COVANTA HOLDING CORPORATION
40 Lane Road
Fairfield, New Jersey 07004
(973) 882-9000

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

To Be Held On May 30, 2007

 

To our Stockholders:

 

We are notifying you that our 2007 Annual Meeting of Stockholders will be held on May 30, 2007, at Covanta Holding Corporation, 40 Lane Road, Fairfield, NJ 07004, at 11:00 a.m. local time. At the meeting we will ask you to:

 

1. elect ten directors to our Board of Directors, each for a term of one year;

 

2. ratify the appointment of Ernst & Young LLP, the independent registered public accountants, as our independent auditors for the 2007 fiscal year; and

 

3. consider such other business as may properly come before the Annual Meeting or any adjournment or postponement of the Annual Meeting.

 

Our Board of Directors has fixed the close of business on April 16, 2007 as the record date for the determination of stockholders entitled to notice of and to vote at the Annual Meeting and at any adjournment or postponement of the Annual Meeting. A complete list of these stockholders will be available at our principal executive offices prior to the Annual Meeting.

 

All stockholders are cordially invited to attend the Annual Meeting in person. Whether or not you expect to attend the meeting, please complete, date, sign and return the enclosed proxy card as promptly as possible in order to ensure your representation at the Annual Meeting. A return envelope (which is postage pre-paid if mailed in the United States) is enclosed for that purpose. Even if you have given your proxy, you may still vote in person if you attend the Annual Meeting. Please note, however, that if your shares are held of record by a broker, bank or other nominee and you wish to vote at the Annual Meeting, you must obtain from that institution that is the record holder a proxy issued in your name and bring to the Annual Meeting.

 

By Order of the Board of Directors

 

Covanta Holding Corporation

 

 

Timothy J. Simpson
Secretary

 

Fairfield, New Jersey

April 25, 2007

 

COVANTA HOLDING CORPORATION
40 Lane Road
Fairfield, New Jersey 07004

 

PROXY STATEMENT

 

The enclosed proxy is solicited by the Board of Directors of Covanta Holding Corporation for use at the Covanta Holding Corporation 2007 Annual Meeting of Stockholders to be held on May 30, 2007, at 11 a.m. local time, or any adjournment or postponement of the Annual Meeting, for the purposes described in this proxy statement and in the accompanying Notice of Annual Meeting of Stockholders. The Annual Meeting will be held at Covanta Holding Corporation, 40 Lane Road, Fairfield, New Jersey 07004. This proxy statement and accompanying proxy card were mailed on or about April 25, 2007 to all stockholders entitled to vote at the Annual Meeting. Throughout this proxy statement when the terms “Covanta,” the “Company,” “we,” “our,” “ours” or “us” are used, they refer to Covanta Holding Corporation and we sometimes refer to our Board of Directors as the “Board.” Our subsidiary Covanta Energy Corporation is often referred to in this proxy statement as “Covanta Energy.”

 

What is the purpose of the Annual Meeting?

 

At the Annual Meeting, you will be asked to act upon the matters outlined in the accompanying Notice of Annual Meeting of Stockholders, including:

 

 

In addition, management will report on our performance and respond to questions from stockholders.

 

Who is entitled to vote at the Annual Meeting?

 

Holders of our common stock at the close of business on the record date, April 16, 2007, are entitled to vote their shares at the Annual Meeting. On that date there were 153,793,825 shares of our common stock outstanding and entitled to vote.

 

How many votes do I have?

 

You will have one vote for each outstanding share of our common stock that you owned on April 16, 2007 (the record date), as each outstanding share of common stock is entitled to one vote on each matter properly brought before the Annual Meeting.

 

How many votes must be present to hold the Annual Meeting?

 

The presence in person or by proxy of stockholders entitled to cast a majority of all of the votes entitled to be cast at the Annual Meeting, including shares represented by proxies that reflect abstentions, constitutes a quorum. Abstentions and broker non-votes are counted as present and entitled to vote for the purposes of determining a quorum. A “broker non-vote” occurs when a broker, bank or other holder of record holding shares for a beneficial owner does not vote on a particular proposal because that record holder does not have discretionary voting power for that particular proposal and has not received voting instructions from the beneficial owner. If there is not a quorum at the Annual Meeting, the stockholders entitled to vote at the Annual Meeting, whether present in person or represented by proxy, will only have the power to adjourn the Annual Meeting until there is a quorum. The Annual Meeting may be reconvened without additional notice to the stockholders, other than an announcement at the prior adjournment of the Annual Meeting, within 30 days after the record date, and a quorum must be present at such reconvened meeting.

 

What is the difference between holding shares as a stockholder of record and as a beneficial owner?

 

If your shares are registered directly in your name with our transfer agent, American Stock Transfer & Trust Co., you are considered, with respect to those shares, the “stockholder of record” or “record owner.” As a record

owner, the Notice of Annual Meeting, Proxy Statement and 2006 Annual Report including our 2006 Annual Report on Form 10-K and proxy card, have been sent directly to you.

 

If your shares are held in a stock brokerage account or by a bank or other holder of record, you are considered the “beneficial owner” of shares held in street name. As a beneficial owner the Notice of Annual Meeting, Proxy Statement and 2006 Annual Report including our Annual Report on Form 10-K and proxy card have been sent to the holder of record of your shares. If you wish to attend the Annual Meeting and vote shares of our common stock held through a broker, bank or other nominee, you will need to obtain a proxy form from the institution that holds your shares and follow the voting instructions on that form.

 

How do I vote my shares at the Annual Meeting?

 

You may vote either in person at the Annual Meeting or by proxy. If you vote by proxy, you may still attend the Annual Meeting in person.

 

If you wish to vote in person at the Annual Meeting, please attend the meeting and you will be instructed there as to the balloting procedures. Please bring personal photo identification with you to the meeting. If you are a beneficial owner of shares, you must obtain a legal proxy from your broker, bank or other holder of record and present it to the inspectors of election with your ballot to be able to vote at the Annual Meeting in person.

 

If you wish to vote by proxy, you must properly execute, date and return the enclosed proxy to us by mail in the enclosed return envelope (which is postage pre-paid if mailed in the United States), and not revoke it before it is exercised at the Annual Meeting. If you do this, your shares of common stock represented by the proxy will be voted by the proxy holders in accordance with your instructions as marked on the proxy. Anthony J. Orlando and Timothy J. Simpson are the proxy holders. If you are a beneficial owner of shares, you will need to obtain a proxy from the institution that holds your shares and follow the voting instructions on that form.

 

If you do not intend to vote in person at the Annual Meeting, please remember to submit your proxy to us prior to the Annual Meeting to ensure that your vote is counted.

 

Can I revoke my proxy or change my vote after I have voted?

 

Even after you have submitted your proxy, you may revoke your proxy or change your vote by doing one of the following before your proxy is exercised at the Annual Meeting:

 

If you are the record owner of shares:

 

(1) deliver a written notice of revocation to our Secretary at Covanta Holding Corporation, 40 Lane Road, Fairfield, New Jersey 07004;

 

(2) submit a properly executed proxy bearing a later date; or

 

(3) attend the Annual Meeting and cast your vote in person.

 

If you are the beneficial owner of shares and have submitted to the institution that holds your shares your proxy, you will need to contact that institution and follow its instructions for revoking a proxy.

 

Attendance at the Annual Meeting will not cause your previously submitted proxy to be revoked unless you cast a vote at the Annual Meeting.

 

What if I do not vote for some of the matters listed on the proxy?

 

If you return a proxy to us without indicating your vote, in accordance with the Board’s recommendation, your shares will be voted by the proxy holders as follows:

 

 

In addition, if other matters are properly presented for voting at the Annual Meeting, or at any adjournment or postponement thereof, your proxy grants Messrs. Orlando and Simpson the discretion to vote your shares on such matters. The Board does not expect any additional matters to be presented for a vote at the Annual Meeting. If, for any unforeseen reason, any of the director nominees described in this proxy statement are not available as a candidate for director, then Messrs. Orlando and Simpson will vote the stockholder proxies for such other candidate or candidates as the Board may nominate.

 

How many votes are required to elect directors and to adopt the other proposals?

 

In the election for directors, the ten nominees receiving the highest number of “FOR” votes cast in person or by proxy will be elected. A “WITHHOLD” vote for a nominee is the equivalent of abstaining. Abstentions and broker non-votes are not counted as votes cast for the purposes of, and therefore will have no impact as to, the election of directors. Although the director nominees with the highest number of “FOR” votes cast will be elected at the Annual Meeting, our Corporate Governance Guidelines contain a majority voting policy which requires any nominee for director in an uncontested election to tender his or her resignation to the Board if that nominee receives a greater number of “WITHHOLD” votes than “FOR” votes in any election. The Nominating and Governance Committee will consider the resignation offer and recommend to the Board the action to be taken with respect to the tendered resignation. The Board will act upon the Nominating and Governance Committee’s recommendation no later than 90 days following certification of the stockholder vote. A complete copy of our Corporate Governance Guidelines are attached to this proxy statement as Exhibit A and are also posted on our website at www.covantaholding.com.

 

All proposals, other than the election of directors, require the affirmative “FOR” vote of a majority of those shares present and entitled to vote. An abstention as to any matter, when passage requires the vote of a majority of the votes entitled to be cast at the Annual Meeting, will have the effect of a vote “AGAINST.” Broker non-votes will not be considered, and will not be counted for any purpose in determining whether a matter has been approved.

 

Brokers, banks or other nominees have discretionary authority to vote shares without instructions from beneficial owners only on matters considered “routine” by the New York Stock Exchange, such as the election of directors and the ratification of the appointment of Ernst & Young LLP as our independent auditors addressed by proposals 1 and 2 in this proxy statement; therefore, your shares may be voted on proposals 1 and 2 if they are held in the name of a brokerage firm, even if you do not provide the brokerage firm with voting instructions. On non-routine matters, nominees do not have discretion to vote shares without instructions from beneficial owners and thus are not entitled to vote on such proposals in the absence of such specific instructions, resulting in a broker non-vote for those shares.

 

Representatives of American Stock Transfer & Trust Company, our transfer agent, will tabulate the votes and act as the inspector of the election at the Annual Meeting.

 

Can my shares be voted if I do not return my proxy and do not attend the Annual Meeting?

 

If you do not vote your shares and you are the beneficial owner of the shares, your broker can vote your shares on matters that the New York Stock Exchange has ruled are routine.

 

If you do not vote your shares and you are the record owner of the shares, your shares will not be voted.

 

Who pays the cost of solicitation of proxies for the Annual Meeting?

 

We will pay the cost of solicitation of proxies. In addition to the solicitation of proxies by mail, our directors, officers and employees may also solicit proxies personally, electronically or by telephone without additional compensation for such proxy solicitation activity. Brokers and other nominees who held our common stock on the record date will be asked to contact the beneficial owners of the shares that they hold to send proxy materials to and obtain proxies from such beneficial owners.

 

Although there is no formal agreement to do so, we may reimburse banks, brokerage houses and other custodians, nominees and fiduciaries for their reasonable expenses in forwarding this proxy statement to our stockholders.

 

BOARD STRUCTURE AND COMPOSITION

 

The Board is currently comprised of ten directors. During 2006, the Board held six meetings and took action by written consent five times. Each director attended at least 75% of all meetings of the Board and those Board committees on which he or she served during 2006. In 2004, we adopted a policy pursuant to which we expect our Board members to attend the annual meetings of our stockholders. In May 2006, all of the then current directors attended our Annual Meeting of Stockholders. The Board has adopted Corporate Governance Guidelines which, among other matters, describe the responsibilities and certain qualifications of our directors. Our Corporate Governance Guidelines are attached to this proxy statement as Exhibit A and are posted on our website at www.covantaholding.com. A copy also may be obtained by writing to our Vice President of Investor Relations at our principal executive offices.

 

Our Corporate Governance Guidelines include a Majority Voting Policy, which was adopted by the Board in February, 2007 and provides that in an uncontested election (i.e., an election where the only nominees are those recommended by the Board), any nominee for directors who receives a greater number of votes “withheld” from his or her election than votes “for” such election shall promptly tender his or her resignation to the Board for consideration in accordance with the procedures described in the Majority Voting Policy attached to our Corporate Governance Guidelines.

 

The Corporate Governance Guidelines also require that a majority of the Board qualify as independent within the meaning of the independence standards of the New York Stock Exchange. The applicable standards for independence to the Board are attached to our Corporate Governance Guidelines, referred to as the “Independence Standards.” These Independence Standards contain categorical standards that we have adopted to assist in making determinations of director independence required by New York Stock Exchange rules. These Independence Standards also describe certain relationships between directors and us that the Board has determined to be categorically immaterial.

 

In accordance with the Independence Standards, the Board undertook its annual review of director independence. During this review, the Board considered transactions and relationships between each director or any member of his or her immediate family and us and our subsidiaries and affiliates. The Board also considered whether there were any transactions or relationships between directors, their organizational affiliations or any member of their immediate family, on the one hand, and us and our executive management, on the other hand. As provided in the Independence Standards, the purpose of this review was to determine whether any such relationships or transactions existed that were inconsistent with a determination that the director is independent.

 

As a result of this review, the Board affirmatively determined that the following directors are independent of us and our management under the standards set forth in the Independence Standards: David M. Barse, Ronald J. Broglio, Peter C.B. Bynoe, Richard L. Huber, William C. Pate, Robert S. Silberman, Jean Smith and Clayton Yeutter, and that none of these directors had relationships with us except those that the Board has determined to be categorically immaterial as set forth in the Independence Standards. In making these determinations, the Board considered that in the ordinary course of business, transactions may occur between us and our subsidiaries and companies at which one or more of our directors are or have been officers. In each case, the amounts paid to these other companies in each of the last three years did not exceed the applicable thresholds set forth in the Independence Standards or the nature of the relationships with these other companies did not otherwise affect the independent judgment of any of such directors. The Board also considered charitable contributions to not-for-profit organizations of which directors or their immediate family members are affiliated, none of which exceeded the applicable thresholds set forth in the Independence Standards.

 

In connection with this review, the Board noted that Mr. Yeutter is senior advisor to the law firm of Hogan & Hartson LLP. Hogan & Hartson LLP has provided Covanta Energy with certain legal services for many years, including 2006. This relationship preceded our acquisition of Covanta Energy and 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 has concluded that this relationship does not interfere with Mr. Yeutter’s exercise of independent judgment as a director or otherwise prevent him from meeting any of the Independence Standards as it does not constitute a “material relationship” to Mr. Yeutter, Hogan & Hartson, us or Covanta Energy and Mr. Yeutter qualifies as an independent director under applicable Securities and Exchange Commission, referred to as the “SEC,” rules and regulations and New York Stock Exchange listing standards.

 

Samuel Zell and Mr. Pate are executive officers of Equity Group Investments, L.L.C., referred to as “EGI.” EGI is affiliated with SZ Investments LLC, referred to as “SZ Investments,” a holder of approximately 15.1% of our common stock as of April 16, 2007, as described under “Equity Ownership of Certain Beneficial Owners.” Although Mr. Zell was an executive officer of ours within the past three years, and is therefore not independent, the Board reviewed the independence of Mr. Pate. In particular, the Board examined not only the amounts paid to EGI and SZ Investments in connection with the financings and other relationships within the past three years, but also the subjective nature of Mr. Pate’s relationship with us, as our former non-executive Chairman of the Board. The Board determined that the amounts paid to EGI and SZ Investments did not exceed the applicable thresholds under New York Stock Exchange listing standards and under our Independence Standards and that these relationships do not interfere with Mr. Pate’s exercise of independent judgment as a director. Therefore, the Board concluded that Mr. Pate qualifies as an independent director under applicable SEC rules and regulations and New York Stock Exchange listing standards.

 

Mr. Barse is the President and Chief Executive Officer of Third Avenue Management LLC, referred to as “Third Avenue,” a holder of approximately 5.7% of our common stock as of April 16, 2007, as described under “Equity Ownership of Certain Beneficial Owners.” The Board noted that although Mr. Barse was our President and Chief Operating Officer from July 1996 until July 2002, such prior service as our executive officer occurred more than three years ago and does not interfere with his exercise of independent judgment as a director. Further, the Board examined the amounts paid to Third Avenue and its affiliates in connection with the financings and other transactions within the past three years, and concluded that these transactions did not exceed the applicable thresholds under New York Stock Exchange rules and under our Independence Standards and that these relationships do not interfere with Mr. Barse’s exercise of independent judgment as a director. Therefore, the Board concluded that Mr. Barse qualifies as an independent director under applicable SEC rules and regulations and New York Stock Exchange listing standards.

 

Committees of the Board

 

Audit Committee.  The current members of the Audit Committee are Ms. Smith (Chair), Mr. Huber and Mr. Pate. Each of the members of the Audit Committee is an independent director under applicable New York Stock Exchange listing standards and applicable SEC rules and regulations and the Board has determined that each of the members of the Audit Committee qualifies as an “audit committee financial expert” under applicable SEC rules. Our Board has determined that Mr. Pate is a financial expert in part due to his “other relevant experience,” which experience includes Mr. Pate’s extensive investment banking experience involving the critical evaluation of financial statements as (a) a director of several public companies, (b) our former Chairman of the Board and (c) the investment manager of private capital. In this later role, our Board has determined that he had oversight of the preparation, auditing or evaluation of financial statements in conjunction with numerous acquisitions in a variety of industries and in conjunction with raising of public fixed income and equity capital for associated corporations.

 

The Audit Committee operates under a written charter that was amended and restated by the Board as of December 2006, a copy of which is available on our website at www.covantaholding.com or may be obtained by writing to our Vice President of Investor Relations at our principal executive offices. Under its charter, the functions of the Audit Committee include assisting the Board in its oversight of the quality and integrity of our financial statements and accounting processes, compliance with legal and regulatory requirements, assessing and reviewing the qualifications and independence of our independent auditors and the performance of the independent auditors and overseeing our internal audit function. The Audit Committee has the sole authority to select, evaluate, appoint or replace our independent auditors and has the sole authority to approve all audit engagement fees and terms. The Audit Committee must pre-approve all permitted non-auditing services to be provided by the independent auditors, discuss with management and the independent auditors our financial statements and any disclosures and SEC filings relating thereto, recommend for stockholder approval the ratification of the independent auditors for us, review the integrity of our financial reporting process, establish policies for hiring of employees or former employees of the auditors and investigate any matters pertaining to the integrity of management.

 

The Audit Committee held six meetings during 2006.

 

Compensation Committee.  The current members of the Compensation Committee are Messrs. Barse (Chair), Silberman and Bynoe. Each of the members of the Compensation Committee qualifies as an independent director under applicable New York Stock Exchange listing standards and is considered to be a “non-employee director” under Rule 16b-3 of the Securities Exchange Act of 1934, as amended, which we refer to as the “Exchange Act” in this proxy statement. Messrs. Silberman and Bynoe are “outside directors” under section 162(m) of the Internal Revenue Code of 1986, as amended, which we refer to as the “Tax Code” in this proxy statement. Because Mr. Barse was previously an executive officer of ours, he does not qualify as an “outside director” solely for purposes of section 162(m) of the Tax Code. However, our Board has determined that Mr. Barse’s prior relationship does not interfere with his exercise of independent judgment as a director and noted that he qualifies as an independent director under applicable New York Stock Exchange listing standards. Consequently, Mr. Barse recuses himself from voting in connection with any compensation matters in which section 162(m) issues may arise, whether made by the Compensation Committee or the full Board.

 

The Compensation Committee operates under a written charter that was amended and restated by our Board as of December 2006, a copy of which is available on our website at www.covantaholding.com or may be obtained by writing to our Vice President of Investor Relations at our principal executive offices. Under its charter, the Compensation Committee among other things, has the following authority:

 

(1) to review and approve the Company’s goals relating to the chief executive officer’s compensation, evaluate the chief executive officer’s performance under those goals and set the chief executive officer’s compensation;

 

(2) to evaluate, review and approve the compensation structure and process for our other officers and the officers of our subsidiaries;

 

(3) to evaluate, review and recommend to our board of directors any changes to, or additional stock-based and other incentive compensation plans;

 

(4) to engage independent advisors to assist the members of the Compensation Committee in carrying out their duties; and

 

(5) to recommend inclusion of the Compensation Discussion and Analysis in this proxy statement and our Annual Report on Form 10-K.

 

The Compensation Committee held eight meetings during 2006.

 

Nominating and Governance Committee.  The current members of the Nominating and Governance Committee are Mr. Yeutter (Chair), Ms. Smith and Mr. Broglio. Each of the members of the Nominating and Governance Committee qualifies as an independent director under applicable New York Stock Exchange listing standards.

 

The Nominating and Governance Committee operates under a written charter that was amended and restated by the Board as of December 2006, a copy of which is available on our website at www.covantaholding.com or may be obtained by writing to our Vice President of Investor Relations at our principal executive offices. Under its charter, the Nominating and Governance Committee is responsible for assisting the Board in identifying qualified candidates to serve on the Board, recommending director nominees for the annual meeting of stockholders, identifying individuals to fill vacancies on the Board, recommending corporate governance guidelines to the Board, leading the Board in its annual self evaluations and recommending nominees to serve on each committee of the Board. The Nominating and Governance Committee, among other things, has the authority to evaluate candidates for the position of director, retain and terminate any search firm used to identify director candidates and review and reassess the adequacy of our corporate governance procedures.

 

The Nominating and Governance Committee held four meetings during 2006 and took action by written consent once.

 

In identifying candidates for positions on the Board, the Nominating and Governance Committee generally relies on suggestions and recommendations from members of the Board, management and stockholders. In 2006, we did not use any search firm or pay fees to other third parties in connection with seeking or evaluating Board nominee candidates.

 

The Nominating and Governance Committee does not set specific minimum qualifications for director positions. Instead, the committee believes that nominations should be based on a particular candidate’s merits and our needs after taking into account the current composition of the Board. When evaluating candidates for the position of director, the Nominating and Governance Committee considers an individual’s skills, age, diversity, independence from us, experience in areas that address the needs of the Board and ability to devote adequate time to Board duties. Candidates that appear to best fit the needs of the Board and us are identified and unless such individuals are well known to the Board, they are interviewed and further evaluated by the Nominating and Governance Committee. Candidates selected by the Nominating and Governance Committee are then recommended to the full Board. After the Board approves a candidate, the Chair of the Nominating and Governance Committee extends an invitation to the candidate to join the Board.

 

The Nominating and Governance Committee will consider candidates recommended by stockholders if such recommendations are accompanied by relevant biographical information and are submitted in accordance with our organizational documents, New York Stock Exchange requirements and SEC rules and regulations, each as in effect from time to time. Candidates recommended by stockholders will be evaluated in the same manner as other candidates. Under our Amended and Restated By-Laws, any holder of 20% or more of our outstanding voting securities has the right, but not the obligation, to nominate one qualified candidate for election as a director. Provided that such stockholder adequately notifies us of a nominee within the time periods set forth in our applicable proxy statement, that individual will be included in our proxy statement as a nominee.

 

Finance Committee.  The current members of the Finance Committee are Mr. Silberman (Chair) and Messrs. Barse, Orlando and Pate.

 

The Finance Committee was created during 2006 and operates under a written charter, a copy of which is available on our website at www.covantaholding.com, or may be obtained by writing to our Vice President of Investor Relations at our principal executive offices. Under its charter, the Finance Committee is responsible for assisting the Board in its oversight of our consideration of new financial commitments, acquisitions, investment, and other transactions that are either material to us or are otherwise not contemplated by our annual budget or business/financial plan. The Finance Committee is also responsible for establishing policies with respect to the issuance of dividends on our common stock and spending authorization by our senior executives.

 

The Finance Committee held one meeting during 2006.

 

Public Policy Committee.  The current members of the Public Policy Committee are Mr. Bynoe (Chair), and Messrs. Broglio, Huber and Orlando.

 

The Public Policy Committee operates under a written charter, a copy of which is available on our website at www.covantaholding.com, or may be obtained by writing to our Vice President of Investor Relations at our principal executive offices. Under its charter, the Public Policy Committee is responsible for the assisting the Board in its oversight responsibilities for matters relating to public policy. The Public Policy Committee’s responsibilities include oversight of legislative and regulatory developments affecting our business, employee safety programs and procedures, community relations programs, political and charitable contributions by us, and other matters of public policy affecting our domestic and international business.

 

The Public Policy Committee held three meetings during 2006.

 

Executive Sessions of Non-Management Directors and Independent Directors

 

The non-management directors of the Board meet regularly in executive sessions without our management present. The independent directors also meet on occasion or as necessary in executive session. The Chairs of each of the committees together select a director to serve as the Chair of each executive session of independent directors. Stockholders wishing to communicate with the independent directors may contact them by writing to: Independent Directors, c/o Corporate Secretary, Covanta Holding Corporation, 40 Lane Road, Fairfield, New Jersey 07004. Any such communication will be promptly distributed to the directors named in the communication in the same manner as described below in “Stockholder Communications with the Board.”

 

Communications with the Board

 

Stockholders and other interested parties can send communications to one or more members of the Board by writing to the Board or to specific directors or group of directors at the following address: Covanta Holding Corporation Board of Directors, c/o Corporate Secretary, Covanta Holding Corporation, 40 Lane Road, Fairfield, New Jersey 07004. Any such communication will be promptly distributed by the Corporate Secretary to the individual director or directors named in the communication or to all directors if the communication is addressed to the entire Board.

 

Compensation of the Board

 

On an annual basis, at the Annual Meeting of Stockholders at which directors are elected, each non-employee director will be awarded 4,500 shares of restricted stock, which vest as follows: one-third vest upon the grant of the award, one-third will vest one year after the date of grant and the final one-third of the restricted shares will vest two years after the date of grant. Mr. Barse waived his right to receive equity awards for 2006 and has indicated his intention to waive his right to receive equity compensation in 2007. Non-employee directors also will receive an annual fee of $30,000. The Chairman of the Board will receive an additional annual fee of $15,000. In addition, the chairs of the Audit Committee and Compensation Committee will each receive an additional annual fee of $10,000 for such service and the chair of each of the other committees of the Board, including without limitation, the Nominating and Governance Committee, the Public Policy Committee and the Finance Committee will be entitled to receive an additional annual fee of $5,000 for such service. Non-employee directors will be entitled to receive a meeting fee of $2,000 for each Audit Committee meeting and $1,500 for each other committee meeting they attend. Directors who are appointed at a date other than the annual meeting of stockholders, will be entitled to receive a pro rata portion of the annual director compensation.

 

The following table sets forth the compensation paid to each of our non-employee directors for the year ended December 31, 2006.

 

Director Compensation for 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

Policies on Business Conduct and Ethics

 

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 and our subsidiaries’, directors, officers and employees. Both the Code of Conduct and Ethics and the Policy of Business Conduct are available on our website at www.covantaholding.com and copies may be obtained by writing to our Vice President of Investor Relations at our principal executive offices.

 

PROPOSAL NO. 1

 

ELECTION OF DIRECTORS

 

The Board is currently comprised of ten directors. The Board, at the recommendation of the Nominating and Governance Committee, has nominated each of the following ten individuals to serve as a director for a term of one year:

 

David M. Barse
Ronald J. Broglio
Peter C.B. Bynoe
Richard L. Huber
Anthony J. Orlando
William C. Pate
Robert S. Silberman
Jean Smith
Clayton Yeutter
Samuel Zell

 

Each of the nominees currently serves as a member of the Board. If elected to another term at this year’s Annual Meeting, each nominee will serve until the date of next year’s annual meeting or until his or her successor has been elected and qualified.

 

Each nominee has consented to serve as a member of the Board if elected or re-elected, as the case may be, for another term. Nevertheless, if any nominee becomes unable to stand for election (which the Board does not anticipate happening), each proxy will be voted for a substitute designated by the Board or, if no substitute is designated by the Board prior to or at the Annual Meeting, the Board will act to reduce the membership of the Board to the number of individuals nominated.

 

There is no family relationship between any nominee and any other nominee or any executive officer of ours. The information set forth below concerning the nominees has been furnished to us by the nominees.

 

The Board recommends that you vote “FOR” the election of each of the above named nominees to the Board. Proxies solicited by the Board will be voted “FOR” the election of each of the nominees named above unless instructions to the contrary are given.

 

Our Directors

 

David M. Barse has served as a director since 1996 and is Chairman of the Compensation Committee and a member of the Finance Committee. Mr. Barse’s one-year term as a director will expire at the next annual meeting of stockholders. Mr. Barse served as our President and Chief Operating Officer from July 1996 until July 2002. Since February 1998, Mr. Barse has served as President and since June 2003, Chief Executive Officer of Third Avenue, an investment adviser to mutual funds and separate accounts. From April 1995 until February 1998, Mr. Barse served as the Executive Vice President and Chief Operating Officer of Third Avenue Trust and its predecessor, Third

Avenue Value Fund, Inc., together with its predecessor, referred to as “Third Avenue Trust,” before assuming the position of President in May 1998 and Chief Executive Officer in September 2003. In 2001, Mr. Barse became Trustee of both the Third Avenue Trust and Third Avenue Variable Series Trust. Since June 1995, Mr. Barse has been the President and, since July 1999, Chief Executive Officer of M.J. Whitman, LLC and its predecessor, a full service broker-dealer. Mr. Barse joined the predecessor of M.J. Whitman LLC and Third Avenue in December 1991 as General Counsel. Mr. Barse also presently serves as a director of American Capital Access Holdings, a privately held financial insurance company. Mr. Barse is 44 years old.

 

Ronald J. Broglio has served as a director since October 2004 and is a member of the Nominating and Governance Committee and the Public Policy Committee. Mr. Broglio’s one-year term as a director will expire at the next annual meeting of stockholders. Mr. Broglio has been the President of RJB Associates, a consulting firm specializing in energy and environmental solutions, since 1996. Mr. Broglio was Managing Director of Waste to Energy for Waste Management International Ltd. from 1991 to 1996. Prior to joining Waste Management, Mr. Broglio held a number of positions with Wheelabrator Environmental Systems Inc. from 1980 through 1990, including Managing Director, Senior Vice President — Engineering, Construction & Operations and Vice President of Engineering & Construction. Mr. Broglio served as Manager of Staff Engineering and as a staff engineer for Rust Engineering Company from 1970 through 1980. Mr. Broglio is 66 years old.

 

Peter C. B. Bynoe has served as a director since July 2004 and is a member of the Compensation Committee and is Chairman of the Public Policy Committee. Mr. Bynoe’s one-year term as a director will expire at the next annual meeting of stockholders. Mr. Bynoe joined the law firm of DLA Piper US, LLP as a partner in 1995 and currently serves on the firm’s Executive Committee. Mr. Bynoe has been a principal of Telemat Ltd., a consulting and project management firm, since 1982. Mr. Bynoe is a director of Rewards Network Inc., a provider of credit card loyalty and rewards programs. Mr. Bynoe is 56 years old.

 

Richard L. Huber has served as a director since July 2002 and is a member of the Audit Committee and the Public Policy Committee. Mr. Huber’s one-year term as a director will expire at the next annual meeting of stockholders. Mr. Huber served as Chairman and the Interim Chief Executive Officer of American Commercial Lines, Inc., a marine transportation and service company (“ACL”), from April 2004 until January 2005 and continues as a director of ACL and various subsidiaries and affiliates of ACL. Mr. Huber has been Managing Director, Chief Executive Officer and Principal of the direct investment group Norte-Sur Partners, a direct private equity investment firm focused on Latin America, since January 2001. Mr. Huber held various positions with Aetna, Inc. since 1995, most recently as the Chief Executive Officer, until February 2000. Mr. Huber has approximately 40 years of prior investment and merchant banking, international business and management experience, including executive positions with Chase Manhattan Bank, Citibank, Bank of Boston and Continental Bank. Mr. Huber is also a director of Gafisa, a Brazilian real estate development company. Mr. Huber is 70 years old.

 

Anthony J. Orlando has served as our President and Chief Executive Officer since October 2004. He has served as a director since September 2005 and is a member of the Public Policy Committee and the Finance Committee. Mr. Orlando’s one-year term as a director will expire at the next annual meeting of stockholders. Previously, Mr. Orlando had been President and Chief Executive Officer of Covanta Energy since November 2003. From March 2003 to November 2003 Mr. Orlando served as Senior Vice President, Business and Financial Management of Covanta Energy. From January 2001 until March 2003, Mr. Orlando served as Covanta Energy’s Senior Vice President, Waste-to-Energy. Previously, he served as Executive Vice President of Covanta Energy Group, Inc. Mr. Orlando joined Covanta Energy in 1987. Mr. Orlando is 47 years old.

 

William C. Pate has served as a director since 1999 and is a member of the Audit Committee and the Finance Committee. Mr. Pate’s one-year term as a director will expire at the next annual meeting of stockholders. He was our Chairman of the Board from October 2004 through September 2005. Mr. Pate is Managing Director of Equity Group Investments LLC (“EGI”), a privately-held investment firm. Mr. Pate has been employed by EGI or its predecessor in various capacities since 1994. Mr. Pate also serves as a director of Adams Respiratory Therapeutic, Inc., a specialty pharmaceutical company, and Hanover Compressor Company, a global oil field services provider. Mr. Pate is 43 years old.

 

Robert S. Silberman has served as a director since December 2004 and is Chairman of the Finance Committee and a member of the Compensation Committee. Mr. Silberman also served during 2006 on the Public Policy

Committee. Mr. Silberman’s one-year term as a director will expire at the next annual meeting of stockholders. Mr. Silberman has been Chairman of the Board of Directors of Strayer Education, Inc., a leading provider of graduate and undergraduate degree programs focusing on working adults, since February 2003 and its Chief Executive Officer since March 2001. Mr. Silberman was Executive in Residence at New Mountain Capital, LLC from August 2000 to March 2001. From 1995 to 2000, Mr. Silberman served as President and Chief Operating Officer of CalEnergy Company, Inc., a California independent energy producer, and in other capacities. Mr. Silberman has also held senior positions within the public sector, including U.S. Assistant Secretary of the Army. In addition to Strayer Education, Inc., Mr. Silberman serves on the Board of Directors of Surgis, Inc., an ambulatory surgery center and surgical services company, and NewPage Holding Corporation, a paper manufacturer. Mr. Silberman is a member of the Council on Foreign Relations. Mr. Silberman is 49 years old.

 

Jean Smith has served as a director since December 2003 and is the Chairperson of the Audit Committee and a member of the Nominating and Governance Committee. Ms. Smith’s one-year term as a director will expire at the next annual meeting of stockholders. Ms. Smith has been a Managing Director of Plainfield Asset Management LLC since 2006. Ms. Smith previously held the position of President of Sure Fit Inc. from 2004 to 2006 and was a private investor and consultant from 2001 to 2004. Ms. Smith has more than 25 years of investment and international banking experience, having previously held the position of Managing Director of Corporate Finance for U.S. Bancorp Libra and positions with Banker’s Trust Company, Citicorp Investment Bank, Security Pacific Merchant Bank and UBS Securities. Ms. Smith is 51 years old.

 

Clayton Yeutter has served as a director since July 2002 and is Chairman of the Nominating and Governance Committee. Mr. Yeutter’s one-year term as a director will expire at the next annual meeting of stockholders. Mr. Yeutter is Senior Advisor to Hogan & Hartson LLP, a law firm in Washington, D.C., where he has had an international trade and agricultural law practice since 1993. From 1985 through 1991, Mr. Yeutter served in the Reagan Administration as U.S. Trade Representative and in the first Bush Administration as Secretary of Agriculture. Mr. Yeutter served as Chief Executive Officer of the Chicago Mercantile Exchange from 1978 through 1985. Mr. Yeutter is presently Chairman of the Board of Directors of ACL and a director of Burlington Capital Group, a privately-owned investment management company. Mr. Yeutter is 76 years old.

 

Samuel Zell has served as our Chairman of the Board since September 2005, and had also previously served as a director from 1999 to 2004, as our President and Chief Executive Officer from July 2002 to April 2004 and as our Chairman of the Board from July 2002 to October 2004. Mr. Zell’s one-year term as our Chairman and as a director will expire at the next annual meeting of stockholders. Mr. Zell has served as Chairman of the Board of Directors of EGI since 1999 and as its President since January 2006, and had been Chairman of the Board of Directors of its predecessor, Equity Group Investments, Inc., for more than five years. For more than the past five years, Mr. Zell has served as Chairman of the Board of Directors of Anixter International, Inc., a global distributor of electrical and cable systems; as Chairman of the Board of Directors of Equity Lifestyle Properties, Inc. (previously known as of Manufactured Home Communities, Inc.), an equity real estate investment trust, commonly known as a “REIT,” primarily engaged in the ownership and operation of manufactured home resort communities; as Chairman of the Board of Trustees of Equity Residential, an equity REIT that owns and operates multi-family residential properties, and as Chairman of the Board of Directors of Capital Trust, Inc., a specialized finance company. Mr. Zell is 65 years old.

 

Mr. Orlando was an officer of Covanta Energy when it filed for bankruptcy and has continued as officer of Covanta Energy after its emergence from bankruptcy and confirmation of its plan of reorganization. Covanta Energy’s Chapter 11 proceedings commenced on April 1, 2002. Covanta Energy and most of its domestic subsidiaries filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. All of the bankruptcy cases were jointly administered under the caption “In re Ogden New York Services, Inc., et al., Case Nos. 02-40826 (CB), et al.” On March 5, 2004, the Bankruptcy Court entered an order confirming Covanta Energy’s plan of reorganization and plan for liquidation for subsidiaries involved in non-core businesses and on March 10, 2004, both plans were effected.

 

PROPOSAL NO. 2

 

RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS

 

The Audit Committee has appointed Ernst & Young LLP, a registered independent accounting firm, as our independent auditors to audit our consolidated financial statements for the year ending December 31, 2007, subject to ratification of the appointment by our stockholders. During the 2006 fiscal year, Ernst & Young LLP served as our independent auditors and also provided certain tax and audit-related services. We have been advised by Ernst & Young LLP that neither it nor any of its members has any direct or indirect financial interest in us.

 

Although we are not required to seek stockholder approval of this appointment, the Audit Committee and the Board believe it to be sound corporate practice to do so. If the appointment is not ratified, the Audit Committee will investigate the reasons for stockholder rejection and the Audit Committee will reconsider the appointment. Representatives of Ernst & Young LLP are expected to attend the Annual Meeting where they will be available to respond to appropriate questions and, if they desire, to make a statement.

 

The Audit Committee recommends a vote “FOR” the ratification of the appointment of Ernst & Young LLP as our independent auditors. Proxies solicited by the Board will be voted “FOR” the ratification of the appointment of Ernst & Young LLP as our independent auditors unless instructions to the contrary are given.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following tables set forth information, as of April 16, 2007 unless otherwise specified, concerning:

 

 

The number of shares beneficially owned by each entity, person, current director, director nominee or named executive officer is determined under the rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has the right to acquire within 60 days after the date of this table, through the exercise of any stock option or other right. Unless otherwise indicated, each person has sole investment and voting power, or shares such powers with his or her spouse or dependent children within his or her household, with respect to the shares set forth in the following table. Unless otherwise indicated, the address for all current executive officers and directors is c/o Covanta Holding Corporation, 40 Lane Road, Fairfield, New Jersey 07004.

 

Equity Ownership of Certain Beneficial Owners

 

 

 

 

Equity Ownership of Management

 

 

 

 

 

 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own more than ten percent of a registered class of our equity securities, to file with the SEC and the New York Stock Exchange initial reports of ownership and reports of changes in ownership of our common stock and other of our equity securities. Executive officers, directors and greater than ten percent stockholders are required by Federal securities regulations to furnish us with copies of all Section 16(a) forms they file.

 

Based upon a review of filings with the SEC and/or written representations from certain reporting persons, we believe that all of our directors, executive officers and other Section 16 reporting persons complied during 2006 with the reporting requirements of Section 16(a).

 

EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

Overview

 

Our objective for named executive officer compensation is consistent with our objective for our business — to create long-term stockholder value. We have designed our compensation arrangements with our named executive officers to reward them for the creation of long-term growth opportunities and for continuing financial and operating performance, to create incentives for them to remain as productive long-term employees and generally to align their interests with those of our stockholders. Our performance over the past several years has supported this objective. Below we provide a more detailed explanation of the compensation and benefit programs for our named executive officers, including a description of our philosophy, plans and processes.

 

Compensation Philosophy and Objectives

 

The Compensation Committee believes that a significant portion of annual and long-term compensation paid to named executive officers should be closely aligned with our operating and financial performance on both a short-term and long-term basis. The goal of our executive compensation programs is to provide our named executive officers with compensation and benefits that are fair, reasonable and competitive in the marketplace. The programs are intended to help us recruit and retain qualified executives, and provide rewards that are linked to performance while also aligning the interests of these individuals with those of our stockholders.

 

Our incentive programs are egalitarian. We have no compensation or benefits programs which are available exclusively to named executive officers. Our philosophy is that in order to achieve a greater level of fairness and consistency across the organization, named executive officers should participate in the same compensation and benefits programs as are available to other officers and management-level employees. Accordingly, under our long-term incentive plan we granted awards of restricted stock during 2006 to 228 participants. Participants in the long-term incentive plan include both domestic and international employees, ranging from our Chief Executive Officer to plant operators in our facilities.

 

The Compensation Committee has the following objectives in designing the programs:

 

Performance

 

 

Alignment

 

 

Retention

 

 

Competitiveness and Benchmarking

 

We generally compete for employees and officers with utility companies, independent energy companies and, to a much lesser extent, waste disposal companies. In order to attract and retain qualified employees and officers, including named executive officers, the Compensation Committee generally targets compensation at the market median for base salary, total cash compensation, total direct compensation overall and benefits.

 

Role of Compensation Consultants

 

Neither we nor the Compensation Committee has any contractual relationship with any compensation consultant who has a role in determining or recommending the amount or form of senior executive or director compensation. Periodically, through our human resources department, we have discussed compensation matters with compensation consultants, at Watson Wyatt Worldwide (“Watson Wyatt”). These consultants have provided assistance in developing compensation strategies and provided compensation advice in connection with Covanta Energy’s emergence from bankruptcy proceedings and our acquisition of the Covanta Energy business and its employees. Subsequently, Watson Wyatt has provided market intelligence and information regarding compensation levels at comparable companies.

 

Separately, the Compensation Committee has exercised its authority to engage the services of independent compensation advisors to assist in carrying out its duties. Beginning in 2004, the Compensation Committee has periodically sought the advice of compensation consultants with Hewitt Associates, Inc. (“Hewitt”) to provide independent compensation advice on various aspects of executive compensation, including the compensation payable to our executive officers and other compensation matters. Hewitt took its direction solely from, and provided their reports solely to, the Compensation Committee. Billing by Hewitt was provided directly to, and approved for payment by, the Compensation Committee.

 

Following the move by the primary consultant utilized by the Compensation Committee from Hewitt to the Dallas office of Watson Wyatt, the Compensation Committee reviewed its relationship with its compensation consultant and elected to continue to work with its primary compensation consultant. In order to address the possible conflict of interest, however, the Compensation Committee directed that formal, written procedures be adopted and established within Watson Wyatt to maintain the independence of the Compensation Committee’s consultants. Consequently, formal written procedures were adopted and implemented prohibiting contact between management’s and the Compensation Committee’s consultants within Watson Wyatt, limiting access by management to the Compensation Committee’s independent consultants and continuing the prior reporting and billing arrangements.

 

Use of Consultants in Analysis of 2006 Compensation

 

In 2006, management’s consultants provided comparisons of compensation and benefits programs. This information included data compiled by Watson Wyatt and other proprietary compensation surveys of publicly- held companies in the general industry and energy businesses with annual revenues between $1 billion and $3 billion. After reviewing this information, recommendations of 2006 compensation and benefit levels were then prepared by our Chief Executive Officer and Vice President of Human Resources and presented to the Compensation Committee.

 

Separately, the Compensation Committee directed its independent consultants in the Dallas office of Watson Wyatt, to conduct a critical and focused analysis involving a comparison of the proposed compensation and benefits of our Chief Executive Officer with those of electric utilities companies, with whom we also compete for officers and employees and which often have relatively more generous benefits programs. Since we do not have a specific group of competitive peers, Watson Wyatt reviewed a broad base of industry and electric utility companies and adjusted the data to correspond to our projected revenue. The Compensation Committee then examined this analysis

as well as our then current internal annual revenue projections for 2006 to confirm and independently validate the compensation levels.

 

In analyzing compensation and benefit levels in connection with our search for a new chief financial officer during 2006, in addition to utilities companies, the Compensation Committee’s consultants also provided data on companies comprising the Dow Jones “DJ Waste & Disposal Services Index,” which included providers of pollution control and environmental services for the management, recovery and disposal of solid and hazardous waste materials, such as landfills and recycling centers. The Compensation Committee included this group in its analysis since we included this index as a peer group in our stock performance graph for the first time in connection with our 2006 annual stockholders meeting proxy statement, and it provided an additional data source for determining the appropriateness of the compensation being offered.

 

The Annual Compensation Process

 

In the first quarter of each year, typically in February, the Compensation Committee reviews management’s recommendations and our historical pay and performance information.

 

In connection with this review, the Compensation Committee also has sought input and advice from its independent consultants at Watson Wyatt and, at its discretion, has sought and may continue to seek independent analysis of competitive compensation levels based upon parameters and benchmarks chosen by the Compensation Committee and its advisors. Other than our Chief Executive Officer working with our vice president of human resources, no executive officers are involved in determining recommendations for executive officer compensation. No officers are involved in determining director compensation. Following the review process, the Compensation Committee approves the annual base salary and incentive cash award targets for the upcoming year for the Chief Executive Officer, Chief Financial Officer and the other named executive officers and discusses the review process and compensation determination with the non-management members of the Board.

 

At the same time, the Compensation Committee also approves:

 

 

The number of shares to be issued under restricted stock awards, based upon the respective dollar amount of such awards, or the exercise price for any stock options, if any are granted, however, are not determined until the effective date of the equity award grant. For 2006 awards, the Compensation Committee approved the value of restricted stock grants in February 2006 with the number of shares to be issued under such grants to be determined prospectively upon their pre-determined effective date of March 17, 2006, following the filing of our Annual Report on Form 10-K. No options were awarded as part of the 2006 annual compensation process.

 

Periodically throughout the year, the Compensation Committee may discuss, as appropriate, the philosophy for the overall compensation packages, and decide whether changes should be made in the components of the package and/or the mix of the package or whether special awards are appropriate or desirable. No such changes or special awards were made in 2006. In 2006, the Compensation Committee also began using tally sheets to assist in analyzing the named executive officers’ total compensation and various elements of their compensation, including salary, annual and long-term incentive payments and retirement benefits, as well as potential payments under change in control agreement provisions of employment agreements.

 

Components of Total Compensation

 

Our compensation and benefits package for named executive officers consists of direct compensation and company-sponsored benefit plans. Each component is designed to contribute to a total compensation package that is

competitive and appropriately performance-based, and to create incentives for our named executive officers that are consistent with our goals and intentions.

 

Consistent with the view that our named executive officers’ compensation should be closely tied to our overall performance, as a percentage of their annual total direct compensation, named executive officers (other than our Chief Executive Officer) received about 60% of their total annual direct compensation in the form of performance-based compensation and approximately 73% of our Chief Executive Officer’s direct compensation was performance-based.

 

Direct Compensation

 

Direct compensation consists of a base salary and performance-based awards comprised of an annual incentive cash award and a long-term incentive award. Other than base salary, all elements of direct compensation include a component that is directly linked to our performance. By creating these links, we seek to achieve our objectives of performance-based, cost-effective compensation programs.

 

Base Salary

 

 

Performance-Based Awards

 

In order to align the interests of our stockholders with our compensation plans, we tie significant portions of our named executive officers’ compensation to our annual financial and operating performance. Our performance-based awards are comprised of an annual incentive cash award and a long-term incentive equity award. The Compensation Committee’s philosophy is that if our performance exceeds our internal targets and budgets, named executive officers can expect the level of their compensation to exceed the competitive median. On the other hand, if our financial performance falls below these expectations, our approach is that named executive officers can expect their compensation to be adversely affected and fall below the competitive median.

 

In 2006, our equity and non-equity incentive award programs used two performance measures based on provisions in our credit arrangements:

 

 

 

We refer to Adjusted EBITDA and free cash flow measures collectively as the “Covanta Performance Measures” in this proxy statement. Neither Adjusted EBITDA nor free cash flow is a term defined under United States generally accepted accounting principles.

 

Annual Incentive Cash Awards

 

 

For 2006, the Compensation Committee adopted “minimum,” “threshold,” “target” and “stretch” goals for each of the Covanta Performance Measures. Based on our budget, which was approved by our full Board in December 2005 for the upcoming 2006 calendar year, these levels were reviewed by the Compensation Committee and its independent compensation consultants in February 2006 and approved by the Compensation Committee for the full year 2006 performance on a prospective basis as part of the annual compensation process. We measure financial performance results with a percentage that is calculated between the stretch goal and the minimum goal. The Compensation Committee also set a “target” bonus level for each of the named executive officers which is a stated percentage of such officer’s base salary. These target levels were 90% for the Chief Executive Officer, 70% for the Chief Financial Officer and ranging from 35% to 65% for the other named executive officers. Based on the level of performance, bonuses were payable in 2006 as follows:

 

 

Between the various levels, we calculate specific incentive cash award percentages as follows:

 

 

Financial results were capped at 200% of target levels for all named executive officers.

 

Under the structure of this series of performance goals, each percentage of performance below the “target” level results in a reduction in the amount of incentive cash awards that is greater than the relative amount of increases in such awards that would result from the same percentage of performance above the “target” level.

 

Awards were determined in February 2007 with reference to our actual Adjusted EBITDA and free cash flow generated in the year ended December 31, 2006 compared to target levels for such measures set in February 2006 by the Compensation Committee for this purpose. As a result of our performance in 2006 against the Covanta Performance Measures, on an aggregate basis for all participants, the average cash award was equal to approximately 132% of target levels.

 

While budgets and operational targets are reset each year and reviewed and approved by the Board, the Compensation Committee seeks to set target levels of Covanta Energy’s financial performance for purposes of the annual incentive cash awards that are achievable if certain conditions are satisfied, including, in particular the following:

 

 

Consequently, our ability to achieve the “target” levels of performance each year is heavily dependent not only upon factors within our control, but also upon other conditions over which we have no control. While there is substantial uncertainty with respect to achieving the performance targets in any year at the time that Covanta Performance Measures are set and communicated, with our strong historical operating performance, the favorable energy, commodity and ferrous recovery market conditions that we have benefited from in recent years and the continued performance by third parties with whom we contract, we have in recent years consistently achieved the Covanta Performance Measures and our named executive officers have experienced a reasonable expectation of receiving, and have received, at least their “target” cash incentive award levels. Even with this strong performance and favorable market conditions, however, the “stretch” levels of performance remain extremely difficult to obtain and maximum cash award levels have not been reached in prior periods. If such expected conditions persist and we are able to avoid a material adverse impact to our business resulting from such unforeseen events, our named executive officers are likely to continue to receive incentive cash awards at or above the “target” level.

 

 

The Individual Performance Measures were the basis upon which the individual portion of a named executive officer’s annual incentive cash award was determined. Within these guidelines, actual award recommendations were based on individual, and where applicable, business area performance. Performance objectives were established for, and communicated to, each named executive officer in February 2006 and were generally tied to each named executive officer’s respective area of responsibility.

 

Long-Term Equity Incentive Awards

 

 

Equity awards are determined by the Compensation Committee in February of each year and issued and priced generally on a specified date in the following month of March following filing of our audited financial statements and Annual Report on Form 10-K. The value of awards granted to each named executive officer reflect our overall performance for the prior year, the responsibilities of such officer and his individual performance. In February 2006, the Compensation Committee authorized equity awards of a fixed dollar amount to our named executive officers in the form of restricted stock, and at the same time established March 17, 2006 as the grant date on which the number of shares awarded would be determined.

 

The number of shares of restricted stock awarded in March 2006 was determined by the fair market value of our common stock on the effective date of the grant. The fair market value was determined using the average of the high and low price of our common stock on the New York Stock Exchange on the trading date immediately preceding the grant date of the award, with the award being effective as of the opening of trading on the effective date. We have used the average of the high and low stock price on the trading date immediately preceding the award date to reflect the fair market value on the date of the grant, consistent with our Equity Award Plan, rather than the closing stock price on the date of the grant, as a means of facilitating the timely and accurate filing of multiple Section 16 reports with the SEC and addressing confusion regarding the time that vesting occurs on future vesting dates of multiple tranche awards.

 

While the pricing of awards has always been done prospectively as of a predetermined future date when the price of our common stock is not known or knowable at the time of the award, in order to avoid confusion with the new SEC disclosure rules, in February 2007, the Compensation Committee adopted the closing price of our common stock on the New York Stock Exchange as of the effective date of the grant as the measure of fair market value to determine the number of shares issuable and to determine the exercise price of any future stock options that may be issued. The Compensation Committee also specified that new awards would be effective as of the close of trading on the grant or vesting date.

 

The Compensation Committee does not have a specific policy or practice to time option grants to the release of material non-public information. However, the Compensation Committee may determine the value of a restricted stock award or number of stock options but not issue or establish the exercise price of such awards while in possession of material non-public information, such as a material pending transaction. Our practice is not to

accelerate or delay the disclosure of material non-public information, whether favorable or unfavorable, but to make such disclosures when appropriate or required by applicable securities laws. In order not to unduly benefit or harm officers and employees, we have postponed and would consider postponing the issuance of awards until after the material non-public information has been publicly disclosed or is no longer considered to be material information. For example, in 2005 the Compensation Committee postponed the issuance of restricted stock awards to officers and employees, including named executive officers, after the February 2, 2005 announcement of our pending acquisition of the American Ref-Fuel business (that would double our size) and our intention to commence a pro rata rights offering to existing stockholders to fund a significant portion of the purchase price. The awards were then issued in July 2005 following the disclosure of the closing of the acquisition and related rights offering and the dissemination of such information into the marketplace. We did not issue stock options in 2005.

 

 

In February 2006, the Compensation Committee adopted the Covanta Performance Measures for the year ended December 31, 2006 and the vesting criteria for all tranches of equity awards vesting under such awards, beginning in March 2007. As noted above, these are the same measures used to determine a portion of the annual cash incentive awards, but vesting of equity awards occurred on an all or nothing basis at 90% of the Adjusted EBITDA and 95% free cash flow “target” performance levels. Accordingly, as of March 17, 2007, 50% of the equity performance awards vested upon satisfaction of specified Adjusted EBITDA targets and 50% of the equity performance awards vested upon satisfaction of specified free cash flow targets, based upon our performance for 2006. The Compensation Committee and senior management believe that the Covanta Performance Measures reflect effective measures of the success of the operation of our business and our long-term financial success, and appropriately exposes management to downside performance risk if these metrics are not achieved.

 

CEO Compensation

 

In determining the compensation of Mr. Orlando, as the Chief Executive Officer, the Compensation Committee considered our operating and financial performance as a whole, as well as Mr. Orlando’s satisfaction of personal management objectives.

 

Mr. Orlando’s compensation package for 2006 consisted of an annual base salary of $500,000 and an incentive cash award of $594,000 awarded in February 2007, reflecting our performance in 2006, which exceeded the Covanta Performance Measures approved by the Compensation Committee. In addition, taking into account Mr. Orlando’s leadership and direction in the successful acquisition of the American Ref-Fuel business, in February 2006, the Compensation Committee authorized a restricted stock grant to Mr. Orlando valued at $750,000, effective as of March 17, 2006, vesting ratably over three years with 34% time-based and 66% performance-based. Based upon our performance in 2006, we exceeded 90% of the target Covanta Performance Measures and all 14,723 shares eligible for vesting on March 17, 2007 vested in accordance with their terms.

 

CFO Compensation

 

As Chief Financial Officer, in 2006 Mr. Pytosh received $116,287 of his $375,000 annual base salary, reflecting his employment for one-third of the year, and an incentive cash award of $119,000 and a special bonus in the amount of $59,425, reflecting an additional two months’ pro rata award made in the discretion of the Compensation Committee, such awards made in February 2007 based upon our financial and operating performance as a whole and his satisfaction of personal management objectives in quickly and effectively assuming responsibilities as Chief Financial Officer and promptly structuring and implementing our refinancing and recapitalization, which was completed in January 2007.

 

Effective upon the commencement of his employment on September 1, 2006, Mr. Pytosh received a grant of options to purchase 50,000 shares of our common stock with an exercise price at the then fair market value of $20.35 per share and a restricted stock award of 20,000 shares. Based upon our performance in 2006, we exceeded 90% of the target Covanta Performance Measures and all 6,666 shares and all 25,000 options eligible for vesting on March 17, 2007 vested in accordance with their respective terms.

 

Executive Stock Ownership

 

Stock Ownership Guidelines:  Our Board believes that it is important for all of our officers, including our officers and officers of our subsidiary Covanta Energy, to acquire and maintain a substantial equity ownership position in our company. Accordingly, we have established stock ownership guidelines for our officers in order to specifically identify and align the interests of our officers with our stockholders and focus attention on managing our business as an equity owner. Since all of our officers are either recently hired or joined us in connection with our acquisition of Covanta Energy and since none of Covanta Energy’s officers had any equity ownership following Covanta Energy’s emergence from bankruptcy proceedings, our guidelines provide that credit is given for unvested restricted stock holdings toward individual targets. Officers are given five years to reach their target ownership levels. The stock ownership guidelines are as follows:

 

 

Insider Derivative and Short-Sale Trading Restrictions:  In order to avoid any appearance of a conflict of interest and to prevent opportunities for trading in violation of applicable securities laws, it is our policy that our employees, including our officers and directors, may not purchase or sell options on our common stock, nor engage in short sales with respect to our common stock. Also, we prohibit trading by employees, officers and directors in puts, calls, straddles, equity swaps or other derivative securities that are linked directly to our common stock. These prohibitions prevent our employees, officers and directors from hedging the economic risk inherent with their ownership of our common stock.

 

Perquisites

 

Consistent with our philosophy of providing the same forms of compensation throughout a broad spectrum of our managerial base, with one exception, we did not provide any perquisites to our named executive officers. One named executive officer whose primary residence is more than 50 miles from our principal executive offices, shared the use of an apartment, at our expense, in close proximity to our office in Fairfield, New Jersey. The incremental cost to us of this benefit to the named executive officer was approximately $17,140 in 2006.

 

Other Matters

 

Benefit Plans

 

We provide company-sponsored insurance and retirement benefit plans to our named executive officers. Benefit programs for named executive officers are the same as those offered to our non-union employee base and are designed to offer financial security.

 

Insurance Plans

 

The core insurance package includes health, dental, disability, AD&D and basic group life insurance coverage.

 

Retirement Plans

 

We provide retirement benefits to named executive officers through a combination of qualified and non-qualified plans, as such terms are used and defined under the Tax Code. We believe these retirement plans are a cost-effective means of providing for long-term retention of our named executive officers. For more information on the retirement plans, see “Retirement Plans” under the “Executive Compensation” heading of this proxy statement.

 

Determining Benefit Levels

 

The Compensation Committee reviews benefit levels periodically to ensure that the plans and programs create the desired incentives in our employees, including named executive officers, which are generally competitive with the applicable marketplace, are cost-effective, and support our human capital needs. Benefit levels are not tied to

company, business area or individual performance. In part due to the fact that we acquired Covanta Energy out of bankruptcy and its officers and employees had no surviving equity interests and the stock ownership guidelines that we have adopted for our officers and officers of our subsidiary, we have not reviewed or tied retirement benefits to gains realized upon the exercise of stock options or the sale of restricted stock.

 

Tax Considerations

 

We generally will be entitled to a tax deduction in connection with awards under the Equity Award Plan in an amount equal to the ordinary income realized by participants and at the time the participants recognize such income. Special rules limit the deductibility of compensation paid to our named executive officers. Under section 162(m) of the Tax Code, the annual compensation paid to named executive officers will be deductible to the extent it does not exceed $1,000,000 or satisfies certain conditions set forth in section 162(m) relating to performance-based plans.

 

COMPENSATION COMMITTEE REPORT

 

The Compensation Committee has reviewed and discussed with management the Compensation Discussion and Analysis contained in this proxy statement. Based upon the review and discussions, the Compensation Committee has recommended to our Board that the Compensation Discussion and Analysis be included in this proxy statement and incorporated into our Annual Report on Form 10-K for the year ended December 31, 2006. This report is provided by the following independent directors, who comprise the Compensation Committee:

 

David M. Barse (chair)

Peter C. B. Bynoe

Robert S. Silberman

Summary Compensation Table For Year Ended December 31, 2006

 

The following table sets forth the compensation for the services in all capacities to us or our subsidiary companies or their predecessors for the year ended December 31, 2006 of (a) our Chief Executive Officer, (b) all individuals who served as our Chief Financial Officer during 2006, and (c) the three most highly compensated executive officers, other than the Chief Executive Officer and Chief Financial Officer, employed by us as of December 31, 2006, whose total annual salary and bonus exceeded $100,000, referred to as the “named executive officers” in this proxy statement:

 

 

 

 

 

 

 

Equity Award Plan

 

Our Equity Award Plan was originally approved by our stockholders in October 2004 and a subsequent amendment was approved by our stockholders on September 19, 2005 to increase the number of authorized shares available for issuance under the Equity Award Plan to 6,000,000. This Equity Award Plan replaced our 1995 Stock and Incentive Plan, which was terminated in October 2004. The 1995 Stock and Incentive Plan now remains in effect only until all awards granted under it have been satisfied or expired.

 

The Equity Award Plan is administered by the Compensation Committee of our Board. Awards under the Equity Award Plan may be granted to employees (including officers) of the Company, its subsidiaries and affiliates. The Equity Award Plan provides for awards to be made in the form of (a) shares of restricted stock, (b) incentive stock options, (c) non-qualified stock options, (d) stock appreciation rights, (e) performance awards, or (f) 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.

 

As of December 31, 2006 there were 3,494,230 common shares available for grant under the Equity Award Plan and no participant may be granted in any calendar year awards with respect to more than 300,000 shares.

 

The following table shows awards that were made under our Equity Award Plan during the year ended December 31, 2006.

 

Grants of Plan-Based Awards — 2006

 

 

 

 

The following table sets forth the outstanding equity awards held by each of our named executive officers as of December 31, 2006:

 

Outstanding Equity Awards at Fiscal Year-End 2006

 

 

 

The following table sets forth the option exercises and stock vesting for each of our named executive officers during the year ended December 31, 2006:

 

Option Exercises and Stock Vested During 2006

 

 

 

 

Retirement Plans

 

Pension Benefits

 

Covanta Energy Pension Plan

 

Messrs. Orlando, Abolt, Klett and Simpson participate in the Covanta Energy Pension Plan, a tax-qualified defined benefit plan of Covanta Energy subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended. The Covanta Energy Pension Plan became effective as of January 1, 1989 and was frozen effective December 31, 2005. This plan, which was maintained by Covanta Energy prior to and during its bankruptcy proceedings, is a qualified defined benefit plan covering all eligible domestic employees of Covanta Energy who had at least one year of service and were at least 21 years of age. Participants with five years of service, as defined by this plan, are entitled to annual pension benefits upon attainment of normal retirement age (65) equal to 1.5% of the participant’s highest average

compensation during the five consecutive calendar years of employment out of the ten consecutive calendar years immediately preceding the participant’s retirement date or termination date, multiplied by his total years of service earned prior to January 1, 2002. For years of service earned after December 31, 2001, the benefit formula has been reduced to coordinate with social security. The reduced benefit is equal to 0.95% of the participant’s average compensation up to the 35-year average of the social security wage base in effect during the 35-year period ending on the last day of the calendar year in which the participant’s employment is terminated, plus 1.5% of the participant’s average compensation in excess of the 35-year average for each year of service earned after December 31, 2001 not to exceed 35 years of service. For each year of service exceeding 35 years earned after December 31, 2001, an additional benefit of 0.95% of final average compensation will be provided. Compensation includes salary and other compensation received during the year and deferred income earned, but does not include imputed income, severance pay, special discretionary cash payments or other non-cash compensation. The relationship of the covered compensation to the annual compensation shown in the Summary Compensation Table would be the Salary, Bonus and Non-equity Incentive Award columns. A plan participant who is at least age 55 and who retires after completion of at least five years of employment receives a benefit equal to the amount the participant would have received if the participant had retired at age 65, reduced by an amount equal to 0.5% of the benefit multiplied by the number of months between the date the participant commences receiving benefits and the date the participant would have commenced to receive benefits if he had not retired prior to age 65.

 

Of our named executive officers, only Messrs. Orlando, Abolt, Klett and Simpson participate in this plan because of their prior employment by Covanta Energy and satisfaction of the full year of service requirement for participation. Effective upon freezing participation in this defined benefit plan on December 31, 2005, all employees, including the named executive officers noted above, who were active participants in the plan on that date were 100% vested and acquired a nonforfeitable right to the plan’s benefits as of such date. Pension benefits are provided to participants under several types of retirement options based upon years of continuous service and age. Retirement benefits are paid to pensioners or beneficiaries in the form of a straight life annuity or various forms of joint and survivor annuities. In calculating benefits to eligible employees, we take into account an individual employee’s average earnings over his or her highest five consecutive years of the last ten years of employment, and his or her total years of service. While the participant’s pension benefits will reflect the highest average five consecutive year compensation level of their last ten years of employment, under the terms of the plan as frozen, we disregard all years of service after December 31, 2005 for purposes of determining the “total years of service” component of the calculated benefit. Compensation includes salary and other compensation received during the year and deferred income earned, but does not include imputed income, severance pay, special discretionary cash payments or other non-cash compensation.

 

Supplemental Benefit Plan

 

We provided to eligible employees, including Messrs. Orlando, Abolt, Klett and Simpson, a non-qualified supplemental defined benefit plan, relative to the Covanta Energy Pension Plan. This plan provided a benefit equivalent to the Covanta Energy Pension Plan benefit for earnings above the IRS earnings cap, which was $220,000 in 2006.

 

This non-qualified plan was in effect since the inception of the Covanta Energy Pension Plan, continued in effect throughout Covanta Energy’s bankruptcy and was approved as part of its reorganization plan by creditors and the bankruptcy court. This plan represents an unfunded and unsecured obligation of Covanta Energy to pay its calculated benefit to retiring employees as and when they would otherwise be eligible to receive a benefit under the now-frozen qualified defined benefit plan. In connection with the freezing of the Covanta Energy Pension Plan, this plan also was frozen effective December 31, 2005 on the same terms as applicable to the related qualified plan.

The following table shows pension benefit information as of December 31, 2006 for the named executive officers under the Covanta Energy Pension Plan and the Covanta Energy Supplemental Benefit Plan. No pension benefits were paid to any of the named executive officers in the year ended December 31, 2006.

 

Pension Benefits 2006

 

 

 

 

Covanta Energy Savings Plan

 

The Covanta Energy Savings Plan is comprised of two components: The first component, which we provide to eligible employees, including named executive officers, is a qualified 401(k) retirement plan. All full-time and part-time employees not subject to a collective bargaining agreement are eligible to participate in this plan upon employment. Named executive officers may elect to contribute a fixed percentage of their earnings into this plan, up to the limit prescribed by the IRS of $220,000 in annual earnings. We provide a matching contribution of 100% of the first 3% of an individual’s earnings, and 50% of the next 2% of such individual’s earnings up to the IRS limit. Our matching contributions are immediately vested.

 

Prior to 2006, we made payments to all eligible employees, including named executive officers, equal to 4% of their annual earnings in excess of the applicable IRS limit. Since these amounts could not be contributed to the plan, they were paid directly to such employees. In 2006 we paid an aggregate of $121,546 with respect to annual earnings in 2005, of which $67,516 was allocable to participating named executive officers. We terminated our payments in excess of the IRS limits beginning with payments applicable to 2006 annual earnings.

 

The second component, which we provide eligible employees, including named executive officers, is a qualified defined contribution retirement plan. This plan became effective as of January 1, 2006 and was designed as an ongoing substitute for the pre-existing defined benefit plan which was frozen as of December 31, 2005. We contribute to this defined contribution plan an amount equal to 3% of an individual’s annual compensation as defined in the plan document up to the social security wage base (which for 2006 was $94,200) and 6% of additional annual compensation up to the IRS limit, which was $220,000 in 2006. Contributions to the defined contribution plan vest in equal amounts over a five year period based on continued employment.

 

Employment Arrangements and Potential Payments Upon Termination or Change in Control

 

Anthony J. Orlando was named our President and Chief Executive Officer effective October 5, 2004. Mr. Orlando continues to serve as the President and Chief Executive Officer of Covanta Energy, a position he

has held since November 2003. We and Covanta Energy entered into a five-year employment agreement with Mr. Orlando that commenced on October 5, 2004. Pursuant to his employment agreement, Mr. Orlando was entitled to an initial base salary of $400,000 per year and an annual target bonus of 80% of his base salary, depending upon Covanta Energy’s achievement of certain financial targets and other criteria approved by our Board. Mr. Orlando also received a grant of 49,656 shares of restricted stock, valued at $360,000 at the date of grant, and options to purchase 200,000 shares of our common stock at a price of $7.43 per share pursuant to the Employees Plan. The restricted stock vests in equal installments over three years, with 50% of such shares vesting in three equal annual installments that commenced on February 28, 2005, as long as Mr. Orlando is employed by us, and 50% vesting in accordance with Covanta Energy’s achievement of certain operating cash flow or other performance-based metrics of Covanta Energy as approved by the Board, which commenced on February 28, 2005. The options vest over three years in equal installments, that commenced on February 28, 2006, and were subsequently accelerated to begin vesting on March 21, 2005 with the remaining tranches continuing to vest on February 28, 2007 and February 28, 2008.

 

Mr. Orlando’s employment is subject to non-compete, non-solicitation and confidentiality provisions as set forth in the employment agreement.

 

The following table shows the potential payments to Mr. Orlando upon his termination of employment or a change in control of the Company under his employment agreement or other plans or agreements of the Company assuming a termination or change of control occurred on December 31, 2006. The table (1) excludes vested account balances under the Covanta Energy Savings Plan and (2) the benefits set forth in the “Pension Benefits Table.”

 

 

 

 

Mark A. Pytosh has served as our Senior Vice President and Chief Financial Officer since September 1, 2006. Pursuant to the Employment Agreement dated as of September 1, 2006, with us and Covanta Energy, Mr. Pytosh is entitled to an initial base salary of $375,000 per year and an annual target bonus of at least 60% of his base salary, depending upon Covanta Energy’s achievement of certain financial targets and other criteria approved by our Board or Compensation Committee, pro rated for the first year for the number of months employed. Mr. Pytosh also received a grant of 20,000 shares of restricted stock, and options to purchase 50,000 shares of our common stock, with an exercise price of $20.35. The restricted stock vests in three equal installments, with 34% of such shares vesting in three equal annual installments that commence on March 17, 2007, as long as Mr. Pytosh is employed by us, and 66% of such shares vesting in three equal annual installments, commencing on March 17, 2007, in accordance with Covanta Energy’s achievement of certain operating cash flow or other performance-based metrics of Covanta Energy as approved by the Board. The options vest in two equal installments, commencing on March 17, 2007.

 

Mr. Pytosh’s employment is subject to non-competition, non-solicitation and confidentiality provisions as set forth in the Employment Agreement.

The following table shows the potential payments to Mr. Pytosh upon his termination of employment or a change in control of the Company under his employment agreement or other plans or agreements of the Company assuming a termination or change of control occurred on December 31, 2006: