e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31,
2009
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file
number: 1-06732
COVANTA HOLDING
CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
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95-6021257
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employee
Identification No.)
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40 Lane Road, Fairfield, N.J.
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07004
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(Address of Principal Executive
Offices)
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(Zip Code)
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Registrants telephone number, including area code:
(973) 882-9000
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.10 par value per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
Company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of June 30, 2009, the aggregate market value of the
registrants common stock held by non-affiliates of the
registrant was $2,186,734,461. The aggregate market value was
computed by using the closing price of the common stock as of
that date on the New York Stock Exchange. (For purposes of
calculating this amount only, all directors and executive
officers of the registrant have been treated as affiliates.)
Indicate the number of shares outstanding of each of the
registrants classes of common stock, as of the latest
practicable date.
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Class
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February 17, 2010
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Common Stock, $0.10 par value per share
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154,936,092 shares
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Documents
Incorporated By Reference:
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Part of Form 10-K of Covanta
Holding Corporation
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Documents Incorporated by
Reference
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Part III
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Portions of the Proxy Statement to be filed with the Securities
and Exchange Commission in connection with the 2010 Annual
Meeting of Stockholders.
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CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on
Form 10-K
may constitute forward-looking statements as defined
in Section 27A of the Securities Act of 1933 (the
Securities Act), Section 21E of the Securities
Exchange Act of 1934 (the Exchange Act), the Private
Securities Litigation Reform Act of 1995 (the PSLRA)
or in releases made by the Securities and Exchange Commission
(SEC), all as may be amended from time to time. Such
forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause the
actual results, performance or achievements of Covanta Holding
Corporation and its subsidiaries (Covanta) or
industry results, to differ materially from any future results,
performance or achievements expressed or implied by such
forward-looking statements. Statements that are not historical
fact are forward-looking statements. Forward-looking statements
can be identified by, among other things, the use of
forward-looking language, such as the words plan,
believe, expect, anticipate,
intend, estimate, project,
may, will, would,
could, should, seeks, or
scheduled to, or other similar words, or the
negative of these terms or other variations of these terms or
comparable language, or by discussion of strategy or intentions.
These cautionary statements are being made pursuant to the
Securities Act, the Exchange Act and the PSLRA with the
intention of obtaining the benefits of the safe
harbor provisions of such laws. Covanta cautions investors
that any forward-looking statements made by Covanta are not
guarantees or indicative of future performance. Important
assumptions and other important factors that could cause actual
results to differ materially from those forward-looking
statements with respect to Covanta include, but are not limited
to, the risks and uncertainties affecting its businesses
described in Item 1A. Risk Factors of this Annual Report on
Form 10-K
and in other filings by Covanta with the SEC.
Although Covanta believes that its plans, intentions and
expectations reflected in or suggested by such forward-looking
statements are reasonable, actual results could differ
materially from a projection or assumption in any of its
forward-looking statements. Covantas future financial
condition and results of operations, as well as any
forward-looking statements, are subject to change and inherent
risks and uncertainties. The forward-looking statements
contained in this Annual Report on
Form 10-K
are made only as of the date hereof and Covanta does not have,
or undertake, any obligation to update or revise any
forward-looking statements whether as a result of new
information, subsequent events or otherwise, unless otherwise
required by law.
AVAILABILITY
OF INFORMATION
You may read and copy any materials Covanta files with the SEC
at the SECs Public Reference Room at
100 F Street, N.E., Room 1580,
Washington, D.C. 20549. Copies of such materials also can
be obtained free of charge at the SECs website,
www.sec.gov, or by mail from the Public Reference Room of
the SEC, at prescribed rates. Please call the SEC at
1-800-SEC-0330
for further information on the operation of the Public Reference
Room. Covantas SEC filings are also available to the
public, free of charge, on its corporate website,
www.covantaholding.com as soon as reasonably practicable
after Covanta electronically files such material with, or
furnishes it to, the SEC. Covantas common stock is traded
on the New York Stock Exchange. Material filed by Covanta can be
inspected at the offices of the New York Stock Exchange at
20 Broad Street, New York, N.Y. 10005.
3
PART I
The terms we, our, ours,
us, Covanta and Company
refer to Covanta Holding Corporation and its subsidiaries and
the term Covanta Energy refers to our subsidiary
Covanta Energy Corporation and its subsidiaries.
About
Covanta Holding Corporation
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. 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 have investments in subsidiaries engaged in
insurance operations in California, primarily in property and
casualty insurance.
As of December 31, 2009, we owned, had equity investments
in, and/or
operated 64 energy generation facilities, 56 of which are in the
Americas and eight of which are located outside the 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, two ashfills and two landfills,
which we use primarily for ash disposal, and 13 waste transfer
stations.
Business
Segments
Our reportable segments are Americas (formerly referred to as
Domestic) 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 the United Kingdom, Ireland, Italy, China,
The Philippines, India, and Bangladesh.
Additional information about our business segments is contained
in Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations
Overview Business Segments and in
Item 8. Financial Statements And Supplementary
Data Note 5. Financial Information by Business
Segments.
The
Energy-From-Waste Solution
Our mission is to be the worlds 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 sustainable 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 business;
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generating sufficient cash to meet our liquidity needs and
invest in our business;
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advancing our Clean World Initiative in order to enhance the
value of our existing business and create new
opportunities; and
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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: by
processing municipal solid waste in energy-from-waste facilities
we reduce greenhouse gas (GHG) emissions, lower the
risk of groundwater contamination, and conserve 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 of
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 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 environmental
performance, beyond mere compliance with legally required
standards. This ethos is embodied in our Clean World
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;
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exploring and implementing processes and technologies at our
facilities to improve energy efficiency and lessen environmental
impacts; and
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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.
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Our Clean World Initiative is designed to be consistent with our
mission to be the worlds 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.
In 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 ongoing global economic slowdown and
related unemployment, policy makers are focused on themes of
economic stimulus, job creation, and energy security. We believe
that the construction and permanent jobs created by additional
energy-from-waste development represent the type of green
jobs that are consistent with this 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.
The United States Congress is currently debating proposals
designed to encourage two broad policy objectives: increased
renewable energy generation 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 ACES bill to be among the
technologies that help to achieve both of these policy
objectives. Similar legislation has been introduced in the
United States Senate. While legislation is far from final and 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.
Growth
and Development
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
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 and
renewable energy production businesses in the Americas, Europe
and Asia. Our business is capital intensive because it is based
on 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 equity
and/or debt
financing, and provide support to our operating subsidiaries.
In the Americas, 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 are also pursuing international waste
and/or
renewable energy business opportunities, particularly in
locations where the market demand, regulatory environment or
other factors encourage technologies such as energy-from-waste
in order 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.
For several years, we have expanded our network of waste and
energy services businesses through acquisitions, equity
investments and additional operating and development contracts.
In our Americas segment, from 2007 through 2009, we added ten
energy-from-waste facilities, two ashfills, eight transfer
stations and four biomass projects to the network of projects
that we own, have equity investments in,
and/or
operate. In addition, we 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 Hempstead, New
York. During this period, we added approximately 17% in waste
disposal capacity and 17% in gross electric capacity for our
Americas segment. We 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,
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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 described in
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations
Overview Growth and Development.
AMERICAS
SEGMENT
Energy-From-Waste
Projects
Energy-from-waste projects have two essential purposes: to
provide waste disposal services, typically to municipal clients
who sponsor the projects, and to use that waste as a fuel source
to generate renewable energy. The electricity or steam generated
by the projects is generally sold to local utilities or
industrial customers, and most of the resulting revenues reduce
the overall cost of waste disposal services to the municipal
clients. These projects are capable of providing waste disposal
services and generating electricity or steam, if properly
operated and maintained, for several decades. Generally, we
provide these waste disposal services and sell the electricity
and steam generated under contracts, which expire on various
dates between 2010 and 2034. Many of our service contracts may
be renewed for varying periods of time, at the option of the
municipal client.
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 Americas segment which generate
electricity from wood waste (biomass), landfill gas, and
hydroelectric resources. The electricity from these other
renewable energy projects is sold to utilities under contracts
or into the regional power pool at short-term rates. For these
projects, we receive revenue from sales of energy, capacity
and/or cash
from equity distributions and additional value from the sale of
renewable energy credits. We may receive additional revenue from
construction activity during periods when we are constructing
new facilities or expanding existing facilities.
Contract
Structures
We currently operate energy-from-waste projects in
16 states and one Canadian province. 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. The following describes features generally common to
these agreements, as well as important distinctions among them:
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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.
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For the energy-from-waste projects we own, financing is
generally accomplished through tax-exempt and taxable revenue
bonds issued by or on behalf of the client community. For these
facilities, the bond proceeds are loaned to us to pay for
facility construction and to fund a debt service reserve for the
project, which is generally sufficient to pay principal and
interest for one year. Project-related debt is included as
project debt and the debt service reserves are
included as restricted funds held in trust in our
consolidated financial statements. Generally, project debt is
secured by the projects revenue, contracts and other
assets of our project subsidiary.
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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
electricity
and/or steam
we sell. Typical features of these agreements are as follows:
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Current
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number of
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Fees for operating projects or for
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Payments for electricity
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Contract types
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projects
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processing waste received
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and/or steam we sell
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Service Fee
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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.
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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
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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
projects 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.
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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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We agree to operate the facility and meet minimum waste
processing capacity and efficiency standards, energy production
levels and environmental standards. Failure to meet these
requirements or satisfy the other material terms of our
agreement (unless the failure is caused by our client community
or by events beyond our control), may result in damages charged
to us or, if the breach is substantial, continuing and
unremedied, termination of the applicable agreement. These
damages could include amounts sufficient to repay project debt
(as reduced by amounts held in trust
and/or
proceeds from sales of facilities securing project debt) and as
such, these contingent obligations cannot readily be quantified.
We have issued performance guarantees to our client communities
and, in some cases other parties, which guarantee that our
project subsidiaries will perform in accordance with contractual
terms including, where required, the payment of such damages. If
one or more contracts were terminated for our default, these
contractual damages may be material to our cash flow and
financial condition. To date, we have not incurred material
liabilities under such performance guarantees.
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The client community generally must deliver minimum quantities
of municipal solid waste to the facility on a
put-or-pay
basis and is obligated to pay a fee for its disposal. A
put-or-pay
commitment means that the client community promises to deliver a
stated quantity of waste and pay an agreed amount for its
disposal, regardless of whether the full amount of waste is
actually delivered. Where a Service Fee structure exists,
portions of the service fee escalate to reflect indices for
inflation, and in many cases, the client community must also pay
for other costs, such as insurance, taxes, and transportation
and disposal of the ash residue to the disposal site. Generally,
expenses resulting from the delivery of unacceptable and
hazardous waste on the site are also borne by the client
community. In addition, the contracts generally require the
client community to pay increased expenses and capital costs
resulting from unforeseen circumstances, subject to specified
limits. At three publicly-owned facilities we operate, our
client community may terminate the operating contract under
limited circumstances without cause.
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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, such
structural features generally do not exist because either we
operate and maintain such facilities for our own account.
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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 the sale 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 projects, our
operating subsidiaries purchase fuel in the open markets which
exposes us to fuel price risk.
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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.
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Contracted
and Merchant Capacity
Our service and waste disposal agreements, as well as our energy
contracts, expire at various times. The extent to which any such
expiration will affect us will depend upon a variety of factors,
including whether we own the project, market conditions then
prevailing, and whether the municipal client exercises options
it may have to extend the contract term. As our contracts
expire, we will become subject to greater market risk in
maintaining and enhancing our revenues. As service agreements at
municipally-owned facilities expire, we intend to seek to enter
into renewal or replacement contracts to operate such
facilities. We will also seek to bid competitively in the market
for additional contracts to operate other facilities as similar
contracts of other vendors expire. As our service and waste
disposal agreements at facilities we own or lease begin to
expire, we intend to seek replacement or additional contracts,
and because project debt on these facilities will be paid off at
such time, we expect to be able to offer rates that will attract
sufficient quantities of waste while providing acceptable
revenues to us. At facilities we own, the expiration of existing
energy contracts will require us to sell our output either into
the local electricity grid at prevailing rates or pursuant to
new contracts.
To date, we have been successful in extending our existing
contracts to operate energy-from-waste facilities owned by
municipal clients where market conditions and other factors make
it attractive for both us and our municipal clients to do so.
See discussion under Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations Overview Growth and
Development for additional information. The extent to which
additional extensions will be attractive to us and to our
municipal clients who own their projects will depend upon the
market and other factors noted above. However, we do not believe
that either our success or lack of success in entering into
additional negotiated extensions to operate such facilities will
have a material impact on our overall cash flow and
profitability. See Item 1A. Risk Factors We
may face increased risk of market influences on our revenues
after our contracts expire.
As we seek to enter into extended or new contracts, we expect
that medium- and long-term contracts for waste supply, at least
for a substantial portion of facility capacity, will be
available on acceptable terms in the marketplace. We also expect
that medium- and long-term contracts for sales of energy will be
less available than in the past. As a result, following the
expiration of these long-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.
In conjunction with our energy-from-waste business, we also own
and/or
operate 13 transfer stations, two ashfills and two landfills in
the northeast United States, which we utilize to supplement and
manage more efficiently the fuel and ash disposal requirements
at our energy-from-waste operations. We provide waste
procurement services to our waste disposal and transfer
facilities which have available capacity to receive waste. With
these services, we seek to maximize our revenue and ensure that
our energy-from-waste facilities are being utilized most
efficiently, taking into account maintenance schedules and
operating restrictions that may exist from time to time at each
facility. We also provide management and marketing of ferrous
and non-ferrous metals recovered from energy-from-waste
operations, as well as services related to non-hazardous special
waste destruction and residue management for our
energy-from-waste projects.
Biomass
Projects
We own and operate seven wood-fired generation facilities and
have a 55% interest in a partnership which owns another
wood-fired generation facility. Six of these facilities are
located in California, and two are located in Maine. The
combined gross energy output from these facilities is 191
megawatts (MW). We derive revenue from our biomass
facilities from sales of electricity, capacity, and where
available, additional value from the sale of renewable energy
credits. Four of these facilities sell their energy output at
fixed rates pursuant to contracts, while the other four
facilities sell into local power pools at rates that float with
the market.
At all of these projects, we purchase fuel pursuant to
short-term contracts or other arrangements, in each case at
prevailing market rates which exposes us to fuel price risk. The
price of fuel varies depending upon the time of year, local
supply, and price of energy. As such, and unlike our
energy-from-waste businesses, we earn income at our biomass
facilities
8
based on the margin between our cost of fuel and our revenue
from selling the related output. During part of 2009, this
margin was negative at two of our biomass facilities, and we
temporarily suspended operations at those locations, and have
subsequently entered into favorable long-term agreements for the
energy output. We will consider taking similar action in the
future if market conditions warrant such action. In both 2009
and 2008, revenue from our biomass projects represented
approximately 6% of our Americas segment revenue.
Other
Renewable Energy Projects
We also engage in developing, owning
and/or
operating renewable energy production facilities utilizing a
variety of energy sources such as water (hydroelectric) and
landfill gas. We derive our revenues from these facilities
primarily from the sale of energy, capacity, and where
available, renewable energy credits. We generally operate and
maintain these projects for our own account or we do so on a
cost-plus basis rather than a fixed-fee basis.
Hydroelectric We own a 50%
equity interest in two small
run-of-river
hydroelectric facilities located in the State of Washington
which sell energy and capacity to Puget Sound Energy under
long-term energy contracts. We operate two hydroelectric
facilities in Costa Rica through an operating subsidiary
pursuant to long-term contracts. We also have a nominal equity
investment in each project. The electric output from both of
these facilities is sold to Instituto Costarricense de
Electricidad, a Costa Rica national electric utility.
Landfill Gas We own and operate
two landfill gas projects located in California and one in
Massachusetts which produce electricity by combusting methane
gas produced in landfills. These projects sell energy to various
utilities. In both 2009 and 2008, revenue from our landfill gas
projects was less than 1% of our Americas segment revenue.
During 2009, we shut down operations of two landfill gas
projects located in California. Upon the expiration of the
remaining energy contracts, we expect that these projects will
enter into new power off-take arrangements or will be shut down.
Summary information with respect to our Americas segment
projects that are currently operating is provided in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
|
|
|
|
Design Capacity
|
|
|
|
Expiration Dates
|
|
|
|
|
|
|
Waste
|
|
Gross
|
|
|
|
Service/
|
|
|
|
|
|
|
|
|
Disposal
|
|
Electric
|
|
|
|
Waste
|
|
|
|
|
|
|
Location
|
|
(TPD)
|
|
(MW)
|
|
Nature of Interest
|
|
Disposal
|
|
Energy
|
|
A.
|
|
ENERGY-FROM-WASTE PROJECTS
TIP FEE STRUCTURES
|
|
|
|
|
|
|
|
|
|
|
1.
|
|
Southeast Massachusetts(1)
|
|
Massachusetts
|
|
2,700
|
|
78.0
|
|
Owner/Operator
|
|
N/A
|
|
2015
|
2.
|
|
Delaware Valley
|
|
Pennsylvania
|
|
2,688
|
|
87.0
|
|
Lessee/Operator
|
|
2017
|
|
2016
|
3.
|
|
Hempstead(2)
|
|
New York
|
|
2,505
|
|
72.0
|
|
Owner/Operator
|
|
2034
|
|
N/A
|
4.
|
|
Indianapolis(3)
|
|
Indiana
|
|
2,362
|
|
6.5
|
|
Owner/Operator
|
|
2018
|
|
2028
|
5.
|
|
Niagara(3)
|
|
New York
|
|
2,250
|
|
50.0
|
|
Owner/Operator
|
|
N/A
|
|
2010-2018
|
6.
|
|
Haverhill
|
|
Massachusetts
|
|
1,650
|
|
44.6
|
|
Owner/Operator
|
|
N/A
|
|
2019
|
7.
|
|
Union County(2)
|
|
New Jersey
|
|
1,440
|
|
42.1
|
|
Lessee/Operator
|
|
2023
|
|
N/A
|
8.
|
|
Tulsa(3)
|
|
Oklahoma
|
|
1,125
|
|
16.5
|
|
Owner/Operator
|
|
2012
|
|
2019
|
9.
|
|
Alexandria/Arlington
|
|
Virginia
|
|
975
|
|
22.0
|
|
Owner/Operator
|
|
2013
|
|
2023
|
10.
|
|
Kent County(3)
|
|
Michigan
|
|
625
|
|
16.8
|
|
Operator
|
|
2023
|
|
2023
|
11.
|
|
Warren County
|
|
New Jersey
|
|
450
|
|
13.5
|
|
Owner/Operator
|
|
N/A
|
|
2013
|
12.
|
|
Springfield
|
|
Massachusetts
|
|
400
|
|
9.4
|
|
Owner/Operator
|
|
2014
|
|
2010
|
13.
|
|
Pittsfield
|
|
Massachusetts
|
|
240
|
|
8.6
|
|
Owner/Operator
|
|
2015
|
|
2015
|
|
|
SERVICE FEE STRUCTURES
|
|
|
|
|
|
|
|
|
|
|
14.
|
|
Fairfax County
|
|
Virginia
|
|
3,000
|
|
93.0
|
|
Owner/Operator
|
|
2011
|
|
2015
|
15.
|
|
Detroit(1)(3)(4)
|
|
Michigan
|
|
2,832
|
|
68.0
|
|
Part Owner/Operator
|
|
2010
|
|
2024
|
16.
|
|
Essex County
|
|
New Jersey
|
|
2,277
|
|
66.0
|
|
Owner/Operator
|
|
2020
|
|
2020
|
17.
|
|
Honolulu(1)(5)
|
|
Hawaii
|
|
2,160
|
|
90.0
|
|
Operator
|
|
2032
|
|
2015
|
18.
|
|
Hartford(1)(6)
|
|
Connecticut
|
|
2,000
|
|
68.5
|
|
Operator
|
|
2012
|
|
2012
|
19.
|
|
Lee County
|
|
Florida
|
|
1,836
|
|
57.3
|
|
Operator
|
|
2024
|
|
2015
|
20.
|
|
Montgomery County
|
|
Maryland
|
|
1,800
|
|
63.4
|
|
Operator
|
|
2016
|
|
2010
|
21.
|
|
Hillsborough County
|
|
Florida
|
|
1,800
|
|
46.5
|
|
Operator
|
|
2027
|
|
2010
|
22.
|
|
Long Beach
|
|
California
|
|
1,380
|
|
36.0
|
|
Operator
|
|
2018
|
|
2018
|
23.
|
|
York
|
|
Pennsylvania
|
|
1,344
|
|
42.0
|
|
Operator
|
|
2015
|
|
2016
|
24.
|
|
Plymouth
|
|
Pennsylvania
|
|
1,216
|
|
32.0
|
|
Owner/Operator
|
|
2014
|
|
2012
|
25.
|
|
Hennepin County
|
|
Minnesota
|
|
1,212
|
|
38.7
|
|
Operator
|
|
2018
|
|
2018
|
26.
|
|
Lancaster County
|
|
Pennsylvania
|
|
1,200
|
|
33.1
|
|
Operator
|
|
2016
|
|
2016
|
27.
|
|
Pasco County
|
|
Florida
|
|
1,050
|
|
29.7
|
|
Operator
|
|
2016
|
|
2024
|
28.
|
|
Onondaga County
|
|
New York
|
|
990
|
|
39.2
|
|
Owner/Operator
|
|
2015
|
|
2025
|
29.
|
|
Stanislaus County
|
|
California
|
|
800
|
|
22.4
|
|
Owner/Operator
|
|
2016
|
|
2010
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
|
|
|
|
|
|
|
Design Capacity
|
|
|
|
Expiration Dates
|
|
|
|
|
|
|
Waste
|
|
Gross
|
|
|
|
Service/
|
|
|
|
|
|
|
|
|
Disposal
|
|
Electric
|
|
|
|
Waste
|
|
|
|
|
|
|
Location
|
|
(TPD)
|
|
(MW)
|
|
Nature of Interest
|
|
Disposal
|
|
Energy
|
|
30.
|
|
Harrisburg(2)
|
|
Pennsylvania
|
|
800
|
|
20.8
|
|
Operator
|
|
2018
|
|
N/A
|
31.
|
|
Huntington(7)
|
|
New York
|
|
750
|
|
24.3
|
|
Owner/Operator
|
|
2012
|
|
2012
|
32.
|
|
Babylon
|
|
New York
|
|
750
|
|
16.8
|
|
Owner/Operator
|
|
2019
|
|
2018
|
33.
|
|
Burnaby
|
|
British Columbia
|
|
720
|
|
25.0
|
|
Operator
|
|
2025
|
|
2013
|
34.
|
|
Huntsville(3)
|
|
Alabama
|
|
690
|
|
|
|
Operator
|
|
2016
|
|
2014
|
35.
|
|
Southeast Connecticut
|
|
Connecticut
|
|
689
|
|
17.0
|
|
Owner/Operator
|
|
2015
|
|
2017
|
36.
|
|
Bristol
|
|
Connecticut
|
|
650
|
|
16.3
|
|
Owner/Operator
|
|
2014
|
|
2014
|
37.
|
|
Marion County
|
|
Oregon
|
|
550
|
|
13.1
|
|
Owner/Operator
|
|
2014
|
|
2014
|
38.
|
|
Lake County
|
|
Florida
|
|
528
|
|
14.5
|
|
Owner/Operator
|
|
2014
|
|
2014
|
39.
|
|
MacArthur
|
|
New York
|
|
486
|
|
12.0
|
|
Operator
|
|
2015
|
|
2010
|
40.
|
|
Hudson Valley
|
|
New York
|
|
450
|
|
9.8
|
|
Operator
|
|
2014
|
|
2014
|
41.
|
|
Wallingford
|
|
Connecticut
|
|
420
|
|
11.0
|
|
Owner/Operator
|
|
2020
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUBTOTAL
|
|
53,790
|
|
1,473.4
|
|
|
|
|
|
|
B.
|
|
ANCILLARY WASTE PROJECTS
|
|
|
|
|
|
|
|
|
|
|
|
|
ASH and LANDFILLS
|
|
|
|
|
|
|
|
|
|
|
|
|
42.
|
|
CMW Semass
|
|
Massachusetts
|
|
1,700
|
|
N/A
|
|
Operator
|
|
2016
|
|
N/A
|
43.
|
|
Peabody (ash only)
|
|
Massachusetts
|
|
700
|
|
N/A
|
|
Owner/Operator
|
|
N/A
|
|
N/A
|
44.
|
|
Haverhill
|
|
Massachusetts
|
|
555
|
|
N/A
|
|
Lessee/Operator
|
|
N/A
|
|
N/A
|
45.
|
|
Springfield (ash only)
|
|
Massachusetts
|
|
175
|
|
N/A
|
|
Owner/Operator
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUBTOTAL
|
|
3,130
|
|
|
|
|
|
|
|
|
|
|
TRANSFER STATIONS
|
|
|
|
|
|
|
|
|
|
|
46.
|
|
Derwood
|
|
Maryland
|
|
2,500
|
|
N/A
|
|
Operator
|
|
2015
|
|
N/A
|
47.
|
|
Girard Point
|
|
Pennsylvania
|
|
2,500
|
|
N/A
|
|
Owner/Operator
|
|
2012
|
|
N/A
|
48.
|
|
58th
Street
|
|
Pennsylvania
|
|
2,000
|
|
N/A
|
|
Owner/Operator
|
|
2012
|
|
N/A
|
49.
|
|
Braintree
|
|
Massachusetts
|
|
1,200
|
|
N/A
|
|
Owner/Operator
|
|
2015
|
|
N/A
|
50.
|
|
Abington
|
|
Pennsylvania
|
|
940
|
|
N/A
|
|
Operator
|
|
2014
|
|
N/A
|
51.
|
|
Lynn
|
|
Massachusetts
|
|
885
|
|
N/A
|
|
Owner/Operator
|
|
N/A
|
|
N/A
|
52.
|
|
Mamaroneck
|
|
New York
|
|
800
|
|
N/A
|
|
Owner/Operator
|
|
2015
|
|
N/A
|
53.
|
|
Holliston
|
|
Massachusetts
|
|
700
|
|
N/A
|
|
Owner/Operator
|
|
N/A
|
|
N/A
|
54.
|
|
Canaan
|
|
New York
|
|
600
|
|
N/A
|
|
Owner/Operator
|
|
N/A
|
|
N/A
|
55.
|
|
Springfield
|
|
Massachusetts
|
|
500
|
|
N/A
|
|
Owner/Operator
|
|
N/A
|
|
N/A
|
56.
|
|
Mt. Kisco
|
|
New York
|
|
350
|
|
N/A
|
|
Owner/Operator
|
|
2016
|
|
N/A
|
57.
|
|
Danvers
|
|
Massachusetts
|
|
250
|
|
N/A
|
|
Operator
|
|
2011
|
|
N/A
|
58.
|
|
Essex
|
|
Massachusetts
|
|
6
|
|
N/A
|
|
Operator
|
|
2015
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUBTOTAL
|
|
13,231
|
|
|
|
|
|
|
|
|
C.
|
|
OTHER RENEWABLE ENERGY PROJECTS
|
|
|
|
|
|
|
|
|
|
|
|
|
BIOMASS
|
|
|
|
|
|
|
|
|
|
|
|
|
59.
|
|
Delano
|
|
California
|
|
N/A
|
|
49.5
|
|
Owner/Operator
|
|
N/A
|
|
2017
|
60.
|
|
Pacific Ultrapower Chinese Station(8)
|
|
California
|
|
N/A
|
|
25.6
|
|
Part Owner
|
|
N/A
|
|
2017
|
61.
|
|
Mendota
|
|
California
|
|
N/A
|
|
25.0
|
|
Owner/Operator
|
|
N/A
|
|
2014
|
62.
|
|
Jonesboro(2)
|
|
Maine
|
|
N/A
|
|
24.5
|
|
Owner/Operator
|
|
N/A
|
|
N/A
|
63.
|
|
West Enfield(2)
|
|
Maine
|
|
N/A
|
|
24.5
|
|
Owner/Operator
|
|
N/A
|
|
N/A
|
64.
|
|
Pacific Oroville
|
|
California
|
|
N/A
|
|
18.7
|
|
Owner/Operator
|
|
N/A
|
|
2016
|
65.
|
|
Burney Mountain
|
|
California
|
|
N/A
|
|
11.4
|
|
Owner/Operator
|
|
N/A
|
|
2015
|
66.
|
|
Mount Lassen
|
|
California
|
|
N/A
|
|
11.4
|
|
Owner/Operator
|
|
N/A
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUBTOTAL
|
|
|
|
190.6
|
|
|
|
|
|
|
|
|
HYDROELECTRIC
|
|
|
|
|
|
|
|
|
|
|
|
|
67.
|
|
Rio Volcan(9)
|
|
Costa Rica
|
|
N/A
|
|
17.0
|
|
Part Owner/Operator
|
|
N/A
|
|
2010
|
68.
|
|
Don Pedro(9)
|
|
Costa Rica
|
|
N/A
|
|
14.0
|
|
Part Owner/Operator
|
|
N/A
|
|
2010
|
69.
|
|
Koma Kulshan(10)
|
|
Washington
|
|
N/A
|
|
12.0
|
|
Part Owner/Operator
|
|
N/A
|
|
2037
|
70.
|
|
South Fork(10)
|
|
Washington
|
|
N/A
|
|
5.0
|
|
Part Owner
|
|
N/A
|
|
2022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUBTOTAL
|
|
|
|
48.0
|
|
|
|
|
|
|
|
|
LANDFILL GAS
|
|
|
|
|
|
|
|
|
|
|
|
|
71.
|
|
Otay
|
|
California
|
|
N/A
|
|
7.4
|
|
Owner/Operator
|
|
N/A
|
|
2011-2019
|
72.
|
|
Haverhill
|
|
Massachusetts
|
|
N/A
|
|
1.6
|
|
Lessee/Operator
|
|
N/A
|
|
N/A
|
73.
|
|
Stockton
|
|
California
|
|
N/A
|
|
0.8
|
|
Owner/Operator
|
|
N/A
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUBTOTAL
|
|
|
|
9.8
|
|
|
|
|
|
|
10
|
|
|
(1) |
|
These facilities use a refuse-derived fuel technology. |
|
(2) |
|
These facilities sell electricity into the regional power pool
at prevailing rates. |
|
(3) |
|
These facilities have been designed to export steam for sale. |
|
(4) |
|
The project receives waste under an agreement with the Greater
Detroit Resource Recovery Authority (GDRRA) with a
term of one year, which renews automatically for successive one
year terms unless either party terminates. In addition, the
project may call upon GDRRA to deliver the waste of the City of
Detroit to the Detroit facility at market-based rates through
2035. |
|
(5) |
|
With respect to this project, we have entered into agreements to
expand waste processing capacity from 2,160 tpd to 3,060 tpd and
to increase gross electricity capacity from 57 MW to
90 MW. The agreements also extend the service contract term
by 20 years. Environmental and other project related
permits have been received and expansion construction has
commenced. |
|
(6) |
|
Under contracts with the Connecticut Resource Recovery
Authority, we operate only the boilers and turbines for this
facility. |
|
(7) |
|
Owned by a limited partnership in which the limited partners are
not affiliated with us. |
|
(8) |
|
We have a 55% ownership interest in this project. |
|
(9) |
|
We have nominal ownership interests in these projects. |
|
(10) |
|
We have a 50% ownership interest in these projects. |
INTERNATIONAL
SEGMENT
General
Approach to International Projects
We have ownership interests in
and/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 are also constructing an energy-from-waste
facility in Ireland. We receive revenue from operating fees,
electricity and steam sales, construction activities, and in
some cases cash from equity distributions. The projects sell the
electricity and steam they generate under either short-term or
long-term contracts or market concessions to utilities,
governmental agencies providing power distribution, creditworthy
industrial users, or local governmental units. Energy-from-waste
facilities also sell waste disposal services.
In developing our international business, we have employed the
same general approach to projects as is described above with
respect to Americas segment projects. We intend to seek to
develop or participate in additional international projects,
particularly energy-from-waste projects, where the regulatory or
market environment is attractive. With respect to some
international energy-from-waste projects, ownership transfer to
the sponsoring municipality (for nominal consideration) is
required following expiration of the projects long-term
operating contract. The ownership and operation of facilities in
foreign countries potentially entails significant political and
financial uncertainties that typically are not encountered in
such activities in the United States, as described below and
discussed in Item 1A. Risk Factors.
|
|
|
|
|
Some of the countries in which we currently operate are lesser
developed countries or developing countries where the political,
social and economic conditions are quite different, and are
often less stable than those conditions prevailing in the United
States or other developed countries. In order to mitigate these
risks both at the outset of project development and over time,
we often develop projects jointly with experienced and respected
local companies.
|
|
|
When a project is developed, we undertake a credit analysis of
the proposed power purchaser
and/or fuel
suppliers (which for energy-from-waste projects are often
municipal governments).
|
|
|
We have typically sought to negotiate long-term contracts for
the supply of fuel with reliable suppliers. For our projects
that are not energy-from-waste facilities, we have sought, to
the extent practicable, to shift the consequences of
interruptions in the delivery of fuel (whether due to the fault
of the fuel supplier or due to reasons beyond the fuel
suppliers control) to the electricity purchaser or service
recipient by securing a suspension of the projects
operating responsibilities under the applicable agreements and
an extension of our operating concession under such agreements.
In some instances, we require the energy purchaser or service
recipient to continue to make payments of fixed costs if such
interruptions occur. In order to mitigate the effect of
short-term interruptions in the supply of fuel, we have also
endeavored to provide
on-site
storage of fuel in sufficient quantities to address such
interruptions.
|
|
|
At some of our international independent power projects, our
operating subsidiaries purchase fuel in the open market.
However, in most cases, the fuel price risk is borne by the
energy purchaser because such risk from changes in fuel prices
is passed through under the contract. In some of our
international projects, the project entity 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.
|
11
|
|
|
|
|
For our energy-from-waste projects in international markets,
typically a significant portion of each projects waste
supply is under long-term contracts with sponsoring
municipalities, thus reducing the risk of fuel supply
interruptions or price instability. Where market conditions are
favorable and we have the contractual right to do so, we may
also reserve a portion of a facilitys capacity for shorter
term contracts or receive waste on a spot basis. For these
energy-from-waste projects, long-term contracts for energy
output are generally not available, and we expect to sell such
output directly into the power pool at market rates, which may
fluctuate.
|
|
|
Payment for services that we provide will often be made in whole
or in part in the domestic currencies of the host countries. In
some of our independent power projects, components of project
costs incurred or funded in U.S. dollars are recovered
without risk of currency fluctuation through negotiated
contractual adjustments to the price charged for electricity or
service provided. This contractual structure may cause the cost
in local currency to the projects power purchaser or
service recipient to rise from time to time in excess of local
inflation, and consequently there is risk in such situations
that such power purchaser or service recipient will, at least in
the near-term, be less able or willing to pay for the
projects power or service.
|
|
|
We expect to fund the energy-from-waste projects that we will
develop and own in international markets through a combination
of local financings and direct equity investment. To the extent
that the equity investment is made in currencies other than
local currency, both the amount of our investment and the
returns we receive on that investment may be affected by
currency fluctuations.
|
We have sought to manage and mitigate these risks through all
appropriate means, including by:
|
|
|
|
|
developing projects jointly with experienced local partners,
where such relationships add value;
|
|
|
political and financial analysis of the host countries and the
key participants in each project;
|
|
|
guarantees of relevant agreements with creditworthy entities;
|
|
|
political risk and other forms of insurance; and/or
|
|
|
participation by United States
and/or
international development finance institutions in the financing
of projects.
|
We determine which mitigation measures to apply based on our
ability to balance the risks presented, the availability of such
measures and their cost.
We have generally participated in projects which provide
services that are treated as a matter of national or key
economic importance by the laws and politics of the host
country. Therefore, there is a risk that the assets constituting
the facilities of these projects could be temporarily or
permanently expropriated or nationalized by a host country, made
subject to local or national control or be subject to
unfavorable legislative action, regulatory decisions or changes
in taxation. We believe that working with experienced and
reputable local joint venture partners mitigates this risk.
In certain cases, we have issued guarantees on behalf of our
international operating subsidiaries with respect to contractual
obligations to operate certain international power projects and
energy-from-waste projects. The potential damages we may owe
under such arrangements may be material. Depending upon the
circumstances giving rise to such damages, the contractual terms
of the applicable contracts, and the contract
counterpartys 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 any material liabilities
under such guarantees on international projects.
International
Projects
We presently have interests in international power projects with
an aggregate generating capacity of approximately 938 MW
(gross), with our portion of the ownership in these facilities
representing approximately 365 MW. In addition to our
headquarters in Fairfield, New Jersey, our international
business is facilitated through field offices in Shanghai,
China; Chennai, India; Dublin, Ireland; and Birmingham, England.
The following describes the important features of these
projects, by fuel type:
Energy-From-Waste
In
Operation
We own a 40% equity interest in Chongqing Sanfeng Covanta
Environmental Industry Co., Ltd. (Sanfeng), a
company located in Chongqing Municipality, Peoples
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 (Fuzhou project and
Tongqing project). Chongqing Iron & Steel Company
(Group) Limited holds the remaining 60% equity interest in
Sanfeng. The solid waste supply for the projects comes from
municipalities under long-term contracts. The municipalities
also have the obligation to coordinate the purchase of power
12
from the facilities as part of the long-term contracts for waste
disposal. The electrical output from these projects is sold at
governmentally established preferential rates under short-term
arrangements with local power bureaus.
We own a 13% equity interest in a 500 metric tpd, 18 MW
mass-burn energy-from-waste project at Trezzo sullAdda in
the Lombardy Region of Italy. The remainder of the equity in the
project is held by a subsidiary of Falck S.p.A. and the
municipality of Trezzo sullAdda. The project is operated
by Ambiente 2000 S.r.l., an Italian special purpose limited
liability company of which we own 40%. The solid waste supply
for the project comes from municipalities and privately-owned
waste haulers under long-term contracts. The electrical output
from the Trezzo project is sold at governmentally established
preferential rates under a long-term purchase contract to
Italys state-owned electricity grid operator, Gestore
della Rete di Trasmissione Nazionale S.p.A.
Under
Construction
Ireland
We have commenced construction of 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. Dublin Waste to Energy Limited has a 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. 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.
China
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, Peoples Republic of
China. We have a 49% equity interest in the project joint
venture. Construction of the facility has commenced and
operation is expected to begin in 2011. The project company has
obtained financing for Rmb 480 million for the project, 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.
Our joint venture 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, Peoples
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
approximately 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.
Independent
Power Projects
|
|
|
|
|
A partnership, in which we hold a 26% equity interest, owns a
510 MW (gross) coal-fired electric power generation
facility located in Mauban, Quezon Province, the Philippines
(Quezon). The remaining equity interests are held by
an affiliate of International Generating Company, an affiliate
of Electricity Generating Public Company Limited (a company
listed on the Stock Exchange of Thailand) and an entity owned by
the original project developer. The Quezon project sells
electricity to the Manila Electric Company
(Meralco), the largest electric distribution company
in the Philippines, which serves the area surrounding and
including metropolitan Manila.
|
|
|
|
|
|
Under an energy contract expiring in 2025, Meralco is obligated
to
take-or-pay
for stated minimum annual quantities of electricity at an all-in
price which consists of capacity, operating, energy,
transmission and other fees adjusted for inflation, fuel cost
and foreign exchange fluctuations. The Quezon project has
entered into two coal supply contracts expiring in 2015 and
2022. Under these supply contracts, the cost of coal is
determined using a base energy price adjusted to fluctuations of
specified international benchmark prices. Our wholly-owned
subsidiary, Covanta Philippines Operating, Inc., operates the
project under a long-term agreement with the Quezon project, and
we have obtained political risk insurance for our equity
investment in this project.
|
|
|
|
|
|
We also have a majority equity interest in a 24 MW (gross)
coal-fired cogeneration facility in the Peoples Republic
of China. The project entity, in which we hold a majority
interest, operates this project. The party holding a minority
position in the project is an affiliate of the local municipal
government. While the steam produced at this project is
|
13
|
|
|
|
|
intended to be sold under a long-term contract to its industrial
host, in practice, steam has been sold on either a short-term
basis to local industries or the industrial host, in each case
at varying rates and quantities. The electric power is sold at
an average grid rate to a subsidiary of the
provincial power bureau.
|
|
|
|
|
|
We hold a 45% equity interest in a barge-mounted 126 MW
(gross) diesel/natural gas-fired electric power generation
facility located near Haripur, Bangladesh. The remaining equity
interests are held by Pendekar Energy (L) Ltd (a consortium
of Tanjong Energy Holdings Sdn Bhd (Malaysia) and Al-Jomaih
Group (Saudi Arabia)) and an affiliate of Wartsila North
America, Inc. The electrical output of the project is sold to
the Bangladesh Power Development Board (BPDB)
pursuant to an energy contract with minimum energy off-take
provisions at an all-in price divided into a fuel component and
an other component. The fuel component reimburses
the fuel cost incurred by the project up to a specified heat
rate. The other component consists of a
pre-determined base rate which is adjusted for the actual load
factor and foreign exchange fluctuations. The BPDB also supplies
all of the projects natural gas requirements at a
pre-determined base cost adjusted for fluctuations on actual
landed cost of the fuel in Bangladesh. The Government of
Bangladesh guarantees the BPDBs contractual obligations.
We operate the project under a long-term agreement with the
project company and we have obtained political risk insurance
for our equity interest in this project.
|
|
|
|
We hold majority equity interests in two 106 MW (gross)
heavy fuel-oil fired electric power generation facilities in
India. We hold a 60% equity interest in the first project (the
Samalpatti project), which is located near
Samalpatti, in the state of Tamil Nadu. The remaining equity
interests in the Samalpatti project are held by affiliates of
Shapoorji Pallonji Infrastructure Capital Co. Ltd. and by
Wartsila India Power Investment, LLC. We hold a 77% equity
interest in the second project (the Madurai
project), which is located in Samayanallur, also in the
state of Tamil Nadu. The remaining equity interest in the
Madurai project is held by an Indian company controlled by the
original project developer. Both projects sell their electrical
output to the Tamil Nadu Electricity Board (TNEB)
pursuant to long-term agreements with a full pass-through all-in
pricing structure that takes into account specified heat rates,
operation and maintenance costs, and equity returns. TNEBs
obligations are guaranteed by the government of the state of
Tamil Nadu. Indian oil companies supply the oil requirements of
both projects through 15 year fuel supply agreements based
on market prices. We operate both projects through subsidiaries
under long-term agreements with the project companies.
|
|
|
|
|
|
Disputing several contractual provisions, TNEB has, since 2001,
failed to pay the full amount due under the energy contracts for
both the Samalpatti and Madurai projects. To date, TNEB has paid
the undisputed portion of its payment obligations (approximately
95% of total billings) representing each projects
operating costs, fuel costs, debt service and some equity
return. Similar to many Indian state electricity boards, TNEB
has also failed to fund an escrow account or post a letter of
credit required under the project energy contracts, which
failure constitutes a default under the project finance
documents. Project lenders for both projects have either granted
periodic waivers of such default or potential default
and/or
otherwise approved scheduled equity distributions. Neither such
default nor potential default in the project financing
arrangements constitutes a default under our financing
arrangements. It is possible that the issue of the escrow
account
and/or
letter of credit requirement will be resolved as part of the
overall negotiation with TNEB with respect to the disputed
receivables in both projects.
|
14
|
|
|
|
|
Summary information with respect to our international projects
that are currently operating is provided in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Design Capacity
|
|
|
|
Contract
|
|
|
|
|
|
|
Waste
|
|
|
|
|
|
Expiration Dates
|
|
|
|
|
|
|
Disposal
|
|
Gross
|
|
|
|
Service/
|
|
|
|
|
|
|
|
|
(Metric
|
|
Electric
|
|
|
|
Waste
|
|
|
|
|
|
|
Location
|
|
TPD)
|
|
(MW)
|
|
Nature of Interest
|
|
Disposal
|
|
Energy
|
|
A.
|
|
ENERGY-FROM-WASTE
TIP FEE STRUCTURES
|
|
|
|
|
|
|
|
|
|
|
1.
|
|
Fuzhou(1)
|
|
China
|
|
1,200
|
|
24
|
|
Part Owner
|
|
2032
|
|
N/A
|
2.
|
|
Tongqing(1)
|
|
China
|
|
1,200
|
|
24
|
|
Part Owner
|
|
2027
|
|
N/A
|
3.
|
|
Trezzo
|
|
Italy
|
|
500
|
|
18
|
|
Part Owner
|
|
2023
|
|
2023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUBTOTAL
|
|
2,900
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B.
|
|
ENERGY-FROM-WASTE UNDER CONSTRUCTION
|
|
|
|
|
|
|
4.
|
|
Chengdu
|
|
China
|
|
1,800
|
|
36
|
|
Part Owner
|
|
|
|
|
5.
|
|
Dublin
|
|
Ireland
|
|
1,700
|
|
68
|
|
Part Owner/Operator
|
|
|
|
|
6.
|
|
Taixing
|
|
China
|
|
350
|
|
30
|
|
Part Owner/Operator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUBTOTAL
|
|
3,850
|
|
134
|
|
|
|
|
|
|
|
|
|
C.
|
|
INDEPENDENT POWER PROJECTS
|
|
|
COAL
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
|
Quezon(2)
|
|
Philippines
|
|
N/A
|
|
510
|
|
Part Owner/Operator
|
|
N/A
|
|
2025
|
8.
|
|
Yanjiang (Taixing)(3)
|
|
China
|
|
N/A
|
|
24
|
|
Part Owner/Operator
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUBTOTAL
|
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NATURAL GAS
|
|
|
|
|
|
|
|
|
|
|
|
|
9.
|
|
Haripur(4)
|
|
Bangladesh
|
|
N/A
|
|
126
|
|
Part Owner/Operator
|
|
N/A
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HEAVY FUEL-OIL
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
|
Madurai(5)
|
|
India
|
|
N/A
|
|
106
|
|
Part Owner/Operator
|
|
N/A
|
|
2016
|
11.
|
|
Samalpatti(6)
|
|
India
|
|
N/A
|
|
106
|
|
Part Owner/Operator
|
|
N/A
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUBTOTAL
|
|
|
|
212
|
|
|
|
|
|
|
|
|
|
(1) |
|
We have a 40% equity interest in Sanfeng, which owns equity
interests of approximately 32% and 25% in the Fuzhou and
Tongqing projects, respectively. Sanfeng operates the Tongqing
project. The Fuzhou project company, in which Sanfeng has a 32%
interest, operates the Fuzhou project. Ownership of these
projects transfers to the applicable municipality at the
expiration of the applicable concession agreement. |
|
(2) |
|
We have a 26% ownership interest in this project. |
|
(3) |
|
We have an 85% ownership interest in this project. Assets of
this project revert back to the local Chinese partner at the
expiration of the joint venture contract in 2034. |
|
(4) |
|
We have a 45% ownership interest in this project. This project
is capable of operating through combustion of diesel oil in
addition to natural gas. |
|
(5) |
|
We have a 77% ownership interest in this project. |
|
(6) |
|
We have a 60% ownership interest in this project. |
15
MARKETS,
COMPETITION AND BUSINESS CONDITIONS
General
Business Conditions
Our business can be adversely affected by general economic
conditions, war, inflation, adverse competitive conditions,
governmental restrictions and controls, changes in laws, natural
disasters, energy shortages, fuel costs, weather, the adverse
financial condition of customers and suppliers, various
technological changes and other factors over which we have no
control. As global populations and consequent economic activity
increase, we expect that demand for energy and effective waste
management technologies will increase. We expect this to create
generally favorable long-term conditions for our existing
business and for our efforts to grow our business. We expect
that any cyclical or structural downturns in general economic
activity may adversely affect both our existing businesses and
our ability to grow through development or acquisitions.
Economic
Conditions Affecting Business Conditions and Financial
Results
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 declines in global natural gas and other fossil fuel prices
have pushed electricity and steam pricing lower generally which
causes lower revenue for the portion of the energy we sell which
is not under fixed-price contracts. Lastly, the downturn in
economic activity tends to reduce global demand for and pricing
of certain commodities, such as the scrap metals we recycle from
our energy-from-waste facilities. The combined effects of these
conditions reduced our revenue and cash flow in 2009.
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 slowdown 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, or through the acquisition
of additional businesses.
Additional
Conditions Affecting Our Existing Business
With respect to our existing waste-related businesses, including
our energy-from-waste and waste procurement business, we compete
in waste disposal markets, which are highly competitive. In the
United States, the market for waste disposal is almost entirely
price-driven and is greatly influenced by economic factors
within regional waste sheds. These factors include:
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regional population and overall waste production rates;
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the number of other waste disposal sites (including principally
landfills and transfer stations) in existence or in the planning
or permitting process;
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the available disposal capacity (in terms of tons of waste per
day) that can be offered by other regional disposal
sites; and
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the availability and cost of transportation options (e.g., rail,
inter-modal, trucking) to provide access to more distant
disposal sites, thereby affecting the size of the waste shed
itself.
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In the Americas segment waste disposal market, disposal service
providers seek to obtain waste supplies for their facilities by
competing on disposal price (usually on a per-ton basis) with
other disposal service providers. At our service fee
energy-from-waste facilities, we typically do not compete in
this market because we do not have the contractual right to
solicit waste. At these facilities, the client community is
responsible for obtaining the waste, if necessary by competing
on price to obtain the tons of waste it has contractually
promised to deliver to us. At our energy-from-waste facilities
governed by tip fee contracts and at our waste procurement
services businesses, we are responsible for obtaining material
amounts of waste supply, and therefore, actively compete in
these markets to enter into spot, medium- and long-term
contracts. These energy-from-waste projects are generally in
densely-populated areas, with high waste generation rates and
numerous large and small participants in the regional market.
Our waste operations are largely concentrated in the
northeastern United States. See Item 1A. Risk
Factors Our waste operations are concentrated in one
region, and expose us to regional economic or market
declines for additional information concerning this
geographic concentration. Certain of our competitors in these
markets are vertically-integrated waste companies which include
waste collection operations, and thus have the ability to
control supplies of waste which may restrict our ability to
offer disposal services at attractive prices. Our business does
not include waste collection operations.
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If a long-term contract expires and is not renewed or extended
by a client community, our percentage of contracted disposal
capacity will decrease and we will need to compete in the
regional market for waste disposal at the facilities we own. At
that point, we will compete on price with landfills, transfer
stations, other energy-from-waste facilities and other waste
disposal technologies that are then offering disposal service in
the region. See the discussion above under Americas
Segment Contract Duration for additional
information concerning the expiration of existing contracts.
With respect to our sales of electricity and other energy
products, we currently sell the majority of our output pursuant
to long-term contracts, and for this portion of our energy
output we do not compete on price. As these contracts expire, we
will sell an increasing portion of our energy output in markets
where we will compete on price and, as such, generally expect to
have a growing exposure to energy market price volatility. In
certain countries where we are seeking new waste and energy
projects, such as China and the United Kingdom, we may sell our
electricity output pursuant to short-term arrangements with
local or regional government entities, or directly into the
local electricity grid, rather than pursuant to contract. In
these markets, we will have exposure to electricity price
fluctuations.
As our existing contracts expire, and as energy prices continue
to fluctuate in the United States and other countries, we may
sell our output pursuant to short-term agreements or directly
into regional electricity grids, in which case we would have
relatively greater exposure to energy market fluctuations. See
discussion under Item 1A. Risk Factors We
may face increased risk of market influences on our revenues
after our contracts expire for additional information
concerning the expiration of existing contracts. We may enter
into contractual arrangements that will mitigate our exposure to
this volatility through a variety of hedging techniques. Our
efforts in this regard will involve only mitigation of price
volatility for the energy we produce, and will not involve
speculative energy trading.
The initial long-term contracts we entered into when our
energy-from-waste projects were originally financed will be
expiring at various dates through 2017. As we seek to enter into
extended or new contracts following these expiration dates, we
expect that medium- and long-term contracts for waste supply,
for a substantial portion of facility capacity, will be
available on acceptable terms in the marketplace. We also expect
that medium- and long-term contracts for sales of energy will be
less available than in the past. As a result, following the
expiration of these initial long-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, we expect approximately 20% of our energy
revenue in the Americas segment to be generated by selling
energy at market rates unless contractual arrangements we put in
place provide otherwise.
Additional
Conditions Affecting Our Growth
Competition for new contracts and projects is intense in all
markets in which we conduct or intend to conduct business, and
our businesses are subject to a variety of competitive,
regulatory and market influences.
The marketplace in the Americas segment for new renewable energy
projects, including energy-from-waste projects, may be affected
by the ongoing global economic slowdown, as well as the outcome
of current policy debates described below under Regulation of
Business Regulations Affecting our Americas
Segment Recent Policy Debate Regarding Climate
Change and Renewable Energy.
In 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 ongoing global economic slowdown and
related unemployment, policy makers are focused on themes of
economic stimulus, job creation, and energy security. We believe
that the construction and permanent jobs created by additional
energy-from-waste development represents the type of green
jobs that will be consistent with this 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.
In both our Americas and International segments, we may develop
or acquire, ourselves or jointly with others, additional waste
or energy projects
and/or
businesses. If we were to do so in a competitive procurement, we
would face competition in the selection process from other
companies, some of which may have greater financial resources,
or more experience in the regional waste
and/or
energy markets. If we were selected, the amount of market
competition we would thereafter face would depend upon the
extent to which the revenue at any such project or business
would be committed under contract. If we were to develop or
acquire additional projects or businesses not in the context of
a competitive procurement, we would face competition in the
regional market and compete on price with landfills, transfer
stations, other energy-from-waste facilities, other energy
producers and other waste disposal or energy generation
technologies that are then offering service in the region.
In our International segment, we compete principally for new
energy-from-waste contracts and projects in China and the United
Kingdom, generally in response to public tenders. In both of
these markets, regulatory conditions are favorable for
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energy-from-waste development, and there are numerous local and
international companies with whom we compete for such contracts
and projects. If we were to be successful in obtaining such
contracts or projects, we expect that a significant portion of
each projects waste disposal capacity would be under
long-term contracts, thus reducing the competition to which we
would be subject in waste disposal markets.
Once a contract is awarded or a project is financed, our
business can be impacted by a variety of risk factors which can
affect profitability during the construction period (which may
extend over several years, depending upon the size and nature of
the project), and subsequently over the life of a project. Some
of these risks are at least partially within our control, such
as successful operation in compliance with laws and the presence
or absence of labor difficulties or disturbances. Other risk
factors are largely out of our control and may have an adverse
impact on a project over a long-term. See Item 1A. Risk
Factors for more information on these types of risks.
Technology,
Research and Development
In our energy-from-waste business, we deploy and operate a
diverse number of mass-burn waste combustion technologies. In
North America, we have the exclusive right to market the
proprietary mass-burn combustion technology of Martin GmbH fur
Umwelt und Energietechnik, referred to herein as
Martin. Through our investment in Sanfeng, we also
have access to certain of Martins mass-burn combustion
technology in China. We believe that our know-how and worldwide
reputation in the field of energy-from-waste and our know-how in
designing, constructing and operating energy-from-waste
facilities of a variety of designs and incorporating numerous
technologies, rather than the use of a particular technology,
are important to our competitive position in the
energy-from-waste industry.
We have pursued, and intend to continue to pursue, opportunities
for mass-burn combustion and other technologies in all markets,
including North America, and will seek to utilize the most
appropriate technology for the markets where these opportunities
exist and to obtain the necessary technology rights either on an
exclusive or project-specific basis.
We believe that mass-burn combustion technology is now the
predominant technology used for the combustion of municipal
solid waste in large-scale applications. Through facility
acquisitions, we own
and/or
operate energy-from-waste facilities which utilize various
technologies from several different vendors, including
non-Martin mass-burn combustion technologies and refuse-derived
fuel technologies which include pre-combustion waste processing
not required with a mass-burn design. As we continue our efforts
to develop
and/or
acquire additional energy-from-waste projects internationally,
we will consider mass-burn combustion and other technologies,
including technologies other than those offered by Martin, which
best fit the needs of the local environment of a particular
project.
We believe that energy-from-waste technologies offer an
environmentally superior solution to waste disposal and energy
challenges faced by leaders around the world, and that our
efforts to expand our business will be enhanced by the
development of additional technologies in such fields as
emission controls, residue disposal, alternative waste treatment
processes, and combustion controls. We have advanced our
research and development efforts in these areas, and have
developed new and cost-effective technologies that represented
major advances in controlling nitrogen oxide
(NOx)
emissions. These technologies, for which patents are pending,
have been tested at existing facilities and we are now operating
and/or
installing such systems at several of our facilities. We also
developed and have patents pending for a proprietary process to
improve the handling of the residue from our energy-from-waste
facilities. We have also 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, as well as improved environmental performance. We intend
to maintain a focus on research and development of technologies
in these and other areas that we believe will enhance our
competitive position, and offer new technical solutions to waste
and energy problems that augment and complement our business.
REGULATION OF
BUSINESS
Regulations
Affecting Our Americas Segment
Environmental
Regulations General
Our business activities in the United States are pervasively
regulated pursuant to federal, state and local environmental
laws. Federal laws, such as the Clean Air Act and Clean Water
Act, and their state counterparts, govern discharges of
pollutants to air and water. Other federal, state and local laws
comprehensively govern the generation, transportation, storage,
treatment and disposal of solid and hazardous waste and also
regulate the storage and handling of chemicals and petroleum
products (such laws and regulations are referred to collectively
as the Environmental Regulatory Laws).
Other federal, state and local laws, such as the Comprehensive
Environmental Response Compensation and Liability Act, commonly
known as CERCLA and collectively referred to with
such other laws as the Environmental Remediation
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Laws, make us potentially liable on a joint and several
basis for any onsite or offsite environmental contamination
which may be associated with our activities and the activities
at our sites. These include landfills we have owned, operated or
leased, or at which there has been disposal of residue or other
waste generated, handled or processed by our facilities. Some
state and local laws also impose liabilities for injury to
persons or property caused by site contamination. Some service
agreements provide us with indemnification from certain
liabilities. In addition, our landfill gas projects have access
rights to landfill sites pursuant to certain leases that permit
the installation, operation and maintenance of landfill gas
collection systems.
The Environmental Regulatory Laws require that many permits be
obtained before the commencement of construction and operation
of any waste or renewable energy project, and further require
that permits be maintained throughout the operating life of the
facility. We can provide no assurance that all required permits
will be issued or re-issued, and the process of obtaining such
permits can often cause lengthy delays, including delays caused
by third-party appeals challenging permit issuance. Our failure
to meet conditions of these permits or of the Environmental
Regulatory Laws can subject us to regulatory enforcement actions
by the appropriate governmental unit, which could include fines,
penalties, damages or other sanctions, such as orders requiring
certain remedial actions or limiting or prohibiting operation.
See Item 1A. Risk Factors Compliance with
environmental laws could adversely affect our results of
operations. To date, we have not incurred material
penalties, been required to incur material capital costs or
additional expenses, or been subjected to material restrictions
on our operations as a result of violations of Environmental
Regulatory Laws or permit requirements.
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 Regulatory
Laws. We may be identified, along with other entities, as being
among parties potentially responsible for contribution to costs
associated with the correction and remediation of environmental
conditions at disposal sites subject to CERCLA
and/or
analogous state Environmental Remediation Laws. Our ultimate
liability in connection with such environmental claims will
depend on many factors, including our volumetric share of waste,
the total cost of remediation, and the financial viability of
other companies that have also sent waste to a given site and,
in the case of divested operations, our contractual arrangement
with the purchaser of such operations.
The Environmental Regulatory Laws may change. New technology may
be required or stricter standards may be established for the
control of discharges of air or water pollutants, for storage
and handling of petroleum products or chemicals, or for solid or
hazardous waste or ash handling and disposal. Thus, as new
technology is developed and proven, we may be required to
incorporate it into new facilities or make major modifications
to existing facilities. This new technology may be more
expensive than the technology we use currently.
Environmental
Regulations Recent Developments
Greenhouse Gas Reporting On
September 22, 2009, the Environmental Protection Agency
(EPA) issued its final rule on Mandatory Reporting
of Greenhouse Gases (the GHG Reporting Rule), which
requires all energy-from-waste facilities with GHG emissions
greater than 25,000 tons carbon dioxide equivalents
(CO2e)
per year to report their GHG emissions from stationary
combustion beginning with the 2010 reporting year. All of our
energy-from-waste facilities are expected to exceed this
reporting threshold. Certain capital improvements to comply with
the GHG Reporting Rule will be necessary at most of our
energy-from-waste facilities, and we also expect to incur
increased operating and maintenance costs, none of which are
expected to be material. We have been voluntarily reporting our
GHG emissions under various state and national programs, and do
not expect the GHG Reporting Rule to materially affect our
business.
MACT Rule In 2006, EPA issued revisions to
the New Source Performance Standards (NSPS) and
Emission Guidelines (EG) applicable to new and
existing municipal waste combustion (MWC) units (the
Revised MACT Rule). The Revised MACT Rule lowered
the emission limits for most of the regulated air pollutants
emitted by MWCs. Certain capital improvements to comply with
revised EG were required and are being implemented at one of our
existing energy-from-waste facilities, which we operate on
behalf of a municipality. Most existing facilities also will
incur increased operating and maintenance costs to meet the
revised EG requirements, none of which are expected to be
material.
In 2008, in response to a lawsuit, EPA was granted a voluntary
remand of the Revised MACT Rule for the purpose of reconsidering
the MWC emission limits. A new rulemaking is expected which may
result in more stringent MWC emission limits than are currently
included in the Revised MACT Rule; however, pending any such
revisions, the requirements and compliance deadlines included in
the Revised MACT Rule remain applicable to subject MWCs. We are
not able to predict the timing and potential outcome of any such
new rulemaking with respect to MWC emission limits at this time.
Revised PM2.5 Rule In 2006, EPA issued a
final rule to implement the revised National Ambient Air Quality
Standards for fine particulate matter, or PM2.5 (Revised
PM2.5 Rule). Unlike the Revised MACT Rule discussed above,
the Revised PM2.5 Rule is not specific to energy-from-waste
facilities, but instead is a nationwide standard for ambient air
quality. The primary impact of the Revised PM2.5 Rule will be on
those areas in certain states that are designated by EPA as
non-attainment with respect to those standards.
EPAs Revised PM2.5 Rule will guide state implementation
plan (SIP)
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revisions and could result in more stringent regulation of
certain energy-from-waste facility emissions that already are
regulated by the Revised MACT Rule. In October 2009, EPA issued
non-attainment designations pursuant to the Revised
PM2.5 Rule for 211 counties in 25 states, including
8 states in which we operate. SIP revisions to meet the
Revised PM2.5 Rule presently are not due until April 2013. We
are not able to predict the timing and potential outcome of any
new PM2.5 emission control requirements for MWCs at this time.
The costs to meet new rules for existing facilities owned by
municipal clients generally will be borne by the municipal
clients. For projects we own or lease, some municipal clients
have the obligation to fund such capital improvements, and at
certain of our projects we may be required to fund a portion of
the related costs. In certain cases, we are required to fund the
full cost of capital improvements.
We believe that most costs incurred to meet the GHG Reporting
Rule, the Revised MACT Rule and the Revised PM2.5 Rule at
facilities we operate may be recovered from municipal clients
and other users of our facilities through increased fees
permitted to be charged under applicable contracts.
The Environmental Remediation Laws prohibit disposal of
regulated hazardous waste at our municipal solid waste
facilities. The service agreements recognize the potential for
inadvertent and improper deliveries of hazardous waste and
specify procedures for dealing with hazardous waste that is
delivered to a facility. Under some service agreements, we are
responsible for some costs related to hazardous waste
deliveries. We have not incurred material hazardous waste
disposal costs to date.
Energy
Regulations
Our businesses are subject to the provisions of federal, state
and local energy laws applicable to the development, ownership
and operation of facilities located in the United States. The
Federal Energy Regulatory Commission (FERC), among
other things, regulates the transmission and the wholesale sale
of electricity in interstate commerce under the authority of the
Federal Power Act (FPA). In addition, under existing
regulations, FERC determines whether an entity owning a
generation facility is an Exempt Wholesale Generator
(EWG), as defined in the Public Utility Holding
Company Act of 2005 (PUHCA 2005). FERC also
determines whether a generation facility meets the ownership and
technical criteria of a Qualifying Facility (cogeneration
facilities and other facilities making use of non-fossil fuel
power sources such as waste, which meet certain size and other
applicable requirements, referred to as QF), under
the Public Utility Regulatory Policies Act of 1978
(PURPA). Each of our U.S. generating facilities
has either been determined by FERC to qualify as a QF or is
otherwise exempt, or the subsidiary owning the facility has been
determined to be an EWG.
Federal Power Act The FPA gives FERC
exclusive rate-making jurisdiction over the wholesale sale of
electricity and transmission of electricity in interstate
commerce. Under the FPA, FERC, with certain exceptions,
regulates the owners of facilities used for the wholesale sale
of electricity or transmission of electricity in interstate
commerce as public utilities. The FPA also gives FERC
jurisdiction to review certain transactions and numerous other
activities of public utilities. Our QFs are currently exempt
from FERCs rate regulation under Sections 205 and 206
of the FPA because (i) the QF is 20 MW or smaller,
(ii) its sales are made pursuant to a state regulatory
authoritys implementation of PURPA or (iii) its sales
are made pursuant to a contract executed on or before
March 17, 2006.
Under Section 205 of the FPA, public utilities are required
to obtain FERCs acceptance of their rate schedules for the
wholesale sale of electricity. Certain of our generating
companies in the United States have sales of electricity
pursuant to market-based rates authorized by FERC. FERCs
orders that grant our generating companies market-based rate
authority reserve the right to revoke or revise that authority
if FERC subsequently determines that we can exercise market
power, create barriers to entry, or engage in abusive affiliate
transactions. In addition, amongst other requirements, our
market-based sales are subject to certain market behavior rules
and, if any of our generating companies were deemed to have
violated any one of those rules, such generating company would
be subject to potential disgorgement of profits associated with
the violation
and/or
suspension or revocation of their market-based rate authority,
as well as criminal and civil penalties.
In compliance with Section 215 of the Energy Policy Act of
2005 (EPAct 2005), FERC has approved the North
American Electric Reliability Corporation, or NERC,
as the National Energy Reliability Organization, or
ERO. As the ERO, NERC is responsible for the
development and enforcement of mandatory reliability standards
for the wholesale electric power system. We are responsible for
complying with the standards in the regions in which we operate.
NERC also has the ability to assess financial penalties for
non-compliance. In addition to complying with NERC requirements,
each of our entities must comply with the requirements of the
regional reliability council for the region in which that entity
is located.
Public Utility Holding Company Act of 2005
PUHCA 2005 provides FERC with certain authority over and
access to books and records of public utility holding companies
not otherwise exempt by virtue of their ownership of EWGs, QFs,
and Foreign Utility Companies, as defined in PUHCA 2005. We are
a public utility holding company, but because all of our
generating facilities have QF status, are otherwise exempt, or
are owned through EWGs, we are exempt from the accounting,
record retention, and reporting requirements of PUHCA 2005.
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EPAct 2005 eliminated the limitation on utility ownership of
QFs. Over time, this may result in greater utility ownership of
QFs and serve to increase competition with our businesses. EPAct
2005 also extended or established certain renewable energy
incentives and tax credits which might be helpful to expand our
businesses or for new development.
Public Utility Regulatory Policies Act PURPA
was passed in 1978 in large part to promote increased energy
efficiency and development of independent power producers. PURPA
created QFs to further both goals, and FERC is primarily charged
with administering PURPA as it applies to QFs. FERC has
promulgated regulations that exempt QFs from compliance with
certain provisions of the FPA, PUHCA 2005, and certain state
laws regulating the rates charged by, or the financial and
organizational activities of, electric utilities. The exemptions
afforded by PURPA to QFs from regulation under the FPA and most
aspects of state electric utility regulation are of great
importance to us and our competitors in the energy-from-waste
and independent power industries.
PURPA also initially included a requirement that utilities must
buy and sell power to QFs. Among other things, EPAct 2005
eliminated the obligation imposed on utilities to purchase power
from QFs at an avoided cost rate where the QF has
non-discriminatory access to wholesale energy markets having
certain characteristics, including nondiscriminatory
transmission and interconnection services. In addition, FERC has
established a regulatory presumption that QFs with a capacity
greater than 20 MW have non-discriminatory access to
wholesale energy markets in most geographic regions in which we
operate. As a result, many of our expansion, renewal and
development projects must rely on competitive energy markets
rather than PURPAs historic avoided cost rates in
establishing and maintaining their viability. Existing contracts
entered into under PURPA are not impacted, but as these
contracts expire, a significant and increasing portion of our
electricity output will be sold at rates determined through our
participation in competitive energy markets.
Recent
Policy Debate Regarding Climate Change and Renewable
Energy
Increased public and political debate has occurred recently over
the need for additional regulation of GHG emissions (principally
carbon dioxide
(CO2)
and methane) as a contributor to climate change. Such
regulations could in the future affect our business. As is the
case with all combustion, our facilities do emit
CO2,
however we believe that energy-from-waste creates net reductions
in GHG emissions and is otherwise environmentally beneficial,
because it:
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Avoids
CO2
emissions from fossil fuel power plants,
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Avoids methane emissions from landfills,
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Avoids habitat destruction and contamination from
landfilling, and
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Avoids GHG emissions from mining and processing metal because it
recovers and recycles scrap metals from waste.
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In addition, energy-from-waste facilities typically are located
close to the source of the waste and thus typically reduce
fossil fuel consumption and air emissions associated with
long-haul transportation of waste to landfills.
For policy makers at the local level who make decisions on waste
disposal alternatives, we believe that using energy-from-waste
instead of landfilling will result in significantly lower net
GHG emissions, while also introducing more control over the cost
of waste disposal and supply of local electrical power. We are
actively engaged in encouraging policy makers at state and
federal levels to enact legislation that supports
energy-from-waste as a superior choice for communities to avoid
both the environmental harm caused by landfilling waste, and
reduce local reliance on fossil fuels as a source of energy.
The United States Congress is currently debating proposals
designed to encourage two broad policy objectives: increased
renewable energy generation and the reduction of fossil fuel
usage and related GHG emissions. The United States House of
Representatives passed a bill known as the American 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 with a market-based emissions trading system aimed at
reducing emissions of
CO2
below baseline levels. Energy-from-waste and biomass have
generally been included in the ACES bill to be among
technologies that help to achieve both of these policy
objectives. Similar legislation has been introduced in the
United States Senate. While legislation is far from final and 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.
Congress is expected to continue to debate energy policy as a
priority and ultimately enact some form of legislation regarding
the need to encourage renewable electricity generation. Given
the ongoing global economic slowdown and related unemployment,
policy makers are also expected to focus on economic stimulus,
job creation, and energy security. We believe that the
construction and permanent jobs created by additional
energy-from-waste development represents the type of green
jobs that will be consistent with this focus.
Many of these same policy considerations apply equally to other
renewable technologies, especially with respect to our biomass
business. The extent to which such potential legislation and
policy initiatives will affect our business will depend in
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part on whether energy-from-waste and our other renewable
technologies are included within the range of renewable
technologies that could benefit from such legislation.
Concurrent with the federal legislative activity noted above,
the EPA is continuing to move forward with its regulation of
GHGs under the Clean Air Act (CAA). During 2009, the
EPA issued its finding that current and projected concentrations
of GHGs threaten the public health and welfare of current and
future generations. In addition, the EPA proposed the Prevention
of Significant Deterioration and Title V Greenhouse Gas
Tailoring Rule, designed to limit regulation of GHGs under the
CAA to large facilities. Both actions set the stage for the EPA
to issue GHG emission requirements for light duty vehicles,
expected in 2010. When finalized, this regulation will set in
motion the addition of GHGs to new and revised facility
Title V operating permits, including those applicable to
our facilities. We cannot predict at this time the potential
impact to our business of the EPAs regulatory initiatives
under the CAA regarding, or whether the EPAs regulation
will be impacted or superseded by any future climate change
legislation. We continue to closely follow developments in this
area.
While the political discussion in Congress, as well as at the
state and regional levels, has not been aimed specifically at
waste or energy-from-waste businesses, regulatory initiatives
developed to date have been broad in scope and designed
generally to promote renewable energy, develop a certified GHG
inventory, and ultimately reduce GHG emissions. Many of these
more developed initiatives have been at the state or regional
levels, and some initiatives exist in regions where we have
projects. For example, during 2006, a group of seven
northeastern states, including Connecticut, New Jersey and New
York, acting through the Regional Greenhouse Gas Initiative
(RGGI), issued a model rule to implement
reductions in GHG emissions. The RGGI model rule also featured a
cap-and-trade program for regional
CO2
emissions, initially fixed at 1990 levels, followed by
incremental reductions below those levels after 2014. To date,
RGGI has been focused on fossil fuel-fired electric generators
and does not directly affect energy-from-waste facilities;
however, we continue to monitor developments with respect to
state implementation of RGGI.
Efforts also are underway, through the Western Climate
Initiative (WCI), to devise a model rule
for GHG emission reductions, including mandatory reporting of
GHG emissions and a regional
cap-and-trade
program. The WCI would operate in seven western states and four
Canadian provinces, including California, Oregon and British
Columbia, where we operate energy-from-waste facilities. Unlike
RGGI, WCI is not limited in scope to fossil electric generation
and may subject our energy-from-waste facilities in covered
states to additional regulatory requirements, although we cannot
predict the outcome of the rulemaking at this time. We continue
to monitor developments with respect to the developing WCI and
intend to participate in the rulemaking process.
We expect that initiatives intended to reduce GHG emissions,
such as RGGI, WCI and any federal legislation that would impose
similar
cap-and-trade
programs, may cause electricity prices to rise, thus potentially
affecting the prices at which we sell electricity from our
facilities which sell into the market.
Regulations
Affecting Our International Segment
We have ownership and operating interests in energy generation
facilities outside the Americas. Most countries have expansive
systems for the regulation of the energy business. These
generally include provisions relating to ownership, licensing,
rate setting and financing of generation and transmission
facilities.
We provide waste and energy services through
environmentally-protective project designs, regardless of the
location of a particular project. Compliance with environmental
standards comparable to those of the United States are often
conditions to credit agreements by multilateral banking
agencies, as well as other lenders or credit providers. The laws
of various countries include pervasive regulation of emissions
into the environment and provide governmental entities with the
authority to impose sanctions for violations, although these
requirements are generally different from those applicable in
the United States. See Item 1A. Risk Factors
Exposure to international economic and political factors may
materially and adversely affect our international businesses
and Compliance with environmental laws could
adversely affect our results of operations.
Climate
Change Policies
Certain international markets in which we compete have recently
adopted regulatory or policy frameworks that encourage
energy-from-waste projects as important components of GHG
emission reduction strategies, as well as waste management
planning and practice.
The European Union
The European Union has adopted regulations which require member
states to reduce the utilization of and reliance upon landfill
disposal. The legislation emanating from the European Union is
primarily in the form of Directives, which are of
direct effect within the member state but need enabling
legislation to implement the practical implications of them,
which
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can result in significant variance between the legislative
schemes introduced by member states. Certain Directives notably
affect the regulation of energy-from-waste facilities across the
European Union. These include (1) Directive 96/61/EC
concerning integrated pollution prevention and control (known as
the IPPC Directive) which governs emissions to air,
land and water from certain large industrial installations,
(2) Directive 1999/31/EC concerning the landfill of waste
(known as the Landfill Directive) which imposes
operational and technical controls on landfills and restricts,
on a reducing scale to the year 2020, the amount of
biodegradable municipal waste which member countries may dispose
of in a landfill, and (3) Directive 2000/76/EC concerning
the incineration of waste (known as the Waste Incineration
Directive or WID), which imposes limits on
emissions to air from the incineration and co-incineration of
waste. The United Kingdom and Ireland, the two primary European
Union member states in which we currently compete, are both
subject to the Directives above.
In response to these Directives and in furtherance of its
policies to reduce GHG emissions, the United Kingdom now imposes
taxes on landfilling of waste: £32/ton in the
2008/09
tax year, increasing annually by £8/ton to £72/ton in
2013/14. In addition, each waste disposal authority in the
United Kingdom is limited in the amount of biodegradable waste
it may landfill each year by the Landfill Directive. This has
been implemented in England by the Landfill Allowance Trading
Scheme (known as LATS). LATS is structured as a
cap-and-trade
program which reduces the capped amount of waste that can be
landfilled each year through 2020 when capped amounts will be
fixed at 35% of 1995 levels. LATS allowances are tradable with
other waste disposal authorities and substantial penalties are
levied against authorities not in compliance. Wales, Scotland
and Northern Ireland have different implementation schemes that
rely on the imposition of direct fines if landfill allowances
are exceeded. Energy-from-waste facilities in the United Kingdom
with combined heat and power may also be eligible for various
green certificates which are designed to promote the
contribution of renewable sources to electricity production.
These include (1) Renewables Obligation Certificates, which
are tradable certificates issued in respect of eligible
renewable source electricity generated within the United Kingdom
and supplied to customers in the United Kingdom by a licensed
supplier, (2) tradable Levy Exemption Certificates,
which exempt the holder from the United Kingdom Climate Change
Levy, and (3) Renewable Energy Guarantees of Origin
(REGOs), which constitute evidence that electricity
was generated from a renewable source.
Similarly in Ireland, the obligation to divert biodegradable
waste from landfill, in accordance with the Landfill Directive,
has led to policies that promote energy-from-waste facilities
over landfill, including a 20 per ton landfill levy that
is soon expected to be increased and proposed conditions in the
operating permits for landfilling that, when adopted, will
restrict disposal to landfills of this source of GHG. In
addition, the biodegradable fraction of waste treated in
energy-from-waste facilities in Ireland is eligible for
renewable support designed to enable Ireland to meet its targets
under Directives 2009/28/EC of 16% of gross final consumption of
energy from renewable sources in 2020 and government targets of
40% of electricity consumption from renewable sources by 2020.
The Renewable Energy
Feed-in-Tariff
(REFIT) Scheme launched in 2006 and extended in 2009
also supports the construction of renewable generation from,
amongst other things, biomass. Energy-from-waste facilities may
also be eligible for REGOs in respect of the energy generated
from the biodegradable fraction of the waste that is thermally
treated in Ireland, although the extent to which REGOs will be
tradable is not yet determined.
China
China currently has a favorable regulatory environment for the
development of energy-from-waste projects. The Ministry of
Housing and Urban-Rural Development of the Peoples
Republic of China has set a goal to increase the volume of waste
disposed of by energy-from-waste facilities from 1% (2005
estimate) to 30% by 2030. The Chinese central government has
further called for an increase in energy-from-waste output
generation from 200 MW (2005 estimate) to 500 MW by
the end of 2010, and to three gigawatts by 2020.
Energy-from-waste and municipal waste disposal services are
designated by the Chinese central government as encouraged
industries for foreign investment. China also has various
promotional laws and policies in place to promote
energy-from-waste and municipal waste disposal projects
including exemptions and reductions of corporate income tax,
value added tax refunds, prioritized commercial bank loans,
state subsidies for loan interest, and a guaranteed subsidized
price for the sale of electricity.
EMPLOYEES
As of December 31, 2009, we employed approximately
4,100 full-time employees worldwide, the majority of which
were employed in the United States.
Of our employees in the United States and Canada, approximately
12% are represented by organized labor. Currently, we are party
to eight collective bargaining agreements: one expired in 2009
and is pending an extension, four expire in 2010, two expire in
2011 and one expires in 2012. In 2008, approximately
140 employees at a facility located in Rochester,
Massachusetts elected to be represented by organized labor. We
are engaged in good faith bargaining with the union representing
these employees.
We consider relations with our employees to be good.
23
EXECUTIVE
OFFICERS OF THE REGISTRANT
A list of our executive officers and their business experience
follows. Ages shown are as of February 17, 2010.
Anthony J. Orlando was named President and Chief
Executive Officer in October 2004. Mr. Orlando was elected
as one of our directors in September 2005 and is a member of the
Technology Committee, Public Policy Committee and the Finance
Committee. Previously, he had been President and Chief Executive
Officer of Covanta Energy since November 2003. From March 2003
to November 2003, he served as Senior Vice President, Business
and Financial Management of Covanta Energy. From January 2001
until March 2003, Mr. Orlando served as Covanta
Energys Senior Vice President,
Waste-to-Energy.
Mr. Orlando joined Covanta Energy in 1987. Age: 50.
Mark A. Pytosh was appointed as Executive Vice President
and Chief Financial Officer in December 2007. Mr. Pytosh
served as Senior Vice President and Chief Financial Officer from
September 2006 to December 2007. Previously, Mr. Pytosh
served as Executive Vice President from February 2004 to August
2006 and Chief Financial Officer from May 2005 to August 2006 of
Waste Services, Inc., a publicly-traded integrated waste
services company. Prior to his tenure with Waste Services, Inc.,
Mr. Pytosh served as a Managing Director in Investment
Banking at Lehman Brothers where he led the firms Global
Industrial Group, from November 2000 to February 2004. Before
joining Lehman Brothers in 2000, Mr. Pytosh had
15 years of investment banking experience at Donaldson,
Lufkin & Jenrette and Kidder, Peabody. Age: 45.
John M. Klett was appointed as Executive Vice President
and Chief Operating Officer in December 2007. Mr. Klett
served as Senior Vice President and Chief Operating Officer of
Covanta Energy from May 2006 to December 2007 and as Covanta
Energys Senior Vice President, Operations from March 2003
to December 2007. Prior thereto, he served as Executive Vice
President of Covanta Waste to Energy, Inc. for more than five
years. Mr. Klett joined Covanta Energy in 1986.
Mr. Klett has been in the energy-from-waste business since
1977. He has been in the power business since 1965. Age: 63.
Seth Myones was appointed as Covanta Energys
President, Americas, in November 2007, which is comprised
principally of Covanta Energys domestic business.
Mr. Myones served as Covanta Energys Senior Vice
President, Business Management, from January 2004 to November
2007. From September 2001 until January 2004, Mr. Myones
served as Vice President,
Waste-to-Energy
Business Management for Covanta Projects, Inc., a wholly-owned
subsidiary of Covanta Energy. Mr. Myones joined Covanta
Energy in 1989. Age: 51.
Timothy J. Simpson was appointed as Executive Vice
President, General Counsel and Secretary in December 2007.
Mr. Simpson served as Senior Vice President, General
Counsel and Secretary from October 2004 to December 2007.
Previously, he served as Senior Vice President, General Counsel
and Secretary of Covanta Energy since March 2004. From June 2001
to March 2004, Mr. Simpson served as Vice President,
Associate General Counsel and Assistant Secretary of Covanta
Energy. Mr. Simpson joined Covanta Energy in 1992. Age: 51.
Thomas E. Bucks has served as Vice President and Chief
Accounting Officer since April 2005. Mr. Bucks served as
Controller from February 2005 to April 2005. Previously,
Mr. Bucks served as Senior Vice President
Controller of Centennial Communications Corp., a leading
provider of regional wireless and integrated communications
services in the United States and the Caribbean, from March 1995
through February 2005, where he was the principal accounting
officer and was responsible for accounting operations and
external financial reporting. Age: 53.
24
The following risk factors could have a material adverse effect
on our business, financial condition and results of operations.
Changes
in public policies and legislative initiatives could materially
affect our business and prospects.
There has been substantial debate recently in the United States
and abroad in the context of environmental and energy policies
affecting climate change, the outcome of which could have a
positive or negative influence on our existing business and our
prospects for growing our business. The United States Congress
has recently considered the enactment of laws that would
encourage electricity generation from renewable technologies and
discourage such generation from fossil fuels. Congress has
considered proposed legislation which would have established new
renewable portfolio standards which are designed to
increase the proportion of the nations electricity that is
generated from renewable technologies. Congress has also
considered enacting legislation which sets declining limits on
greenhouse gas emissions, and requires generators to purchase
rights to emit in excess of such limits, and allows such rights
to be traded. This structure is sometimes referred to as
cap-and-trade.
In addition, Congress has periodically considered extending
existing tax benefits to renewable energy technologies, which
would expire without such an extension. Each of these policy
initiatives, and potentially others that may be considered,
could provide material financial and competitive benefits to
those technologies which are included among those defined as
renewable in any legislation that is enacted, or are otherwise
favorably treated as greenhouse gas reducing technologies in
cap-and-trade
legislation. For those sources of greenhouse gas emissions that
are unable to meet the required limitations, such legislation
could impose substantial financial burdens. Our business could
be adversely affected if renewable technologies we use were not
included among those technologies identified in any final law as
being renewable
and/or
greenhouse gas reducing, and therefore entitled to the benefits
of such laws.
Weakness
in the economy may have an adverse effect on our revenue and
cash flow.
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 recent decline in global oil and natural gas prices has
pushed energy pricing lower generally, and may reduce the prices
for the portion of the energy we sell under short-term
arrangements. Lastly, the downturn in economic activity tends to
reduce global demand for and pricing of certain commodities,
such as the scrap metals we recycle from our energy-from-waste
facilities. These factors could have a material adverse effect
on our revenue and cash flow, and may not be successfully
mitigated or reduced by the efforts of governments to stimulate
economic activity.
Weakness
in the economy may have an adverse effect on our ability to grow
our business.
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 ongoing global
economic slowdown and increases in unemployment. 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.
We may
face increased risk of market influences on our revenues after
our contracts expire.
The contracts pursuant to which we operate energy-from-waste
projects and sell energy output expire on various dates between
2010 and 2034. Expiration of these contracts will subject us to
greater market risk in entering into new or replacement
contracts at pricing levels which will generate comparable or
enhanced revenues. We cannot assure you that we will be able to
enter into renewal or replacement contracts on favorable terms,
or at all. The expiration of existing energy sales contracts, if
not renewed, will require us to sell project energy output
either into the electricity grid or pursuant to new contracts.
We may
face risk of revenue and cash flow loss if we are not successful
in extending or renewing our contracts to operate facilities
which we do not own.
We operate facilities for municipal clients, under long-term
contracts and we have historically been successful extending
such contracts. If in the future when existing contracts expire,
we are unable to reach agreement with our municipal clients on
the terms under which they would extend our operating contracts,
this may adversely affect our revenue, cash flow and
profitability. We cannot assure you that we will be able to
enter into such contracts or that the terms available in the
market at the time will be favorable to us.
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Recent
dislocations in credit and capital markets may make it more
difficult for us to borrow money or raise capital needed to
finance the construction of new projects, the expansion of our
existing projects, and the acquisitions of certain
businesses.
Our business is capital intensive, and we typically borrow money
from project lenders to pay for a portion of the cost to
construct facilities. Recent dislocations in the credit markets,
including for project debt, have resulted in less credit being
made available by banks and other lending institutions,
and/or
borrowing terms that are less favorable than has historically
been the case. As a result, we may not be able to obtain
financing for new facilities or expansions of our existing
facilities, on terms,
and/or for a
cost, that we find acceptable, which may make it more difficult
to grow our business through new
and/or
expanded facilities.
We also intend to grow our business through opportunistic
acquisitions of projects or businesses. Some acquisitions may be
large enough to require capital in excess of our cash on hand
and availability under our revolving credit facility. Recent
dislocations in the capital markets may adversely impact our
access to debt or equity capital, and our ability to execute our
strategy to grow our business through such acquisitions.
Recent
dislocations in the credit and capital markets, if prolonged and
severe, could make it more difficult or costly for us to
refinance our corporate debt when it matures.
A substantial portion of our debt will need to be refinanced
between 2012 and 2014. Prolonged instability or worsening of the
credit or capital markets may adversely affect our ability to
obtain refinancing of such debt on favorable terms, or at all.
Such circumstances could adversely affect our business,
financial condition,
and/or the
share price of our common stock.
Our
reputation could be adversely affected if opposition to our
efforts to grow our business results in adverse
publicity.
With respect to our efforts to grow and maintain our business
globally, we sometimes experience opposition from advocacy
groups or others intended to halt development or on-going
business. Such opposition is often intended to discourage third
parties from doing business with us and may be based on
misleading, inaccurate, incomplete or inflammatory assertions.
Our reputation may be adversely affected as a result of adverse
publicity resulting from such opposition. Such damage to our
reputation could adversely affect our ability to grow and
maintain our business.
Changes
in technology may have a material adverse effect on our
profitability.
Research and development activities are ongoing to provide
alternative and more efficient technologies to dispose of waste,
produce by-products from waste, or to produce power. We and many
other companies are pursuing these technologies, and an
increasing amount of capital is being invested to find new
approaches to waste disposal, waste treatment, and renewable
power generation. It is possible that this deployment of capital
may lead to advances in these or other technologies which will
reduce the cost of waste disposal or power production to a level
below our costs
and/or
provide new or alternative methods of waste disposal or energy
generation that become more accepted than those we currently
utilize. Unless we are able to participate in these advances,
any of these changes could have a material adverse effect on our
revenues, profitability and the value of our existing facilities.
Operation
of our facilities involves significant risks.
The operation of our facilities involves many risks, including:
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the inaccuracy of our assumptions with respect to the timing and
amount of anticipated revenues;
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supply interruptions;
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the breakdown or failure of equipment or processes;
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difficulty or inability to find suitable replacement parts for
equipment;
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increases in the prices of commodities we need to continue
operating our facilities;
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the unavailability of sufficient quantities of waste or fuel;
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fluctuations in the heating value of the waste we use for fuel
at our energy-from-waste facilities;
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decreases in the fees for solid waste disposal and electricity
generated;
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decreases in the demand or market prices for recovered ferrous
or non-ferrous metal;
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disruption in the transmission of electricity generated;
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permitting and other regulatory issues, license revocation and
changes in legal requirements;
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labor disputes and work stoppages;
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unforeseen engineering and environmental problems;
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unanticipated cost overruns;
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weather interferences, catastrophic events including fires,
explosions, earthquakes, droughts and acts of terrorism;
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the exercise of the power of eminent domain; and
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performance below expected levels of output or efficiency.
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We cannot predict the impact of these risks on our business or
operations. These risks, if they were to occur, could prevent us
from meeting our obligations under our operating contracts and
have an adverse affect on our results of operations.
Development
and construction of new projects and expansions may not commence
as anticipated, or at all.
The development and construction of new waste and energy
facilities involves many risks including:
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difficulties in identifying, obtaining and permitting suitable
sites for new projects;
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the inaccuracy of our assumptions with respect to the cost of
and schedule for completing construction;
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difficulty, delays or inability to obtain financing for a
project on acceptable terms;
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delays in deliveries of, or increases in the prices of,
equipment sourced from other countries;
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the unavailability of sufficient quantities of waste or other
fuels for startup;
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permitting and other regulatory issues, license revocation and
changes in legal requirements;
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labor disputes and work stoppages;
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unforeseen engineering and environmental problems;
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unanticipated cost overruns; and
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weather interferences, catastrophic events including fires,
explosions, earthquakes, droughts and acts of terrorism.
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In addition, new facilities have no operating history and may
employ recently developed technology and equipment. Our
businesses maintain insurance to protect against risks relating
to the construction of new projects; however, such insurance may
not be adequate to cover lost revenues or increased expenses. As
a result, a new facility may be unable to fund principal and
interest payments under its debt service obligations or may
operate at a loss. In certain situations, if a facility fails to
achieve commercial operation, at certain levels or at all,
termination rights in the agreements governing the
facilitys financing may be triggered, rendering all of the
facilitys debt immediately due and payable. As a result,
the facility may be rendered insolvent and we may lose our
interest in the facility.
Construction
activities may cost more and take longer than we
estimate.
The design and construction of new projects or expansions
requires us to contract for services from engineering and
construction firms, and make substantial purchases of equipment
such as boilers, turbine generators and other components that
require large quantities of steel to fabricate. World-wide
demand for new infrastructure spending, including energy
generating facilities and waste disposal facilities, continues
to increase, and prices for building materials such as steel may
also rise sharply. In addition, this increased demand affects
not only the cost of obtaining the services necessary to design
and construct these facilities, but also the availability of
quality firms to perform the services. These conditions may
adversely affect our ability to successfully compete for new
projects, or construct and complete such projects on time and
within budget.
Exposure
to foreign currency fluctuations may affect our results from
operations or construction costs of facilities we develop in
international markets.
We have sought to participate in projects where the host country
has allowed the convertibility of its currency into
U.S. dollars and repatriation of earnings, capital and
profits subject to compliance with local regulatory
requirements. As we grow our business in other countries and
enter new international markets, we expect to invest substantial
amounts in foreign currencies to pay for the construction costs
of facilities we develop, or for the cost to acquire existing
businesses or assets. Currency volatility in those markets, as
well as the effectiveness of any currency hedging strategies we
may implement, may impact the amount we are required to invest
in new projects, as well as our reported results.
In some cases, components of project costs incurred or funded in
U.S. dollars are recovered with limited exposure to
currency fluctuations through negotiated contractual adjustments
to the price charged for electricity or service provided. This
contractual structure may cause the cost in local currency to
the projects power purchaser or service recipient to rise
from time to time in excess of local inflation. As a result,
there is a risk in such situations that such power purchaser or
service recipient will, at least in the near term, be less able
or willing to pay for the projects power or service.
Changes
in labor laws could adversely affect our relationship with our
employees and cause disruptions to our business.
Legislation has been proposed in Congress which would materially
change the labor laws in the United States. The proposed changes
would, among other things, allow labor unions to organize
employees without secret ballot employee
27
protections; require arbitrator-imposed contracts in the event
good faith bargaining was not successful within short time
periods; and impose significant fines on employers under certain
circumstances. Our business depends upon the professionalism,
innovation, and hard work of our employees and our ability to
maintain a safe workplace where employees are treated fairly,
with respect, and where we have the flexibility to make
operating decisions. We believe our success may be affected by
the degree to which we are able to maintain a direct
relationship with our employees without the imposition of third
party representatives, such as labor unions. We cannot predict
if such legislation will be enacted in its present form or
whether and to what extent it may affect our relationship with
our employees, the cost of operating our facilities and our
operating discretion.
The
rapid growth of our operations could strain our resources and
cause our business to suffer.
We have experienced rapid growth and intend to further grow our
business. This growth has placed, and potential future growth
will continue to place, a strain on our management systems,
infrastructure and resources. Our ability to successfully offer
services and implement our business plan in a rapidly evolving
market requires an effective planning and management process. We
expect that we will need to continually evaluate and maintain
our financial and managerial controls, reporting systems and
procedures. We will also need to expand, train and manage our
workforce worldwide. Furthermore, we expect that we will be
required to manage an increasing number of relationships with
various customers and other third parties. Failure to expand in
any of the foregoing areas efficiently and effectively could
interfere with the growth and current operation of our business
as a whole.
Our
efforts to grow our business will require us to incur
significant costs in business development, often over extended
periods of time, with no guarantee of success.
Our efforts to grow our waste and energy services business will
depend in part on how successful we are in developing new
projects and expanding existing projects. The development period
for each project may occur over several years, during which we
incur substantial expenses relating to siting, design,
permitting, community relations, financing and professional fees
associated with all of the foregoing. Not all of our development
efforts will be successful, and we may decide to cease
developing a project for a variety of reasons. If the cessation
of our development efforts were to occur at an advanced stage of
development, we may have incurred a material amount of expenses
for which we will realize no return.
Our
insurance and contractual protections may not always cover lost
revenues, increased expenses or liquidated damages
payments.
Although our businesses maintain insurance, obtain warranties
from vendors, require contractors to meet certain performance
levels and, in some cases, pass risks we cannot control to the
service recipient or output purchaser, the proceeds of such
insurance, warranties, performance guarantees or risk sharing
arrangements may not be adequate to cover lost revenues,
increased expenses or liquidated damages payments.
Performance
reductions could materially and adversely affect us and our
projects may operate at lower levels than
expected.
Most service agreements for our energy-from-waste facilities
provide for limitations on damages and cross-indemnities among
the parties for damages that such parties may incur in
connection with their performance under the service agreement.
In most cases, such contractual provisions excuse our businesses
from performance obligations to the extent affected by
uncontrollable circumstances and provide for service fee
adjustments if uncontrollable circumstances increase our costs.
We cannot assure you that these provisions will prevent our
businesses from incurring losses upon the occurrence of
uncontrollable circumstances or that if our businesses were to
incur such losses they would continue to be able to service
their debt.
We have issued or are party to performance guarantees and
related contractual obligations associated with our
energy-from-waste facilities. With respect to our businesses, we
have issued guarantees to our municipal clients and other
parties that we will perform in accordance with contractual
terms, including, where required, the payment of damages or
other obligations. The obligations guaranteed will depend upon
the contract involved. Many of our subsidiaries have contracts
to operate and maintain energy-from-waste facilities. In these
contracts, the subsidiary typically commits to operate and
maintain the facility in compliance with legal requirements; to
accept minimum amounts of solid waste; to generate a minimum
amount of electricity per ton of waste; and to pay damages to
contract counterparties under specified circumstances, including
those where the operating subsidiarys contract has been
terminated for default. Any contractual damages or other
obligations incurred by us could be material, and in
circumstances where one or more subsidiarys contract has
been terminated for its default, such damages could include
amounts sufficient to repay project debt. Additionally, damages
payable under such guarantees on our owned energy-from-waste
facilities could expose us to recourse liability on project
debt. Certain of our operating subsidiaries which have issued
these guarantees may not have sufficient sources of cash to pay
28
such damages or other obligations. We cannot assure you that we
will be able to continue to avoid incurring material payment
obligations under such guarantees or that, if we did incur such
obligations, that we would have the cash resources to pay them.
Our
businesses generate their revenue primarily under long-term
contracts and must avoid defaults under those contracts in order
to service their debt and avoid material liability to contract
counterparties.
We must satisfy performance and other obligations under
contracts governing energy-from-waste facilities. These
contracts typically require us to meet certain performance
criteria relating to amounts of waste processed, energy
generation rates per ton of waste processed, residue quantity
and environmental standards. Our failure to satisfy these
criteria may subject us to termination of operating contracts.
If such a termination were to occur, we would lose the cash flow
related to the projects and incur material termination damage
liability, which may be guaranteed by us. In circumstances where
the contract has been terminated due to our default, we may not
have sufficient sources of cash to pay such damages. We cannot
assure you that we will be able to continue to perform our
respective obligations under such contracts in order to avoid
such contract terminations, or damages related to any such
contract termination, or that if we could not avoid such
terminations that we would have the cash resources to pay
amounts that may then become due.
We
have provided guarantees and financial support in connection
with our projects.
We are obligated to guarantee or provide financial support for
our projects in one or more of the following forms:
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support agreements in connection with service or operating
agreement-related obligations;
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direct guarantees of certain debt relating to our facilities;
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contingent obligations to pay lease payment installments in
connection with certain of our facilities;
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agreements to arrange financing for projects under development;
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contingent credit support for damages arising from performance
failures;
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environmental indemnities; and
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contingent capital and credit support to finance costs, in most
cases in connection with a corresponding increase in service
fees, relating to uncontrollable circumstances.
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Many of these contingent obligations cannot readily be
quantified, but, if we were required to provide this support, it
may be material to our cash flow and financial condition.
Our
businesses depend on performance by third parties under
contractual arrangements.
Our waste and energy services businesses depend on a limited
number of third parties to, among other things, purchase the
electric and steam energy produced by our facilities, and supply
and deliver the waste and other goods and services necessary for
the operation of our energy facilities. The viability of our
facilities depends significantly upon the performance by third
parties in accordance with long-term contracts, and such
performance depends on factors which may be beyond our control.
If those third parties do not perform their obligations, or are
excused from performing their obligations because of
nonperformance by our waste and energy services businesses or
other parties to the contracts, or due to force majeure events
or changes in laws or regulations, our businesses may not be
able to secure alternate arrangements on substantially the same
terms, if at all, for the services provided under the contracts.
In addition, the bankruptcy or insolvency of a participant or
third party in our facilities could result in nonpayment or
nonperformance of that partys obligations to us. Many of
these third parties are municipalities and public authorities.
The ongoing global economic slowdown and disruptions in credit
markets have strained resources of these entities generally, and
could make it difficult for these entities to honor their
obligations to us.
We are
subject to counterparty and market risk with respect to
transactions with financial and other
institutions.
Recent global economic conditions have resulted in the actual or
perceived failure or financial difficulties of many financial
institutions.
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. If one or more of the counterparties to one or more
of our cash convertible note hedge transactions becomes subject
to insolvency proceedings, we will become an unsecured creditor
in those proceedings with a claim equal to our exposure at the
time under those transactions. Our exposure will depend on many
factors but, generally, the increase in our exposure will be
correlated to the increase in our stock price and in volatility
of our stock. We may also suffer adverse tax consequences as a
result of a default by one of the option counterparties. In
addition, a default by an option counterparty may result in our
inability to repay the 3.25% Cash Convertible Senior Notes as
29
a result of the negative covenants in our credit agreement or
otherwise. We can provide no assurances as to the financial
stability or viability of any of our counterparties.
We also have a revolving credit facility, a funded letter of
credit facility, and term loan with a diversified group of
financial institutions. We can provide no assurances as to the
financial stability or viability of these financial and other
institutions and their ability to fund their obligation when
required under our agreements.
We also expect that medium- and long-term contracts for sales of
energy will be less available than in the past. As a result,
following the expiration of our initial long-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. Consequently, we may enter into futures, forward
contracts, swaps or options with financial institutions to hedge
our exposure to market risk in energy markets. We can provide no
assurances as to the financial stability or viability of these
financial and other institutions.
Concentration
of suppliers and customers may expose us to heightened financial
exposure.
Our waste and energy services businesses often rely on single
suppliers and single customers at our facilities, exposing such
facilities to financial risks if any supplier or customer should
fail to perform its obligations.
For example, our businesses often rely on a single supplier to
provide waste, fuel, water and other services required to
operate a facility and on a single customer or a few customers
to purchase all or a significant portion of a facilitys
output. In most cases our businesses have long-term agreements
with such suppliers and customers in order to mitigate the risk
of supply interruption. The financial performance of these
facilities depends on such customers and suppliers continuing to
perform their obligations under their long-term agreements. A
facilitys financial results could be materially and
adversely affected if any one customer or supplier fails to
fulfill its contractual obligations and we are unable to find
other customers or suppliers to produce the same level of
profitability. We cannot assure you that such performance
failures by third parties will not occur, or that if they do
occur, such failures will not adversely affect the cash flows or
profitability of our businesses.
In addition, we rely on the municipal clients as a source not
only of waste for fuel, but also of revenue from the fees for
disposal services we provide. Because our contracts with
municipal clients are generally long-term, we may be adversely
affected if the credit quality of one or more of our municipal
clients were to decline materially.
Our
waste operations are concentrated in one region, and expose us
to regional economic or market declines.
The majority of our waste disposal facilities are located in the
northeastern United States, primarily along the
Washington, D.C. to Boston, Massachusetts corridor. Adverse
economic developments in this region could affect regional waste
generation rates and demand for waste disposal services provided
by us. Adverse market developments caused by additional waste
disposal capacity in this region could adversely affect waste
disposal pricing. Either of these developments could have a
material adverse effect on our revenues and cash generation.
Some
of our energy contracts involve greater risk of exposure to
performance levels which could result in materially lower
revenues.
Some of our energy-from-waste facilities receive 100% of the
energy revenues they generate. As a result, if we are unable to
operate these facilities at their historical performance levels
for any reason, our revenues from energy sales could materially
decrease.
Exposure
to international economic and political factors may materially
and adversely affect our international businesses.
Our international operations expose us to political, legal, tax,
currency, inflation, convertibility and repatriation risks, as
well as potential constraints on the development and operation
of potential business, any of which can limit the benefits to us
of an international project.
Our projected cash distributions from most of our existing
international facilities come from facilities located in
countries with sovereign ratings below investment grade. The
financing, development and operation of projects outside the
United States can entail significant political and financial
risks, which vary by country, including:
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changes in law or regulations;
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changes in electricity pricing;
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changes in foreign tax laws and regulations;
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changes in United States federal, state and local laws,
including tax laws, related to foreign operations;
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compliance with United States federal, state and local foreign
corrupt practices laws;
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changes in government policies or personnel;
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changes in general economic conditions affecting each country,
including conditions in financial markets;
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changes in labor relations in operations outside the United
States;
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political, economic or military instability and civil unrest;
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expropriation and confiscation of assets and facilities; and
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credit quality of entities that purchase our power.
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The legal and financial environment in foreign countries in
which we currently own assets or projects could also make it
more difficult for us to enforce our rights under agreements
relating to such projects.
Any or all of the risks identified above with respect to our
international projects could adversely affect our revenue and
cash generation. As a result, these risks may have a material
adverse effect on our business, consolidated financial condition
and results of operations.
Our
reputation could be adversely affected if our businesses, or
third parties with whom we have a relationship, were to fail to
comply with United States or foreign laws or
regulations.
Some of our projects and new business may be conducted in
countries where corruption has historically penetrated the
economy to a greater extent than in the United States. It is our
policy to comply, and to require our local partners and those
with whom we do business to comply, with all applicable
anti-bribery laws, such as the U.S. Foreign Corrupt
Practices Act, and with applicable local laws of the foreign
countries in which we operate. Our reputation may be adversely
affected if we were reported to be associated with corrupt
practices or if we or our local partners failed to comply with
such laws. Such damage to our reputation could adversely affect
our ability to grow our business.
Exposure
to fuel supply prices may affect our costs and results of
operations.
Changes in the market prices and availability of fuel supplies
to generate electricity may increase our cost of producing
power, which could adversely impact our energy businesses
profitability and financial performance.
The market prices and availability of fuel supplies fluctuate
for some of our international facilities, and for our biomass
facilities. Any price increase, delivery disruption or reduction
in the availability of such supplies could affect our ability to
operate the facilities and impair their cash flow and
profitability. We may be subject to further exposure if any of
our future international operations are concentrated in
facilities using fuel types subject to fluctuating market prices
and availability. We may not be successful in our efforts to
mitigate our exposure to supply and price swings.
Our
inability to obtain resources for operations may adversely
affect our ability to effectively compete.
Our energy-from-waste facilities depend on solid waste for fuel,
which provides a source of revenue. For most of our facilities,
the prices we charge for disposal of solid waste are fixed under
long-term contracts and the supply is guaranteed by sponsoring
municipalities. However, for some of our energy-from-waste
facilities, the availability of solid waste to us, as well as
the tipping fee that we must charge to attract solid waste to
our facilities, depends upon competition from a number of
sources such as other energy-from-waste facilities, landfills
and transfer stations competing for waste in the market area. In
addition, we may need to obtain waste on a competitive basis as
our long-term contracts expire at our owned facilities. There
has been consolidation and there may be further consolidation in
the solid waste industry which would reduce the number of solid
waste collectors or haulers that are competing for disposal
facilities or enable such collectors or haulers to use wholesale
purchasing to negotiate favorable below-market disposal rates.
The consolidation in the solid waste industry has resulted in
companies with vertically integrated collection activities and
disposal facilities. Such consolidation may result in economies
of scale for those companies as well as the use of disposal
capacity at facilities owned by such companies or by affiliated
companies. Such activities can affect both the availability of
waste to us for disposal at some of our energy-from-waste
facilities and market pricing.
Compliance
with environmental laws could adversely affect our results of
operations.
Costs of compliance with federal, state, local and foreign
existing and future environmental regulations could adversely
affect our cash flow and profitability. Our waste and energy
services businesses are subject to extensive environmental
regulation by federal, state and local authorities, primarily
relating to air, waste (including residual ash from combustion)
and water. We are required to comply with numerous environmental
laws and regulations and to obtain numerous governmental permits
in operating our facilities. Our businesses may incur
significant additional costs to comply with these requirements.
Environmental regulations may also limit our ability to operate
our facilities at maximum capacity or at all. If our businesses
fail to comply with these requirements, we could be subject to
civil or criminal liability, damages and fines. Existing
environmental regulations could be revised or reinterpreted and
new laws and regulations could be adopted or become applicable
to us or our facilities, and future changes in environmental
laws and regulations could occur. This may materially
31
increase the amount we must invest to bring our facilities into
compliance, impose additional expense on our operations, or
otherwise impose structural changes to markets which would
adversely affect our competitive positioning in those markets.
In addition, lawsuits or enforcement actions by federal, state
and/or
foreign regulatory agencies may materially increase our costs.
Stricter environmental regulation of air emissions, solid waste
handling or combustion, residual ash handling and disposal, and
waste water discharge could materially affect our cash flow and
profitability. Certain environmental laws make us potentially
liable on a joint and several basis for the remediation of
contamination at or emanating from properties or facilities we
currently or formerly owned or operated or properties to which
we arranged for the disposal of hazardous substances. Such
liability is not limited to the cleanup of contamination we
actually caused. Although we seek to obtain indemnities against
liabilities relating to historical contamination at the
facilities we own or operate, we cannot provide any assurance
that we will not incur liability relating to the remediation of
contamination, including contamination we did not cause.
Our businesses may not be able to obtain or maintain, from time
to time, all required environmental regulatory approvals. If
there is a delay in obtaining any required environmental
regulatory approvals or if we fail to obtain and comply with
them, the operation of our facilities could be jeopardized or
become subject to additional costs.
Energy
regulation could adversely affect our revenues and costs of
operations.
Our waste and energy services businesses are subject to
extensive energy regulations by federal, state and foreign
authorities. We cannot predict whether the federal, state or
foreign governments will modify or adopt new legislation or
regulations relating to the solid waste or energy industries.
The economics, including the costs, of operating our facilities
may be adversely affected by any changes in these regulations or
in their interpretation or implementation or any future
inability to comply with existing or future regulations or
requirements.
The Federal Power Act (FPA) regulates energy
generating companies and their subsidiaries and places
constraints on the conduct of their business. The FPA regulates
wholesale sales of electricity and the transmission of
electricity in interstate commerce by public utilities. Under
the Public Utility Regulatory Policies Act of 1978, our
facilities located in the United States are exempt from most
provisions of the FPA and state rate regulation. Our foreign
projects are also exempt from regulation under the FPA.
The Energy Policy Act of 2005 enacted comprehensive changes to
the energy industry in the United States which may affect our
businesses. The Energy Policy Act removed certain regulatory
constraints that previously limited the ability of utilities and
utility holding companies to invest in certain activities and
businesses, which may have the effect over time of increasing
competition in energy markets in which we participate. In
addition, the Energy Policy Act includes provisions that may
remove some of the benefits provided to non-utility electricity
generators, like us, after our existing energy sale contracts
expire. As a result, we may face increased competition after
such expirations occur.
If our businesses lose existing exemptions under the FPA, the
economics and operations of our energy projects could be
adversely affected, including as a result of rate regulation by
the Federal Energy Regulatory Commission with respect to our
output of electricity, which could result in lower prices for
sales of electricity. In addition, depending on the terms of the
projects power purchase agreement, a loss of our
exemptions could allow the power purchaser to cease taking and
paying for electricity under existing contracts. Such results
could cause the loss of some or all contract revenues or
otherwise impair the value of a project and could trigger
defaults under provisions of the applicable project contracts
and financing agreements. Defaults under such financing
agreements could render the underlying debt immediately due and
payable. Under such circumstances, we cannot assure you that
revenues received, the costs incurred, or both, in connection
with the project could be recovered through sales to other
purchasers.
Failure
to obtain regulatory approvals could adversely affect our
operations.
Our waste and energy services businesses are continually in the
process of obtaining or renewing federal, state, local and
foreign approvals required to operate our facilities. While we
believe our businesses currently have all necessary operating
approvals, we may not always be able to obtain all required
regulatory approvals, and we may not be able to obtain any
necessary modifications to existing regulatory approvals or
maintain all required regulatory approvals. If there is a delay
in obtaining any required regulatory approvals or if we fail to
obtain and comply with any required regulatory approvals, the
operation of our facilities or the sale of electricity to third
parties could be prevented, made subject to additional
regulation or subject our businesses to additional costs or a
decrease in revenue.
The
energy industry is becoming increasingly competitive, and we
might not successfully respond to these changes.
We may not be able to respond in a timely or effective manner to
the changes resulting in increased competition in the energy
industry in global markets. These changes may include
deregulation of the electric utility industry in some markets,
32
privatization of the electric utility industry in other markets
and increasing competition in all markets. To the extent
competitive pressures increase and the pricing and sale of
electricity assumes more characteristics of a commodity
business, the economics of our business may be subject to
greater volatility.
Our
substantial indebtedness could adversely affect our business,
financial condition and results of operations and our ability to
meet our payment obligations under our
indebtedness.
The level of our consolidated indebtedness could have
significant consequences on our future operations, including:
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making it difficult for us to meet our payment and other
obligations under our outstanding indebtedness;
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limiting our ability to obtain additional financing to fund
working capital, capital expenditures, acquisitions and other
general corporate purposes;
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subjecting us to the risk of increased sensitivity to interest
rate increases on indebtedness under our credit facilities;
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limiting our flexibility in planning for, or reacting to, and
increasing our vulnerability to, changes in our business, the
industries in which we operate and the general economy; and
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placing us at a competitive disadvantage compared to our
competitors that have less debt or are less leveraged.
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Any of the above-listed factors could have an adverse effect on
our business, financial condition and results of operations and
our ability to meet our payment obligations under our
consolidated debt, and the price of our common stock.
We
cannot assure you that our cash flow from operations will be
sufficient to service our indebtedness.
Our ability to meet our obligations under our indebtedness
depends on our ability to generate cash and our ability to
receive dividends and distributions from our subsidiaries in the
future. This, in turn, is subject to many factors, some of which
are beyond our control, including the following:
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the continued operation and maintenance of our facilities,
consistent with historical performance levels;
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maintenance or enhancement of revenue from renewals or
replacement of existing contracts and from new contracts to
expand existing facilities or operate additional facilities;
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market conditions affecting waste disposal and energy pricing,
as well as competition from other companies for contract
renewals, expansions and additional contracts, particularly
after our existing contracts expire; and
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general economic, financial, competitive, legislative,
regulatory and other factors.
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We cannot assure you that our business will generate cash flow
from operations, or that future borrowings will be available to
us under our credit facilities or otherwise, in an amount
sufficient to enable us to meet our payment obligations under
our outstanding indebtedness and to fund other liquidity needs.
If we are not able to generate sufficient cash flow to service
our debt obligations, we may need to refinance or restructure
our debt, sell assets, reduce or delay capital investments, or
seek to raise additional capital. If we are unable to implement
one or more of these alternatives, we may not be able to meet
our payment obligations under our outstanding indebtedness,
which could have a material and adverse affect on our financial
condition.
Our
credit facilities contain covenant restrictions that may limit
our ability to operate our business.
Our credit facilities contain operating and financial
restrictions and covenants that impose operating and financial
restrictions on us and require us to meet certain financial
tests. Complying with these covenant restrictions may have a
negative impact on our business, results of operations and
financial condition by limiting our ability to engage in certain
transactions or activities, including:
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incurring additional indebtedness or issuing guarantees, in
excess of specified amounts;
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creating liens, in excess of specified amounts;
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making certain investments, in excess of specified amounts;
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entering into transactions with our affiliates;
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selling certain assets, in excess of specified amounts;
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making cash distributions or paying dividends to us, in excess
of specified amounts;
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redeeming capital stock or making other restricted payments to
us, in excess of specified amounts; and
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merging or consolidating with any person.
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Our ability to comply with these covenants is dependent on our
future performance, which will be subject to many factors, some
of which are beyond our control, including prevailing economic
conditions. As a result of these covenants, our ability to
respond to changes in business and economic conditions and to
obtain additional financing, if needed, may be restricted, and
we may be prevented from engaging in transactions that might
otherwise be beneficial to us, or in declaring and paying
dividends to our stockholders. In addition, the failure to
comply with these covenants in our credit facilities could
result in a default thereunder and a default under the
1.00% Senior Convertible Debentures due 2027 (the
Debentures). Upon the occurrence of such an event of
default, the lenders under our credit facilities could elect to
declare all amounts
33
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 which could have a material and adverse affect on our
financial condition.
We
cannot be certain that our NOLs will continue to be available to
offset tax liability.
Our net operating loss carryforwards (NOLs), which
offset our consolidated taxable income, will expire in various
amounts, if not used, between 2011 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, it
is possible that some portion of the NOLs would not be available
to offset our future consolidated taxable income.
As of December 31, 2009, we estimated that we had
approximately $545 million of NOLs. In order to utilize the
NOLs, we must generate consolidated taxable income which can
offset such carryforwards. The NOLs are also used to offset
income from certain grantor trusts that were established as part
of the reorganization in 1990 of certain of our subsidiaries
engaged in the insurance business and are administered by state
regulatory agencies. As the administration of these grantor
trusts is concluded, taxable income could result, which could
utilize a portion of our NOLs and, in turn, could accelerate the
date on which we may be otherwise obligated to pay incremental
cash taxes.
In addition, if our existing insurance business were to require
capital infusions from us in order to meet certain regulatory
capital requirements, and we were to fail to provide such
capital, some or all of our subsidiaries comprising our
insurance business could enter insurance insolvency or
bankruptcy proceedings. In such event, such subsidiaries may no
longer be included in our consolidated tax return, and a
portion, which could constitute a significant portion, of our
remaining NOLs may no longer be available to us. In such event,
there may be a significant inclusion of taxable income in our
federal consolidated income tax return.
Our
controls and procedures may not prevent or detect all errors or
acts of fraud.
Our management, including our Chief Executive Officer and Chief
Financial Officer, believes that any disclosure controls and
procedures or internal controls and procedures, no matter how
well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must consider
the benefits of controls relative to their costs. Inherent
limitations within a control system include the realities that
judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by an
unauthorized override of the controls. While the design of any
system of controls is to provide reasonable assurance of the
effectiveness of disclosure controls, such design is also based
in part upon certain assumptions about the likelihood of future
events, and such assumptions, while reasonable, may not take
into account all potential future conditions. Accordingly,
because of the inherent limitations in a cost effective control
system, misstatements due to error or fraud may occur and may
not be prevented or detected.
Failure
to maintain an effective system of internal control over
financial reporting may have an adverse effect on our stock
price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
and the rules and regulations promulgated by the Securities and
Exchange Commission to implement Section 404, we are
required to furnish a report by our management to include in our
annual report on
Form 10-K
regarding the effectiveness of our internal control over
financial reporting. The report includes, among other things, an
assessment of the effectiveness of our internal control over
financial reporting as of the end of our fiscal year, including
a statement as to whether or not our internal control over
financial reporting is effective. This assessment must include
disclosure of any material weaknesses in our internal control
over financial reporting identified by management.
We have in the past discovered, and may potentially in the
future discover, areas of internal control over financial
reporting which may require improvement. If we are unable to
assert that our internal control over financial reporting is
effective now or in any future period, or if our auditors are
unable to express an opinion on the effectiveness of our
internal controls, we could lose investor confidence in the
accuracy and completeness of our financial reports, which could
have an adverse effect on our stock price.
Provisions
of our certificate of incorporation, Debentures and Notes could
discourage an acquisition by a third party.
Provisions of our restated certificate of incorporation could
make it more difficult for a third party to acquire control of
us. For example, our restated certificate of incorporation
authorizes our Board of Directors to issue preferred stock
without
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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.
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 or Notes. We may also
be required to issue additional shares upon conversion or
provide for conversion based on the acquirers capital
stock in the event of certain fundamental changes. These
possibilities could discourage an acquisition of us.
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;
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quarterly variations in our operating results;
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our operating results that vary from the expectations of
management, securities analysts and investors;
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changes in expectations as to our future financial performance;
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announcements of strategic developments, significant contracts,
acquisitions and other material events by us or our competitors;
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the operating and securities price performance of other
companies that investors believe are comparable to us;
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future sales of our equity or equity-related securities;
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changes in the economy and the financial markets;
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purchases or sales of large blocks of our stock by existing or
new holders of our common stock;
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departures of key personnel;
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changes in governmental regulations; and
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geopolitical conditions, such as acts or threats of terrorism or
military conflicts.
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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.
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Item 1B.
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UNRESOLVED
STAFF COMMENTS
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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,
2009, we owned, had equity
35
investments in
and/or
operated 73 projects in the Americas segment consisting of 41
energy-from-waste operations, two ashfills and two landfills, 13
transfer stations, eight wood waste (biomass) energy projects,
four water (hydroelectric) energy projects, and three landfill
gas energy projects. Principal projects are described above
under Item 1. Business Americas Segment.
Projects in the Americas segment which we own or lease are
conducted at properties, which we also own or lease, aggregating
approximately 1,717 acres, of which approximately
1,373 acres are owned and approximately 341 acres are
leased.
We operate our International segment projects through a network
of offices located in Shanghai, China; Chennai, India; Dublin,
Ireland; and Birmingham, England, where we lease office space
aggregating approximately 24,973 square feet. We hold a
long-term lease for 23 acres of undeveloped land in
Cheshire, England. As of December 31, 2009, we are the part
owner/operator of eight international projects, of which three
are owned or controlled by subsidiaries, with businesses
conducted at properties which are leased aggregating
approximately 66 acres. Principal projects are described
above under Item 1. Business International
Segment.
|
|
Item 3.
|
LEGAL
PROCEEDINGS
|
For information regarding legal proceedings, see Item 8.
Financial Statements And Supplementary Data
Note 21. Commitments and Contingencies, which
information is incorporated herein by reference.
|
|
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, 2009.
36
PART II
|
|
Item 5.
|
MARKET
FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our common stock is traded on the New York Stock Exchange under
the symbol CVA. On February 17, 2010, there
were approximately 1,442 holders of record of our common stock.
On February 17, 2010, the closing price of our common stock
on the New York Stock Exchange was $17.55 per share. The
following table sets forth the high and low stock prices of our
common stock for the last two years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
|
High
|
|
Low
|
|
High
|
|
Low
|
|
First Quarter
|
|
$
|
22.92
|
|
|
$
|
12.47
|
|
|
$
|
29.50
|
|
|
$
|
22.89
|
|
Second Quarter
|
|
$
|
17.63
|
|
|
$
|
12.61
|
|
|
$
|
30.37
|
|
|
$
|
26.03
|
|
Third Quarter
|
|
$
|
19.22
|
|
|
$
|
16.12
|
|
|
$
|
29.86
|
|
|
$
|
20.40
|
|
Fourth Quarter
|
|
$
|
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. See Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources and
Item 8. Financial Statements And Supplementary
Data Note 11. Long-Term Debt.
See Item 8. Financial Statements And Supplementary
Data Note 4. Earnings Per Share and Equity
regarding repurchased shares of our common stock in
connection with tax withholdings for vested stock awards and
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters regarding
securities authorized for issuance under equity compensation
plans.
|
|
Item 6.
|
SELECTED
FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005(1)
|
|
|
(In thousands, except per share amounts)
|
|
Statements of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
1,550,467
|
|
|
$
|
1,664,253
|
|
|
$
|
1,433,087
|
|
|
$
|
1,268,536
|
|
|
$
|
978,763
|
|
Equity in net income from unconsolidated investments
|
|
$
|
23,036
|
|
|
$
|
23,583
|
|
|
$
|
22,196
|
|
|
$
|
28,636
|
|
|
$
|
25,609
|
|
Net income attributable to Covanta Holding Corporation
|
|
$
|
101,645
|
|
|
$
|
128,960
|
|
|
$
|
121,693
|
|
|
$
|
105,789
|
|
|
$
|
59,326
|
|
Income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.66
|
|
|
$
|
0.84
|
|
|
$
|
0.80
|
|
|
$
|
0.73
|
|
|
$
|
0.49
|
|
Diluted
|
|
$
|
0.66
|
|
|
$
|
0.83
|
|
|
$
|
0.79
|
|
|
$
|
0.72
|
|
|
$
|
0.46
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
153,694
|
|
|
|
153,345
|
|
|
|
152,653
|
|
|
|
145,663
|
|
|
|
122,209
|
|
Diluted
|
|
|
154,994
|
|
|
|
154,732
|
|
|
|
153,997
|
|
|
|
147,030
|
|
|
|
127,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
(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. |
(2) |
|
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. |
37
|
|
Item 7.
|
MANAGEMENTS
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.
As of December 31, 2009, we owned, had equity investments
in, and/or
operate 64 energy generation facilities, 56 of which were in the
Americas and eight of which were located outside the 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, two ash fills and two landfills,
which we use primarily for ash disposal, and 13 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
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 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 equity
and/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 development contracts.
In our Americas segment, from 2007 through 2009, we have added
ten energy-from-waste facilities, two ashfills, eight transfer
stations and four biomass projects to the network 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 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 under
Growth and Development.
The
Energy-From-Waste Solution
Our mission is to be the worlds 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 sustainable solutions. In order to accomplish
this mission and create additional value for our stockholders,
we are focused on:
|
|
|
|
|
providing customers with superior service and effectively
managing our existing business;
|
|
|
generating sufficient cash to meet our liquidity needs and
invest in our business;
|
|
|
advancing our Clean World Initiative in order to enhance the
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.
|
38
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: by
processing municipal solid waste in energy-from-waste facilities
we reduce greenhouse gas (GHG) emissions, lower the
risk of groundwater contamination, and conserve 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 the Americas and 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 environmental
performance, beyond mere compliance with legally required
standards. This ethos is embodied in our Clean World
Initiative, an umbrella program under which we are:
|
|
|
|
|
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 worlds 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.
In 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 ongoing global economic slowdown and
related unemployment, policy makers are also expected to focus
on economic stimulus, job creation, and energy security. We
believe that the construction and permanent jobs created by
additional energy-from-waste development represent the type of
green jobs that are consistent with this 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.
The United States Congress is currently debating proposals
designed to encourage two broad policy objectives: increased
renewable energy generation, 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 ACES bill to be among the
technologies that help to achieve both policy objectives.
Similar legislation has been introduced in the United States
Senate. While legislation is far from final and 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 the Results of Operations
discussion below. The highlights of the components of
operating income between the two periods are as follows:
|
|
|
|
|
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.
|
39
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 the Liquidity and Capital Resources discussion
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. See Liquidity and Capital
Resources Available Sources of Liquidity below.
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 declines in global
natural gas and other fossil fuel prices have pushed electricity
and steam pricing lower generally which causes lower revenue for
the portion of the energy we sell which is not under fixed-price
contracts. Lastly, the downturn in economic activity has reduced
global demand for and pricing of certain commodities, such as
the scrap metals we recycle from our energy-from-waste
facilities. The combined effects of these conditions reduced our
revenue and cash flow in 2009.
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 slowdown 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, or through the acquisition
of additional businesses.
40
Seasonal Our quarterly operating
income for the Americas and International segments, within the
same fiscal year, typically differ 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. For additional information
about such risks and damages that we may owe for unexcused
operating performance failures, see Item 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;
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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;
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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;
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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
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The availability and adequacy of insurance to cover losses from
business interruption in the event of casualty or other insured
events.
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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;
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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;
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The financial condition and creditworthiness of purchasers of
power and services provided by us;
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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
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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.
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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.
41
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Segment
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Description
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Americas
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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
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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
electricity
and/or steam
we sell. Typical features of these agreements are as follows:
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Current
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number of
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Fees for operating projects or for
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Payments for electricity
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Contract types
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projects
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processing waste received
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and/or steam we sell
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Service Fee
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28
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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).
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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
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16
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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
projects 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).
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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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42
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
projects 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 waste
and/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. See Item 8.
Financial Statements And Supplementary Data
Note 3. Acquisitions, Business Development and Dispositions
for additional information.
43
ACQUISITIONS
AND BUSINESS DEVELOPMENT
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Facility/Operating
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Contract
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Location
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Year
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Transaction
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Type
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Summary
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Long Beach
Hudson Valley
MacArthur
Plymouth
York
Burnaby
Abington
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CA
NY
NY
PA
PA
Canada
PA
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2009
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Acquisition
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EfW
EfW
EfW
EfW
EfW
EfW
Trans.St.
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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
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MI
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2009
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Contract
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EfW
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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
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MI
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2009
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Acquisition
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EfW
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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
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CA
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2009
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Contract
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EfW
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We extended our service fee contract with Stanislaus County from
2010 to 2016.
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Philadelphia
Transfer
Stations
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PA
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2009
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Acquisition
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Transfer
Stations
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We acquired two waste transfer stations with combined capacity
of 4,500 tpd in Philadelphia, Pennsylvania.
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Maine
Biomass
Energy
Facilities
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ME
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2008
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Acquisition
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Biomass
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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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44
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Facility/Operating
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Contract
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Location
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Year
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Transaction
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Type
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Summary
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Tulsa
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OK
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2008
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Acquisition/
Contract
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EfW
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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
facilitys 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
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MA
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2008
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Acquisition
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Ash
Landfill
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We acquired a landfill for the disposal of ash.
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Harrisburg
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PA
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2008
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Contract
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EfW
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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. See Energy-From-Waste Under Advanced
Development or Construction discussion below related to this
facility.
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Indianapolis
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IN
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2008
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Contract
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EfW
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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 facilitys capacity. (91 pounds of
steam generated per day).
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Kent County
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MI
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2008
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Contract
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EfW
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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 facilitys capacity.
Previously this was a service fee contract.
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Pasco County
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FL
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2008
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Contract
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EfW
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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
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CT
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2008
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Contract
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EfW
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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 facilitys capacity through
2020.
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Holliston
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MA
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2007
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Acquisition
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Transfer
Station
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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
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MA
NY
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2007
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Acquisition
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EfW /
Ash
Landfill /
Transfer
Stations
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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
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CA
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2007
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Acquisition
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Biomass
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We acquired Central Valley Biomass Holdings, LLC which owned two
biomass energy facilities and a biomass energy fuel management
business, all located in Californias 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
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NY
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2007
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Acquisition
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Transfer
Stations
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We acquired two waste transfer stations with combined capacity
of 1,150 tpd in Westchester County, New York.
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45
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Facility/Operating
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Contract
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Location
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Year
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Transaction
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Type
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Summary
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Hempstead
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NY
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2007
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Contract
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EfW
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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 facilitys 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 facilitys capacity.
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ENERGY-FROM-WASTE
PROJECTS UNDER ADVANCED DEVELOPMENT OR
CONSTRUCTION
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Project/Facility
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Location
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Summary
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Technology Development
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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. 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
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HI
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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 facilitys 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
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PA
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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
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FL
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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
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FL
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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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46
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Project/Facility
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Location
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Summary
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INTERNATIONAL
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Dublin
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Ireland
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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
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China
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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, Peoples 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
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China
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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 metric tpd energy-from-waste facility for Chengdu
Municipality in Sichuan Province, Peoples 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.
|
|
|
Sanfeng
|
|
China
|
|
We purchased a 40% equity interest in Chongqing Sanfeng Covanta
Environmental Industry Co., Ltd. (Sanfeng), a
company located in Chongqing Municipality, Peoples
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.
|
|
|
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 under Overview
Growth and Development, our
acquisition and business development initiatives in 2009, 2008
and 2007 resulted in various additional projects which increased
comparative revenues and expenses. These factors must be taken
into account in developing meaningful comparisons between the
periods compared below.
47
RESULTS
OF OPERATIONS Year Ended December 31, 2009 vs.
Year Ended December 31, 2008
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)
|
|
|
|
2009
|
|
|
2008
|
|
|
2009 vs 2008
|
|
|
CONSOLIDATED RESULTS OF OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
1,550,467
|
|
|
$
|
1,664,253
|
|
|
$
|
(113,786
|
)
|
Total operating expenses
|
|
|
1,354,632
|
|
|
|
1,408,288
|
|
|
|
(53,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
195,835
|
|
|
|
255,965
|
|
|
|
(60,130
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
4,007
|
|
|
|
5,717
|
|
|
|
(1,710
|
)
|
Interest expense
|
|
|
(38,116
|
)
|
|
|
(46,804
|
)
|
|
|
(8,688
|
)
|
Non-cash convertible debt related expense
|
|
|
(24,290
|
)
|
|
|
(17,979
|
)
|
|
|
6,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
(58,399
|
)
|
|
|
(59,066
|
)
|
|
|
(667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense and equity in net income from
unconsolidated investments
|
|
|
137,436
|
|
|
|
196,899
|
|
|
|
(59,463
|
)
|
Income tax expense
|
|
|
(50,044
|
)
|
|
|
(84,561
|
)
|
|
|
(34,517
|
)
|
Equity in net income from unconsolidated investments
|
|
|
23,036
|
|
|
|
23,583
|
|
|
|
(547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
|
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
|
|
|
153,694
|
|
|
|
153,345
|
|
|
|
349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
154,994
|
|
|
|
154,732
|
|
|
|
262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.66
|
|
|
$
|
0.84
|
|
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.66
|
|
|
$
|
0.83
|
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 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
|
48
|
|
|
|
|
$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 the
Liquidity section 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. See Item 8. Financial Statements And
Supplementary Data Note 16. Income Taxes
for 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
|
49
|
|
|
|
|
$22.5 million, of which $9.7 million was related to
our Stanislaus clients 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 the Americas Segment Results of
Operations Comparison of Results for the Year Ended
December 31, 2008 vs. Results for the Year Ended
December 31, 2007 below.
Other operating expenses decreased by $29.6 million
primarily due to timing of construction activity and lower
losses on retirement of assets. See Item 8. Financial
Statements And Supplementary Data Note 15.
Supplementary Financial Information for 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 Americas
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 Americas
segment, and
|
|
|
increased plant operating expenses resulting from additional
operating and maintenance costs from new businesses acquired in
the Americas 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.
|
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 the
Liquidity and Capital Resources section 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
Item 8. Financial Statements And Supplementary
Data Note 11. Long-Term Debt for additional
information.
Income tax expense increased by $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. See
Item 8. Financial Statements And Supplementary
Data Note 16. Income Taxes 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. See Item 8. Financial Statements And
Supplementary Data Note 8. Equity Method
Investments for additional information.
Americas
Segment Results of Operations Comparison of Results
for the Year Ended December 31, 2008 vs. Results for the
Year Ended December 31, 2007
The Americas segment results of operations are presented in the
table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
Increase (Decrease)
|
|
|
|
2008
|
|
|
2007
|
|
|
2008 vs 2007
|
|
|
Waste and service revenues
|
|
$
|
930,537
|
|
|
$
|
860,252
|
|
|
$
|
70,285
|
|
Electricity and steam sales
|
|
|
384,640
|
|
|
|
325,804
|
|
|
|
58,836
|
|
Other operating revenues
|
|
|
56,254
|
|
|
|
59,561
|
|
|
|
(3,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
1,371,431
|
|
|
|
1,245,617
|
|
|
|
125,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant operating expenses
|
|
|
753,848
|
|
|
|
664,641
|
|
|
|
89,207
|
|
Depreciation and amortization expense
|
|
|
190,659
|
|
|
|
187,875
|
|
|
|
2,784
|
|
Net interest expense on project debt
|
|
|
47,816
|
|
|
|
48,198
|
|
|
|
(382
|
)
|
General and administrative expenses
|
|
|
76,090
|
|
|
|
71,022
|
|
|
|
5,068
|
|
Insurance recoveries, net of write-down of assets
|
|
|
(8,325
|
)
|
|
|
|
|
|
|
(8,325
|
)
|
Other operating expenses
|
|
|
56,336
|
|
|
|
53,789
|
|
|
|
2,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,116,424
|
|
|
|
1,025,525
|
|
|
|
90,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
255,007
|
|
|
$
|
220,092
|
|
|
|
34,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
Operating
Revenues
Operating revenues for the Americas segment increased by
$125.8 million for the twelve month comparative period 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
|
|
$
|
13.3
|
|
|
$
|
0.6
|
|
|
$
|
13.9
|
|
Tip fee
|
|
|
3.9
|
|
|
|
30.4
|
|
|
|
34.3
|
|
Recycled metal
|
|
|
21.1
|
|
|
|
1.0
|
|
|
|
22.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total waste and service revenues
|
|
|
38.3
|
|
|
|
32.0
|
|
|
|
70.3
|
|
Electricity and steam sales
|
|
|
36.7
|
|
|
|
22.1
|
|
|
|
58.8
|
|
Other operating revenues
|
|
|
(3.3
|
)
|
|
|
|
|
|
|
(3.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
$
|
71.7
|
|
|
$
|
54.1
|
|
|
$
|
125.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
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. 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.
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
|
|
$
|
36.8
|
|
|
$
|
52.4
|
|
|
$
|
89.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 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.
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
|
|
|
$
|
|
|
Other operating expenses increased by $2.5 million
primarily due to losses on the retirement of fixed assets offset
by reduced construction activity. See Item 8. Financial
Statements And Supplementary Data Note 15.
Supplementary Financial Information for additional
information.
International
Segment Results of Operations Comparison of Results
for the Year Ended December 31, 2008 vs. Results for the Year
Ended December 31, 2007
The international segment 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.
54
2009
Supplementary Financial Information Adjusted EBITDA
(Non-GAAP Discussion)
To supplement our results prepared in accordance with United
States generally accepted accounting principles
(GAAP), we use the measure of Adjusted 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 tables 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 Energys credit facilities as described below under
Liquidity and Capital Resources, which we have
guaranteed. Adjusted EBITDA is defined as earnings before
interest, taxes, depreciation and amortization, as adjusted for
additional items subtracted from or added to net income. Because
our business is substantially comprised of that of Covanta
Energy, our financial performance is substantially similar to
that of Covanta Energy. For this reason, and in order to avoid
use of multiple financial measures which are not all from the
same entity, the calculation of Adjusted EBITDA and other
financial measures presented herein are 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,
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
55
|
|
|
(A) |
|
This amount relates primarily to acquisition-related costs
associated with 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. |
(B) |
|
These items represent amounts that are non-cash in nature. |
(C) |
|
Adjusted EBITDA for 2008 includes the impact 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. |
The decrease in Adjusted EBITDA of $58.7 million from the
prior year period was primarily due to $25.0 million
revenue 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 of $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 $13.9 million lower waste disposal revenue due to
price and lower deliveries; partially offset by lower operating
expenses.
The following is a reconciliation of cash flow provided by
operating activities to Adjusted EBITDA (in thousands):
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
LIQUIDITY
AND CAPITAL RESOURCES
We generate substantial cash flow from our ongoing business,
which we believe will allow us to meet our liquidity needs,
invest in our business, pay down debt, and pursue strategic
growth opportunities. As of December 31, 2009, in addition
to our ongoing cash flow, we had access to several sources of
liquidity, as discussed in Available Sources of Liquidity
below, 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 from
the projects in our Americas and International segments, which
allow us to satisfy project debt covenants and payments and
distribute cash. We typically receive cash distributions from
our Americas 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. The frequency and predictability 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.
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 existing facilities or operate additional
facilities and by investing in new projects. See
Managements Discussion and Analysis of Financial
Condition Overview Growth and
Development above.
Sources
and Uses of 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
Year
Ended December 31, 2009 vs. Year Ended December 31,
2008
Net cash provided by operating activities for the year ended
December 31, 2009 was $397.2 million, a decrease of
$5.4 million from the prior year period. The decrease was
primarily due to lower results of operations, including
$10.9 million of lower insurance recoveries and
$4.6 million of cash acquisition costs relating to the
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 Veolia EfW Acquisition;
|
|
|
$23.7 million to acquire the non-controlling interests of
one of the subsidiaries acquired in the Veolia EfW Acquisition;
|
|
|
$16.2 million of property insurance proceeds received in
2008;
|
|
|
$3.0 million related to a loan issued for the Harrisburg
energy-from-waste facility; and
|
|
|
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 $10.6 million lower outflows for purchase of
investments in fixed maturities.
|
Offset by lower cash outflows of:
|
|
|
|
|
$14.3 million in capital expenditures primarily due to
lower maintenance capital expenditures;
|
|
|
$16.7 million in purchases to acquire land use rights in
the United Kingdom and United States in 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:
|
|
|
|
|
proceeds of $460.0 million from the sale of the Notes;
|
|
|
proceeds of $54.0 million from the sale of Warrants;
|
|
|
use of cash of $112.4 million to purchase the Note
Hedge; and
|
|
|
use of cash of $14.3 million for transaction related costs.
|
The remaining net increase in sources of cash of
$13.9 million was primarily driven by:
|
|
|
|
|
release of $33.0 million from restricted funds; offset by a
|
|
|
payment of $9.8 million of interest rate swap termination
costs;
|
|
|
net increase in project debt payments of
$3.6 million; and
|
|
|
payment of $3.9 million in higher distributions to partners
of noncontrolling interests in subsidiaries.
|
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).
|
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;
|
57
|
|
|
|
|
$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
refinancing of long-term debt in 2007. The net proceeds from
refinancing the previously existing 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 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
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. 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
managements use of non-GAAP measures, see Results 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, 2009 and 2008, reconciled
for each such period to cash flow provided by operating
activities.
58
The following is a summary of Free Cash Flow and 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
The loan documentation under the Credit Facilities contains
customary affirmative and negative covenants and financial
covenants as discussed in Item 8. Financial Statements
And Supplementary Data Note 11. Long-Term
Debt. As of December 31, 2009, we were in compliance
with the covenants under the Credit Facilities.
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 3.75 to 1.00 for the
four quarter period ended December 31, 2009, which measures
Covanta Energys principal amount of consolidated debt less
certain restricted funds dedicated to
|
59
|
|
|
|
|
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, 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:
|
|
|
|
|
|
3.75 to 1.00 for each of the four quarter periods ended
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 Energys 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, see Results 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.
|
|
|
|
|
We purchased, for $112.4 million, cash-settled call options
on our common stock (the Note Hedge) initially
correlating to the 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. The
Note Hedge is a derivative which is recorded at fair value
quarterly and is recorded in other noncurrent assets in our
consolidated 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 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 Warrants are recorded at the amounts received
net of expenses within additional paid-in capital in our
consolidated balance sheets.
|
60
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, see
Item 8. Financial Statements And Supplementary
Data Note 11. Long-Term Debt, Note 13.
Financial Instruments and Note 14. Derivative
Instruments.
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
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 see Capital
Requirements below and Item 8. Financial Statements
And Supplementary Data Note 11. Long-Term Debt,
Note 13. Financial Instruments and Note 14.
Derivative Instruments.
Project
Debt
Americas
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 under Other Commitments.
Certain subsidiaries had recourse liability for project debt
which is recourse to certain Covanta ARC Holdings, Inc.
subsidiaries, but is non-recourse to us and as of
December 31, 2009 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. See Item 8. Financial Statements
And Supplementary Data Note 14. Derivative
Instruments for 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
61
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
assets
and/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. We believe
that the resources of the insurance business are adequate to
meet its current operating requirements.
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. 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, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Investments by grade:
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
U.S. government obligations and agencies
|
|
$
|
13,472
|
|
|
$
|
13,726
|
|
Residential mortgage-backed
|
|
|
5,150
|
|
|
|
5,203
|
|
Corporate (AAA to A)
|
|
|
8,878
|
|
|
|
9,213
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
27,500
|
|
|
|
28,142
|
|
Equity securities
|
|
|
732
|
|
|
|
871
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,232
|
|
|
$
|
29,013
|
|
|
|
|
|
|
|
|
|
|
62
Capital
Requirements
The following table summarizes our gross contractual obligations
including project debt, leases and other obligations as of
December 31, 2009 (in thousands; references to Notes in the
table are references to the Notes in Item 8. Financial
Statements And Supplementary Data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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. |
|
(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. 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. 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. For purposes of this Capital
Requirements chart, we have assumed that the Debentures will be
repurchased pursuant to the holders option on
February 1, 2012. For information detailing the contingent
interest, conversion or redemption features of the Debentures,
see Item 8. Financial Statements And Supplementary
Data Note 11. Long-Term Debt. |
|
(3) |
|
Excludes $18.7 million of unamortized debt premium. |
|
(4) |
|
Payment obligations for the project debt associated with owned
energy-from-waste facilities are limited recourse to operating
subsidiaries and non-recourse to us, subject to operating
performance guarantees and commitments. |
|
(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. |
|
(6) |
|
Retirement plan obligations are based on actuarial estimates for
the pension plan obligations and post-retirement plan
obligations as of December 31, 2009. |
|
(7) |
|
Accounting for uncertainty in income tax obligations are based
upon the expected date of settlement taking into account all of
our administrative rights including possible litigation. |
63
Other
Commitments
Other commitments as of December 31, 2009 were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments Expiring by Period
|
|
|
|
|
|
|
Less Than
|
|
|
More Than
|
|
|
|
Total
|
|
|
One Year
|
|
|
One Year
|
|
|
Letters of credit
|
|
$
|
278,191
|
|
|
$
|
6,550
|
|
|
$
|
271,641
|
|
Surety bonds
|
|
|
111,032
|
|
|
|
|
|
|
|
111,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other commitments net
|
|
$
|
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 Americas and 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 ($100.2 million) and support for
closure obligations of various energy projects when such
projects cease operating ($10.8 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 arise as follows:
|
|
|
|
|
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 cash
and/or our
common stock.
|
We have certain contingent obligations related to the Notes.
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 or Notes, see
Item 8. Financial Statements And Supplementary
Data Note 11. Long-Term Debt.
As discussed in the Overview Growth and
Development discussion 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.
We have issued or are party to guarantees and related
contractual support obligations undertaken pursuant to
agreements to construct and operate certain Americas and
International 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 Americas and International 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 damages, the contractual terms
of the applicable contracts, and the contract
counterpartys 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. See
Item 1A. Risk Factors We have provided
guarantees and financial support in connection with our
projects.
64
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 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 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 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 projects former operator in connection with the
disposition of its interest in the Delaware Valley facility.
Pursuant to the terms of various guarantee agreements, we have
guaranteed the payments of Basic Rent B and Stipulated Loss to
the extent such payments are not made by our subsidiary. We do
not believe, however, that such payments constitute a material
obligation of our subsidiary since our subsidiary expects to
continue to operate the Delaware Valley facility in the ordinary
course for the entire term of the lease and will continue to pay
rent throughout the term of the lease. As of December 31,
2009, the estimated Stipulated Loss would have been
$107.9 million.
We are also a party to various lease arrangements pursuant to
which we lease rolling stock in connection with our operating
activities, as well as lease certain office space and equipment.
Rent payable under these arrangements is not material to our
financial condition. We generally use operating lease treatment
for all of the foregoing arrangements. A summary of the
operating lease obligations is contained in Item 8.
Financial Statements And Supplementary Data
Note 10. Leases.
As described above under Other Commitments, we have
issued or are party to performance guarantees and related
contractual obligations undertaken mainly pursuant to agreements
to construct and operate certain energy and waste facilities. To
date, we have not incurred material liabilities under our
guarantees.
We have investments in several investees and joint ventures
which are accounted for under the equity and cost methods and
therefore we do not consolidate the financial information of
those companies. See Item 8. Financial Statements And
Supplementary Data Note 8. Equity Method
Investments for additional information regarding these
investments.
Discussion
of Critical Accounting Policies
In preparing our consolidated financial statements in accordance
with GAAP, we are required to use judgment in making estimates
and assumptions that affect the amounts reported in our
consolidated financial statements and related notes. We base our
estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances. These estimates form the basis for making
judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Many of our
critical accounting policies are subject to significant
judgments and uncertainties which could potentially result in
materially different results under different conditions and
assumptions. Future events rarely develop exactly as forecast,
and the best estimates routinely require adjustment.
Stock-Based
Compensation
We calculate the fair value of our share-based option awards
using the Black-Scholes option pricing model which requires
estimates of the expected life of the award and stock price
volatility. The expected life for the options issued in 2007 and
2008 was determined using the simplified method and
as such, the expected lives of the options issued in 2007 range
65
from 6.5 years to 6.04 years and 2008 range from
6.54 years to 6.48 years. In 2009, we did not grant
options to purchase shares of common stock to employees or
directors.
In addition, we also estimate expected forfeitures for our
options and share-based awards and the probability of achieving
specific performance factors affecting the vesting of our
share-based awards. For our current share-based awards, our
estimate of a forfeiture rate and determination of achieving
stated performance vesting factors will have the most
significant impact on the compensation cost we must recognize.
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 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.
Purchase
Accounting
We allocate acquisition purchase prices to identified intangible
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.
The fair value estimates used reflect our best estimates for the
highest and best use by market participants based on our work
and the work of independent valuation consultants using relevant
information available to us. These estimates, and the
assumptions used by us and by our valuation consultants, are
subject to inherent uncertainties and contingencies beyond our
control. For example, we used the discounted cash flow method to
estimate the value of many of our assets. This entailed
developing projections about future cash flows and adopting an
appropriate market participant discount rate. We cannot predict
with certainty actual cash flows and the selection of a discount
rate is heavily dependent on judgment. If different cash flow
projections or discount rates were used, the fair values of our
assets and liabilities could be materially increased or
decreased. Accordingly, there can be no assurance that such
estimates and assumptions reflected in the valuations will be
realized, or that further adjustments will not occur. The
assumptions and estimates used by us substantially affect our
consolidated balance sheets. In addition, the valuations impact
depreciation and amortization expense and changes in such
assumptions and estimates may affect earnings in the future.
Depreciation
and Amortization
We have estimated the useful lives over which we depreciate our
long-lived assets. Additionally, in accordance with accounting
standards related to asset retirement obligations, we have
capitalized the estimate of our legal liabilities which includes
closure and post-closure costs for landfill cells and site
restoration for certain energy-from-waste and power producing
sites.
Goodwill
and Intangible Assets
In accordance with accounting standards related to goodwill and
other intangible assets, we evaluate our goodwill and indefinite
lived intangible assets for impairment at least annually or when
indications of impairment exist. Our judgments regarding the
existence of impairment indicators are based on regulatory
factors, market conditions, anticipated cash flows and
operational performance of our acquired assets. There was no
impairment recognized in 2009, 2008 or 2007, however the impact
of impairment in the future could have a material impact on our
financial position and results of operations.
In accordance with accounting standards related to accounting
for the impairment or disposal of long-lived assets, we evaluate
our long-term assets and amortizable intangible assets for
recoverability whenever events or changes in circumstances
indicate that its carrying amount may not be recoverable. No
events or change in circumstances occurred in 2009, 2008 or 2007
to warrant impairment testing. However, had an event or change
in circumstances occurred that resulted in recognizing an
impairment, the impact of such impairment could have a material
impact on our financial position and results of operations.
Net
Operating Loss Carryforwards Deferred Tax
Assets
As described in Item 8. Financial Statements And
Supplementary Data Note 16. Income Taxes,
we have recorded a deferred tax asset related to our NOLs. The
amount recorded was calculated based upon future taxable income
arising from (a) the reversal of temporary differences
during the period the NOLs are available and (b) future
operating income expected from our Americas and International
segment businesses, to the extent it is reasonably predictable.
We estimated that we have NOLs of approximately
$545 million for federal income tax purposes as of the end
of 2009. The NOLs will expire in various amounts beginning on
December 31, 2011 through December 31, 2028, if not
used. The amount of NOLs available to us will be reduced by any
taxable income generated by current members of our tax
consolidated
66
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.
Loss
Contingencies
As described in Item 8. Financial Statements And
Supplementary Data Note 21. Commitments and
Contingencies, 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
As described in Item 8. Financial Statements And
Supplementary Data Note 13. Financial
Instruments, 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
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.
The fair value of the Note Hedge 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 Hedge is adjusted to reflect
counterparty risk of non-performance, and is based on the
counterpartys 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.
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 discounted using a 7.25%
discount rate, our estimated borrowing rate at the 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 the
percentage-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.
67
Pensions
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
|
|
Effective January 1, 2010, the defined benefit pension plan
was amended to exclude future compensation increases received by
eligible participants after December 31, 2009. See
Item 8. Financial Statements And Supplementary
Data Note 17. Employee Benefit Plans for
additional information related to our 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 on whom we
significantly rely 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.
Recent
Accounting Pronouncements
See Item 8. Financial Statements And Supplementary
Data Note 1. Organization and Summary of
Significant Accounting Policies and Note 2. Recent
Accounting Pronouncements for a summary of additional
accounting policies and new accounting pronouncements.
Related-Party
Transactions
Affiliate
Agreements
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 Quezons 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 equity in net income
from unconsolidated investments. For the fiscal years ended
December 31, 2009, 2008, and 2007, we collected
$40.6 million, $34.0 million, and $35.4 million,
respectively, for the operation and maintenance of the facility.
As of December 31, 2009 and 2008, the net amount due to
Quezon was $5.0 million and $3.2 million,
respectively, which represents advance payments received from
Quezon for operation and maintenance costs.
68
On 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 the
Detroit facility, pursuant to which we operate, maintain and
provide certain other services for the owners of the 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
such, 30% of the revenue earned under the terms of the operation
and maintenance agreement is eliminated against equity in net
income from unconsolidated investments. See Item 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 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. Yeutters exercise of independent
judgment as a director.
|
|
Item 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
In the normal course of business, our subsidiaries are party to
financial instruments that are subject to market risks arising
from changes in commodity prices, interest rates, foreign
currency exchange rates, and derivative instruments. Our use of
derivative instruments is very limited and we do not enter into
derivative instruments for trading purposes. The following
analysis provides quantitative information regarding our
exposure to financial instruments with market risks. We use a
sensitivity model to evaluate the fair value or cash flows of
financial instruments with exposure to market risk that assumes
instantaneous, parallel shifts in exchange rates and interest
rate yield curves. There are certain limitations inherent in the
sensitivity analysis presented, primarily due to the assumption
that exchange rates change in a parallel manner and that
interest rates change instantaneously. In addition, the fair
value estimates presented herein are based on pertinent
information available to us as of December 31, 2009.
Further information is included in Item 8. Financial
Statements And Supplementary Data Note 13.
Financial Instruments and Note 14. Derivative
Instruments.
Commodity
Price Risk and Contract Revenue Risk
Fuel
Price Risk
Generally, we are protected against fluctuations in fuel
(municipal waste) price risk in our Americas segment
energy-from-waste business because most of our municipal waste
is provided under long-term contracts where we are paid for our
fuel at fixed rates. At 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 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-term arrangements.
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 revenues in our
consolidated statements of 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. We
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 medium- and long-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 medium- and long-term contracts for sales of
energy will be less available than in the past. As a result,
following the expiration of these initial long-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. In the future, we may enter into futures,
forward contracts, swaps or options to hedge our exposure to
market risk in energy markets. At some of our facilities, 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 the
expiration of these initial long-term contracts.
At our biomass projects, we plan to maximize profitability by
curtailing operations of these facilities when the 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, see Item 8. Financial Statements And
Supplementary Data Note 11. Long-Term Debt.
As of December 31, 2009, the outstanding balance of the
Term Loan was $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, 2009 market interest rates would result in a
potential reduction to twelve month future earnings of
$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 on fixed rate debt. Of our project
debt, approximately $29.9 million was floating rate debt as
of December 31, 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 purchased, for $112.4 million,
cash settled call options on our common stock (the Note
Hedge) initially correlating to the 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 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
70
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 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.
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 the Notes, Cash Conversion
Option, and Note Hedge, see Item 8. Financial Statements
And Supplementary Data Note 11. Long-Term Debt
and 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 the fair market value for the embedded derivative was
zero as of December 31, 2009. For additional information
related to the Credit Facilities, see Item 8. Financial
Statements And Supplementary Data Note 11.
Long-Term Debt and Note 14. Derivative
Instruments.
Foreign
Currency Exchange Rate Risk
We have investments in energy projects in various foreign
markets, including the Philippines, China, India and Bangladesh,
and to a much lesser degree, Canada, United Kingdom, Ireland,
Italy and Costa Rica. As we grow our business in other countries
and enter new international markets, we expect to invest
substantial amounts in foreign currencies to pay for the
construction costs of facilities we develop, or for the cost to
acquire existing businesses or assets. Currency volatility in
those markets, as well as the effectiveness of any currency
hedging strategies we may implement, may impact the amount we
are required to invest in new projects and the financial returns
on these projects, as well our 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 entitys 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, 2009, we had $31.1 million of
project debt related to two heavy fuel-oil projects in India.
For $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 in equity in our consolidated balance
sheets. The remaining $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, 2009 quoted
foreign currency exchange rates would be approximately
$2.8 million, pre-tax.
As of December 31, 2009, we also had net investments in
foreign subsidiaries and projects. See Item 8. Financial
Statements And Supplementary Data Note 8.
Equity Method Investments 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 subsidiarys board
of
71
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.
Fixed
Maturities
With respect to our insurance business, interest rate risk is
the price sensitivity of fixed maturities to changes in interest
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, 2009 and 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 2.2%
decrease in the fair value of the portfolio while a hypothetical
100 basis point decrease would cause an approximate 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 of residential
mortgage-backed securities and collateralized mortgage
obligations, collectively (MBS) as of
December 31, 2009 and 2008, respectively. All MBS held by
our insurance subsidiary were issued by the Federal National
Mortgage Association (FNMA), the Federal Home Loan
Mortgage Corporation (FHLMC), or the Government
National Mortgage Association (GNMA) all of which
are rated AAA by Moodys 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.
Equity
Securities
Our insurance subsidiarys 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, 2009, equity
securities represented 3% of our insurance companys total
investment portfolio. During 2009, the insurance subsidiary
permanently impaired 3 equity securities for a total of
$0.03 million. The impaired equity securities were
primarily in the financial services sector.
72
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Item 8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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Page
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74
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75
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76
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77
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78
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79
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79
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85
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86
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90
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92
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93
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93
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94
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95
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95
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96
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102
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103
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108
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109
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111
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115
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120
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123
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123
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123
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125
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125
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Financial Statement Schedule:
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126
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73
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, 2009 and 2008, and the related consolidated
statements of income, equity, and cash flows for each of the
three years in the period ended December 31, 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 Companys
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, 2009 and 2008, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 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 2, 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.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Covanta Holding Corporations internal control over
financial reporting as of December 31, 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 22, 2010
expressed an unqualified opinion thereon.
MetroPark, New Jersey
February 22, 2010
74
COVANTA
HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
|
OPERATING REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Waste and service revenues
|
|
$
|
919,604
|
|
|
$
|
934,527
|
|
|
$
|
864,396
|
|
Electricity and steam sales
|
|
|
580,248
|
|
|
|
660,616
|
|
|
|
498,877
|
|
Other operating revenues
|
|
|
50,615
|
|
|
|
69,110
|
|
|
|
69,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenues
|
|
|
1,550,467
|
|
|
|
1,664,253
|
|
|
|
1,433,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Plant operating expenses
|
|
|
946,166
|
|
|
|
999,674
|
|
|
|
801,560
|
|
Depreciation and amortization expense
|
|
|
202,872
|
|
|
|
199,488
|
|
|
|
196,970
|
|
Net interest expense on project debt
|
|
|
48,391
|
|
|
|
53,734
|
|
|
|
54,579
|
|
General and administrative expenses
|
|
|
109,235
|
|
|
|
97,016
|
|
|
|
82,729
|
|
Insurance recoveries, net of write-down of assets
|
|
|
|
|
|
|
(8,325
|
)
|
|
|
|
|
Other operating expenses
|
|
|
47,968
|
|
|
|
66,701
|
|
|
|
60,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,354,632
|
|
|
|
1,408,288
|
|
|
|
1,196,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
195,835
|
|
|
|
255,965
|
|
|
|
236,610
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
|
4,007
|
|
|
|
5,717
|
|
|
|
10,578
|
|
Interest expense
|
|
|
(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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
(58,399
|
)
|
|
|
(59,066
|
)
|
|
|
(103,974
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense and equity in net income from
unconsolidated investments
|
|
|
137,436
|
|
|
|
196,899
|
|
|
|
132,636
|
|
Income tax expense
|
|
|
(50,044
|
)
|
|
|
(84,561
|
)
|
|
|
(24,483
|
)
|
Equity in net income from unconsolidated investments
|
|
|
23,036
|
|
|
|
23,583
|
|
|
|
22,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
|
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
|
|
|
153,694
|
|
|
|
153,345
|
|
|
|
152,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
154,994
|
|
|
|
154,732
|
|
|
|
153,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.66
|
|
|
$
|
0.84
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.66
|
|
|
$
|
0.83
|
|
|
$
|
0.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
75
COVANTA
HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except per share amounts)
|
|
|
ASSETS
|
Current:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
433,683
|
|
|
$
|
192,393
|
|
Restricted funds held in trust
|
|
|
131,223
|
|
|
|
175,093
|
|
Receivables (less allowances of $2,978 and $3,437)
|
|
|
306,631
|
|
|
|
243,791
|
|
Unbilled service receivables
|
|
|
37,692
|
|
|
|
49,468
|
|
Deferred income taxes
|
|
|
9,509
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
126,139
|
|
|
|
123,514
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
1,044,877
|
|
|
|
784,259
|
|
Property, plant and equipment, net
|
|
|
2,582,841
|
|
|
|
2,530,035
|
|
Investments in fixed maturities at market (cost: $27,500 and
$26,620, respectively)
|
|
|
28,142
|
|
|
|
26,737
|
|
Restricted funds held in trust
|
|
|
146,529
|
|
|
|
149,818
|
|
Unbilled service receivables
|
|
|
37,389
|
|
|
|
44,298
|
|
Waste, service and energy contracts, net
|
|
|
380,359
|
|
|
|
223,397
|
|
Other intangible assets, net
|
|
|
84,610
|
|
|
|
83,331
|
|
Goodwill
|
|
|
202,996
|
|
|
|
195,617
|
|
Investments in investees and joint ventures
|
|
|
120,173
|
|
|
|
102,953
|
|
Other assets
|
|
|
306,366
|
|
|
|
139,544
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
4,934,282
|
|
|
$
|
4,279,989
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Current:
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
7,027
|
|
|
$
|
6,922
|
|
Current portion of project debt
|
|
|
191,993
|
|
|
|
198,034
|
|
Accounts payable
|
|
|
27,831
|
|
|
|
24,470
|
|
Deferred revenue
|
|
|
60,256
|
|
|
|
15,202
|
|
Accrued expenses and other current liabilities
|
|
|
217,721
|
|
|
|
215,046
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
504,828
|
|
|
|
459,674
|
|
Long-term debt
|
|
|
1,430,679
|
|
|
|
941,596
|
|
Project debt
|
|
|
767,371
|
|
|
|
880,336
|
|
Deferred income taxes
|
|
|
571,122
|
|
|
|
493,919
|
|
Waste and service contracts
|
|
|
101,353
|
|
|
|
114,532
|
|
Other liabilities
|
|
|
141,760
|
|
|
|
165,881
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
3,517,113
|
|
|
|
3,055,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 21)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 155,615 and 154,797 shares;
outstanding 154,936 and 154,280 shares)
|
|
|
15,562
|
|
|
|
15,480
|
|
Additional paid-in capital
|
|
|
909,205
|
|
|
|
832,595
|
|
Accumulated other comprehensive income (loss)
|
|
|
7,443
|
|
|
|
(8,205
|
)
|
Accumulated earnings
|
|
|
450,864
|
|
|
|
349,219
|
|
Treasury stock, at par
|
|
|
(68
|
)
|
|
|
(52
|
)
|
|
|
|
|
|
|
|
|
|
Total Covanta Holding Corporation stockholders equity
|
|
|
1,383,006
|
|
|
|
1,189,037
|
|
|
|
|
|
|
|
|
|
|
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,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
110,428
|
|
|
$
|
135,921
|
|
|
$
|
130,349
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
202,872
|
|
|
|
199,488
|
|
|
|
196,970
|
|
Revenue contract levelization
|
|
|
(664
|
)
|
|
|
(586
|
)
|
|
|
(555
|
)
|
Amortization of long-term debt deferred financing costs
|
|
|
5,272
|
|
|
|
3,684
|
|
|
|
3,841
|
|
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
|
|
Provision for doubtful accounts
|
|
|
2,249
|
|
|
|
1,839
|
|
|
|
1,184
|
|
Stock-based compensation expense
|
|
|
14,220
|
|
|
|
14,750
|
|
|
|
13,448
|
|
Equity in net income from unconsolidated investments
|
|
|
(23,036
|
)
|
|
|
(23,583
|
)
|
|
|
(22,196
|
)
|
Dividends from unconsolidated investments
|
|
|
11,310
|
|
|
|
19,459
|
|
|
|
24,250
|
|
Deferred income taxes
|
|
|
32,126
|
|
|
|
63,160
|
|
|
|
(688
|
)
|
Other, net
|
|
|
6,859
|
|
|
|
3,809
|
|
|
|
(1,801
|
)
|
Change in operating assets and liabilities, net of effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in restricted funds held in trust
|
|
|
17,823
|
|
|
|
29,481
|
|
|
|
5,493
|
|
Receivables
|
|
|
(2,922
|
)
|
|
|
4,138
|
|
|
|
(36,084
|
)
|
Unbilled service receivables
|
|
|
18,620
|
|
|
|
14,020
|
|
|
|
19,403
|
|
Accounts payable and accrued expenses
|
|
|
3,974
|
|
|
|
(38,450
|
)
|
|
|
22,880
|
|
Other, net
|
|
|
(17,646
|
)
|
|
|
(31,795
|
)
|
|
|
(25,494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
397,238
|
|
|
|
402,607
|
|
|
|
363,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired
|
|
|
(265,644
|
)
|
|
|
(73,393
|
)
|
|
|
(110,465
|
)
|
Proceeds from the sale of investment securities
|
|
|
6,838
|
|
|
|
20,295
|
|
|
|
15,057
|
|
Purchase of investment securities
|
|
|
(8,008
|
)
|
|
|
(18,577
|
)
|
|
|
(622
|
)
|
Acquisition of noncontrolling interest in subsidiary
|
|
|
(23,700
|
)
|
|
|
|
|
|
|
|
|
Purchase of equity interests
|
|
|
(8,938
|
)
|
|
|
(18,503
|
)
|
|
|
(11,199
|
)
|
Purchase of property, plant and equipment
|
|
|
(73,619
|
)
|
|
|
(87,920
|
)
|
|
|
(85,748
|
)
|
Property insurance proceeds
|
|
|
|
|
|
|
16,215
|
|
|
|
9,441
|
|
Acquisition of land use rights
|
|
|
|
|
|
|
(16,727
|
)
|
|
|
|
|
Loans issued to client community to fund certain facility
improvements, net of repayments
|
|
|
(11,191
|
)
|
|
|
(8,233
|
)
|
|
|
|
|
Other, net
|
|
|
(2,978
|
)
|
|
|
(2,465
|
)
|
|
|
3,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(387,240
|
)
|
|
|
(189,308
|
)
|
|
|
(179,910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings on long-term debt
|
|
|
460,000
|
|
|
|
|
|
|
|
949,907
|
|
Proceeds from issuance of warrants
|
|
|
53,958
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings on project debt
|
|
|
74,194
|
|
|
|
8,278
|
|
|
|
3,506
|
|
Proceeds from borrowings on revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
Proceeds from the issuance of common stock, net
|
|
|
|
|
|
|
|
|
|
|
135,757
|
|
Principal payments on long-term debt
|
|
|
(6,591
|
)
|
|
|
(6,877
|
)
|
|
|
(1,181,130
|
)
|
Principal payments on project debt
|
|
|
(257,331
|
)
|
|
|
(187,800
|
)
|
|
|
(164,167
|
)
|
Payments of borrowings on revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
(30,000
|
)
|
Payments of long-term debt deferred financing costs
|
|
|
(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
|
)
|
Increase in holding company restricted funds
|
|
|
|
|
|
|
|
|
|
|
6,660
|
|
Decrease in restricted funds held in trust
|
|
|
54,616
|
|
|
|
21,575
|
|
|
|
31,432
|
|
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 provided by (used in) financing activities
|
|
|
230,950
|
|
|
|
(170,242
|
)
|
|
|
(268,335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
342
|
|
|
|
(70
|
)
|
|
|
618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
241,290
|
|
|
|
42,987
|
|
|
|
(84,036
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
192,393
|
|
|
|
149,406
|
|
|
|
233,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
433,683
|
|
|
$
|
192,393
|
|
|
$
|
149,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Paid for Interest and Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
90,559
|
|
|
$
|
114,207
|
|
|
$
|
146,677
|
|
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
CONSOLIDATED STATEMENTS OF EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Treasury Stock
|
|
|
Interests in
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Earnings
|
|
|
Shares
|
|
|
Amount
|
|
|
Subsidiaries
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
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
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
13,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,448
|
|
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
|
|
Shares forfeited for terminated employees
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
Shares repurchased for tax withholdings for vested stock awards
|
|
|
|
|
|
|
|
|
|
|
(3,954
|
)
|
|
|
|
|
|
|
|
|
|
|
175
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
(3,971
|
)
|
Exercise of options to purchase common stock
|
|
|
113
|
|
|
|
11
|
|
|
|
801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
812
|
|
Shares issued in non-vested stock award
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121,693
|
|
|
|
|
|
|
|
|
|
|
|
8,656
|
|
|
|
130,349
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,796
|
|
|
|
7,184
|
|
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 on
available-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
|
|
|
|
121,693
|
|
|
|
|
|
|
|
|
|
|
|
11,452
|
|
|
|
145,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
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
|
|
Shares forfeited for terminated employees
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
Shares repurchased for tax withholdings for vested stock awards
|
|
|
|
|
|
|
|
|
|
|
(3,705
|
)
|
|
|
|
|
|
|
|
|
|
|
137
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
(3,719
|
)
|
Exercise of options to purchase common stock
|
|
|
22
|
|
|
|
2
|
|
|
|
260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
262
|
|
Shares issued in non-vested stock award
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128,960
|
|
|
|
|
|
|
|
|
|
|
|
6,961
|
|
|
|
135,921
|
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,481
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,032
|
)
|
|
|
(16,513
|
)
|
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 on
available-for-sale
securities, net of income tax benefit of $219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive (loss) income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,509
|
)
|
|
|
128,960
|
|
|
|
|
|
|
|
|
|
|
|
929
|
|
|
|
105,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
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 on
available-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
|
|
NOTE 1.
|
ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
The terms we, our, ours,
us and Company refer to Covanta Holding
Corporation and its subsidiaries; the term Covanta
Energy refers to our subsidiary Covanta Energy 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. As of December 31, 2009, we
owned, had equity investments in,
and/or
operate 64 energy generation facilities, 56 of which are in the
Americas and eight of which are located outside the 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, four landfills, which we use
primarily for ash disposal, and several waste transfer stations.
Our reportable segments are Americas (formerly referred to as
Domestic) 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 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-temporary
declines in value and make reductions when appropriate.
Revenue 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 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.
|
79
COVANTA
HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 accounting standards for revenue recognition of 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 the
percentage-of-completion
method, measured by the
cost-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 the
percentage-of-completion.
This method is used because we consider the costs incurred 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
were $72.1 million, $65.6 million, and
$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 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, 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, however certain related tax attributes are
recorded in our consolidated financial statements since they are
part of our federal tax return. For additional information, see
Note 16. Income Taxes.
80
COVANTA
HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock-Based Compensation
Stock-based compensation is accounted for in accordance with
accounting standards for share-based awards to employees which
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 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
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 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
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. 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 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Funds Other
As of December 31, 2009 and 2008, we had $26.3 million
and $20.4 million, respectively, in restricted accounts to
pay for certain taxes which may be due relating to Covanta
Energys bankruptcy, which occurred prior to its
acquisition by us, and that are estimated to be paid in the
future 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 these restricted accounts are not available for
general corporate purposes.
Deferred Financing Costs
As of December 31, 2009 and 2008, we had $24.1 million
and $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 is to be outstanding.
81
COVANTA
HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred Revenue
Deferred revenue consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Current
|
|
|
Noncurrent
|
|
|
Current
|
|
|
Noncurrent
|
|
|
Advance billings to municipalities
|
|
$
|
10,265
|
|
|
$
|
|
|
|
$
|
8,333
|
|
|
$
|
|
|
Unearned insurance premiums
|
|
|
2,105
|
|
|
|
|
|
|
|
1,587
|
|
|
|
|
|
Other
|
|
|
47,886
|
|
|
|
3,681
|
|
|
|
5,282
|
|
|
|
4,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
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.
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 36 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 sheets
and any gain or loss is reflected in the consolidated statements
of income.
Asset Retirement Obligations
In accordance with accounting standards for 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 recognize
period-to-period
changes in the liability resulting from revisions to the timing
or the amount of the original estimate of the undiscounted cash
flows. 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,
|
|
|
|
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 2009 and 2008 related to expenditures and
settlements of the asset retirement obligation liability, net
revisions based on current estimates of the liability and
revised expected cash flows and life of the liability. |
|
(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 |
82
COVANTA
HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
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.
See Note 3. Acquisitions, Business Development and
Dispositions. |
Amortization of Waste, Service and Energy Contracts and
Intangible Assets
Our waste, service and energy contracts are intangible assets
related to 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
recorded at their estimated fair market values based primarily
upon discounted cash flows in accordance with accounting
standards related to business combinations. See Note 6.
Amortization of Waste, Service and Energy 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 accounting standards
related to goodwill and other intangible assets. Fair value is
generally determined utilizing a discounted cash flow approach,
based on managements 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, the reporting
units goodwill is compared to its implied value of
goodwill. If the carrying value of the reporting units
goodwill exceeds the implied value, an impairment charge is
recognized to reduce the carrying value to the implied value.
For indefinite-lived intangible assets, the evaluation requires
a comparison of the estimated fair value of the asset to the
carrying value. If the carrying value of an indefinite-lived
intangible asset exceeds its fair value, an impairment charge is
recognized to reduce the carrying value of the asset 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 reviewing for impairment,
we compare the carrying value of the relevant assets to their
estimated undiscounted future cash flows. When the estimated
undiscounted future cash flows are less than their carrying
amount, an impairment charge is recognized to reduce the
assets 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 acquired company are included in the
post-combination results of operations. Tax adjustments for
business combinations, if any, previously recorded will be
recognized in the results of operations.
83
COVANTA
HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accumulated Other Comprehensive Income
AOCI, in the consolidated statements of 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
as
available-for-sale,
and net unrealized gains and losses on interest rate swaps.
Derivative Instruments
We recognize derivative instruments on the balance sheet at
their fair value. For additional information, see Note 14.
Derivative Instruments.
Foreign Currency Translation
For foreign operations, assets and liabilities are translated at
year-end exchange rates and 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 equity as a component of AOCI.
Currency transaction gains and losses are recorded in other
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 accounting standards for defined benefit
pension and 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 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,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net unpaid losses and LAE at beginning of year
|
|
$
|
20,207
|
|
|
$
|
22,400
|
|
|
$
|
25,712
|
|
Incurred, net, related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
12,364
|
|
|
|
7,272
|
|
|
|
6,398
|
|
Prior years
|
|
|
3,271
|
|
|
|
1,818
|
|
|
|
1,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net incurred
|
|
|
15,635
|
|
|
|
9,090
|
|
|
|
7,890
|
|
Paid, net, related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
(6,996
|
)
|
|
|
(4,361
|
)
|
|
|
(3,905
|
)
|
Prior years
|
|
|
(5,370
|
)
|
|
|
(6,982
|
)
|
|
|
(7,357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net paid
|
|
|
(12,366
|
)
|
|
|
(11,343
|
)
|
|
|
(11,262
|
)
|
Plus: Increase in allowance for reinsurance recoverable on
unpaid losses
|
|
|
60
|
|
|
|
60
|
|
|
|
60
|
|
Less: Effect of deconsolidation of subsidiary
|
|
|
(1,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unpaid losses and LAE at end of year
|
|
|
22,367
|
|
|
|
20,207
|
|
|
|
22,400
|
|
Plus: Reinsurance recoverable on unpaid losses
|
|
|
12,325
|
|
|
|
9,155
|
|
|
|
10,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unpaid losses and LAE at end of year
|
|
$
|
34,692
|
|
|
$
|
29,362
|
|
|
$
|
32,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
COVANTA
HOLDING CORPORATION
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.
Reclassifications
Certain prior period amounts have been reclassified in the
financial statements to conform to the current period
presentation. See Note 23. Adoption of New Accounting
Pronouncements.
|
|
NOTE 2.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
|
The following is a summary of recent accounting standards issued
by the Financial Accounting Standards Board (FASB):
|
|
|
|
|
Subject
|
|
Summary
|
|
Effect of Adoption
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
The following is a summary of the effects of new accounting
pronouncements adopted in 2009:
Effective January 1, 2009, we adopted an accounting
standard related to noncontrolling interests in consolidated
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
consolidated financial statements for all years presented.
Effective January 1, 2009, we adopted an accounting
standard related to convertible debt instruments that may be
settled in cash upon 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 and accrete the resultant debt
discount over the expected life of the Debentures. See
Note 11. Long-Term Debt.
85
COVANTA
HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The consolidated statements of income and consolidated balance
sheets were retroactively restated as follows (amounts in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
As Reported
|
|
|
As Adjusted
|
|
|
As Reported
|
|
|
As Adjusted
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
|
As Reported
|
|
|
As Adjusted
|
|
|
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
|
|
|
|
NOTE 3.
|
ACQUISITIONS,
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. We adopted recent accounting standards for
business combinations which were effective for business
combinations for which the 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.
Acquisitions
and Business Development
Americas
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
86
COVANTA
HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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:
|
|
|
|
|
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 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 MW to our renewable energy
portfolio. We sell the electric output and renewable energy
credits from these facilities into the New England market.
87
COVANTA
HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We acquired these two facilities for cash consideration of
$53.4 million, net of cash acquired, inclusive of final
working capital adjustments. There were no amounts allocated to
goodwill or other intangible assets in the final purchase price
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 facilitys
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, 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 facilitys 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 Pasco County, 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 facilitys capacity.
Tulsa Energy-from-Waste Facility
On June 2, 2008, we acquired an energy-from-waste facility
in Tulsa, Oklahoma for cash consideration of $12.7 million.
The design capacity of the facility is 1,125 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 facilitys three boilers to service in November
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 which expires in 2019.
Peabody Landfill
On May 20, 2008, we acquired a landfill for the disposal of
ash in Peabody, Massachusetts for cash consideration of
$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. Licensing fees
and demonstration unit purchases aggregated $4.7 million
and $6.5 million during the years ended December 31,
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, 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. 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.
88
COVANTA
HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Lee County Energy-from-Waste Facility
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.
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
$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 for cash consideration of
$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). Under the terms of
the purchase agreement, we paid cash consideration of
$51 million plus $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 $8 million prior to December 31,
2007, and $11 million during the year ended
December 31, 2008 in capital improvements to significantly
increase the facilities productivity and improve
environmental performance. These capital improvements were
completed by September 30, 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 for cash consideration of
$7.5 million. In addition, we invested $4.2 million
prior to December 31, 2007 and $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, New York for a term of 25 years which commenced
upon expiration of the previous contract in August 2009. This
contract provides approximately 50% of the facilitys 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 facilitys
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, Florida. In 2005, we entered into
agreements with Hillsborough County to implement a
89
COVANTA
HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
600 tpd expansion of this energy-from-waste facility, and to
extend the agreement under which we operate the facility through
2027. During the third quarter of 2009, acceptance testing was
successfully completed and commercial operation 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, Peoples
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,
Peoples Republic of China. On June 25, 2008, the
projects 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
company. Construction of the facility has commenced and
operation is expected to begin in 2011. The project company has
obtained financing for Rmb 480 million for the project, 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.
On April 25, 2007, we purchased a 40% equity interest in
Chongqing Sanfeng Environmental Industry Co., Ltd.
(Sanfeng), a company located in Chongqing
Municipality, Peoples 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 $10 million in connection with our investment in
Sanfeng.
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 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. Dublin Waste to Energy Limited has a
25 year tip fee type contract to provide disposal service
for 320,000 metric tons of waste annually. The project is
expected to sell electricity into the local electricity 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.
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,
Peoples 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 $1.7 million in other operating income in
our consolidated statements of income.
|
|
NOTE 4.
|
EARNINGS
PER SHARE AND 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
90
COVANTA
HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 warrants 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,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net income attributable to Covanta Holding Corporation
|
|
$
|
101,645
|
|
|
$
|
128,960
|
|
|
$
|
121,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
153,694
|
|
|
|
153,345
|
|
|
|
152,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.66
|
|
|
$
|
0.84
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
153,694
|
|
|
|
153,345
|
|
|
|
152,653
|
|
Dilutive effect of stock options
|
|
|
433
|
|
|
|
649
|
|
|
|
620
|
|
Dilutive effect of restricted stock
|
|
|
867
|
|
|
|
738
|
|
|
|
724
|
|
Dilutive effect of convertible debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding
|
|
|
154,994
|
|
|
|
154,732
|
|
|
|
153,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
$
|
0.66
|
|
|
$
|
0.83
|
|
|
$
|
0.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options excluded from the weighted average dilutive common
shares outstanding because their inclusion would have been
antidilutive
|
|
|
1,975
|
|
|
|
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. The Debentures did not have a
dilutive effect on earnings per share for any of the years ended
December 31, 2009, 2008 and 2007. See Note 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.
91
COVANTA
HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In September 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.
|
|
NOTE 5.
|
FINANCIAL
INFORMATION BY BUSINESS SEGMENTS
|
Our 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 segment to Americas, which 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 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
|
|
|
|
|
|
|
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 in
Item 1. Business. A summary of revenues and total
assets by geographic area is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Year Ended December 31, 2007
|
|
$
|
1,255,870
|
|
|
$
|
157,405
|
|
|
$
|
19,812
|
|
|
$
|
1,433,087
|
|
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
|
|
92
COVANTA
HOLDING CORPORATION
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
|
|
93
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 8.
|
EQUITY
METHOD INVESTMENTS
|
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.
94
COVANTA
HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2009 and 2008, investments in investees
and joint ventures accounted for under the equity method were as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
See Note 3. Acquisitions, Business Development and
Dispositions for a discussion related to these equity
investments.
|
The unaudited combined results of operations and financial
position of our equity 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
|
|
Companys 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 renewal
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 schedule, by year, of future minimum rental
payments required under operating leases that have initial or
remaining non-cancelable lease terms in excess of one year as of
December 31, 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 facilitys 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 which are
comprised of:
|
|
|
|
|
a $300 million revolving loan facility due 2013, which
includes a $200 million
sub-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 $632 million was outstanding
as of December 31, 2009 (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
through the date of maturity as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 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 and
³
3.25:1.00
|
|
|
1.75
|
%
|
|
|
0.75
|
%
|
|
|
1.50
|
%
|
|
|
0.50
|
%
|
< 3.25:1.00 and
³
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
Facilities 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, 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);
|
|
|
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 3.75 to 1.00 for the
four quarter period ended December 31, 2009, which measures
Covanta Energys 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, 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:
|
|
|
|
|
|
3.75 to 1.00 for each of the four quarter periods ended
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 Energys 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;
|
|
|
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
COVANTA
HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 Notes due in 2014 in a private
transaction exempt from registration under the Securities Act of
1933, as amended. On June 15, 2009, we issued 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 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, we may be
required to pay contingent interest on the Notes as a result of
failure to comply with the reporting obligations in the
indenture, failure to file required Securities and Exchange
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
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 closing sale price of our
common stock for at least 20 trading days during the period of
30 consecutive trading days ending on the last trading day of
the immediately preceding fiscal quarter is greater than or
equal to 130% of the then effective conversion price; or
|
|
|
upon the occurrence of specified corporate transactions (as
provided in the indenture for the Notes); or
|
|
|
upon certain fundamental changes (as defined in the indenture
for the Notes in which case the conversion rate will be
increased as provided in the indenture); or
|
|
|
during the five 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 the product of the closing sale price of our 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
holders 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 credit spreads of the
Option 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 shares 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 Note Hedge and $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
the Option Counterparties, and are not part of the 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 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 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 the fair market value for the embedded derivative was zero
as of December 31, 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 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 holders 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
COVANTA
HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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.
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, and $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 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
102
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.
The maturities of long-term project debt as of December 31,
2009 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2009, such revenue bonds were collateralized
by property, plant and equipment with a net carrying value of
$2.1 billion and restricted funds held in trust of
approximately $256.5 million.
International project debt includes the following obligations as
of December 31, 2009:
|
|
|
|
|
$18.5 million due to financial institutions, of which
$3.2 million is denominated in U.S. dollars and
$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% (4.79% as of
December 31, 2009). The outstanding Indian rupee debt
borrowed for construction of the power plant is serviced at a
floating rate of 9.75% as of December 31, 2009. The average
coupon rate on the working capital debt was 11.88% in 2009. The
construction related debt extends through 2011. The entire debt
is non-recourse to 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.
|
|
|
$12.7 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 2009 and the average coupon rate
on the working capital debt was 12.6% in 2009. The construction
related debt extends through 2010. The entire debt is
non-recourse to 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.
|
|
|
NOTE 13.
|
FINANCIAL
INSTRUMENTS
|
Fair
Value Measurements
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 long-term debt and project debt are determined
using quoted market prices.
|
|
|
The fair value of the Note Hedge 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
|
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 counterpartys 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.
|
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 amounts that we would realize in a
current market exchange. The fair-value estimates presented
herein are based on pertinent information available to us as of
December 31, 2009. However, such amounts have not been
comprehensively revalued for purposes of these financial
statements since December 31, 2009, and current estimates
of fair value may differ significantly from the amounts
presented herein.
The following table presents information about the fair value
measurement of our assets and liabilities as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 classified as
available-for-sale
and are carried at fair value. Equity securities that are traded
on a national securities exchange are stated at the last
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 AOCI in the consolidated statements of
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
the cost basis for equity securities on the date of trade,
subject to any previous adjustments for
other-than-temporary
declines.
Other-than-temporary
declines in fair value are recorded as realized losses in the
consolidated statements of income to the extent they relate to
credit losses, and to AOCI to the extent they are related to
other factors. The cost basis of the security is also 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;
|
|
|
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.
105
COVANTA
HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The cost or amortized cost, unrealized gains, unrealized losses
and the fair value of our investments categorized by type of
security, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 sets 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 temporarily 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 collateralized mortgage
obligations, collectively (MBS) representing 18.7%,
and 15.6% of the total fixed maturities as of December 31,
2009 and 2008, respectively. Our MBS holdings are issued by the
Federal National Mortgage Association (FNMA), the
Federal Home Loan Mortgage Corporation (FHLMC), or
the Government National Mortgage Association (GNMA)
all of which
106
COVANTA
HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
are rated AAA by Moodys 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.
The 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)
on
available-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) on
available-for-sale
securities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net unrealized holding gain (loss) on
available-for-sale
securities arising during the period
|
|
$
|
797
|
|
|
$
|
(543
|
)
|
|
$
|
698
|
|
Reclassification adjustment for net realized losses (gains) on
available-for-sale
securities included in net income
|
|
|
27
|
|
|
|
136
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain (loss) on
available-for-sale
securities
|
|
$
|
824
|
|
|
$
|
(407
|
)
|
|
$
|
712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized investment loss is as follows for our insurance
subsidiary (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 14.
|
DERIVATIVE
INSTRUMENTS
|
The following disclosures summarize the fair value of derivative
instruments not designated as hedging instruments in the
consolidated balance sheets and the effect of changes in fair
value related to those derivative instruments not designated as
hedging instruments on the consolidated statements of 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 communitys 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,
|
|
|
|
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 1980s. 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.
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)
|
|
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
120
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 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 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) on
available-for-sale
securities
|
|
|
739
|
|
|
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
|
$
|
7,443
|
|
|
$
|
(8,205
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 20.
|
RELATED-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 Quezons 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 equity in net income
from unconsolidated investments. For the years ended
December 31, 2009, 2008 and 2007, we collected
$40.6 million, $34.0 million, and $35.4 million,
respectively, for the operation and maintenance of the facility.
As of December 31, 2009 and 2008, the net amount due to
Quezon was $5.0 million and $3.2 million,
respectively, which represents advance payments received from
Quezon for operation and maintenance costs.
On 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 the
facility, pursuant to which we operate, maintain and provide
certain other services for the owners of the 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 such, 30% of 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, and $0.9 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
|
|
NOTE 21.
|
COMMITMENTS
AND CONTINGENCIES
|
We are party to a number of claims, lawsuits and pending
actions, most of which are routine and all of which are
incidental to our business. We assess the likelihood of
potential losses on an ongoing basis and when losses are
considered probable and reasonably estimable, record as a loss
an estimate of the 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.
Environmental
Matters
Our operations are subject to environmental regulatory laws and
environmental remediation laws. Although our operations are
occasionally subject to proceedings and orders pertaining to
emissions into the environment and other environmental
violations, which may result in fines, penalties, damages or
other sanctions, we believe that we are in substantial
compliance with existing environmental laws and regulations.
We may be identified, along with other entities, as being among
parties potentially responsible for contribution to costs
associated with the correction and remediation of environmental
conditions at disposal sites subject to federal
and/or
analogous state laws. In certain instances, we may be exposed to
joint and several liabilities for remedial action or damages.
Our 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 August 2004, the United States Environmental Protection
Agency (EPA) notified Covanta Essex Company
(Essex) that it was a potentially responsible party
(PRP) for Superfund response actions in the Lower
Passaic River Study Area, referred to as LPRSA, a
17 mile stretch of river in northern New Jersey. Essex 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 $52.5 million, in
addition to EPA oversight costs. Essexs 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
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-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
Essexs ultimate liability in the matter, including for
LPRSA remedial costs
and/or
natural resource damages
and/or
contribution claims made by Occidental
and/or other
PRPs.
Other
Commitments
Other commitments as of December 31, 2009 were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments Expiring by Period
|
|
|
|
|
|
|
Less Than
|
|
|
More Than
|
|
|
|
Total
|
|
|
One Year
|
|
|
One Year
|
|
|
Letters of credit
|
|
$
|
278,191
|
|
|
$
|
6,550
|
|
|
$
|
271,641
|
|
Surety bonds
|
|
|
111,032
|
|
|
|
|
|
|
|
111,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other commitments net
|
|
$
|
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 projects in the Americas and 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 ($100.2 million) and support for
closure obligations of various energy projects when such
projects cease operating ($10.8 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 cash
and/or our
common stock.
|
124
COVANTA
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 and the Notes, see
Note 11. Long-Term Debt.
We have issued or are party to guarantees and related
contractual support obligations undertaken pursuant to
agreements to construct and operate waste and energy facilities.
For some projects, such performance guarantees include
obligations to repay certain financial obligations if the
project revenues are insufficient to do so, or to obtain or
guarantee financing for a project. With respect to our
businesses, we have issued guarantees to municipal clients and
other parties that our subsidiaries will perform in accordance
with contractual terms, including, where required, the payment
of damages or other obligations. Additionally, damages payable
under such guarantees for our energy-from-waste facilities could
expose us to recourse liability on project debt. If we must
perform under one or more of such guarantees, our liability for
damages upon contract termination would be reduced by funds held
in trust and proceeds from sales of the facilities securing the
project debt and is presently not estimable. Depending upon the
circumstances giving rise to such damages, the contractual terms
of the applicable contracts, and the contract
counterpartys 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.
|
|
NOTE 22.
|
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
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
Fiscal Quarter
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
Operating revenue
|
|
$
|
358,760
|
|
|
$
|
388,766
|
|
|
$
|
375,786
|
|
|
$
|
422,996
|
|
|
$
|
408,709
|
|
|
$
|
438,671
|
|
|
$
|
407,212
|
|
|
$
|
413,820
|
|
Operating income
|
|
|
3,192
|
|
|
|
30,765
|
|
|
|
61,332
|
|
|
|
76,529
|
|
|
|
70,979
|
|
|
|
88,083
|
|
|
|
60,332
|
|
|
|
60,588
|
|
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
|
|
|
|
|
|
|
0.08
|
|
|
|
0.22
|
|
|
|
0.28
|
|
|
|
0.27
|
|
|
|
0.31
|
|
|
|
0.18
|
|
|
|
0.18
|
|
Diluted
|
|
|
|
|
|
|
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.
125
Schedule II
Valuation and Qualifying Accounts
Receivables Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Charged to
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
Other
|
|
|
|
|
|
End of
|
|
|
|
of Period
|
|
|
Expense
|
|
|
Accounts
|
|
|
Deductions
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
(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
|
|
Doubtful receivables noncurrent
|
|
|
409
|
|
|
|
18
|
|
|
|
|
|
|
|
120
|
|
|
|
307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
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
|
|
Doubtful receivables noncurrent
|
|
|
382
|
|
|
|
(80
|
)
|
|
|
|
|
|
|
(107
|
)
|
|
|
409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,851
|
|
|
$
|
1,190
|
|
|
|
$ 19
|
|
|
$
|
1,298
|
|
|
$
|
4,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Covantas disclosure controls and
procedures, as required by
Rule 13a-15(b)
and
15d-15(b)
under the Securities Exchange Act of 1934 (the Exchange
Act) as of December 31, 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 Commissions 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 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, 2009 as
required by Section 404 of the Sarbanes-Oxley Act.
Managements report on our internal control over financial
reporting is included on page 128. The Independent
Registered Public Accounting Firms report with respect to
the effectiveness of our
126
internal control over financial reporting is included on
page 129. Management has concluded that internal control
over financial reporting is effective as of December 31,
2009.
Changes
in Internal Control over Financial Reporting
In August 2009, we completed the acquisition 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
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 Managements 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, 2009 that has materially affected, or is
reasonably likely to materially affect, internal control over
financial reporting.
127
Managements
Report on Internal Control over Financial Reporting
The management of Covanta Holding Corporation
(Covanta) is responsible for establishing and
maintaining adequate internal control over financial reporting,
as such term is defined in Exchange Act
Rule 13a-15(f).
All internal control systems, no matter how well designed, have
inherent limitations including the possibility of human error
and the circumvention or overriding of controls. Further,
because of changes in conditions, the effectiveness of internal
controls may vary over time. Projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate. Accordingly, even those systems determined to
be effective can provide us only with reasonable assurance with
respect to financial statement preparation and presentation.
Covantas management has assessed the effectiveness of
internal control over financial reporting as of
December 31, 2009, following the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
in Internal Control Integrated Framework.
Based on our assessment under the framework in Internal
Control Integrated Framework, Covantas
management has concluded that our internal control over
financial reporting was effective as of December 31, 2009.
The assessment of and conclusion on the effectiveness of
internal control over financial reporting by Covantas
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 129 of
this report on
Form 10-K
for the year ended December 31, 2009.
/s/ Anthony J. Orlando
Anthony J. Orlando
President and Chief Executive Officer
/s/ Mark A. Pytosh
Mark A. Pytosh
Executive Vice President and Chief
Financial Officer
February 22, 2010
128
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Covanta Holding
Corporation
We have audited Covanta Holding Corporations internal
control over financial reporting as of December 31, 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 Corporations 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
Managements Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the
companys 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 companys 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 companys
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
companys 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 Managements Report on
Internal Control over Financial Reporting, managements
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, 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, 2009 and 2008, and the related consolidated
statements of income, equity, and cash flows for each of the
three years in the period ended December 31, 2009 and our
report dated February 22, 2010 expressed an unqualified
opinion thereon.
MetroPark, New Jersey
February 22, 2010
129
|
|
Item 9B.
|
OTHER
INFORMATION
|
None.
PART III
|
|
Item 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
Information regarding our executive officers is incorporated by
reference herein from the discussion under Item 1.
Business Executive Officers of this Annual
Report on
Form 10-K.
We have a Code of Conduct and Ethics for Senior Financial
Officers and a Policy of Business Conduct. The Code of Conduct
and Ethics applies to our Chief Executive Officer, Chief
Financial Officer, Chief Accounting Officer, Controller or
persons performing similar functions. The Policy of Business
Conduct applies to all of our directors, officers and employees
and those of our subsidiaries. Both the Code of Conduct and
Ethics and the Policy of Business Conduct are posted on our
website at www.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 2010 Annual Meeting of Stockholders.
|
|
Item 11.
|
EXECUTIVE
COMPENSATION
|
The information required by Item 11 of
Form 10-K
is incorporated by reference herein from the discussions under
the headings Compensation Committee Report,
Board Structure and Composition Compensation
of the Board, and Executive Compensation in
our definitive Proxy Statement for the 2010 Annual Meeting of
Stockholders.
|
|
Item 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
|
The information required by Item 12 of
Form 10-K
with respect to directors, executive officers and certain
beneficial owners is incorporated by reference herein from the
discussion under the heading Security Ownership of Certain
Beneficial Owners and Management in our definitive Proxy
Statement for the 2010 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 Plan as of December 31, 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
|
|
|
|
Number of Securities to
|
|
|
Exercise Price of
|
|
|
Available for Future Issuance
|
|
|
|
be Issued Upon Exercise
|
|
|
Outstanding
|
|
|
Under Equity Compensation
|
|
|
|
of Outstanding Options,
|
|
|
Options, Warrants
|
|
|
Plans (Excluding Securities
|
|
|
|
Warrants and Rights
|
|
|
and Rights
|
|
|
Reflected in Column A)
|
|
Plan Category
|
|
(A)
|
|
|
(B)
|
|
|
(C)
|
|
|
Equity Compensation Plans Approved By Security Holders
|
|
|
2,750,609
|
|
|
$
|
18.43
|
|
|
|
6,331,961
|
(1)
|
Equity Compensation Plans Not Approved By Security Holders
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
2,750,609
|
|
|
$
|
18.43
|
|
|
|
6,331,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Of the 6,331,961 shares that remain available for future
issuance, 6,109,627 shares are currently reserved for
issuance under the equity compensation plans. |
|
|
Item 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The information required by Item 13 of
Form 10-K
is incorporated by reference herein from the discussions under
the headings Board Structure and Composition and
Certain Relationships and Related Transactions in
the definitive Proxy Statement for the 2010 Annual Meeting of
Stockholders.
130
|
|
Item 14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
The information required by Item 14 of
Form 10-K
is incorporated by reference herein from the discussion under
the heading Independent Auditor Fees in the
definitive Proxy Statement for the 2010 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 and 2007
|
Consolidated Balance Sheets as of December 31, 2009 and 2008
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2009, 2008 and 2007
|
Consolidated Statements of Equity for the years ended
December 31, 2009, 2008 and 2007
|
Notes to Consolidated Financial Statements, for the years ended
December 31, 2009, 2008 and 2007
|
Report of Ernst & Young LLP, Independent Auditors, on
the consolidated financial statements of Covanta Holding
Corporation for the years ended December 31, 2009, 2008 and
2007
|
(2) Financial Statement Schedules of Covanta Holding
Corporation:
Included in Part II of this
report: Schedule II Valuation and
Qualifying Accounts
All other schedules are omitted because they are not applicable,
not significant or not required, or because the required
information is included in the financial statement notes thereto.
(3) Exhibits:
EXHIBIT INDEX
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
Plan of Acquisition, Reorganization, Arrangement, Liquidation
or Succession.
|
|
|
|
|
|
|
2
|
.1
|
|
Share Purchase Agreement by and among Covanta Holding
Corporation and Veolia Environmental Services North America
Corp. (incorporated herein by reference to Exhibit 2.1 of
Covanta Holding Corporations Current Report on
Form 8-K
dated July 3, 2009 and filed with the SEC on July 6,
2009).
|
|
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 Corporations Current
Report on
Form 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,
effective May 7, 2009 (incorporated herein by reference to
Exhibit 3.1(ii) of Covanta Holding Corporations
Current Report on
Form 8-K
dated March 31, 2009 filed with the SEC on April 1,
2009).
|
|
Instruments Defining Rights of Security Holders, Including
Indentures.
|
|
|
|
|
|
|
4
|
.1
|
|
Specimen certificate representing shares of Covanta Holding
Corporations common stock (incorporated herein by
reference to Exhibit 4.1 of Covanta Holding
Corporations Amendment No. 3 to Registration
Statement on
Form 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 Corporations Annual Report on
Form 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 Corporations Current Report on
Form 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 Corporations Amendment No. 3 to
Registration Statement on
Form S-1
filed with the SEC on December 19, 2005).
|
131
|
|
|
|
|
Exhibit No.
|
|
Description
|
|
|
|
|
|
|
|
4
|
.5
|
|
Indenture dated as of January 18, 2007 between Covanta
Holding Corporation and Wells Fargo Bank, National Association,
as trustee (incorporated herein by reference to Exhibit 4.1
of Covanta Holding Corporations Registration Statement on
Form 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 Corporations Current Report on
Form 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 Corporations Current Report on
Form 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 Corporations Current
Report on
Form 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
Corporations Annual Report on
Form 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
Corporations Annual Report on
Form 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 Corporations Annual Report on
Form 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 Corporations Annual
Report on
Form 10-K
for the year ended December 31, 2004 and filed with the SEC
on March 16, 2005).
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10
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.5*
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Covanta Holding Corporation Equity Award Plan for Directors, as
amended (incorporated herein by reference to Exhibit B of
Covanta Holding Corporations 2008 Definitive Proxy
Statement on Form DEF 14A filed with the SEC on
April 1, 2008).
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10
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.6*
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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 Corporations Current
Report on
Form 8-K
dated May 12, 2009 and filed with the SEC on May 12,
2009).
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10
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.7*
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Form of Covanta Holding Corporation Stock Option Agreement for
Employees and Officers (incorporated herein by reference to
Exhibit 4.3 of Covanta Holding Corporations
Registration Statement on
Form S-8
filed with the SEC on May 7, 2008).
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10
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.8*
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Form of Covanta Holding Corporation Restricted Stock Award
Agreement (incorporated herein by reference to Exhibit 4.4
of Covanta Holding Corporations Registration Statement on
Form S-8
filed with the SEC on May 7, 2008).
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10
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.9*
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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 Corporations Proxy
Statement filed with the SEC on June 24, 2002).
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10
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.10*
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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
Corporations Current Report on
Form 8-K
dated October 5, 2004 and filed with the SEC on
October 7, 2004).
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10
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.11*
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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
Corporations Current Report on
Form 8-K
dated October 5, 2004 filed with the SEC on October 7,
2004).
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132
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Exhibit No.
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Description
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10
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.12*
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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
Corporations Current Report on
Form 8-K
dated March 18, 2005 and filed with the SEC on
March 24, 2005).
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10
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.13
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|
Summary Description of Covanta Holding Corporation Cash Bonus
Program, dated February 2008 (incorporated herein by reference
to Exhibit 10.14 of Covanta Holding Corporations
Annual Report on
Form 10-K
for the fiscal year ended December 31, 2007).
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10
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.14
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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 Corporations Current Report on
Form 8-K
dated June 24, 2005 and filed with the SEC on June 30,
2005).
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10
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.15*
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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
Corporations Current Report on
Form 8-K
dated October 5, 2004 and filed with the SEC on
October 7, 2004)
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10
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.16*
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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
Corporations Current Report on
Form 8-K
dated October 5, 2004 and filed with the SEC on
October 7, 2004).
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10
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.17*
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Form of Amendment to Employment Agreement with
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a. Anthony J. Orlando, President
and Chief Executive Officer;
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b. Mark A. Pytosh, Executive Vice
President and Chief Financial Officer;
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c. John M. Klett, Executive Vice
President and Chief Operating Officer;
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d. Timothy J. Simpson, Executive
Vice President, General Counsel and Secretary;
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e. Seth Myones, President,
Americas Covanta Energy
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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
Corporations
Quarterly Report on
Form 10-Q
for the period ended September 30, 2008 and filed with the
SEC on October 22, 2008).
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10
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.18
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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 Corporations Current
Report on
Form 8-K
dated March 2, 2006 and filed with the SEC on March 6,
2006).
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10
|
.19
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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
Corporations Current Report on
Form 8-K
dated March 17, 2006 and filed with the SEC on
March 20, 2006).
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10
|
.20
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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 Corporations Current
Report on
Form 8-K
dated March 2, 2006 and filed with the SEC on March 6,
2006).
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10
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.21
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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 Corporations
Current Report on
Form 8-K
dated March 2, 2006 and filed with the SEC on March 6,
2006).
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10
|
.22*
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Form of Covanta Holding Corporation Restricted Stock Award
Agreement for Directors (incorporated herein by reference to
Exhibit 10.1 of Covanta Holding Corporations Current
Report on
Form 8-K
dated May 31, 2006 and filed with the SEC on June 2,
2006).
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133
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Exhibit No.
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|
Description
|
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10
|
.23*
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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 Corporations Current Report on
Form 8-K
dated August 17, 2006 and filed with the SEC on
August 17, 2006).
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10
|
.24
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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
Corporations Current Report on
Form 8-K
dated February 9, 2007 and filed with the SEC on
February 15, 2007).
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10
|
.25
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|
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 Corporations Current
Report on
Form 8-K
dated February 9, 2007 and filed with the SEC on
February 15, 2007).
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10
|
.26
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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 Corporations Current
Report on
Form 8-K
dated February 9, 2007 and filed with the SEC on
February 15, 2007).
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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 Corporations Current
Report on
Form 8-K
dated February 9, 2007 and filed with the SEC on
February 15, 2007).
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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 Corporations Current
Report on
Form 8-K
dated December 6, 2007 and filed with the SEC on
December 12, 2007.
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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 Corporations Current Report on
Form 8-K
dated January 31, 2005 and filed with the SEC on
February 2, 2005).
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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
Corporations Current Report on
Form 8-K
dated January 31, 2005 and filed with the SEC on
February 2, 2005).
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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 Corporations Current Report on
Form 8-K
dated January 31, 2005 and filed with the SEC on
February 2, 2005).
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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 Corporations Current Report on
Form 8-K
dated May 22, 2009 and filed with the SEC on May 22,
2009).
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10
|
.33
|
|
Form of Confirmation of Cash Convertible Note Hedge Transaction
(incorporated herein by reference to Exhibit 10.1 of
Covanta Holding Corporations Current Report on
Form 8-K
dated May 22, 2009 and filed with the SEC on May 22,
2009).
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10
|
.34
|
|
Form of Confirmation of Warrant (incorporated herein by
reference to Exhibit 10.1 of Covanta Holding
Corporations Current Report on
Form 8-K
dated May 22, 2009 and filed with the SEC on May 22,
2009).
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12
|
.1
|
|
Computation of Ratio of Earnings to Fixed Charges.
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21
|
.1
|
|
List of Subsidiaries.
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23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm of
Covanta Holding Corporation and Subsidiaries: Ernst &
Young LLP.
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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).
|
134
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|
|
Exhibit No.
|
|
Description
|
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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).
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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.
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Not filed herewith, but incorporated herein by reference. |
|
* |
|
Management contract or compensatory plan or arrangement. |
Pursuant to paragraph 601(b)(4)(iii)(A) of
Regulation S-K,
the registrant has omitted from the foregoing list of exhibits,
and hereby agrees to furnish to the Securities and Exchange
Commission, upon its request, copies of certain instruments,
each relating to long-term debt not exceeding 10% of the total
assets of the registrant and its subsidiaries on a consolidated
basis.
(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.
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)
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|
By:
|
/s/ Anthony
J. Orlando
|
Anthony J. Orlando
President and Chief Executive Officer
Date: February 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.
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Name
|
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Title
|
|
Date
|
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|
|
/s/ Anthony
J. Orlando
Anthony
J. Orlando
|
|
President and Chief Executive Officer and Director
(Principal Executive Officer)
|
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February 22, 2010
|
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|
|
/s/ Mark
A. Pytosh
Mark
A. Pytosh
|
|
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
|
|
February 22, 2010
|
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|
|
/s/ Thomas
E. Bucks
Thomas
E. Bucks
|
|
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
|
|
February 22, 2010
|
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/s/ Samuel
Zell
Samuel
Zell
|
|
Chairman of the Board
|
|
February 22, 2010
|
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/s/ David
M. Barse
David
M. Barse
|
|
Director
|
|
February 22, 2010
|
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|
/s/ Ronald
J. Broglio
Ronald
J. Broglio
|
|
Director
|
|
February 22, 2010
|
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|
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/s/ Peter
C. B. Bynoe
Peter
C. B. Bynoe
|
|
Director
|
|
February 22, 2010
|
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/s/ Linda
J. Fisher
Linda
J. Fisher
|
|
Director
|
|
February 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
|
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Director
|
|
February 22, 2010
|
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/s/ William
C. Pate
William
C. Pate
|
|
Director
|
|
February 22, 2010
|
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/s/ Robert
S. Silberman
Robert
S. Silberman
|
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Director
|
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February 22, 2010
|
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/s/ Jean
Smith
Jean
Smith
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Director
|
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February 22, 2010
|
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/s/ Clayton
Yeutter
Clayton
Yeutter
|
|
Director
|
|
February 22, 2010
|
136