008, or a deferred tax asset of $180 million. Of this $180 million deferred tax asset, $111 million was previously recognized on the balance sheet either in December 2006 or September 2008.
We have discussed with the Director of the Division of Insurance of the State of Missouri (the “Missouri Director”), who administers the balance of the grantor trusts relating to the Mission Insurance entities, similar arrangements for distribution of the remaining 154,756 shares of our common stock by the Missouri Director to claimants of the Missouri grantor trusts. Given the claims activity relating to the Missouri grantor trusts, and the lack of disputed matters with the Missouri Director, we do not expect to enter into additional or amended contractual arrangements with the Missouri Director with respect to the final administration of the Missouri grantor trusts or the related distribution by the Missouri Director of shares of our common stock.
While we cannot predict with certainty 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 nor the final administration by the Missouri Director will result in a material reduction in available NOLs.
| |
NOTE 17. | 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.
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 all defined contribution
115
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
plans were $14.5 million, $13.0 million, and $12.2 million for the years ended December 31, 2009, 2008, and 2007, respectively.
Pension and Postretirement Benefit Obligations
Effective December 31, 2005, we froze service accruals in the defined benefit pension plan for employees in the Untied States who do not participate in retirement plans offered by collective bargaining units. All active employees who were eligible participants in the defined benefit pension plan, as of December 31, 2005, became 100% vested and have a non-forfeitable right to these benefits as of such date. Effective January 1, 2010, the defined benefit pension plan was further amended to exclude future compensation increases received by eligible participants after December 31, 2009.
Assumptions
Costs and the related obligations and assets arising from the pension and other postretirement benefit plans are accounted for based on actuarially-determined estimates. On an annual basis, we evaluate the assumed discount rate and expected return on assets used to determine pension benefit and other postretirement benefit obligations. The discount rate is determined based on the timing of future benefit payments and expected rates of return currently available on high quality fixed income securities whose cash flows match the timing and amount of future benefit payments of the plan. We record a pension plan liability equal to the amount by which the present value of the projected benefit obligations (using the discount rate) exceeded the fair value of pension assets.
The discount rate and net gain (loss) recognized are as follows:
| | | | | | | | | | | | |
| | | | Net Gain (Loss)
| | Net Gain (Loss),
|
| | Discount Rate | | Recognized in AOCI | | Net of Tax, Recognized in AOCI |
| | (dollars in millions) |
|
Year Ended December 31, 2009 | | | 6.00 | % | | $ | 14.6 | | | $ | 8.8 | |
Year Ended December 31, 2008 | | | 6.25 | % | | $ | (20.0 | ) | | $ | (13.2 | ) |
Year Ended December 31, 2007 | | | 6.50 | % | | $ | 14.5 | | | $ | 9.4 | |
An annual rate of increase of 9.5% in the per capita cost of health care benefits was assumed for 2009 for covered employees. The rate was assumed to decrease gradually to 5.5% in 2017 and remain at that level. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage point change in the assumed health care trend rate would have the following effects (in thousands):
| | | | | | | | |
| | One-Percentage
| | One-Percentage
|
| | Point Increase | | Point Decrease |
|
Effect on total service and interest cost components | | $ | 28 | | | $ | (25 | ) |
Effect on postretirement benefit obligation | | $ | 466 | | | $ | (411 | ) |
116
COVANTA HOLDING CORPORATION
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 defined benefit pension and other postretirement benefit plans, the funded status (using a December 31 measurement date) of the plans and the related amounts recognized in our consolidated balance sheets (in thousands, except percentages as noted):
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
| | For the Year
| | For the Year
| | For the Year
| | For the Year
|
| | Ended
| | Ended
| | Ended
| | Ended
|
| | December 31,
| | December 31,
| | December 31,
| | December 31,
|
| | 2009 | | 2008 | | 2009 | | 2008 |
|
Change in benefit obligation: | | | | | | | | | | | | | | | | |
Benefit obligation at beginning of year | | $ | 77,352 | | | $ | 72,895 | | | $ | 8,161 | | | $ | 8,810 | |
Service cost | | | — | | | | — | | | | — | | | | — | |
Interest cost | | | 4,786 | | | | 4,705 | | | | 490 | | | | 549 | |
Amendments | | | (11,066 | ) | | | 663 | | | | — | | | | — | |
Actuarial loss (gain) | | | 1,532 | | | | 541 | | | | 403 | | | | (143 | ) |
Benefits paid | | | (1,371 | ) | | | (1,452 | ) | | | (809 | ) | | | (1,055 | ) |
| | | | | | | | | | | | | | | | |
Benefit obligation at end of year | | $ | 71,233 | | | $ | 77,352 | | | $ | 8,245 | | | $ | 8,161 | |
| | | | | | | | | | | | | | | | |
Change in plan assets: | | | | | | | | | | | | | | | | |
Plan assets at fair value at beginning of year | | $ | 50,756 | | | $ | 61,639 | | | $ | — | | | $ | — | |
Actual return on plan assets | | | 9,641 | | | | (13,596 | ) | | | — | | | | — | |
Contributions | | | 5,226 | | | | 4,165 | | | | 809 | | | | 1,055 | |
Benefits paid | | | (1,371 | ) | | | (1,452 | ) | | | (809 | ) | | | (1,055 | ) |
| | | | | | | | | | | | | | | | |
Plan assets at fair value at end of year | | $ | 64,252 | | | $ | 50,756 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | |
Reconciliation of accrued benefit liability and net amount recognized: | | | | | | | | | | | | | | | | |
Funded status of the plan | | $ | (6,981 | ) | | $ | (26,596 | ) | | $ | (8,245 | ) | | $ | (8,161 | ) |
Unrecognized net gain | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Net amount recognized | | $ | (6,981 | ) | | $ | (26,596 | ) | | $ | (8,245 | ) | | $ | (8,161 | ) |
| | | | | | | | | | | | | | | | |
Accumulated other comprehensive (income) loss recognized: | | | | | | | | | | | | | | | | |
Net actuarial loss (gain) | | $ | 634 | | | $ | 4,681 | | | $ | (1,807 | ) | | $ | (2,360 | ) |
Net prior service (credit) cost | | | (10,478 | ) | | | 663 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Total as of December 31, 2009 | | $ | (9,844 | ) | | $ | 5,344 | | | $ | (1,807 | ) | | $ | (2,360 | ) |
| | | | | | | | | | | | | | | | |
Weighted average assumptions used to determine net periodic benefit expense for years ending December 31: | | | | | | | | | | | | | | | | |
Discount rate | | | 6.25 | % | | | 6.50 | % | | | 6.25 | % | | | 6.50 | % |
Expected return on plan assets | | | 7.50 | % | | | 7.50 | % | | | N/A | | | | N/A | |
Rate of compensation increase | | | 4.00 | % | | | 4.00 | % | | | N/A | | | | N/A | |
Weighted average assumptions used to determine projected benefit obligations as of December 31: | | | | | | | | | | | | | | | | |
Discount rate | | | 6.00 | % | | | 6.25 | % | | | 6.00 | % | | | 6.25 | % |
Rate of compensation increase | | | N/A | | | | 4.00 | % | | | N/A | | | | N/A | |
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 $71.2 million, $71.2 million and $64.3 million, respectively as of December 31, 2009 and $77.4 million, $65.6 million, and $50.8 million, respectively as of December 31, 2008.
We estimate that the service vesting conditionfuture benefits payable for the retirement and postretirement plans in place are as follows (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, | |
| | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 - 2019 | |
|
Pension Benefits | | $ | 1,715 | | | $ | 1,988 | | | $ | 2,611 | | | $ | 2,923 | | | $ | 3,059 | | | $ | 17,723 | |
Other Benefits (Net of Medicare Part D Subsidy) | | $ | 667 | | | $ | 695 | | | $ | 700 | | | $ | 715 | | | $ | 725 | | | $ | 2,992 | |
Attributable to Medicare Part D Subsidy | | $ | (37 | ) | | $ | (38 | ) | | $ | (40 | ) | | $ | (40 | ) | | $ | (41 | ) | | $ | (166 | ) |
117
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Pension costs for our defined benefit plans and other post-retirement benefit plans included the following components (in thousands):
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | | Other Benefits | |
| | For the Year
| | | For the Year
| | | For the Year
| | | For the Year
| |
| | Ended
| | | Ended
| | | Ended
| | | Ended
| |
| | December 31,
| | | December 31,
| | | December 31,
| | | December 31,
| |
| | 2009 | | | 2008 | | | 2009 | | | 2008 | |
|
Components of Net Periodic Benefit Cost: | | | | | | | | | | | | | | | | |
Service cost | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Interest cost | | | 4,786 | | | | 4,705 | | | | 490 | | | | 549 | |
Expected return on plan assets | | | (3,900 | ) | | | (4,728 | ) | | | — | | | | — | |
Amortization of net prior service cost | | | 76 | | | | — | | | | — | | | | — | |
Amortization of net actuarial gain | | | (184 | ) | | | (524 | ) | | | (150 | ) | | | (154 | ) |
| | | | | | | | | | | | | | | | |
Net periodic benefit cost | | | 778 | | | | (547 | ) | | | 340 | | | | 395 | |
Settlement cost | | | 21 | | | | 65 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Final net periodic benefit cost | | $ | 799 | | | $ | (482 | ) | | $ | 340 | | | $ | 395 | |
| | | | | | | | | | | | | | | | |
Plan Assets
Plan assets had a fair value of $64.3 million and $50.8 million as of December 31, 2009 and 2008, respectively. The allocation of plan assets was as follows:
| | | | | | | | |
| | As of December 31, |
| | 2009 | | 2008 |
|
Total Equities | | | 61 | % | | | 45 | % |
Total Debt Securities | | | 36 | % | | | 49 | % |
Other | | | 3 | % | | | 6 | % |
| | | | | | | | |
Total | | | 100 | % | | | 100 | % |
| | | | | | | | |
Our expected return on plan assets assumption is based on historical experience and by evaluating input from the trustee managing the plan assets. The expected return on the plan assets is also impacted by the target allocation of assets, which is based on our goal of earning the highest rate of return while maintaining risk at acceptable levels. The plan strives to have assets sufficiently diversified so that adverse or unexpected results from one security class will not have an unduly detrimental impact on the entire portfolio. The target ranges of allocation of assets are as follows:
| | | | |
Total Equities | | | 40 — 75 | % |
Total Debt Securities | | | 20 — 60 | % |
Other | | | 0 — 10 | % |
We anticipate that the long-term asset allocation on average will approximate the targeted allocation. Actual asset allocations are reviewed and the pension plans’ investments are rebalanced to reflect the targeted allocation when considered appropriate.
118
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following sets forth the types of assets measured at fair value and a brief description of the valuation technique for each asset type:
| | | | |
Type of Fund | | Types of Investments | | Valuation Technique |
|
|
U.S. Stock Funds | | Funds comprised of domestic equity securities. | | Securities are typically priced using the closing price from the applicable exchange, such as the NYSE, NASDAQ, etc. |
|
|
U.S. Bond Funds | | Funds comprised of domestic fixed income securities. | | Securities are priced by a third-party evaluation service using inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads. |
|
|
International Stock Funds | | Funds comprised of international equity securities. | | Securities are priced using the closing price from the local international stock exchange, such as the International Stock Index. |
|
|
Real Estate Funds | | Comprised of real estate investments either directly owned or through partnership interests and mortgage and other loans on income producing real estate. | | The fair value of real estate properties is determined quarterly through an independent appraisal process utilizing traditional real estate valuation methodologies. |
|
|
Short-Term Funds | | Portfolios comprised of short-term securities. | | Securities are valued initially at cost and thereafter adjusted for amortization of any discount or premium, i.e. amortized cost, which approximates fair value. |
|
|
The fair value of pension plan assets, by asset category, is as follows:
| | | | | | | | | | | | | | | | |
| | Fair Value Measurements as of December 31, 2009 | |
| | | | | Quoted Market
| | | | | | | |
| | | | | Prices in Active
| | | | | | Significant
| |
| | | | | Markets for
| | | Significant Other
| | | Unobservable
| |
| | | | | Identical Assets
| | | Observable Inputs
| | | Inputs
| |
| | Total | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
|
Equity securities: | | | | | | | | | | | | | | | | |
U.S. companies(a) | | $ | 32,226 | | | $ | — | | | $ | 32,226 | | | $ | — | |
International companies(b) | | | 6,859 | | | | — | | | | 6,859 | | | | — | |
U.S. Bonds(c) | | | 23,179 | | | | — | | | | 23,179 | | | | — | |
Real estate(d) | | | 1,736 | | | | — | | | | 1,736 | | | | — | |
Short-term securities | | | 252 | | | | — | | | | 252 | | | | — | |
| | | | | | | | | | | | | | | | |
Total pension plan assets, at fair value | | $ | 64,252 | | | $ | — | | | $ | 64,252 | | | $ | — | |
| | | | | | | | | | | | | | | | |
| | |
(a) | | Approximately 50% of the pension plan assets are in U.S. Stock Funds held in trusts, which are comprised of a well diversified portfolio of U.S. large-cap and mid-cap companies. |
(b) | | Approximately 11% of the pension plan assets are in International Equity Funds held in trusts, of which approximately 55% is invested in equity securities of foreign companies primarily located in the United Kingdom and Europe. The remaining 45% is invested in equity securities of foreign companies primarily in growth markets located in the United Kingdom and Europe or emerging markets in Asia and Latin America. |
(c) | | Approximately 36% of the pension plan assets are in U.S. Bond Funds held in trusts, which are primarily invested in U.S. Government obligations, U.S. Agency securities and corporate debt securities with an investment grade of A or better. |
(d) | | Approximately 3% of the pension plan assets are in Real Estate Funds held in trusts, which are comprised primarily of real estate investments either directly owned or through partnership interests and mortgage and other loans on income producing real estate. |
119
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —– (Continued)
restricted stock awards granted to the directors on May 1, 2008 to be non-substantive and, in accordance with SFAS 123R, recorded the entire fair value of the award as compensation expense on the grant date.
Changes in nonvested restricted stock awards during the year ended December 31, 2008 were as follows:
| | | | | | | | |
| | | | | Weighted-
| |
| | | | | Average
| |
| | Number of
| | | Grant Date
| |
| | Shares | | | Fair Value | |
|
Nonvested at December 31, 2007 | | | 812,826 | | | $ | 18.77 | |
Granted | | | 494,105 | | | | 26.37 | |
Vested | | | (428,656 | ) | | | 17.64 | |
Forfeited | | | (21,029 | ) | | | 23.17 | |
| | | | | | | | |
Nonvested at December 31, 2008 | | | 857,246 | | | | 23.61 | |
| | | | | | | | |
As of December 31, 2008, there was $10.6 million unrecognized stock-based compensation expense related to nonvested restricted stock awards. This expense is expected to be recognized over a period of up to three years. Total compensation expense for restricted stock awards was $9.5 million, $7.9 million, and $5.5 million for the years ended December 31, 2008, 2007 and 2006, respectively.
Stock Options
We have also awarded stock options to certain employees and directors. Stock options awarded to directors vest immediately. Stock options awarded to employees have typically vested annually over 3 to 5 years and expire over 10 years. On February 21, 2008 and March 31, 2008, we granted options to purchase an aggregate of 200,000 shares and 50,000 shares, respectively, of common stock. The options expire 10 years from the date of grant and vest in equal installments over five years commencing on March 17, 2009.
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. For the option awards granted prior to 2007, we determined an expected life of eight years in accordance with SFAS 123 and SFAS 123R. In December 2007, the SEC issued SAB No. 110, which permits use of the simplified method, as discussed in SAB No. 107, to determine the expected life of “plain vanilla” options. The expected life for the options issued in 2007 was determined using this “simplified method.” The fair value of the stock option awards granted during the year ended December 2008 was calculated using the following assumptions:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Stock
| | | Exercise
| | | Risk-Free
| | | Dividend
| | | Volatility
| | | Expected
| |
Grant Date | | Options | | | Price | | | Interest Rate | | | Yield | | | Expected (A) | | | Life (B) | |
|
February 21, 2008 | | | 200,000 | | | $ | 26.26 | | | | 3.387 | % | | | 0 | % | | | 28 | % | | | 6.54 years | |
March 31, 2008 | | | 50,000 | | | $ | 27.50 | | | | 2.977 | % | | | 0 | % | | | 31 | % | | | 6.48 years | |
| | |
(A) | | Expected volatility is based on implied volatility. |
|
(B) | | Simplified method per SAB 107 and 110. |
120
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes activity and balance information of the options under the Award Plans and 1995 Plan:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, | |
| | 2008 | | | 2007 | | | 2006 | |
| | | | | Weighted
| | | | | | Weighted
| | | | | | Weighted
| |
| | | | | Average
| | | | | | Average
| | | | | | Average
| |
| | | | | Exercise
| | | | | | Exercise
| | | | | | Exercise
| |
| | Shares | | | Price | | | Shares | | | Price | | | Shares | | | Price | |
|
1995 Stock Option Plan | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding at the beginning of the year | | | 108,426 | | | $ | 3.86 | | | | 178,426 | | | $ | 5.11 | | | | 315,093 | | | $ | 5.26 | |
Granted | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Exercised | | | — | | | | — | | | | 70,000 | | | | 7.06 | | | | 136,667 | | | | 5.45 | |
Forfeited | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding at the end of the year | | | 108,426 | | | $ | 3.86 | | | | 108,426 | | | $ | 3.86 | | | | 178,426 | | | $ | 5.11 | |
Options exercisable at year end | | | 108,426 | | | $ | 3.86 | | | | 108,426 | | | $ | 3.86 | | | | 178,426 | | | $ | 5.11 | |
Options available for future grant | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
2004 Stock Option Plan | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding at the beginning of the year | | | 2,553,443 | | | $ | 17.96 | | | | 851,238 | | | $ | 8.87 | | | | 928,115 | | | $ | 8.14 | |
Granted | | | 250,000 | | | | 26.51 | | | | 1,805,000 | | | | 22.14 | | | | 50,000 | | | | 20.35 | |
Exercised | | | 21,500 | | | | 12.18 | | | | 42,795 | | | | 7.43 | | | | 41,543 | | | | 9.19 | |
Forfeited | | | 12,000 | | | | 22.02 | | | | 60,000 | | | | 22.02 | | | | 85,334 | | | | 7.43 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding at the end of the year | | | 2,769,943 | | | $ | 18.76 | | | | 2,553,443 | | | $ | 17.96 | | | | 851,238 | | | $ | 8.87 | |
Options exercisable at year end | | | 1,126,543 | | | $ | 12.87 | | | | 500,617 | | | $ | 9.24 | | | | 216,572 | | | $ | 10.12 | |
Options available for future grant | | | 6,851,630 | | | | | | | | 1,295,735 | | | | | | | | 3,494,230 | | | | | |
As of December 31, 2008, options for shares were in the following price ranges:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Weighted
| | | | | | | |
| | | | | | | | Average
| | | | | | | |
| | Options Outstanding | | | Remaining
| | | Options Exercisable | |
| | Number of
| | | Weighted Average
| | | Contractual Life
| | | Number of
| | | Weighted Average
| |
Exercise Price Range | | Shares | | | Exercise Price | | | (Years) | | | Shares | | | Exercise Price | |
|
$1.45 - $5.31 | | | 108,426 | | | $ | 3.86 | | | | 3.23 | | | | 108,426 | | | $ | 3.86 | |
$7.43 | | | 637,271 | | | | 7.43 | | | | 5.80 | | | | 637,271 | | | | 7.43 | |
$12.90 | | | 106,672 | | | | 12.90 | | | | 6.70 | | | | 106,672 | | | | 12.90 | |
$20.35 - $22.02 | | | 1,726,000 | | | | 21.97 | | | | 8.20 | | | | 372,600 | | | | 21.80 | |
$24.80 - $28.34 | | | 300,000 | | | | 26.46 | | | | 9.50 | | | | 10,000 | | | | 26.22 | |
| | | | | | | | | | | | | | | | | | | | |
| | | 2,878,369 | | | | | | | | | | | | 1,234,969 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
The aggregate intrinsic value as of December 31, 2008 for options outstanding, options vested and expected to vest in the future and options exercisable was $10.8 million, $10.9 million, and $12.2 million, respectively. The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the closing stock price on the last trading day of 2008 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 2008 (December 31, 2008). The intrinsic value changes based on the fair market value of our common stock. Total intrinsic value of options exercised for the year ended as of December 31, 2008 was $0.3 million.
As of December 31, 2008, there were options to purchase 2,661,859 shares of common stock that had vested and were expected to vest in future periods at a weighted average exercise price of $17.87. The total fair value of options expensed was $5.3 million for the year ended December 31, 2008. As of December 31, 2008, there was $6.5 million of total unrecognized compensation expense related to stock options which is expected to be recognized over a weighted-average period of 3.4 years.
121
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
NoteNOTE 18. | Accumulated Other Comprehensive (Loss) IncomeSTOCK-BASED AWARD PLANS |
AOCI, net of income taxes, consists of the following (in thousands):
| | | | | | | | |
| | As of December 31, | |
| | 2008 | | | 2007 | |
|
Foreign currency translation | | $ | (5,233 | ) | | $ | 5,248 | |
Minimum pension liability | | | (765 | ) | | | (362 | ) |
Amortization of SFAS 158 unrecognized net actuarial (loss) gain | | | (2,122 | ) | | | 11,096 | |
Net unrealized (loss) gain on available-for-sale securities | | | (85 | ) | | | 322 | |
| | | | | | | | |
Accumulated other comprehensive (loss) income | | $ | (8,205 | ) | | $ | 16,304 | |
| | | | | | | | |
| |
Note 19. | Financial Instruments |
On January 1, 2008, we adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (“fair value option”). The fair value option may be elected on aninstrument-by-instrument basis and is irrevocable, unless a new election date occurs. We did not elect to apply the fair value option to any of our eligible financial assets and liabilities.
On January 1, 2008, we partially adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. This statement does not require any new fair value measurements. In February 2008, the FASB issued FASB Staff PositionFAS 157-2, “Effective Date of FASB Statement No. 157,” which deferred the effective date of SFAS 157 for one year for all non-financial assets and non-financial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).
Our investment securities that are traded on a national securities exchange are stated at the last reported sales price on the day of valuation.
| | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at Reporting Date Using | |
| | | | | Quoted Prices in
| | | | | | | |
| | As of
| | | Active Markets for
| | | Significant Other
| | | Significant
| |
| | December 31,
| | | Identical Assets
| | | Observable Inputs
| | | Unobservable Inputs
| |
| | 2008 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| | (In thousands) | |
|
Marketable securities available for sale | | $ | 300 | | | $ | 300 | | | $ | — | | | $ | — | |
Investments in fixed maturities at market | | | 26,737 | | | | 26,737 | | | | — | | | | — | |
Derivatives — Contingent interest feature of the Convertible Debentures (See Note 6) | | | 0 | | | | — | | | | 0 | | | | — | |
| | | | | | | | | | | | | | | | |
Total | | $ | 27,037 | | | $ | 27,037 | | | $ | 0 | | | $ | — | |
| | | | | | | | | | | | | | | | |
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
| | |
| • | 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 debt were determined based on interest rates that are currently available to us for issuance of debt with similar terms and remaining maturities for debt issues that are not traded on quoted market prices. The fair value of project debt is estimated based on quoted market prices for the same or similar issues. |
| • | Fair value of our interest rate swap agreement is the estimated amount we would receive or pay to terminate the agreement based on the net present value of the future cash flows as defined in the agreement. |
122
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Stock-Based Compensation
The disclosure below of the estimated fair value of financial instruments is madeWe recognize stock-based compensation expense in accordance with the requirementsaccounting standards for stock-based compensation in effect at the date of SFAS No. 107, “Disclosures About Fair Valuegrant.
We received $0.6 million, $0.3 million, and $0.8 million from the exercise of Financial Instruments.”non-qualified stock options in the years ended December 31, 2009, 2008, and 2007 respectively. The estimated fair-value amountstax benefits related to the exercise of the non-qualified stock options and the vesting of the restricted stock award were not recognized during 2009 and 2008 due to our NOLs. When the NOLs have been determined using available market informationfully utilized by us, we will recognize a tax benefit and appropriate valuation methodologies. However, considerable judgment is necessarily requiredan increase in interpreting market data to develop estimates of fair value. Accordingly,additional paid-in capital for the estimates presented herein are not necessarily indicativeexcess tax deductions received on the exercised non-qualified stock options and vested restricted stock. Future realization of the amounts that we would realizetax benefit will be presented in a current market exchange. The fair-value estimates presented herein arecash flows from financing activities in the consolidated statements of cash flows in the period the tax benefit is recognized.
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 pertinent information availablethe number of stock options and restricted stock awards expected to vest by using an estimate of expected forfeitures. We review the forfeiture rates at least annually and revise compensation expense, if necessary. Prior to the fourth quarter of 2009, the range for forfeiture rates was 8% to 15%. During the fourth quarter of 2009, we reviewed the forfeiture rates and modified the rate to 10%. The cumulative effect of the change in the forfeiture rate to compensation expense did not have a material effect on our financial results of operations.
Stock-Based Award Plans
We adopted the Covanta Holding Corporation Equity Award Plan for Employees and Officers (the “Employees Plan”) and the Covanta Holding Corporation Equity Award Plan for Directors (the “Directors Plan”) (collectively, the “Award Plans”), effective with stockholder approval on October 5, 2004. On July 25, 2005, our Board of Directors approved and on September 19, 2005, our stockholders approved the amendment to the Employees Plan to authorize the issuance of an additional 2,000,000 shares. The 1995 Stock and Incentive Plan (the “1995 Plan”) was terminated with respect to any future awards under such plan on October 5, 2004 upon stockholder approval of the Award Plans. The 1995 Plan will remain in effect until all awards have been satisfied or expired. On February 21, 2008, our Board of Directors approved and on May 1, 2008, our stockholders approved the amendment to the Employees Plan and Directors Plan to authorize the issuance of an additional 6,000,000 shares and 300,000 shares of common stock, respectively. On February 26, 2009, our Board of Directors approved and on May 7, 2009, our stockholders approved the amendment to the Employees Plan and Directors Plan to permit us asto issue additional types of December 31, 2008. However, such amounts have not been comprehensively revalued for purposeslong-term incentive performance awards under the Award Plans in the form of these financial statements since December 31, 2008,restricted stock units, performance shares and current estimates of fair value may differ significantly from the amounts presented herein.performance units.
The estimated fair valuepurpose of financial instrumentsthe Award Plans is presented as follows (in thousands):
| | | | | | | | |
| | As of December 31, 2008 | |
| | Carrying
| | | Estimated
| |
| | Amount | | | Fair Value | |
|
Assets: | | | | | | | | |
Cash and cash equivalents | | $ | 192,393 | | | $ | 192,393 | |
Receivables | | | 262,731 | | | | 262,731 | |
Restricted funds | | | 345,330 | | | | 345,633 | |
Parent investments — fixed maturity securities | | | 300 | | | | 300 | |
Insurance business investments — fixed maturity securities | | | 26,737 | | | | 26,737 | |
Insurance business investments — equity securities | | | 792 | | | | 792 | |
Interest rate swap receivable | | | 13,984 | | | | 13,984 | |
| | | | | | | | |
Liabilities: | | | | | | | | |
Long-term debt | | $ | 1,012,887 | | | $ | 850,122 | |
Project debt | | | 1,078,370 | | | | 1,045,371 | |
Interest rate swap payable | | | 13,984 | | | | 13,984 | |
| | | | | | | | |
Off Balance-Sheet Financial Instruments: | | | | | | | | |
Guarantees(a) | | | | | | | | |
| | |
(a) | | Additionally guarantees include approximately $1.5 million of guarantees related to international energy projects. |
Contingent Interest
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 contingent interest featureAward Plans provide for awards to be made in the Debenturesform 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 stand alone, combination or tandem basis. The maximum aggregate number of shares of common stock available for issuance is an embedded derivative instrument. The first contingent cash interest payment period does not commence until February 1, 2012,12,000,000 under the Employees Plan and 700,000 under the fair market value for the embedded derivative was zero as of December 31, 2008. For information detailing the contingent interest feature of the Debentures, see Note 6. Long-Term Debt.Directors Plan.
Interest Rate Swaps
AsOn August 20, 2009, one of December 31, 2008,our client communities refinanced project debt ($63.7 million outstanding) and we terminated a related interest rate swap ($9.8 million liability) with the proceeds from new bonds and cash on hand. Prior to this refinancing, we had onean interest rate swap agreement related to the existing project debt that economically fixesfixed the interest rate on certainthe adjustable-rate revenue bonds. This swap agreement was entered into in September 1995 and expires in January 2019. Any payments made or received under the swap agreement, including fair value amounts upon termination, arewere included as an explicit component of the client community’s obligation under the related service agreement. Therefore, all payments made or received under the swap agreement arewere a pass through to the client community. Under the swap agreement, we pay a fixed rate of 5.18% and receive a floating rate that is either equal to (i) the rate on the adjustable rate revenue bonds or (ii) an alternative floating rate based on a percentage of LIBOR or the BMA Municipal Swap Index if certain triggering events occur, such as a put of bonds to the standby credit facility that backstops the weekly rate re-sets. Bonds have been put to the standby credit facility at various points in time during 2008, and as a result, the average floating rate received under the swap agreement for 2008 was 2.09%, which was less than the variable rate paid on the bonds. In the event that we terminate the swap
123
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
prior to its maturity, the floating rate used for determination of settling the fair value of the swap would also be based on a set percentage of LIBOR or the BMA Municipal Swap index at the option of the counterparty. The notional amount of the swap as of December 31, 2008 was $68.2 million and is reduced in accordance with the scheduled repayments of the applicable revenue bonds. The counterparty to the swap is a major financial institution. We believe that the credit risk associated with nonperformance by the counterparty is not significant. The swap agreement resulted in increased debt service expense, which is a pass through to the client community, of $2.1 million, $1.2$2.1 million, and $1.4$1.2 million for the years ended December 31, 2009, 2008 and 2007, and 2006, respectively. The effect on our weighted-average borrowing rate of the project debt was an increase of 0.18% for 2008.
We were required, under financing arrangements in effect from June 24, 2005 to February 9, 2007, to enter into hedging arrangements with respect to a portion of our exposure to interest rate changes with respect to our borrowing under the previously existing credit facilities. On July 8, 2005, we entered into two separate pay fixed, receive floating interest rate swap agreements with a total notional amount of $300 million. On March 21, 2006, we entered into one additional pay fixed, receive floating interest rate swap agreement with a notional amount of $37.5 million. On December 27, 2006, the notional amount of the original swap agreements reduced to $250 million from $300 million. These swaps were designated as cash flow hedges in accordance with SFAS 133. Accordingly, unrealized gains or losses are deferred in other comprehensive income until the hedged cash flows affect earnings. The impact of the swaps decreased interest expense for the year ended December 31, 2006 by $2.4 million. As of December 31, 2006, the net after-tax deferred gain in other comprehensive income was $2.1 million ($3.3 million before income taxes which was recorded in other assets). In connection with the refinancing of our previously existing credit facilities, the interest rate swap agreements described above were settled on February 9, 2007. We recognized a gain associated with the settlement of our interest rate swap agreements of $3.4 million, pre-tax. The Credit Facilities do not require us to enter into interest rate swap agreements. For additional information related topre-tax, for the Credit Facilities, see Note 6. Long-Term Debt.year ended December 31, 2007.
| |
NoteNOTE 15. | SUPPLEMENTARY FINANCIAL INFORMATION |
Revenues and Unbilled Service Receivables
The following table summarizes the components of waste and service revenues for the periods presented below (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
|
Waste and service revenues unrelated to project debt | | $ | 840,352 | | | $ | 836,115 | | | $ | 764,560 | |
Revenue earned explicitly to service project debt-principal | | | 56,986 | | | | 72,229 | | | | 69,163 | |
Revenue earned explicitly to service project debt-interest | | | 22,266 | | | | 26,183 | | | | 30,673 | |
| | | | | | | | | | | | |
Total waste and service revenues | | $ | 919,604 | | | $ | 934,527 | | | $ | 864,396 | |
| | | | | | | | | | | | |
Under some of our service agreements, we bill municipalities fees to service project debt (principal and interest). The amounts billed are based on the actual principal amortization schedule for the project bonds. Regardless of the amounts billed to client communities relating to project debt principal, we recognize revenue earned explicitly to service project debt principal on a levelized basis over the term of the applicable agreement. In the beginning of the agreement, principal billed is less than the amount of levelized revenue recognized related to principal and we record an unbilled service receivable asset. At some point during the agreement, the amount we bill will exceed the levelized revenue and the unbilled service receivable begins to reduce, and ultimately becomes nil at the end of the contract.
In the final year(s) of a contract, cash is utilized from debt service reserve accounts to pay remaining principal amounts due to project bondholders and such amounts are no longer billed to or paid by municipalities. Generally, therefore, in the last
109
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
year of the applicable agreement, little or no cash is received from municipalities relating to project debt, while our levelized service revenue continues to be recognized until the expiration date of the term of the agreement.
Other Operating Expenses
The components of other operating expenses are as follows (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
|
Construction costs | | $ | 26,707 | | | $ | 50,611 | | | $ | 55,675 | |
Insurance subsidiary operating expenses(1) | | | 21,258 | | | | 12,641 | | | | 10,699 | |
Insurance recoveries | | | (276 | ) | | | (3,934 | ) | | | (1,909 | ) |
Loss on the retirement of fixed assets | | | 1,040 | | | | 7,475 | | | | 1,940 | |
Foreign exchange (gain) loss | | | (9 | ) | | | 1,899 | | | | (1,719 | ) |
Other | | | (752 | ) | | | (1,991 | ) | | | (4,047 | ) |
| | | | | | | | | | | | |
Total other operating expenses | | $ | 47,968 | | | $ | 66,701 | | | $ | 60,639 | |
| | | | | | | | | | | | |
| | |
| (1) | Insurance subsidiary operating expenses are primarily comprised of increased incurred but not reported loss reserves, loss adjustment expenses and policy acquisition costs. |
Semass Fire
On March 31, 2007, our SEMASS energy-from-waste facility located in Rochester, Massachusetts experienced a fire in the front-end receiving portion of the facility. Damage was extensive to this portion of the facility and operations at the facility were suspended completely for approximately 20 days. As a result of this loss, we recorded an asset impairment of $17.3 million, pre-tax, which represented the net book value of the assets destroyed.
The cost of repair or replacement, and business interruption losses, are insured under the terms of applicable insurance policies, subject to deductibles. Insurance recoveries were recorded as insurance recoveries, net of write-down of assets where such recoveries relate to repair and reconstruction costs, or as a reduction to plant operating expenses where such recoveries relate to other costs or business interruption losses. We recorded insurance recoveries in our consolidated statements of income and received cash proceeds in settlement of these claims as follows (in millions):
| | | | | | | | | | | | | | | | |
| | Insurance Recoveries
| | | | |
| | Recorded | | | Cash Proceeds Received | |
| | For the Years Ended December 31, | |
| | 2008 | | | 2007 | | | 2008 | | | 2007 | |
|
Repair and reconstruction costs (Insurance recoveries, net of write-down of assets) | | $ | 8.3 | | | $ | 17.3 | | | $ | 16.2 | | | $ | 9.4 | |
Clean-up costs (reduction to Plant operating expenses) | | $ | — | | | $ | 2.7 | | | $ | — | | | $ | 2.7 | |
Business interruption losses (reduction to Plant operating expenses) | | $ | 5.2 | | | $ | 2.0 | | | $ | 7.2 | | | $ | — | |
Non-cash convertible debt related expense
The components of non-cash convertible debt related expense are as follows (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
|
Debt discount accretion related to the Debentures | | $ | 19,327 | | | $ | 17,979 | | | $ | 15,377 | |
Debt discount accretion related to the Notes | | | 11,956 | | | | — | | | | — | |
Fair value changes related to the Note Hedge | | | (11,165 | ) | | | — | | | | — | |
Fair value changes related to the Cash Conversion Option | | | 4,172 | | | | — | | | | — | |
| | | | | | | | | | | | |
Total non-cash convertible debt related expense | | $ | 24,290 | | | $ | 17,979 | | | $ | 15,377 | |
| | | | | | | | | | | | |
110
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Selected Supplementary Balance Sheet Information
Selected supplementary balance sheet information is as follows (in thousands):
| | | | | | | | |
| | As of December 31, | |
| | 2009 | | | 2008 | |
|
Interest rate swap (Note 14) | | $ | — | | | $ | 13,984 | |
Contract acquisition costs | | | 13,762 | | | | 10,351 | |
Reinsurance recoverable on unpaid losses (Note 1) | | | 12,325 | | | | 9,155 | |
Deferred financing costs | | | 17,737 | | | | 10,191 | |
Note Hedge (Note 11) | | | 123,543 | | | | — | |
Spare parts | | | 16,490 | | | | 16,631 | |
Other noncurrent receivables | | | 32,705 | | | | 21,121 | |
Restricted funds for pre-petition tax liabilities (Note 1) | | | 20,243 | | | | 20,419 | |
Prepaid expenses | | | 58,745 | | | | 27,655 | |
Other | | | 10,816 | | | | 10,037 | |
| | | | | | | | |
Total Other Noncurrent Assets | | $ | 306,366 | | | $ | 139,544 | |
| | | | | | | | |
Interest payable | | $ | 15,783 | | | $ | 16,328 | |
Deferred income taxes | | | — | | | | 17,752 | |
Payroll and payroll taxes | | | 37,758 | | | | 33,840 | |
Accrued liabilities to client communities | | | 35,836 | | | | 46,245 | |
Operating expenses | | | 86,011 | | | | 68,420 | |
Other | | | 42,333 | | | | 32,461 | |
| | | | | | | | |
Total Accrued Expenses and Other Current Liabilities | | $ | 217,721 | | | $ | 215,046 | |
| | | | | | | | |
Deferred revenue | | $ | 3,681 | | | $ | 4,345 | |
Interest rate swap (Note 14) | | | — | | | | 13,984 | |
Benefit obligations (Note 17) | | | 16,014 | | | | 35,110 | |
Asset retirement obligations (Note 1) | | | 26,076 | | | | 25,911 | |
Tax liabilities for uncertain tax positions (Note 16) | | | 32,991 | | | | 33,965 | |
Insurance loss and loss adjustment reserves (Note 1) | | | 34,692 | | | | 29,362 | |
Other | | | 28,306 | | | | 23,204 | |
| | | | | | | | |
Total Other Noncurrent Liabilities | | $ | 141,760 | | | $ | 165,881 | |
| | | | | | | | |
We file a federal consolidated income tax return with our eligible subsidiaries. Covanta Lake II, Inc. files outside of the consolidated return group. 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 thousands):
| | | | | | | | | | | | |
| | For the Years Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
|
Current: | | | | | | | | | | | | |
Federal | | $ | (1,221 | ) | | $ | (1,445 | ) | | $ | 3,373 | |
State | | | 10,204 | | | | 17,189 | | | | 15,186 | |
Foreign | | | 8,935 | | | | 5,657 | | | | 6,612 | |
| | | | | | | | | | | | |
Total current | | | 17,918 | | | | 21,401 | | | | 25,171 | |
Deferred: | | | | | | | | | | | | |
Federal | | | 18,789 | | | | 67,282 | | | | 3,411 | |
State | | | 14,303 | | | | (3,998 | ) | | | (4,213 | ) |
Foreign | | | (966 | ) | | | (124 | ) | | | 114 | |
| | | | | | | | | | | | |
Total deferred | | | 32,126 | | | | 63,160 | | | | (688 | ) |
| | | | | | | | | | | | |
Total income tax expense | | $ | 50,044 | | | $ | 84,561 | | | $ | 24,483 | |
| | | | | | | | | | | | |
111
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Domestic and foreign pre-tax income was as follows (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
|
Domestic | | $ | 116,486 | | | $ | 179,617 | | | $ | 110,513 | |
Foreign | | | 20,950 | | | | 17,282 | | | | 22,123 | |
| | | | | | | | | | | | |
Total | | $ | 137,436 | | | $ | 196,899 | | | $ | 132,636 | |
| | | | | | | | | | | | |
The effective income tax rate was 36.4%, 42.9% and 18.5% for the years ended December 31, 2009, 2008, and 2007, respectively. The decrease in the effective tax rate for the year ended December 31, 2009, compared to the year ended December 31, 2008, is primarily related to lower pre-tax income combined with an increase in production tax credits, and changes in the valuation allowance. The increase in the effective tax rate for the year ended December 31, 2008, compared to the year ended December 31, 2007, is primarily related to taxes associated with the wind down of the grantor trusts and additional liability for uncertain tax positions in 2008, and the tax benefit resulting from the release of valuation allowance from previously unrecognized federal and state net operating loss carryforwards (“NOLs”) in 2007. See rate reconciliation table below for further details.
We recognize benefits from a foreign tax holiday in India. Our two Indian power project companies began taking advantage of a tax holiday under Indian law in April of 2005. The Indian tax holiday permits the companies to use the alternative tax rate, currently approximately 17%, for a 10 year period.
The aggregate benefit and affect on diluted earnings per share was as follows (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
|
Aggregate benefit | | $ | 2,954 | | | $ | 3,257 | | | $ | 4,433 | |
Affect on diluted EPS | | $ | 0.02 | | | $ | 0.02 | | | $ | 0.03 | |
A reconciliation of our income tax expense at the federal statutory income tax rate of 35% to income tax expense at the effective tax rate is as follows (in thousands):
| | | | | | | | | | | | |
| | For the Years Ended December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
|
Income tax expense at the federal statutory rate | | $ | 48,103 | | | $ | 68,915 | | | $ | 46,423 | |
State and other tax expense | | | 16,818 | | | | 9,926 | | | | 7,797 | |
Change in valuation allowance | | | (4,780 | ) | | | 10,610 | | | | (34,968 | ) |
Grantor trust income(loss) | | | 896 | | | | (104,443 | ) | | | 5,580 | |
Subpart F income and foreign dividends | | | 2,204 | | | | 1,491 | | | | 90 | |
Taxes on foreign earnings | | | 526 | | | | (524 | ) | | | (1,132 | ) |
Production tax credits | | | (13,389 | ) | | | (8,529 | ) | | | (4,525 | ) |
Expiration of tax attributes | | | — | | | | — | | | | 5,977 | |
Liability for uncertain tax positions | | | (1,361 | ) | | | 107,156 | | | | 898 | |
Other, net | | | 1,027 | | | | (41 | ) | | | (1,657 | ) |
| | | | | | | | | | | | |
Total income tax expense | | $ | 50,044 | | | $ | 84,561 | | | $ | 24,483 | |
| | | | | | | | | | | | |
112
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We had consolidated federal NOLs estimated to be approximately $544.9 million for federal income tax purposes as of the end of 2009. These consolidated federal NOLs will expire, if not used, in the following amounts in the following years (in thousands):
| | | | |
| | Amount of
| |
| | Carryforward
| |
| | Expiring | |
|
2010 | | $ | — | |
2011 | | | 3,330 | |
2012 | | | 38,255 | |
2019 | | | 33,635 | |
2022 | | | 26,931 | |
2023 | | | 108,331 | |
2024 | | | 212 | |
2025 | | | 203 | |
2026 | | | 260 | |
2027 | | | 391 | |
2028 | | | 333,372 | |
| | | | |
| | $ | 544,920 | |
| | | | |
In addition to the consolidated federal NOLs, we have state NOL carryforwards of $264.7 million, which expire between 2011 and 2027, capital loss carryforwards of $0.2 million expiring in 2013, and additional federal credit carryforwards of $47.5 million. These deferred tax assets are offset by a valuation allowance of $20.5 million.
As of December 31, 2009, we had a valuation allowance of $20.5 million on deferred tax assets. During 2009, we decreased our valuation allowance by $23.6 million related to the expiration of capital losses. During 2008, we increased our valuation allowance by $10.6 million related to capital losses, state NOLs, and a deferred tax asset established for certain deductions from the grantor trust. As of December 31, 2007, the reduction in the valuation allowance of $35.0 million primarily included a $31.4 million adjustment related to NOLs that were due to expire and were able to be utilized as a reduction to income tax expense. The remaining reduction in 2007 of the valuation allowance of $3.6 million related to previously unrecognized federal and state NOLs for our unconsolidated subsidiary Covanta Lake II, Inc.
The tax effects of temporary differences that give rise to the deferred tax assets and liabilities are presented as follows (in thousands):
| | | | | | | | |
| | As of December 31, | |
| | 2009 | | | 2008 | |
|
Deferred Tax Assets: | | | | | | | | |
Loss reserve discounting | | $ | 1,082 | | | $ | (1,568 | ) |
Capital loss carryforward | | | 90 | | | | 24,149 | |
Net operating loss carryforwards | | | 97,337 | | | | 109,989 | |
Accrued expenses | | | 19,294 | | | | 30,601 | |
Tax basis in bond and other costs | | | 21,470 | | | | 16,725 | |
Deferred tax assets attributable to pass-through entities | | | 9,869 | | | | 9,869 | |
Other | | | 866 | | | | 5,535 | |
AMT and other credit carryforwards | | | 47,462 | | | | 32,750 | |
| | | | | | | | |
Total gross deferred tax asset | | | 197,470 | | | | 228,050 | |
Less: valuation allowance | | | (20,461 | ) | | | (44,089 | ) |
| | | | | | | | |
Total deferred tax asset | | | 177,009 | | | | 183,961 | |
| | | | | | | | |
Deferred Tax Liabilities: | | | | | | | | |
Unbilled accounts receivable | | | 33,833 | | | | 5,713 | |
Property, plant and equipment | | | 486,414 | | | | 465,027 | |
Intangible assets | | | 87,802 | | | | 68,593 | |
Deferred tax liabilities attributable to pass-through entities | | | 57,996 | | | | 93,346 | |
Capitalized interest | | | 52,566 | | | | 43,953 | |
Prepaid expenses | | | 13,281 | | | | 11,218 | |
Other, net | | | 6,729 | | | | 7,782 | |
| | | | | | | | |
Total gross deferred tax liability | | | 738,621 | | | | 695,632 | |
| | | | | | | | |
Net deferred tax liability | | $ | (561,612 | ) | | $ | (511,671 | ) |
| | | | | | | | |
113
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
We adopted the permanent reinvestment exception whereby we will no longer provide for deferred taxes on the undistributed earnings of our international subsidiaries. We intend to permanently reinvest our international earnings outside of the United States in our existing international operations and in any new international business which may be developed or acquired. This policy resulted in an unrecognized deferred tax liability of approximately $39.7 million and $32.7 million as of December 31, 2009 and 2008, respectively. Cumulative undistributed foreign earnings for which United States taxes were not provided were included in consolidated retained earnings in the amount of approximately $114.9 million and $94.8 million as of December 31, 2009 and 2008, respectively.
Deferred tax assets relating to tax benefits of employee stock option grants have been reduced to reflect exercises in the calendar year ended December 31, 2007. Some exercises resulted in tax deductions in excess of previously recorded benefits based on the option value at the time of grant (a “windfall”). Although these additional tax benefits or windfalls were reflected in the NOLs, the additional tax benefit associated with the windfall is not recognized until the deduction reduces taxes payable. Accordingly, since the tax benefit does not reduce our current taxes payable in 2008 due to the NOLs, these windfall tax benefits were not reflected in our NOLs in the deferred tax assets for 2009 and 2008. Windfalls included in NOLs but not reflected in deferred tax assets were $11.4 million and $14.4 million for 2009 and 2008, respectively.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
| | | | |
Balance as of January 1, 2007 | | $ | 24,483 | |
Additions based on tax positions related to the current year | | | 500 | |
Additions for tax positions of prior years | | | 398 | |
Reductions for tax positions of prior years | | | — | |
Settlements | | | — | |
| | | | |
Balance at December 31, 2007 | | $ | 25,381 | |
| | | | |
Additions based on tax positions related to the current year | | | 109,956 | |
Additions for tax positions of prior years | | | 717 | |
Reductions for lapse in applicable statute of limitations | | | (280 | ) |
Reductions for tax positions of prior years | | | (3,237 | ) |
| | | | |
Balance at December 31, 2008 | | $ | 132,537 | |
| | | | |
Additions based on tax positions related to the current year | | $ | — | |
Additions for tax positions of prior years | | | 976 | |
Reductions for lapse in applicable statute of limitations | | | (2,337 | ) |
Reductions for tax positions of prior years | | | — | |
| | | | |
Balance at December 31, 2009 | | $ | 131,176 | |
| | | | |
The liability for uncertain tax positions, exclusive of interest and penalties, was $131.2 million and $132.5 million as of December 31, 2009 and 2008, respectively. Included in the balance of uncertain tax benefits as of December 31, 2009 and 2008 are potential benefits of $114.7 million and $114.8 million, respectively, that, if recognized, would affect the effective tax rate. The liability for uncertain tax positions may decrease by approximately $5.8 million in the next 12 months with respect to the expiration of statutes.
We record interest accrued on liabilities for uncertain tax positions and penalties as part of the tax provision. For the year ended December 31, 2009 and 2008, we recognized $0.1 million and $0.9 million, respectively, of interest on liabilities for uncertain tax positions. As of December 31, 2009 and 2008, we had accrued interest and penalties associated with liabilities for uncertain tax positions of $8.4 million and $8.1 million, respectively.
As issues are examined by the Internal Revenue Service (“IRS”) and state auditors, we may decide to adjust the existing FIN 48 liability for issues that were not deemed an exposure at the time we adopted accounting standards related to the accounting for uncertainty in income taxes. Accordingly, we will continue to monitor the results of audits and adjust the liability as needed. Federal income tax returns for Covanta Energy are closed for the years through 2003. However, to the extent NOLs are utilized from earlier years, federal income tax returns for Covanta Holding Corporation, formerly known as Danielson Holding Corporation, are still open. The tax returns of our subsidiary ARC Holdings had been under an IRS examination for 2004 and 2005. This examination was related to ARC Holdings’ refund requests related to NOL carryback claims from tax years prior to our acquisition of ARC Holdings in 2005 that required the approval of the Joint Committee. The audit was concluded with no change and the Joint Committee approved the refund, which we received during the third
114
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
quarter of 2009. State income tax returns are generally subject to examination for a period of three to five years after the filing of the respective 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 (which were subsidiaries of our predecessor, which was 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.
In January 2006, we executed agreements with the California Commissioner of Insurance (the “California Commissioner”), who administers the majority of the grantor trusts, regarding the final administration and conclusion of such trusts. The agreements, which were approved by the California state court overseeing the Mission insolvency proceedings (the “Mission Court”), settle matters that had been in dispute regarding the historic rights and obligations relating to the conclusion of the grantor trusts. These include the treatment of certain claims against the grantor trusts which are entitled to distributions of an aggregate of 1,572,625 shares of our common stock issued to the California Commissioner in 1990 under existing agreements entered into at the inception of the Mission insurance entities’ reorganization.
Pursuant to a claims evaluation process that we administered pursuant to such agreements with, and overseen by, the Conservation and Liquidation Office, all claim holders entitled to receive distributions of shares of our common stock from the California Commissioner were identified. As a result of this process, approximately $1.135 billion in claims were approved pursuant to orders of the Mission Court. As part of the wind down process and final claims evaluation by the Conservation and Liquidation Office, and in accordance with the parties’ contractual obligations and the requirements of the Internal Revenue Code governing such exchanges of stock for debt, the California Commissioner distributed shares of our common stock in settlement of these claims. This distribution, which is among the final steps necessary to conclude the insolvency cases relating to the trusts being administered by the California Commissioner, was conducted in December 2008 pursuant to orders of the Mission Court. These events resulted in our recognition of $515 million of additional NOLs in 2008, or a deferred tax asset of $180 million. Of this $180 million deferred tax asset, $111 million was previously recognized on the balance sheet either in December 2006 or September 2008.
We have discussed with the Director of the Division of Insurance of the State of Missouri (the “Missouri Director”), who administers the balance of the grantor trusts relating to the Mission Insurance entities, similar arrangements for distribution of the remaining 154,756 shares of our common stock by the Missouri Director to claimants of the Missouri grantor trusts. Given the claims activity relating to the Missouri grantor trusts, and the lack of disputed matters with the Missouri Director, we do not expect to enter into additional or amended contractual arrangements with the Missouri Director with respect to the final administration of the Missouri grantor trusts or the related distribution by the Missouri Director of shares of our common stock.
While we cannot predict with certainty 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 nor the final administration by the Missouri Director will result in a material reduction in available NOLs.
| |
NOTE 17. | 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.
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 all defined contribution
115
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
plans were $14.5 million, $13.0 million, and $12.2 million for the years ended December 31, 2009, 2008, and 2007, respectively.
Pension and Postretirement Benefit Obligations
Effective December 31, 2005, we froze service accruals in the defined benefit pension plan for employees in the Untied States who do not participate in retirement plans offered by collective bargaining units. All active employees who were eligible participants in the defined benefit pension plan, as of December 31, 2005, became 100% vested and have a non-forfeitable right to these benefits as of such date. Effective January 1, 2010, the defined benefit pension plan was further amended to exclude future compensation increases received by eligible participants after December 31, 2009.
Assumptions
Costs and the related obligations and assets arising from the pension and other postretirement benefit plans are accounted for based on actuarially-determined estimates. On an annual basis, we evaluate the assumed discount rate and expected return on assets used to determine pension benefit and other postretirement benefit obligations. The discount rate is determined based on the timing of future benefit payments and expected rates of return currently available on high quality fixed income securities whose cash flows match the timing and amount of future benefit payments of the plan. We record a pension plan liability equal to the amount by which the present value of the projected benefit obligations (using the discount rate) exceeded the fair value of pension assets.
The discount rate and net gain (loss) recognized are as follows:
| | | | | | | | | | | | |
| | | | Net Gain (Loss)
| | Net Gain (Loss),
|
| | Discount Rate | | Recognized in AOCI | | Net of Tax, Recognized in AOCI |
| | (dollars in millions) |
|
Year Ended December 31, 2009 | | | 6.00 | % | | $ | 14.6 | | | $ | 8.8 | |
Year Ended December 31, 2008 | | | 6.25 | % | | $ | (20.0 | ) | | $ | (13.2 | ) |
Year Ended December 31, 2007 | | | 6.50 | % | | $ | 14.5 | | | $ | 9.4 | |
An annual rate of increase of 9.5% in the per capita cost of health care benefits was assumed for 2009 for covered employees. The rate was assumed to decrease gradually to 5.5% in 2017 and remain at that level. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage point change in the assumed health care trend rate would have the following effects (in thousands):
| | | | | | | | |
| | One-Percentage
| | One-Percentage
|
| | Point Increase | | Point Decrease |
|
Effect on total service and interest cost components | | $ | 28 | | | $ | (25 | ) |
Effect on postretirement benefit obligation | | $ | 466 | | | $ | (411 | ) |
116
COVANTA HOLDING CORPORATION
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 defined benefit pension and other postretirement benefit plans, the funded status (using a December 31 measurement date) of the plans and the related amounts recognized in our consolidated balance sheets (in thousands, except percentages as noted):
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Benefits |
| | For the Year
| | For the Year
| | For the Year
| | For the Year
|
| | Ended
| | Ended
| | Ended
| | Ended
|
| | December 31,
| | December 31,
| | December 31,
| | December 31,
|
| | 2009 | | 2008 | | 2009 | | 2008 |
|
Change in benefit obligation: | | | | | | | | | | | | | | | | |
Benefit obligation at beginning of year | | $ | 77,352 | | | $ | 72,895 | | | $ | 8,161 | | | $ | 8,810 | |
Service cost | | | — | | | | — | | | | — | | | | — | |
Interest cost | | | 4,786 | | | | 4,705 | | | | 490 | | | | 549 | |
Amendments | | | (11,066 | ) | | | 663 | | | | — | | | | — | |
Actuarial loss (gain) | | | 1,532 | | | | 541 | | | | 403 | | | | (143 | ) |
Benefits paid | | | (1,371 | ) | | | (1,452 | ) | | | (809 | ) | | | (1,055 | ) |
| | | | | | | | | | | | | | | | |
Benefit obligation at end of year | | $ | 71,233 | | | $ | 77,352 | | | $ | 8,245 | | | $ | 8,161 | |
| | | | | | | | | | | | | | | | |
Change in plan assets: | | | | | | | | | | | | | | | | |
Plan assets at fair value at beginning of year | | $ | 50,756 | | | $ | 61,639 | | | $ | — | | | $ | — | |
Actual return on plan assets | | | 9,641 | | | | (13,596 | ) | | | — | | | | — | |
Contributions | | | 5,226 | | | | 4,165 | | | | 809 | | | | 1,055 | |
Benefits paid | | | (1,371 | ) | | | (1,452 | ) | | | (809 | ) | | | (1,055 | ) |
| | | | | | | | | | | | | | | | |
Plan assets at fair value at end of year | | $ | 64,252 | | | $ | 50,756 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | |
Reconciliation of accrued benefit liability and net amount recognized: | | | | | | | | | | | | | | | | |
Funded status of the plan | | $ | (6,981 | ) | | $ | (26,596 | ) | | $ | (8,245 | ) | | $ | (8,161 | ) |
Unrecognized net gain | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Net amount recognized | | $ | (6,981 | ) | | $ | (26,596 | ) | | $ | (8,245 | ) | | $ | (8,161 | ) |
| | | | | | | | | | | | | | | | |
Accumulated other comprehensive (income) loss recognized: | | | | | | | | | | | | | | | | |
Net actuarial loss (gain) | | $ | 634 | | | $ | 4,681 | | | $ | (1,807 | ) | | $ | (2,360 | ) |
Net prior service (credit) cost | | | (10,478 | ) | | | 663 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Total as of December 31, 2009 | | $ | (9,844 | ) | | $ | 5,344 | | | $ | (1,807 | ) | | $ | (2,360 | ) |
| | | | | | | | | | | | | | | | |
Weighted average assumptions used to determine net periodic benefit expense for years ending December 31: | | | | | | | | | | | | | | | | |
Discount rate | | | 6.25 | % | | | 6.50 | % | | | 6.25 | % | | | 6.50 | % |
Expected return on plan assets | | | 7.50 | % | | | 7.50 | % | | | N/A | | | | N/A | |
Rate of compensation increase | | | 4.00 | % | | | 4.00 | % | | | N/A | | | | N/A | |
Weighted average assumptions used to determine projected benefit obligations as of December 31: | | | | | | | | | | | | | | | | |
Discount rate | | | 6.00 | % | | | 6.25 | % | | | 6.00 | % | | | 6.25 | % |
Rate of compensation increase | | | N/A | | | | 4.00 | % | | | N/A | | | | N/A | |
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 $71.2 million, $71.2 million and $64.3 million, respectively as of December 31, 2009 and $77.4 million, $65.6 million, and $50.8 million, respectively as of December 31, 2008.
We estimate that the future benefits payable for the retirement and postretirement plans in place are as follows (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, | |
| | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 - 2019 | |
|
Pension Benefits | | $ | 1,715 | | | $ | 1,988 | | | $ | 2,611 | | | $ | 2,923 | | | $ | 3,059 | | | $ | 17,723 | |
Other Benefits (Net of Medicare Part D Subsidy) | | $ | 667 | | | $ | 695 | | | $ | 700 | | | $ | 715 | | | $ | 725 | | | $ | 2,992 | |
Attributable to Medicare Part D Subsidy | | $ | (37 | ) | | $ | (38 | ) | | $ | (40 | ) | | $ | (40 | ) | | $ | (41 | ) | | $ | (166 | ) |
117
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Pension costs for our defined benefit plans and other post-retirement benefit plans included the following components (in thousands):
| | | | | | | | | | | | | | | | |
| | Pension Benefits | | | Other Benefits | |
| | For the Year
| | | For the Year
| | | For the Year
| | | For the Year
| |
| | Ended
| | | Ended
| | | Ended
| | | Ended
| |
| | December 31,
| | | December 31,
| | | December 31,
| | | December 31,
| |
| | 2009 | | | 2008 | | | 2009 | | | 2008 | |
|
Components of Net Periodic Benefit Cost: | | | | | | | | | | | | | | | | |
Service cost | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Interest cost | | | 4,786 | | | | 4,705 | | | | 490 | | | | 549 | |
Expected return on plan assets | | | (3,900 | ) | | | (4,728 | ) | | | — | | | | — | |
Amortization of net prior service cost | | | 76 | | | | — | | | | — | | | | — | |
Amortization of net actuarial gain | | | (184 | ) | | | (524 | ) | | | (150 | ) | | | (154 | ) |
| | | | | | | | | | | | | | | | |
Net periodic benefit cost | | | 778 | | | | (547 | ) | | | 340 | | | | 395 | |
Settlement cost | | | 21 | | | | 65 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | |
Final net periodic benefit cost | | $ | 799 | | | $ | (482 | ) | | $ | 340 | | | $ | 395 | |
| | | | | | | | | | | | | | | | |
Plan Assets
Plan assets had a fair value of $64.3 million and $50.8 million as of December 31, 2009 and 2008, respectively. The allocation of plan assets was as follows:
| | | | | | | | |
| | As of December 31, |
| | 2009 | | 2008 |
|
Total Equities | | | 61 | % | | | 45 | % |
Total Debt Securities | | | 36 | % | | | 49 | % |
Other | | | 3 | % | | | 6 | % |
| | | | | | | | |
Total | | | 100 | % | | | 100 | % |
| | | | | | | | |
Our expected return on plan assets assumption is based on historical experience and by evaluating input from the trustee managing the plan assets. The expected return on the plan assets is also impacted by the target allocation of assets, which is based on our goal of earning the highest rate of return while maintaining risk at acceptable levels. The plan strives to have assets sufficiently diversified so that adverse or unexpected results from one security class will not have an unduly detrimental impact on the entire portfolio. The target ranges of allocation of assets are as follows:
| | | | |
Total Equities | | | 40 — 75 | % |
Total Debt Securities | | | 20 — 60 | % |
Other | | | 0 — 10 | % |
We anticipate that the long-term asset allocation on average will approximate the targeted allocation. Actual asset allocations are reviewed and the pension plans’ investments are rebalanced to reflect the targeted allocation when considered appropriate.
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COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following sets forth the types of assets measured at fair value and a brief description of the valuation technique for each asset type:
| | | | |
Type of Fund | | Types of Investments | | Valuation Technique |
|
|
U.S. Stock Funds | | Funds comprised of domestic equity securities. | | Securities are typically priced using the closing price from the applicable exchange, such as the NYSE, NASDAQ, etc. |
|
|
U.S. Bond Funds | | Funds comprised of domestic fixed income securities. | | Securities are priced by a third-party evaluation service using inputs such as benchmark yields, reported trades, broker/dealer quotes, issuer spreads. |
|
|
International Stock Funds | | Funds comprised of international equity securities. | | Securities are priced using the closing price from the local international stock exchange, such as the International Stock Index. |
|
|
Real Estate Funds | | Comprised of real estate investments either directly owned or through partnership interests and mortgage and other loans on income producing real estate. | | The fair value of real estate properties is determined quarterly through an independent appraisal process utilizing traditional real estate valuation methodologies. |
|
|
Short-Term Funds | | Portfolios comprised of short-term securities. | | Securities are valued initially at cost and thereafter adjusted for amortization of any discount or premium, i.e. amortized cost, which approximates fair value. |
|
|
The fair value of pension plan assets, by asset category, is as follows:
| | | | | | | | | | | | | | | | |
| | Fair Value Measurements as of December 31, 2009 | |
| | | | | Quoted Market
| | | | | | | |
| | | | | Prices in Active
| | | | | | Significant
| |
| | | | | Markets for
| | | Significant Other
| | | Unobservable
| |
| | | | | Identical Assets
| | | Observable Inputs
| | | Inputs
| |
| | Total | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
|
Equity securities: | | | | | | | | | | | | | | | | |
U.S. companies(a) | | $ | 32,226 | | | $ | — | | | $ | 32,226 | | | $ | — | |
International companies(b) | | | 6,859 | | | | — | | | | 6,859 | | | | — | |
U.S. Bonds(c) | | | 23,179 | | | | — | | | | 23,179 | | | | — | |
Real estate(d) | | | 1,736 | | | | — | | | | 1,736 | | | | — | |
Short-term securities | | | 252 | | | | — | | | | 252 | | | | — | |
| | | | | | | | | | | | | | | | |
Total pension plan assets, at fair value | | $ | 64,252 | | | $ | — | | | $ | 64,252 | | | $ | — | |
| | | | | | | | | | | | | | | | |
| | |
(a) | | Approximately 50% of the pension plan assets are in U.S. Stock Funds held in trusts, which are comprised of a well diversified portfolio of U.S. large-cap and mid-cap companies. |
(b) | | Approximately 11% of the pension plan assets are in International Equity Funds held in trusts, of which approximately 55% is invested in equity securities of foreign companies primarily located in the United Kingdom and Europe. The remaining 45% is invested in equity securities of foreign companies primarily in growth markets located in the United Kingdom and Europe or emerging markets in Asia and Latin America. |
(c) | | Approximately 36% of the pension plan assets are in U.S. Bond Funds held in trusts, which are primarily invested in U.S. Government obligations, U.S. Agency securities and corporate debt securities with an investment grade of A or better. |
(d) | | Approximately 3% of the pension plan assets are in Real Estate Funds held in trusts, which are comprised primarily of real estate investments either directly owned or through partnership interests and mortgage and other loans on income producing real estate. |
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COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| |
NOTE 18. | STOCK-BASED AWARD PLANS |
Stock-Based Compensation
We recognize stock-based compensation expense in accordance with the accounting standards for stock-based compensation in effect at the date of grant.
We received $0.6 million, $0.3 million, and $0.8 million from the exercise of non-qualified stock options in the years ended December 31, 2009, 2008, and 2007 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 2009 and 2008 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.
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 and restricted stock awards expected to vest by using an estimate of expected forfeitures. We review the forfeiture rates at least annually and revise compensation expense, if necessary. Prior to the fourth quarter of 2009, the range for forfeiture rates was 8% to 15%. During the fourth quarter of 2009, we reviewed the forfeiture rates and modified the rate to 10%. The cumulative effect of the change in the forfeiture rate to compensation expense did not have a material effect on our financial results of operations.
Stock-Based Award Plans
We adopted the Covanta Holding Corporation Equity Award Plan for Employees and Officers (the “Employees Plan”) and the Covanta Holding Corporation Equity Award Plan for Directors (the “Directors Plan”) (collectively, the “Award Plans”), effective with stockholder approval on October 5, 2004. On July 25, 2005, our Board of Directors approved and on September 19, 2005, our stockholders approved the amendment to the Employees Plan to authorize the issuance of an additional 2,000,000 shares. The 1995 Stock and Incentive Plan (the “1995 Plan”) was terminated with respect to any future awards under such plan on October 5, 2004 upon stockholder approval of the Award Plans. The 1995 Plan will remain in effect until all awards have been satisfied or expired. On February 21, 2008, our Board of Directors approved and on May 1, 2008, our stockholders approved the amendment to the Employees Plan and Directors Plan to authorize the issuance of an additional 6,000,000 shares and 300,000 shares of common stock, respectively. On February 26, 2009, our Board of Directors approved and on May 7, 2009, our stockholders approved the amendment to the Employees Plan and Directors Plan to permit us to issue additional types of long-term incentive performance awards under the Award Plans in the form of restricted stock units, performance shares and performance units.
The purpose of the Award Plans 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 Award Plans provide 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 stand alone, combination or tandem basis. The maximum aggregate number of shares of common stock available for issuance is 12,000,000 under the Employees Plan and 700,000 under the Directors Plan.
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. A percentage of each employee restricted stock awards granted have financial performance factors. 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.
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 prior to 2006 were subject to the same forfeiture restrictions as are applicable to employees. Restricted stock awards issued to directors in 2006 and thereafter are not subject to forfeiture in the event a
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COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 assumed 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 or to receive dividends, when issued). Commencing with share-based stock awards granted in 2007, we calculated the fair value of share-based stock awards based on the closing price on the date the award was granted. Prior to 2007, we calculated the fair value of our share-based stock awards based on the average of the high and low price on the day prior to the grant date.
During the year ended December 31, 2009, we awarded certain employees 697,003 shares of restricted stock awards. The restricted stock awards will be expensed over the requisite service period, subject to an assumed 10% forfeiture rate. The terms of the restricted stock awards include two vesting provisions; one based on a performance factor and continued service (applicable to 66% of the award) and one based solely on continued service (applicable to 34% of the award). If all performance and service criteria are satisfied, the awards vest during March of 2010, 2011 and 2012.
On May 7, 2009, in accordance with our existing program for annual director compensation, we awarded 45,000 restricted stock awards under the Directors Plan. We determined that the service vesting condition of the restricted stock awards granted to the directors on May 7, 2009 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:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
| | | | | Weighted-
| | | | | | Weighted-
| | | | | | Weighted-
| |
| | | | | Average
| | | | | | Average
| | | | | | Average
| |
| | Number of
| | | Grant Date
| | | Number of
| | | Grant Date
| | | Number of
| | | Grant Date
| |
| | Shares | | | Fair Value | | | Shares | | | Fair Value | | | Shares | | | Fair Value | |
|
Nonvested at the beginning of the year | | | 857,246 | | | $ | 23.61 | | | | 812,826 | | | $ | 18.77 | | | | 935,533 | | | $ | 13.85 | |
Granted | | | 742,003 | | | | 16.59 | | | | 494,105 | | | | 26.37 | | | | 393,495 | | | | 22.35 | |
Vested | | | (446,866 | ) | | | 21.86 | | | | (428,656 | ) | | | 17.64 | | | | (491,508 | ) | | | 12.43 | |
Forfeited | | | (22,016 | ) | | | 22.05 | | | | (21,029 | ) | | | 23.17 | | | | (24,694 | ) | | | 16.91 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Nonvested at the end of the year | | | 1,130,367 | | | $ | 19.72 | | | | 857,246 | | | $ | 23.61 | | | | 812,826 | | | $ | 18.77 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2009, there was $11.2 million of unrecognized stock-based compensation expense related to nonvested restricted stock awards. This expense is expected to be recognized over a weighted-average period of 1.8 years. Total compensation expense for restricted stock awards was $10.4 million, $9.5 million, and $7.9 million for the years ended December 31, 2009, 2008 and 2007, respectively.
Stock Options
We have also awarded stock options to certain employees and directors. Stock options awarded to directors vest immediately. Stock options awarded to employees have typically vested annually over 3 to 5 years and expire over 10 years. We calculate the fair value of our share-based option awards using the Black-Scholes option pricing model which requires estimates of the expected life of the award and stock price volatility. During the year ended December 31, 2009, we did not grant options to purchase shares of common stock to employees or directors. The fair value of the stock option awards granted during the year ended December 2008 was calculated using the following assumptions:
| | | | | | | | | | | | | | | | | | | | | | |
| | Stock
| | Exercise
| | Risk-Free
| | Dividend
| | Volatility
| | Expected
|
Grant Date | | Options | | Price | | Interest Rate | | Yield | | Expected(A) | | Life(B) |
|
February 21, 2008 | | | 200,000 | | | $ | 26.26 | | | | 3.4 | % | | | 0 | % | | | 28 | % | | 6.5 years |
March 31, 2008 | | | 50,000 | | | $ | 27.50 | | | | 3.0 | % | | | 0 | % | | | 31 | % | | 6.5 years |
| | |
(A) | | Expected volatility is based on implied volatility. |
(B) | | Simplified method per SAB 107 and 110. |
121
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table summarizes activity and balance information of the options under the Award Plans and 1995 Plan:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, | |
| | 2009 | | | 2008 | | | 2007 | |
| | | | | Weighted
| | | | | | Weighted
| | | | | | Weighted
| |
| | | | | Average
| | | | | | Average
| | | | | | Average
| |
| | | | | Exercise
| | | | | | Exercise
| | | | | | Exercise
| |
| | Shares | | | Price | | | Shares | | | Price | | | Shares | | | Price | |
|
1995 Stock Option Plan | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding at the beginning of the year | | | 108,426 | | | $ | 3.86 | | | | 108,426 | | | $ | 3.86 | | | | 178,426 | | | $ | 5.11 | |
Granted | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Exercised | | | (38,425 | ) | | | 5.31 | | | | — | | | | — | | | | (70,000 | ) | | | 7.06 | |
Forfeited | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding at the end of the year | | | 70,001 | | | $ | 3.06 | | | | 108,426 | | | $ | 3.86 | | | | 108,426 | | | $ | 3.86 | |
Options exercisable at year end | | | 70,001 | | | $ | 3.06 | | | | 108,426 | | | $ | 3.86 | | | | 108,426 | | | $ | 3.86 | |
Options available for future grant | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
2004 Stock Option Plan | | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding at the beginning of the year | | | 2,769,943 | | | $ | 18.76 | | | | 2,553,443 | | | $ | 17.96 | | | | 851,238 | | | $ | 8.87 | |
Granted | | | — | | | | — | | | | 250,000 | | | | 26.51 | | | | 1,805,000 | | | | 22.14 | |
Exercised | | | (38,121 | ) | | | 9.34 | | | | (21,500 | ) | | | 12.18 | | | | (42,795 | ) | | | 7.43 | |
Expired | | | (6,214 | ) | | | 22.02 | | | | — | | | | — | | | | — | | | | — | |
Forfeited | | | (45,000 | ) | | | 22.02 | | | | (12,000 | ) | | | 22.02 | | | | (60,000 | ) | | | 22.02 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Outstanding at the end of the year | | | 2,680,608 | | | $ | 18.83 | | | | 2,769,943 | | | $ | 18.76 | | | | 2,553,443 | | | $ | 17.96 | |
Options exercisable at year end | | | 1,475,613 | | | $ | 15.54 | | | | 1,126,543 | | | $ | 12.87 | | | | 500,617 | | | $ | 9.24 | |
Options available for future grant | | | 6,109,627 | | | | | | | | 6,851,630 | | | | | | | | 1,295,735 | | | | | |
As of December 31, 2009, options for shares were in the following price ranges:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Weighted
| | | | |
| | | | | | Average
| | | | |
| | Options Outstanding | | Remaining
| | Options Exercisable |
| | Number of
| | Weighted Average
| | Contractual Life
| | Number of
| | Weighted Average
|
Exercise Price Range | | Shares | | Exercise Price | | (Years) | | Shares | | Exercise Price |
|
$1.45 — $5.31 | | | 70,001 | | | $ | 3.06 | | | | 3.46 | | | | 70,001 | | | $ | 3.06 | |
$7.43 | | | 612,484 | | | | 7.43 | | | | 4.80 | | | | 612,484 | | | | 7.43 | |
$12.90 | | | 93,338 | | | | 12.90 | | | | 5.70 | | | | 93,338 | | | | 12.90 | |
$20.35 — $22.02 | | | 1,674,786 | | | | 21.97 | | | | 7.20 | | | | 699,600 | | | | 21.80 | |
$24.80 — $28.34 | | | 300,000 | | | | 26.46 | | | | 8.50 | | | | 70,191 | | | | 26.42 | |
| | | | | | | | | | | | | | | | | | | | |
| | | 2,750,609 | | | | | | | | | | | | 1,545,614 | | | | | |
| | | | | | | | | | | | | | | | | | | | |
The aggregate intrinsic value as of December 31, 2009 for options exercisable was $8.1 million for both options outstanding and options vested and was zero for options expected to vest. The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the closing stock price on the last trading day of 2009 and the exercise price, multiplied by the number ofin-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 2009 (December 31, 2009). 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, 2009, 2008 and 2007 was $0.7 million, $0.3 million and $1.8 million, respectively.
As of December 31, 2009, there were options to purchase 2,630,109 shares of common stock that had vested and were expected to vest in future periods at a weighted average exercise price of $18.23. The total fair value of options expensed was $3.8 million, $5.3 million and $5.5 million for the years ended December 31, 2009, 2008 and 2007, respectively. As of December 31, 2009, there was $3.3 million of total unrecognized compensation expense related to stock options which is expected to be recognized over a weighted-average period of 2.4 years. The fair value of options vested during the years ended December 31 2009, 2008, and 2007 was $3.6 million, $3.5 million, and $1.9 million, respectively.
122
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
| |
NOTE 19. | ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
AOCI, net of income taxes, consists of the following (in thousands):
| | | | | | | | |
| | As of December 31, | |
| | 2009 | | | 2008 | |
|
Foreign currency translation | | $ | 659 | | | $ | (5,233 | ) |
Minimum pension liability | | | (587 | ) | | | (765 | ) |
Pension and other postretirement plan unrecognized net actuarial gain (loss) | | | 6,632 | | | | (2,122 | ) |
Net unrealized gain (loss) onavailable-for-sale securities | | | 739 | | | | (85 | ) |
| | | | | | | | |
Accumulated other comprehensive income (loss) | | $ | 7,443 | | | $ | (8,205 | ) |
| | | | | | | | |
| |
NOTE 20. | Related-Party TransactionsRELATED-PARTY TRANSACTIONS |
We hold a 26% investment in Quezon Power, Inc. (“Quezon”). We are party to an agreement with Quezon in which we assumed responsibility for the operation and maintenance of Quezon’s coal-fired electricity generation facility. Accordingly, 26% of the net income of Quezon is reflected in our consolidated statements of income and as such, 26% of the revenue earned under the terms of the operation and maintenance agreement is eliminated against Equityequity in Net Incomenet income from Unconsolidated Investments.unconsolidated investments. For the years ended December 31, 2009, 2008 2007 and 2006,2007, we collected $40.6 million, $34.0 million, $35.4 million, and $26.9$35.4 million, respectively, for the operation and maintenance of the facility. As of December 31, 20082009 and December 31, 2007,2008, the net amount due to Quezon was $3.2$5.0 million and $1.1$3.2 million, respectively, which represents advance payments received from Quezon for operation and maintenance costs.
As partOn June 30, 2009, we acquired a 30% owner-participant interest in the Detroit energy-from-waste facility. We are party to an operating and maintenance agreement with the owners of our acquisition of Covanta Energy in 2004 as part of its emergence from bankruptcy, we agreed to conduct a registered offering of our common stock to certain holders of Covanta Energy’s pre-petition secured debentures. On February 24, 2006, we completed this offering, in which 5,696,911 shares were issued in consideration for $20.8 million in gross proceeds, including 633,380 shares purchased by D.E. Shaw Laminar Portfolios, L.L.C. (“Laminar”)the facility, pursuant to which we operate, maintain and provide certain other services for the exerciseowners of rights held by Laminarthe facility for a term of one year. Accordingly, 30% of the net income of the Detroit energy-from-waste facility is reflected in our consolidated statements of income and as a holdersuch, 30% of those debentures.the revenue earned under the terms of the operation and maintenance agreement is eliminated against equity in net income from unconsolidated investments. See Note 3. Acquisitions, Business Development and Dispositions.
One member of our current Board of Directors is a senior advisor to a major law firm which Covanta Energy has used for several years, including many years prior to 2004, when we acquired Covanta Energy. Such member of the Board of Directors has had no direct or indirect involvement in the procurement, oversight or provision of services we receive from this law firm, is not involved in any manner in the billing of such services, and does not directly or indirectly benefit from associated fees. We paid this law firm approximately $1.3 million, $2.2 million, $0.9 million, and $0.3$0.9 million for the years ended December 31, 2009, 2008 2007 and 2006,2007, respectively.
| |
NoteNOTE 21. | Commitments and ContingenciesCOMMITMENTS AND CONTINGENCIES |
Weand/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
124
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
basis and when losses are considered probable and reasonably estimable, record as a loss an estimate of the ultimate outcome. If we can only estimate the range of a possible loss, an amount representing the low end of the range of possible outcomes is recorded. The final consequences of these proceedings are not presently determinable with certainty.
Covanta Energy Corporation
Generally, claims and lawsuits arising from events occurring prior to their respective petition dates against Covanta Energy and its subsidiaries, that had filed bankruptcy petitions and subsequently emerged from bankruptcy, have been resolved pursuant to the Covanta Energy reorganization plan, and have been discharged pursuant to orders of the Bankruptcy Court which confirmed the Covanta Energy reorganization plan or similar plans of subsidiaries emerging separately from Chapter 11. However, to the extent that claims are not dischargeable in bankruptcy, such claims may not be discharged. For example, the claims of certain persons who were personally injured prior to the petition date but whose injury only became manifest thereafter may not be discharged pursuant to the Covanta Energy reorganization plan.
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 federaland/or analogous state laws. In certain instances, we may be exposed to joint and several liabilities for remedial action or damages. 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 also sent waste to a given site and, in the case of divested operations, its contractual arrangement with the purchaser of such operations.
123
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The potential costs related to the matters described below and the possible impact on future operations are uncertain due in part to the complexity of governmental laws and regulations and their interpretations, the varying costs and effectiveness of cleanup technologies, the uncertain level of insurance or other types of recovery and the questionable level of our responsibility. Although the ultimate outcome and expense of any litigation, including environmental remediation, is uncertain, we believe that the following proceedings will not have a material adverse effect on our consolidated financial position or results of operations.
In June 2001,August 2004, the United States Environmental Protection Agency (“EPA”) named Covanta Haverhill, Inc. (“Haverhill”), as a potentially responsible party (“PRP”) at the Beede Waste Oil Superfund Site, Plaistow, New Hampshire (“Beede site”). On December 15, 2006, Haverhill together with numerous other PRPs signed the Beede Waste Oil Superfund Site RD/RA Consent Decree with respect to remediation of the Beede site. The Consent Decree was entered by the U.S. District Court in New Hampshire on July 22, 2008, and on October 1, 2008, Haverhill resolved its previously recorded liability of $750,000 under the Consent Decree by means of a payment to the Beede Waste Oil Superfund Site Settlement Trust. Haverhill’s ultimate liability at the Beede site was not material to its financial position and results of operations.
In August 2004, EPA notified Covanta Essex Company (“Essex”) that it was a potentially liableresponsible 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 is one of at least 73 PRPs named thus far that have joined the LPRSA PRP group. On May 8, 2007, EPA and the PRP group entered into an Administrative Order on Consent by which the PRP group is undertaking a Remedial Investigation/Feasibility Study (“Study”) of the LPRSA under EPA oversight. The cost to complete the Study is estimated at $54$52.5 million, in addition to EPA oversight costs. Essex’s share of the Study costs to date are not material to its financial position and results of operations; however, the Study costs are exclusive of
125
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
any costs that may be required of PRPs to remediate the LPRSA or costs associated with natural resource damages to the LPRSA that may be assessed against PRPs. On February 4, 2009, Essex and over 300 other PRPs were named as third-party defendants in a suit brought by the State of New Jersey Department of Environmental Protection (“NJDEP”) in Superior Court of New Jersey, Essex County against Occidental Chemical Corporation and certain related entities (“Occidental”) with respect to alleged contamination of the LPRSA by Occidental. The Occidental third partythird-party complaint seeks contribution from the third-party defendants with respect to any award to NJDEP of damages against Occidental in the matter. Considering the history of industrial and other discharges into the LPRSA from other sources, including named PRPs, Essex believes any releases to the LPRSA from its facility to be de minimis in comparison; however, it is not possible at this time to predict that outcome with certainty or to estimate Essex’s ultimate liability in the matter, including for LPRSA remedial costsand/or natural resource damagesand/or contribution claims made by Occidentaland/or other PRPs.
Other Commitments
Other commitments as of December 31, 20082009 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Commitments Expiring by Period | | | Commitments Expiring by Period | |
| | | | Less Than
| | More Than
| | | | | Less Than
| | More Than
| |
| | Total | | One Year | | One Year | | | Total | | One Year | | One Year | |
|
Letters of credit | | $ | 300,415 | | | $ | 46,111 | | | $ | 254,304 | | | $ | 278,191 | | | $ | 6,550 | | | $ | 271,641 | |
Surety bonds | | | 64,086 | | | | — | | | | 64,086 | | | | 111,032 | | | | — | | | | 111,032 | |
| | | | | | | | | | | | | | |
Total other commitments — net | | $ | 364,501 | | | $ | 46,111 | | | $ | 318,390 | | | $ | 389,223 | | | $ | 6,550 | | | $ | 382,673 | |
| | | | | | | | | | | | | | |
The letters of credit were issued under various credit facilities (primarily the Funded L/C Facility) to secure our performance under various contractual undertakings related to our domesticprojects in the Americas and international projectsInternational segments 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 these letters of credit, unreimbursed amounts would be treated under the Credit Facilities as additional term loans in the case of letters of credit issued under the Funded L/C Facility, or as revolving loans in the case of letters of credit issued under the Revolving Loan Facility.
The surety bonds listed on the table above relate primarily to performance obligations ($55.1100.2 million) and support for closure obligations of various energy projects when such projects cease operating ($9.010.8 million). 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 Debentures. These are:
| | |
| • | holders may require us to repurchase their Debentures on February 1, 2012, February 1, 2017 and February 1, 2022; |
| • | holders may require us to repurchase their Debentures, if a fundamental change occurs; and |
| • | holders may exercise their conversion rights upon the occurrence of certain events, which would require us to pay the conversion settlement amount in cashand/or our common stock. |
124
See Note 6. Long-Term Debt forCOVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Concluded)
We have certain contingent obligations related to the Notes. These are:
| | |
| • | holders may require us to repurchase their Notes, if a fundamental change occurs; and |
| • | holders may exercise their conversion rights upon the occurrence of certain events, which would require us to pay the conversion settlement amount in cash. |
For specific criteria related to contingent interest, conversion or redemption features of the Debentures.Debentures and the Notes, see Note 11. Long-Term Debt.
We have issued or are party to performance guarantees and related contractual support obligations undertaken pursuant to agreements to construct and operate domestic and international waste and energy facilities. For some projects, such performance guarantees include obligations to repay certain financial obligations if the project
126
COVANTA HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Concluded)
revenues are insufficient to do so, or to obtain or guarantee financing for a project. With respect to our domestic and international 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 onfor 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 domestic and international 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, either on domestic or international projects. SeeItem 1A. Risk Factors — We have provided guarantees and financial support in connection with our projects.guarantees.
| |
NoteNOTE 22. | Quarterly Data (Unaudited)QUARTERLY DATA (UNAUDITED) |
The following table present quarterly unaudited financial data for the periods presented on the consolidated statements of income (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Calendar Quarter Ended | | | Calendar Quarter Ended | |
| | March 31, | | June 30, | | September 30, | | December 31, | | | March 31, | | June 30, | | September 30, | | December 31, | |
Fiscal Quarter | | 2008 | | 2007 | | 2008 | | 2007 | | 2008 | | 2007 | | 2008 | | 2007 | | | 2009 | | 2008 | | 2009 | | 2008 | | 2009 | | 2008 | | 2009 | | 2008 | |
|
Operating revenue | | $ | 388,766 | | | $ | 330,209 | | | $ | 422,996 | | | $ | 355,140 | | | $ | 438,671 | | | $ | 352,350 | | | $ | 413,820 | | | $ | 395,388 | | | $ | 358,760 | | | $ | 388,766 | | | $ | 375,786 | | | $ | 422,996 | | | $ | 408,709 | | | $ | 438,671 | | | $ | 407,212 | | | $ | 413,820 | |
Operating income | | | 30,765 | | | | 8,280 | | | | 76,529 | | | | 77,212 | | | | 88,083 | | | | 71,627 | | | | 60,588 | | | | 79,491 | | | | 3,192 | | | | 30,765 | | | | 61,332 | | | | 76,529 | | | | 70,979 | | | | 88,083 | | | | 60,332 | | | | 60,588 | |
Net income (loss) | | | 14,772 | | | | (17,918 | ) | | | 44,853 | | | | 37,716 | | | | 49,700 | | | | 38,415 | | | | 29,948 | | | | 72,300 | | |
Earnings (loss) per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) income attributable to Covanta Holding Corporation | | | | (651 | ) | | | 12,263 | | | | 33,167 | | | | 42,299 | | | | 40,852 | | | | 47,099 | | | | 28,277 | | | | 27,299 | |
Earnings per share: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 0.10 | | | | (0.12 | ) | | | 0.29 | | | | 0.25 | | | | 0.32 | | | | 0.25 | | | | 0.20 | | | | 0.47 | | | | — | | | | 0.08 | | | | 0.22 | | | | 0.28 | | | | 0.27 | | | | 0.31 | | | | 0.18 | | | | 0.18 | |
Diluted | | | 0.10 | | | | (0.12 | ) | | | 0.29 | | | | 0.24 | | | | 0.32 | | | | 0.25 | | | | 0.19 | | | | 0.47 | | | | — | | | | 0.08 | | | | 0.21 | | | | 0.27 | | | | 0.26 | | | | 0.30 | | | | 0.18 | | | | 0.18 | |
| |
NOTE 23. | SUBSEQUENT EVENTS |
On February 1, 2010, we completed the acquisition transaction with Veolia Environmental Services North America Corp. by acquiring the 3,000 tpd energy-from-waste business in Miami-Dade, Florida for cash consideration of approximately $128.4 million. The consideration is subject to certain post-closing adjustments. We plan to record the preliminary purchase price allocation for this acquisition in the first quarter of 2010, which is expected to include working capital, an intangible asset related to a long-term operating contract, goodwill and assumed debt. This acquired business includes a long-term operating contract for this publicly-owned energy-from-waste facility with Miami-Dade County in Florida.
We have evaluated all significant activities through February 22, 2010 (the issue date of this report) and have concluded that no additional subsequent events have occurred that would require recognition in the consolidated financial statements or disclosure in the notes to consolidated financial statements.
127125
Schedule II — Valuation and Qualifying Accounts
Receivables Valuation and Qualifying Accounts
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Additions | | | | | | | | | Additions | | | | | |
| | Balance at
| | Charged to
| | Charged to
| | | | Balance at
| | | Balance at
| | Charged to
| | Charged to
| | | | Balance at
| |
| | Beginning
| | Costs and
| | Other
| | | | End of
| | | Beginning
| | Costs and
| | Other
| | | | End of
| |
| | of Period | | Expense | | Accounts | | Deductions | | Period | | | of Period | | Expense | | Accounts | | Deductions | | Period | |
| | (In thousands) | | | | | | | (In thousands) | | | | | |
| |
For the year ended December 31, 2009 | | | | | | | | | | | | | | | | | | | | | |
Allowances deducted in the balance sheet from the assets to which they apply: | | | | | | | | | | | | | | | | | | | | | |
Doubtful receivables — current | | | $ | 3,437 | | | $ | 2,240 | | | | $ — | | | $ | 2,699 | | | $ | 2,978 | |
Doubtful receivables — noncurrent | | | | 307 | | | | 9 | | | | — | | | | 30 | | | | 286 | |
| | | | | | | | | | | | |
Total | | | $ | 3,744 | | | $ | 2,249 | | | | $ — | | | $ | 2,729 | | | $ | 3,264 | |
| | | | | | | | | | | |
For the year ended December 31, 2008 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowances deducted in the balance sheet from the assets to which they apply: | | | | | | | | | | | �� | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Doubtful receivables — current | | $ | 4,353 | | | $ | 1,821 | | | $ | — | | | $ | 2,737 | | | $ | 3,437 | | | $ | 4,353 | | | $ | 1,821 | | | | $ — | | | $ | 2,737 | | | $ | 3,437 | |
Doubtful receivables — noncurrent | | | 409 | | | | 18 | | | | — | | | | 120 | | | | 307 | | | | 409 | | | | 18 | | | | — | | | | 120 | | | | 307 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 4,762 | | | $ | 1,839 | | | $ | — | | | $ | 2,857 | | | $ | 3,744 | | | $ | 4,762 | | | $ | 1,839 | | | | $ — | | | $ | 2,857 | | | $ | 3,744 | |
| | | | | | | | | | | | | | | | | | | | | | |
For the year ended December 31, 2007 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Allowances deducted in the balance sheet from the assets to which they apply: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Doubtful receivables — current | | $ | 4,469 | | | $ | 1,270 | | | $ | 19 | | | $ | 1,405 | | | $ | 4,353 | | | $ | 4,469 | | | $ | 1,270 | | | | $ 19 | | | $ | 1,405 | | | $ | 4,353 | |
Doubtful receivables — noncurrent | | | 382 | | | | (80 | ) | | | — | | | | (107 | ) | | | 409 | | | | 382 | | | | (80 | ) | | | — | | | | (107 | ) | | | 409 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 4,851 | | | $ | 1,190 | | | $ | 19 | | | $ | 1,298 | | | $ | 4,762 | | | $ | 4,851 | | | $ | 1,190 | | | | $ 19 | | | $ | 1,298 | | | $ | 4,762 | |
| | | | | | | | | | | | | | | | | | | | | | |
For the year ended December 31, 2006 | | | | | | | | | | | | | | | | | | | | | |
Allowances deducted in the balance sheet from the assets to which they apply: | | | | | | | | | | | | | | | | | | | | | |
Doubtful receivables — current | | $ | 4,959 | | | $ | 2,088 | | | $ | 1,003 | | | $ | 3,581 | | | $ | 4,469 | | |
Doubtful receivables — noncurrent | | | 274 | | | | 81 | | | | — | | | | (27 | ) | | | 382 | | |
| | | | | | | | | | | | |
Total | | $ | 5,233 | | | $ | 2,169 | | | $ | 1,003 | | | $ | 3,554 | | | $ | 4,851 | | |
| | | | | | | | | | | | |
| |
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 |
Disclosure 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 byRule 13a-15(b) and15d-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of December 31, 2008.2009. 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 Chief Executive Officer and Chief Financial Officer have concluded that, based on their review, our disclosure controls and procedures are effective to provide such reasonable assurance.
Our management, including the 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
128
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, 20082009 as required by Section 404 of the Sarbanes-Oxley Act. Management’s report on our internal control over financial reporting is included on page 130.128. The Independent Registered Public Accounting Firm’s report with respect to the effectiveness of our
126
internal control over financial reporting is included on page 131.129. Management has concluded that internal control over financial reporting is effective as of December 31, 2008.2009.
Changes in Internal Control over Financial Reporting
Our management continually reviewsIn August 2009, we completed the disclosureacquisition of six energy-from-waste businesses and one transfer station business located in New York, Pennsylvania, California and Canada. As a result of the timing of the closing of this acquisition, a complete integration and analysis of the internal controls and procedures and makes changes, as necessary,relating to ensure the qualityacquired businesses was not practicable for purposes of inclusion in our assessment. We will continue to evaluate the impact of the acquisition of these businesses on our system of internal controls over financial reporting. We have excluded these businesses from Management’s Report on Internal Control over Financial Reporting as of December 31, 2009.
There has not been any change in our system of internal control over financial reporting during the fiscal quarter ended December 31, 20082009 that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.
129127
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 ActRule 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, 2008,2009, following the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission inInternal Control — Integrated Framework.Based on our assessment under the framework inInternal Control — Integrated Framework, Covanta’s management has concluded that our internal control over financial reporting was effective as of December 31, 2008.2009.
The assessment of and conclusion on the effectiveness of internal control over financial reporting by Covanta’s management did not include internal controls of the six energy-from-waste businesses and one transfer station business acquired from Veolia Environmental Services North America Corp., which are included in our 2009 consolidated financial statements and constituted 8% and 21% of total and net assets, respectively, as of December 31, 2009 and 3% and 2% of revenues and net income, respectively, for the year then ended. This acquisition was closed in August 2009 and a complete integration and analysis of the internal controls relating to the acquired businesses was not practicable for purposes of inclusion in our assessment. We will continue to evaluate the impact of the acquisition of these businesses on our system of internal controls over financial reporting. We have excluded these businesses from our assessment of the effectiveness of internal control over financial reporting as of December 31, 2009.
Our independent auditors, Ernst & Young LLP, have issued an attestation report on our internal control over financial reporting. This report appears on page 131129 of this report onForm 10-K for the year ended December 31, 2008.2009.
Anthony J. Orlando
President and Chief Executive Officer
Mark A. Pytosh
Executive Vice President and Chief
Financial Officer
February 25, 200922, 2010
130128
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Covanta Holding Corporation
We have audited Covanta Holding Corporation’s internal control over financial reporting as of December 31, 2008,2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (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.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the six energy-from-waste and one transfer station acquired from Veolia Environmental Services North America Corp., which are included in the 2009 consolidated financial statements of Covanta Holding Corporation and constituted 8% and 21% of total and net assets, respectively, as of December 31, 2009 and 3% and 2% of revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of Covanta Holding Corporation also did not include an evaluation of the internal control over financial reporting of the six energy-from-waste businesses and one transfer station acquired from Veolia Environmental Services North America Corp.
In our opinion, Covanta Holding Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008,2009, based on the COSO criteria.
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, 20082009 and 2007,2008, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 20082009 and our report dated February 25, 200922, 2010 expressed an unqualified opinion thereon.
MetroPark, New Jersey
February 25, 200922, 2010
131129
| |
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 underItem 1. Business — Executive Officersof this Annual Report onForm 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, controllerController 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 atwww.covantaholding.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 the definitive Proxy Statement for the 20092010 Annual Meeting of Stockholders.
| |
Item 11. | EXECUTIVE COMPENSATION |
The information required by Item 11 ofForm 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 20092010 Annual Meeting of Stockholders.
| |
Item 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by Item 12 ofForm 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 20092010 Annual Meeting of Stockholders.
Equity Compensation Plans
The following table sets forth information regarding the number of our securities which could be issued upon the exercise of outstanding options, the weighted average exercise price of those options in the 2004 and 1995 Stock and Incentive Plans and the number of securities remaining for future issuance under the 2004 Stock and Incentive PlansPlan as of December 31, 2008.2009. Upon adoption of the 2004 Stock and Incentive Plans, future issuances under the 1995 Stock and Incentive Plan were terminated. We do not have any equity compensation plans that have not been approved by our security holders.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Weighted Average
| | Number of Securities Remaining
| | | | | Weighted Average
| | Number of Securities Remaining
| |
| | Number of Securities to
| | Exercise Price of
| | Available for Future Issuance
| | | Number of Securities to
| | Exercise Price of
| | Available for Future Issuance
| |
| | be Issued Upon Exercise
| | Outstanding
| | Under Equity Compensation
| | | be Issued Upon Exercise
| | Outstanding
| | Under Equity Compensation
| |
| | of Outstanding Options,
| | Options, Warrants
| | Plans (Excluding Securities
| | | of Outstanding Options,
| | Options, Warrants
| | Plans (Excluding Securities
| |
| | Warrants and Rights
| | and Rights
| | Reflected in Column A)
| | | Warrants and Rights
| | and Rights
| | Reflected in Column A)
| |
Plan category | | (A) | | (B) | | (C) | | |
Plan Category | | | (A) | | (B) | | (C) | |
|
Equity Compensation Plans Approved By Security Holders | | | 2,878,369 | | | $ | 18.20 | | | | 7,028,964 | (1) | | | 2,750,609 | | | $ | 18.43 | | | | 6,331,961 | (1) |
Equity Compensation Plans Not Approved By Security Holders | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
| | | | | | | | | | | | | | |
TOTAL | | | 2,878,369 | | | $ | 18.20 | | | | 7,028,964 | | | | 2,750,609 | | | $ | 18.43 | | | | 6,331,961 | |
| | | | | | | | | | | | | | |
| | |
(1) | | Of the 7,028,9646,331,961 shares that remain available for future issuance, 6,851,6306,109,627 shares are currently reserved for issuance under the equity compensation plans. |
132
| |
Item 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by Item 13 ofForm 10-K is incorporated by reference herein from the discussions under the headings “Board Structure and Composition” and “Certain Relationships and Related Transactions” in the definitive Proxy Statement for the 20092010 Annual Meeting of Stockholders.
130
| |
Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by Item 14 ofForm 10-K is incorporated by reference herein from the discussion under the heading “Independent Auditor Fees” in the definitive Proxy Statement for the 20092010 Annual Meeting of Stockholders.
PART IV
| |
Item 15. | EXHIBITS AND 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 Income for the years ended December 31, 2009, 2008 2007 and 20062007 |
|
| | Consolidated Balance Sheets as of December 31, 20082009 and 20072008 |
|
| | Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 2007 and 20062007 |
|
| | Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2009, 2008 2007 and 20062007 |
|
| | Notes to Consolidated Financial Statements, for the years ended December 31, 2009, 2008 2007 and 20062007 |
|
| | Report of Ernst & Young LLP, Independent Auditors, on the consolidated financial statements of Covanta Holding Corporation for the years ended December 31, 2009, 2008 2007 and 20062007 |
(2) Financial Statement Schedules of Covanta Holding Corporation:
| | |
| | Included in Part II of this report: |
Included in Part II of this report: Schedule II — Valuation and Qualifying Accounts
| | |
| | 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.
133
(3) Exhibits:
EXHIBIT INDEX
| | | | |
Exhibit No. | | Description |
|
|
Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession. |
| | | | |
| 2 | .1† | | Investment andShare Purchase Agreement by and betweenamong Covanta Holding Corporation and Covanta Energy Corporation dated as of December 2, 2003Veolia Environmental Services North America Corp. (incorporated herein by reference to Exhibit 2.1 of Covanta Holding Corporation’s Current Report onForm 8-K dated December 2, 2003July 3, 2009 and filed with the SEC on December 5, 2003, as amended by Covanta Holding Corporation’s Current Report on Form 8-K/A dated December 2, 2003 and filed with the SEC on January 30, 2004)July 6, 2009). |
| 2 | .2† | | Note Purchase Agreement by and between Covanta Holding Corporation and the Purchasers named therein dated as of December 2, 2003 (incorporated herein by reference to Exhibit 2.2 of Covanta Holding Corporation’s Current Report on Form 8-K dated December 2, 2003 and filed with the SEC on December 5, 2003, as amended by Covanta Holding Corporation’s Current Report on Form 8-K/A dated December 2, 2003 and filed with the SEC on January 30, 2004). |
| 2 | .3† | | Amendment to Investment and Purchase Agreement by and between Covanta Holding Corporation and Covanta Energy Corporation dated February 23, 2004 (incorporated herein by reference to Exhibit 2.3 of Covanta Holding Corporation’s Current Report on Form 8-K dated March 10, 2004 and filed with the SEC on March 11, 2004). |
| 2 | .4† | | First Amendment to Note Purchase Agreement and Consent by and among Covanta Holding Corporation and 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 as of February 23, 2004 (incorporated herein by reference to Exhibit 2.4 of Covanta Holding Corporation’s Current Report on Form 8-K dated March 10, 2004 and filed with the SEC on March 11, 2004). |
| 2 | .5† | | Stock Purchase Agreement among Covanta ARC Holdings, Inc., the Sellers party thereto and Covanta Holding Corporation dated as of January 31, 2005 (incorporated herein by reference to Exhibit 2.1 of Covanta Holding Corporation’s Current Report on Form 8-K dated January 31, 2005 and filed with the SEC on February 2, 2005). |
Articles of Incorporation and By-Laws. |
| | | | |
| 3 | .1† | | Restated Certificate of Incorporation of Covanta Holding Corporation (incorporated herein by reference to Exhibit 3.1 of Covanta Holding Corporation’s Current Report onForm 8-K dated January 19, 2007 and filed with the SEC on January 19, 2007). |
| | | | |
| 3 | .2† | | Amended and Restated Bylaws of Covanta Holding Corporation, as amended and effective May 30, 20077, 2009 (incorporated herein by reference to Exhibit 3.1(ii) of Covanta Holding Corporation’s Current Report onForm 8-K dated May 30, 2007March 31, 2009 filed with the SEC on May 31, 2007)April 1, 2009). |
|
Instruments Defining Rights of Security Holders, Including Indentures. |
| | | | |
| 4 | .1† | | Specimen certificate representing shares of Covanta Holding Corporation’s common stock (incorporated herein by reference to Exhibit 4.1 of Covanta Holding Corporation’s Amendment No. 3 to Registration Statement onForm S-1 filed with the SEC on December 19, 2005). |
| | | | |
| 4 | .2† | | 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 onForm 10-K for the year ended December 27, 2002 and filed with the SEC on March 27, 2003). |
| | | | |
| 4 | .3† | | 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 onForm 8-K dated December 2, 2003 and filed with the SEC on December 5, 2003). |
| | | | |
| 4 | .4† | | Form of Warrant Offering Agreement between Wells Fargo Bank, National Association and Covanta Holding Corporation (incorporated herein by reference to Exhibit 4.11 of Covanta Holding Corporation’s Amendment No. 3 to Registration Statement onForm S-1 filed with the SEC on December 19, 2005). |
134131
| | | | |
Exhibit No. | | Description |
|
| | | | |
| 4 | .5† | | Indenture dated as of January 18, 2007 between Covanta Holding Corporation and Wells Fargo Bank, National Association, as trustee.trustee (incorporated herein by reference to Exhibit 4.1 of Covanta Holding Corporation’s Registration Statement onForm S-3 (Reg.No. 333-140082) filed with the SEC on January 19, 2007). |
| | | | |
| 4 | .6† | | First Supplemental Indenture dated as of January 31, 2007 between Covanta Holding Corporation and Wells Fargo Bank, National Association, as trustee (including the Form of Global Debenture) (incorporated herein by reference to Exhibit 4.2 of Covanta Holding Corporation’s Current Report onForm 8-K dated January 31, 2007 and filed with the SEC on February 6, 2007). |
| | | | |
| 4 | .7† | | Indenture dated May 22, 2009 by and among Covanta Holding Corporation and Wells Fargo Bank, National Association (incorporated herein by reference to Exhibit 4.1 of Covanta Holding Corporation’s Current Report onForm 8-K dated May 22, 2009 and filed with the SEC on May 22, 2009). |
| | | | |
| 4 | .8† | | First Supplemental Indenture dated as of June 10, 2009 between Covanta Holding Corporation and Wells Fargo Bank, National Association (incorporated herein by reference to Exhibit 4.1 of Covanta Holding Corporation’s Current Report onForm 8-K dated June 15, 2009 and filed with the SEC on June 15, 2009). |
|
Material Contracts. |
| | | | |
| 10 | .1† | | 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 onForm 10-K for the year ended December 31, 2003 and filed with the SEC on March 15, 2004). |
| | | | |
| 10 | .2† | | Corporate Services and Expenses Reimbursement Agreement, dated as of March 10, 2004, by and between Covanta Holding Corporation and Covanta Energy Corporation (incorporated herein by reference to Exhibit 10.26 of Covanta Holding Corporation’s Annual Report onForm 10-K for the year ended December 31, 2003 and filed with the SEC on March 15, 2004). |
| | | | |
| 10 | .3† | | Management Services and Reimbursement Agreement, dated March 10, 2004, among Covanta Energy Corporation, Covanta Energy Group, Inc., Covanta Projects, Inc., Covanta Power International Holdings, Inc., and certain Subsidiaries listed therein (incorporated herein by reference to Exhibit 10.30 of Covanta Holding Corporation’s Annual Report onForm 10-K for the year ended December 31, 2003 and filed with the SEC on March 15, 2004). |
| | | | |
| 10 | .4†* | | 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 onForm 10-K for the year ended December 31, 2004 and filed with the SEC on March 16, 2005). |
| 10 | .5†* | | Covanta Holding Corporation Equity Award Plan for Employees and Officers, as amended (incorporated herein by reference to Exhibit A of Covanta Holding Corporation’s 2008 Definitive Proxy Statement on Form DEF 14A filed with the SEC on April 1, 2008). | |
| 10 | .6†.5†* | | Covanta Holding Corporation Equity Award Plan for Directors, as amended (incorporated herein by reference to Exhibit B of Covanta Holding Corporation’s 2008 Definitive Proxy Statement on Form DEF 14A filed with the SEC on April 1, 2008). |
| | | | |
| 10 | .6†* | | Covanta Holding Corporation Equity Award Plan for Employees and Officers, as amended by the Board of Directors through February 26, 2009 (incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Current Report onForm 8-K dated May 12, 2009 and filed with the SEC on May 12, 2009). |
| | | | |
| 10 | .7†* | | 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 onForm S-8 filed with the SEC on May 7, 2008). |
| | | | |
| 10 | .8†* | | Form of Covanta Holding Corporation Restricted Stock Award Agreement (incorporated herein by reference to Exhibit 4.4 of Covanta Holding Corporation’s Registration Statement onForm S-8 filed with the SEC on May 7, 2008). |
| | | | |
| 10 | .9†* | | Covanta Holding Corporation 1995 Stock and Incentive Plan (as amended effective December 12, 2000 and as further amended effective July 24, 2002) (incorporated herein by reference to Appendix A to Covanta Holding Corporation’s Proxy Statement filed with the SEC on June 24, 2002). |
| | | | |
| 10 | .10†* | | Employment Agreement, dated October 5, 2004, by and between Anthony J. Orlando and Covanta Projects, Inc., Covanta Energy Corporation and Covanta Holding Corporation (incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Current Report onForm 8-K dated October 5, 2004 and filed with the SEC on October 7, 2004). |
| | | | |
| 10 | .11†* | | Employment Agreement, dated October 5, 2004, by and between Timothy J. Simpson and Covanta Projects, Inc., Covanta Energy Corporation and Covanta Holding Corporation (incorporated herein by reference to Exhibit 10.3 of Covanta Holding Corporation’s Current Report onForm 8-K dated October 5, 2004 filed with the SEC on October 7, 2004). |
132
| | | | |
Exhibit No. | | Description |
|
| | | | |
| 10 | .12†* | | Form of Covanta Holding Corporation Amendment to Stock Option Agreement for Employees and Officers (incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Current Report onForm 8-K dated March 18, 2005 and filed with the SEC on March 24, 2005). |
135
| | | | |
Exhibit No.
| | Description
|
|
| 10 | .13† | | Summary Description of Covanta Holding Corporation Cash Bonus Program, dated February 2008 (incorporated herein by reference to Exhibit 10.14 of Covanta Holding Corporation’s Annual Report onForm 10-K for the fiscal year ended December 31, 2007). |
| | | | |
| 10 | .14† | | 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 onForm 8-K dated June 24, 2005 and filed with the SEC on June 30, 2005). |
| | | | |
| 10 | .15†* | | Employment Agreement, dated October 5, 2004, by and between John Klett and Covanta Energy Corporation (incorporated herein by reference to Exhibit 10.7 of Covanta Energy Corporation’s Current Report onForm 8-K dated October 5, 2004 and filed with the SEC on October 7, 2004). |
| | | | |
| 10 | .16†* | | Employment Agreement, dated October 5, 2004, by and between Seth Myones and Covanta Energy Corporation (incorporated herein by reference to Exhibit 10.9 of Covanta Energy Corporation’s Current Report onForm 8-K dated October 5, 2004 and filed with the SEC on October 7, 2004). |
| | | | |
| 10 | .17†* | | Form of Amendment to Employment Agreement with |
| | | | |
| | | | a. Anthony J. Orlando, President and Chief Executive Officer; |
| | | | |
| | | | b. Mark A. Pytosh, Executive Vice President and Chief Financial Officer; |
| | | | |
| | | | c. John M. Klett, Executive Vice President and Chief Operating Officer; |
| | | | |
| | | | d. Timothy J. Simpson, Executive Vice President, General Counsel and Secretary; |
| | | | |
| | | | e. Seth Myones, President, Americas Covanta Energy |
| | | | |
| | | | and certain subsidiaries, dated October 22, 2008, and effective as of January 1, 2009 (incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Quarterly Report onForm 10-Q for the period ended September 30, 2008 and filed with the SEC on October 22, 2008). |
| | | | |
| 10 | .18† | | 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 onForm 8-K dated March 2, 2006 and filed with the SEC on March 6, 2006). |
| | | | |
| 10 | .19† | | 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 onForm 8-K dated March 17, 2006 and filed with the SEC on March 20, 2006). |
| | | | |
| 10 | .20† | | 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 onForm 8-K dated March 2, 2006 and filed with the SEC on March 6, 2006). |
| | | | |
| 10 | .21† | | Latent Deficiency Claims Administration Procedures Agreement (Exhibit B to the 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 10.3 of Covanta Holding Corporation’s Current Report onForm 8-K dated March 2, 2006 and filed with the SEC on March 6, 2006). |
| 10 | .22†* | | Transition and Separation Agreement, dated April 5, 2006, among Craig D. Abolt, Covanta Holding Corporation, Covanta Energy Corporation and Covanta Projects, Inc. (incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Current Report on Form 8-K dated April 5, 2006 and filed with the SEC on April 7, 2006). |
136
| | | | |
Exhibit No.
| | Description
|
|
| 10 | .23† | | Amended and Restated Credit Agreement, dated as of May 26, 2006, among Covanta Energy Corporation, Covanta Holding Corporation as a guarantor, certain subsidiaries of Covanta Energy Corporation as guarantors, various lenders, Goldman Sachs Credit Partners L.P., as Sole Lead Arranger, Sole Book Runner and Sole Syndication Agent, Administrative Agent and Collateral Agent, JPMorgan Chase Bank, as Co-Documentation Agent, Revolving Issuing Bank and a Funded LC Issuing Bank, UBS Securities LLC, as Co-Documentation Agent, UBS AG, Stamford Branch, as a Funded LC Issuing Bank, and Calyon New York Branch, as Co-Documentation Agent (incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Current Report on Form 8-K dated May 26, 2006 and filed with the SEC on May 31, 2006). |
| 10 | .24† | | Amendment to Second Lien Credit and Guaranty Agreement, dated as of May 26, 2006, among Covanta Energy Corporation, Covanta Holding Corporation and the parties signatory thereto (incorporated herein by reference to Exhibit 10.2 of Covanta Holding Corporation’s Current Report on Form 8-K dated May 26, 2006 and filed with the SEC on May 31, 2006). |
| 10 | .25† | | Amendment and Limited Waiver to Intercreditor Agreement, dated as of May 26, 2006, among Covanta Energy Corporation, Goldman Sachs Credit Partners L.P., as Collateral Agent under the First Lien Credit Agreement, Credit Suisse, Cayman Islands Branch, as Administrative Agent for the Second Lien Credit Agreement and as Collateral Agent for the Parity Lien Claimholders (incorporated herein by reference to Exhibit 10.3 of Covanta Holding Corporation’s Current Report on Form 8-K dated May 26, 2006 and filed with the SEC on May 31, 2006). |
| 10 | .26†.22†* | | Form of Covanta Holding Corporation Restricted Stock Award Agreement for Directors (incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Current Report onForm 8-K dated May 31, 2006 and filed with the SEC on June 2, 2006). |
| 10 | .27†* | | Employment Agreement, dated as of August 17, 2006, among Covanta Holding Corporation, Covanta Energy Corporation and Mark A. Pytosh (incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Current Report on Form 8-K dated August 17, 2006 and filed with the SEC on August 17, 2006). |
| 10 | .28† | | Credit and Guaranty Agreement, dated as of February 9, 2007, among Covanta Energy Corporation, Covanta Holding Corporation, certain subsidiaries of Covanta Energy Corporation, as guarantors, the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Collateral Agent, Revolving Issuing Bank and a Funded LC Issuing Bank, UBS AG, Stamford Branch, as a Funded LC Issuing Bank, Lehman Commercial Paper Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Syndication Agents, and Bank of America, N.A. and Barclays Bank PLC, as Documentation Agents (incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Current Report on Form 8-K dated February 9, 2007 and filed with the SEC on February 15, 2007). |
| 10 | .29† | | Pledge and Security Agreement, dated as of February 9, 2007, between each of Covanta Energy Corporation and the other grantors party thereto, and JPMorgan Chase Bank, N.A., as Collateral Agent (incorporated herein by reference to Exhibit 10.2 of Covanta Holding Corporation’s Current Report on Form 8-K dated February 9, 2007 and filed with the SEC on February 15, 2007). |
| 10 | .30† | | Pledge Agreement, dated as of February 9, 2007, between Covanta Holding Corporation and JPMorgan Chase Bank, N.A., as Collateral Agent (incorporated herein by reference to Exhibit 10.3 of Covanta Holding Corporation’s Current Report on Form 8-K dated February 9, 2007 and filed with the SEC on February 15, 2007). |
| 10 | .31† | | Intercompany Subordination Agreement, dated as of February 9, 2007, among Covanta Energy Corporation, Covanta Holding Corporation, certain subsidiaries of Covanta Energy Corporation, as Guarantor Subsidiaries, certain other subsidiaries of Covanta Energy Company, as Excluded Subsidiaries or Unrestricted Subsidiaries, and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated herein by reference to Exhibit 10.4 of Covanta Holding Corporation’s Current Report on Form 8-K dated February 9, 2007 and filed with the SEC on February 15, 2007). |
137
133
| | | | |
Exhibit No. | | Description |
|
| 10 | .32† | | Form of Covanta Holding Corporation Indemnification Agreement, entered into with each of the following: David M. Barse, Ronald J. Broglio, Peter C.B. Bynoe, Linda J. Fisher, Richard L. Huber, Anthony J. Orlando, William C. Pate, Robert S. Silberman, Jean Smith, Clayton Yeutter, Samuel Zell, Mark A. Pytosh, Timothy J. Simpson, Thomas E. Bucks, John M. Klett and Seth Myones (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. |
| 12 | .1 | | Computation of Ratio of Earnings to Fixed Charges. |
| 21 | .1 | | List of Subsidiaries. |
| 23 | .1 | | Consent of Independent Registered Public Accounting Firm of Covanta Holding Corporation and Subsidiaries: Ernst & Young LLP. |
| 31 | .1 | | Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended). |
| 31 | .2 | | Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended). |
| 32 | .1 | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from the Chief Executive Officer and the Chief Financial Officer of Covanta Holding Corporation. |
| | | | |
Exhibit No. | | Description |
|
| | | | |
| 10 | .23†* | | Employment Agreement, dated as of August 17, 2006, among Covanta Holding Corporation, Covanta Energy Corporation and Mark A. Pytosh (incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Current Report onForm 8-K dated August 17, 2006 and filed with the SEC on August 17, 2006). |
| | | | |
| 10 | .24† | | Credit and Guaranty Agreement, dated as of February 9, 2007, among Covanta Energy Corporation, Covanta Holding Corporation, certain subsidiaries of Covanta Energy Corporation, as guarantors, the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Collateral Agent, Revolving Issuing Bank and a Funded LC Issuing Bank, UBS AG, Stamford Branch, as a Funded LC Issuing Bank, Lehman Commercial Paper Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Syndication Agents, and Bank of America, N.A. and Barclays Bank PLC, as Documentation Agents (incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Current Report onForm 8-K dated February 9, 2007 and filed with the SEC on February 15, 2007). |
| | | | |
| 10 | .25† | | Pledge and Security Agreement, dated as of February 9, 2007, between each of Covanta Energy Corporation and the other grantors party thereto, and JPMorgan Chase Bank, N.A., as Collateral Agent (incorporated herein by reference to Exhibit 10.2 of Covanta Holding Corporation’s Current Report onForm 8-K dated February 9, 2007 and filed with the SEC on February 15, 2007). |
| | | | |
| 10 | .26† | | Pledge Agreement, dated as of February 9, 2007, between Covanta Holding Corporation and JPMorgan Chase Bank, N.A., as Collateral Agent (incorporated herein by reference to Exhibit 10.3 of Covanta Holding Corporation’s Current Report onForm 8-K dated February 9, 2007 and filed with the SEC on February 15, 2007). |
| | | | |
| 10 | .27† | | Intercompany Subordination Agreement, dated as of February 9, 2007, among Covanta Energy Corporation, Covanta Holding Corporation, certain subsidiaries of Covanta Energy Corporation, as Guarantor Subsidiaries, certain other subsidiaries of Covanta Energy Company, as Excluded Subsidiaries or Unrestricted Subsidiaries, and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated herein by reference to Exhibit 10.4 of Covanta Holding Corporation’s Current Report onForm 8-K dated February 9, 2007 and filed with the SEC on February 15, 2007). |
| | | | |
| 10 | .28† | | Form of Covanta Holding Corporation Indemnification Agreement, entered into with each of the following: David M. Barse, Ronald J. Broglio, Peter C.B. Bynoe, Linda J. Fisher, Joseph M. Holsten, Richard L. Huber, Anthony J. Orlando, William C. Pate, Robert S. Silberman, Jean Smith, Clayton Yeutter, Samuel Zell, Mark A. Pytosh, Timothy J. Simpson, Thomas E. Bucks, John M. Klett and Seth Myones (incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Current Report onForm 8-K dated December 6, 2007 and filed with the SEC on December 12, 2007. |
| | | | |
| 10 | .29† | | 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 onForm 8-K dated January 31, 2005 and filed with the SEC on February 2, 2005). |
| | | | |
| 10 | .30† | | 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 onForm 8-K dated January 31, 2005 and filed with the SEC on February 2, 2005). |
| | | | |
| 10 | .31† | | 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 onForm 8-K dated January 31, 2005 and filed with the SEC on February 2, 2005). |
| | | | |
| 10 | .32† | | Purchase Agreement dated May 18, 2009 by and among Covanta Holding Corporation and Barclays Capital Inc., Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., as representatives of the several initial purchasers named therein (incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Current Report onForm 8-K dated May 22, 2009 and filed with the SEC on May 22, 2009). |
| | | | |
| 10 | .33† | | Form of Confirmation of Cash Convertible Note Hedge Transaction (incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Current Report onForm 8-K dated May 22, 2009 and filed with the SEC on May 22, 2009). |
| | | | |
| 10 | .34† | | Form of Confirmation of Warrant (incorporated herein by reference to Exhibit 10.1 of Covanta Holding Corporation’s Current Report onForm 8-K dated May 22, 2009 and filed with the SEC on May 22, 2009). |
| | | | |
| 12 | .1 | | Computation of Ratio of Earnings to Fixed Charges. |
| | | | |
| 21 | .1 | | List of Subsidiaries. |
| | | | |
| 23 | .1 | | Consent of Independent Registered Public Accounting Firm of Covanta Holding Corporation and Subsidiaries: Ernst & Young LLP. |
| | | | |
| 31 | .1 | | Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (pursuant toRule 13a-14(a) andRule 15d-14(a) of the Securities Exchange Act, as amended). |
134
| | | | |
Exhibit No. | | Description |
|
| | | | |
| 31 | .2 | | Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (pursuant toRule 13a-14(a) andRule 15d-14(a) of the Securities Exchange Act, as amended). |
| | | | |
| 32 | .1 | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 from the Chief Executive Officer and the Chief Financial Officer of Covanta Holding Corporation. |
| | |
† | | Not filed herewith, but incorporated herein by reference. |
|
* | | Management contract or compensatory plan or arrangement. |
Pursuant to paragraph 601(b)(4)(iii)(A) ofRegulation 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.
(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.
138
135
SIGNATURES
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.
COVANTA HOLDING CORPORATION
(Registrant)
| | |
| By: | /s/ Anthony J. Orlando |
Anthony J. Orlando
President and Chief Executive Officer
Date: March 2, 2009February 22, 2010
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 | | Date |
|
| | | | |
/s/ Anthony J. Orlando Anthony J. Orlando | | President and Chief Executive Officer and Director (Principal (Principal Executive Officer) | | March 2, 2009February 22, 2010 |
| | | | |
/s/ Mark A. Pytosh Mark A. Pytosh | | Executive Vice President and Chief Financial Officer (Principal (Principal Financial Officer) | | March 2, 2009February 22, 2010 |
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/s/ Thomas E. Bucks Thomas E. Bucks | | Vice President and Chief Accounting Officer (Principal (Principal Accounting Officer) | | March 2, 2009February 22, 2010 |
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/s/ Samuel Zell Samuel Zell | | Chairman of the Board | | March 2, 2009February 22, 2010 |
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/s/ David M. Barse David M. Barse | | Director | | March 2, 2009February 22, 2010 |
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/s/ Ronald J. Broglio Ronald J. Broglio | | Director | | March 2, 2009February 22, 2010 |
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/s/ Peter C. B. Bynoe Peter C. B. Bynoe | | Director | | March 2, 2009February 22, 2010 |
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/s/ Linda J. Fisher Linda J. Fisher | | Director | | March 2, 2009February 22, 2010 |
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/s/ Joseph M. Holsten Joseph M. Holsten | | Director | | February 22, 2010 |
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/s/ Richard L. Huber Richard L. Huber | | Director | | March 2, 2009February 22, 2010 |
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/s/ William C. Pate William C. Pate | | Director | | March 2, 2009February 22, 2010 |
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/s/ Robert S. Silberman Robert S. Silberman | | Director | | March 2, 2009February 22, 2010 |
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/s/ Jean Smith Jean Smith | | Director | | March 2, 2009February 22, 2010 |
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/s/ Clayton Yeutter Clayton Yeutter | | Director | | March 2, 2009February 22, 2010 |
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