CVA-9.30.13-10Q
Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
Commission file number 1-06732
COVANTA HOLDING CORPORATION
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
95-6021257
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification Number)
 
 
 
445 South Street, Morristown, NJ
 
07960
(Address of Principal Executive Office)
 
(Zip Code)
(862) 345-5000
(Registrant’s telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ  No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  þ  No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  þ
Accelerated filer ¨
Non-accelerated filer ¨
Smaller reporting company  ¨
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨  No  þ
Applicable Only to Corporate Issuers:
Indicate the number of shares of the registrant’s Common Stock outstanding as of the latest practicable date.
 
Class
  
Outstanding at October 17, 2013  
Common Stock, $0.10 par value
  
130,503,593





Table of Contents


COVANTA HOLDING CORPORATION AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
For the Quarter Ended September 30, 2013
 
 
PART I. FINANCIAL INFORMATION
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
OTHER
 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q may constitute “forward-looking” statements as defined in Section 27A of the Securities Act of 1933 (the “Securities Act”), Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), the Private Securities Litigation Reform Act of 1995 (the “PSLRA”) or in releases made by the Securities and Exchange Commission (“SEC”), all as may be amended from time to time. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of Covanta Holding Corporation and its subsidiaries (“Covanta”) or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Statements that are not historical fact are forward-looking statements. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as the words “plan,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “may,” “will,” “would,” “could,” “should,” “seeks,” or “scheduled to,” or other similar words, or the negative of these terms or other variations of these terms or comparable language, or by discussion of strategy or intentions. These cautionary statements are being made pursuant to the Securities Act, the Exchange Act and the PSLRA with the intention of obtaining the benefits of the “safe harbor” provisions of such laws. Covanta cautions investors that any forward-looking statements made by us are not guarantees or indicative of future performance. Important factors, risks and uncertainties that could cause actual results to differ materially from those forward-looking statements include, but are not limited to:
seasonal or long-term fluctuations in the prices of energy, waste disposal, scrap metal and commodities, and our ability to renew or replace expiring contracts at comparable prices;
adoption of new laws and regulations in the United States and abroad, including energy laws, environmental laws, labor laws and healthcare laws;
our ability to avoid adverse publicity relating to our business expansion efforts;
advances in technology;
difficulties in the operation of our facilities, including fuel supply and energy delivery interruptions, failure to obtain regulatory approvals, equipment failures, labor disputes and work stoppages, and weather interference and catastrophic events;
failure to maintain historical performance levels at our facilities and our ability to retain the rights to operate facilities we do not own;
difficulties in the financing, development and construction of new projects and expansions, including increased construction costs and delays;
our ability to realize the benefits of long-term business development and bear the costs of business development over time;
our ability to utilize net operating loss carryforwards;
limits of insurance coverage;
our ability to avoid defaults under our long-term contracts;
performance of third parties under our contracts and such third parties' observance of laws and regulations;
concentration of suppliers and customers;
geographic concentration of facilities;
increased competitiveness in the energy and waste industries;
changes in foreign currency exchange rates;
limitations imposed by our existing indebtedness and our ability to perform our financial obligations and guarantees and to refinance our existing indebtedness;
exposure to counterparty credit risk and instability of financial institutions in connection with financing transactions;
the scalability of our business;
restrictions in our certificate of incorporation and debt documents regarding strategic alternatives;
failures of disclosure controls and procedures and internal controls over financial reporting;
our ability to attract and retain talented people;
general economic conditions in the United States and abroad, including the availability of credit and debt financing; and
other risks and uncertainties affecting our businesses described in Item 1A. Risk Factors of Covanta's Annual Report on Form 10-K for the year ended December 31, 2012 and in other filings by Covanta with the SEC.
Although we believe that our plans, intentions and expectations reflected in or suggested by such forward-looking statements are reasonable, actual results could differ materially from a projection or assumption in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties. The forward-looking statements contained in this Quarterly Report on Form 10-Q are made only as of the date hereof and we do not have, or undertake, any obligation to update or revise any forward-looking statements whether as a result of new information, subsequent events or otherwise, unless otherwise required by law.
 

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PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS
COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
Three Months Ended
September 30,

Nine Months Ended
September 30,
 
2013

2012

2013

2012
 
(Unaudited)
(In millions, except per share amounts)
OPERATING REVENUES:
 
 
 
 
 
 
 
Waste and service revenues
$
257

 
$
247

 
$
747

 
$
747

Recycled metals revenues
19

 
17

 
52

 
55

Electricity and steam sales
117

 
115

 
322

 
297

Other operating revenues
34

 
33

 
92

 
115

Total operating revenues
427

 
412

 
1,213

 
1,214

OPERATING EXPENSES:
 
 
 
 
 
 
 
Plant operating expenses
232

 
225

 
765

 
735

Other operating expenses
26

 
31

 
67

 
100

General and administrative expenses
22

 
24

 
72

 
74

Depreciation and amortization expense
52

 
46

 
157

 
145

Net interest expense on project debt
3

 
7

 
10

 
22

Net write-offs (gains)
12

 
(2
)
 
63

 
(2
)
Total operating expenses
347

 
331

 
1,134

 
1,074

Operating income
80

 
81

 
79

 
140

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(30
)
 
(25
)
 
(88
)
 
(67
)
Non-cash convertible debt related expense
(7
)
 
(6
)
 
(21
)
 
(19
)
Loss on extinguishment of debt

 

 
(1
)
 
(2
)
Other income, net

 

 

 
3

Total other expenses
(37
)
 
(31
)
 
(110
)
 
(85
)
Income (loss) from continuing operations before income tax expense and equity in net income from unconsolidated investments
43

 
50

 
(31
)
 
55

Income tax expense
(19
)
 
(27
)
 
(9
)
 
(30
)
Equity in net income from unconsolidated investments
4

 
4

 
4

 
10

Income (loss) from continuing operations
28

 
27

 
(36
)
 
35

Loss from discontinued operations, net of income tax expense of $0, $0, $0 and $1, respectively

 

 

 
(2
)
NET INCOME (LOSS)
28

 
27

 
(36
)
 
33

Less: Net (income) loss from continuing operations attributable to noncontrolling interests in subsidiaries

 
(1
)
 
1

 
(1
)
NET INCOME (LOSS) ATTRIBUTABLE TO COVANTA HOLDING CORPORATION
$
28

 
$
26

 
$
(35
)
 
$
32

 
 
 
 
 
 
 
 
Amounts Attributable to Covanta Holding Corporation stockholders:
 
 
 
 
 
 
 
Continuing operations
$
28

 
$
26

 
$
(35
)
 
$
34

Discontinued operations

 

 

 
(2
)
Net Income (Loss) Attributable to Covanta Holding Corporation
$
28

 
$
26

 
$
(35
)
 
$
32

 
 
 
 
 
 
 
 


The accompanying notes are an integral part of the condensed consolidated financial statements.

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COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
(Unaudited)
(In millions, except per share amounts)
Earnings (Loss) Per Share Attributable to Covanta Holding Corporation stockholders:
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
Continuing operations
$
0.22

 
$
0.20

 
$
(0.27
)
 
$
0.25

Discontinued operations

 

 

 
(0.01
)
Covanta Holding Corporation
$
0.22

 
$
0.20

 
$
(0.27
)
 
$
0.24

Weighted Average Shares
129

 
131

 
129

 
133

 
 
 
 
 
 
 
 
Diluted
 
 
 
 
 
 
 
Continuing operations
$
0.22

 
$
0.19

 
$
(0.27
)
 
$
0.25

Discontinued operations

 

 

 
(0.01
)
Covanta Holding Corporation
$
0.22

 
$
0.19

 
$
(0.27
)
 
$
0.24

Weighted Average Shares
130

 
132

 
129

 
134

 
 
 
 
 
 
 
 
Cash Dividend Declared Per Share:
$
0.165

 
$
0.15

 
$
0.495

 
$
0.45



The accompanying notes are an integral part of the condensed consolidated financial statements.

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COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
 
(Unaudited)
(In millions)
Net income (loss)
$
28

 
$
27

 
$
(36
)
 
$
33

Foreign currency translation
2

 
2

 
(3
)
 
(2
)
Adjustment for defined benefit pension plan settlement, net of tax benefit of $0, $0, $2 and $0, respectively

 
1

 
(4
)
 
1

Pension and postretirement plan unrecognized benefits, net of tax expense of $0, $0, $1 and $0, respectively

 

 
3

 

Net unrealized gain (loss) on derivative instruments, net of tax (benefit) expense of $0, $1, $0 and $1, respectively
1

 
(3
)
 
1

 
(2
)
Net unrealized (loss) gain on available for sale securities, net of tax expense of $0, $0, $0 and $0, respectively
(1
)
 
1

 
(1
)
 
1

Other comprehensive income (loss) attributable to Covanta Holding Corporation
2

 
1

 
(4
)
 
(2
)
Comprehensive income (loss)
30

 
28

 
(40
)
 
31

Less:
 
 
 
 
 
 
 
Net (income) loss attributable to noncontrolling interests in subsidiaries

 
(1
)
 
1

 
(1
)
Comprehensive (income) loss attributable to noncontrolling interests in subsidiaries

 
(1
)
 
1

 
(1
)
Comprehensive income (loss) attributable to Covanta Holding Corporation
$
30

 
$
27

 
$
(39
)
 
$
30



The accompanying notes are an integral part of the condensed consolidated financial statements.

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COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 
As of
 
September 30,
2013
 
December 31,
2012
 
(Unaudited)
 
 
 
(In millions, except per
share amounts)
ASSETS
 
 
 
Current:
 
 
 
Cash and cash equivalents
$
252

 
$
246

Restricted funds held in trust
54

 
53

Receivables (less allowances of $8 and $6, respectively)
268

 
256

Unbilled service receivables
16

 
18

Deferred income taxes
39

 
18

Note Hedge
175

 

Prepaid expenses and other current assets
106

 
97

Total Current Assets
910

 
688

Property, plant and equipment, net
2,609

 
2,561

Investments in fixed maturities at market (cost: $33 and $36, respectively)
33

 
36

Restricted funds held in trust
140

 
161

Unbilled service receivables
14

 
17

Waste, service and energy contract intangibles, net
373

 
399

Other intangible assets, net
21

 
23

Goodwill
249

 
249

Investments in investees and joint ventures
47

 
49

Other assets
184

 
343

Total Assets
$
4,580

 
$
4,526

LIABILITIES AND EQUITY
 
 
 
Current:
 
 
 
Current portion of long-term debt
$
618

 
$
3

Current portion of project debt
59

 
80

Accounts payable
34

 
41

Accrued expenses and other current liabilities
301

 
236

Total Current Liabilities
1,012

 
360

Long-term debt
1,574

 
2,012

Project debt
206

 
237

Deferred income taxes
718

 
691

Waste, service and other contract intangibles, net
32

 
35

Other liabilities
131

 
136

Total Liabilities
3,673

 
3,471

Commitments and Contingencies (Note 13)

 

Equity:
 
 
 
Covanta Holding Corporation stockholders equity:
 
 
 
Preferred stock ($0.10 par value; authorized 10 shares; none issued and outstanding)

 

Common stock ($0.10 par value; authorized 250 shares; issued 136 and 159 shares, respectively; outstanding 131 and 132 shares, respectively)
14

 
16

Additional paid-in capital
788

 
806

Accumulated other comprehensive income
3

 
7

Accumulated earnings
99

 
222

Treasury stock, at par
(1
)
 
(3
)
Total Covanta Holding Corporation stockholders equity
903

 
1,048

Noncontrolling interests in subsidiaries
4

 
7

Total Equity
907

 
1,055

Total Liabilities and Equity
$
4,580

 
$
4,526


The accompanying notes are an integral part of the condensed consolidated financial statements.

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COVANTA HOLDING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Nine Months Ended
September 30,
 
2013
 
2012
 
(Unaudited, in millions)
OPERATING ACTIVITIES:
 
 
 
Net (loss) income
$
(36
)
 
$
33

Less: Loss from discontinued operations, net of tax expense

 
(2
)
(Loss) income from continuing operations
(36
)
 
35

Adjustments to reconcile net (loss) income from continuing operations to net cash provided by operating activities from continuing operations:
 
 
 
Depreciation and amortization expense
157

 
145

Amortization of long-term debt deferred financing costs
6

 
5

Amortization of debt premium and discount
(1
)
 
(3
)
Net write-offs (gains)
63

 
(2
)
Defined benefit pension plan settlement gain
(6
)
 

Loss on extinguishment of debt
1

 
2

Non-cash convertible debt related expense
21

 
19

Stock-based compensation expense
12

 
13

Equity in net income from unconsolidated investments
(4
)
 
(10
)
Dividends from unconsolidated investments
7

 
7

Deferred income taxes
6

 
23

Other, net
(11
)
 
(8
)
Change in restricted funds held in trust
17

 
(10
)
Change in working capital
35

 
52

Total adjustments for continuing operations
303

 
233

Net cash provided by operating activities from continuing operations
267

 
268

Net cash provided by operating activities from discontinued operations

 

Net cash provided by operating activities
267

 
268

INVESTING ACTIVITIES:
 
 
 
Proceeds from the sale of investment securities
6

 
2

Purchase of investment securities
(15
)
 
(10
)
Purchase of property, plant and equipment
(140
)
 
(94
)
Acquisition of business, net of cash acquired
(49
)
 

Acquisition of noncontrolling interest in subsidiary
(14
)
 

Acquisition of land use rights

 
(1
)
Property insurance proceeds
4

 
7

Other, net
(2
)
 
(2
)
Net cash used in investing activities from continuing operations
(210
)
 
(98
)
Net cash provided by investing activities from discontinued operations

 
11

Net cash used in investing activities
(210
)
 
(87
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from borrowings on long-term debt
22

 
699

Payment of deferred financing costs
(1
)
 
(26
)
Principal payments on long-term debt
(2
)
 
(621
)
Principal payments on project debt
(53
)
 
(46
)
Convertible debenture repurchases

 
(25
)
Payments of borrowings on revolving credit facility
(396
)
 
(63
)
Proceeds from borrowings on revolving credit facility
462

 
83

Change in restricted funds held in trust
3

 
(11
)
Cash dividends paid to stockholders
(45
)
 
(51
)
Common stock repurchased
(34
)
 
(83
)
Financing of insurance premiums, net

 
(10
)
Distributions to partners of noncontrolling interests in subsidiaries

 
(1
)
Other, net
(8
)
 
3

Net cash used in financing activities from continuing operations
(52
)
 
(152
)
Net cash used in financing activities from discontinued operations

 
(2
)
Net cash used in financing activities
(52
)
 
(154
)
Effect of exchange rate changes on cash and cash equivalents
1

 
1

Net increase in cash and cash equivalents
6

 
28

Cash and cash equivalents at beginning of period
246

 
234

Cash and cash equivalents at end of period
252

 
262

Less: Cash and cash equivalents of discontinued operations at end of period

 

Cash and cash equivalents of continuing operations at end of period
$
252

 
$
262


The accompanying notes are an integral part of the condensed consolidated financial statements.

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COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
The terms “we,” “our,” “ours,” “us” and “Company” refer to Covanta Holding Corporation and its subsidiaries; the term “Covanta Energy” refers to our subsidiary Covanta Energy Corporation and its subsidiaries.
Organization
Covanta is one of the world’s largest owners and operators of infrastructure for the conversion of waste to energy (known as “energy-from-waste” or “EfW”), as well as other waste disposal and renewable energy production businesses. Energy-from-waste serves two key markets as both a sustainable waste management solution that is environmentally superior to landfilling and as a source of clean energy that reduces overall greenhouse gas emissions and is considered renewable under the laws of many states and under federal law. Our facilities are critical infrastructure assets that allow our customers, which are principally municipal entities, to provide an essential public service.
Our EfW facilities earn revenue from both the disposal of waste and the generation of electricity, generally under long-term contracts, as well as from the sale of metal recovered during the energy-from-waste process. We process approximately 20 million tons of solid waste annually. We operate and/or have ownership positions in 45 energy-from-waste facilities, which are primarily located in North America, and 14 additional energy generation facilities, including other renewable energy production facilities in North America (wood biomass and hydroelectric). In total, these assets produce approximately 10 million megawatt hours (“MWh”) of baseload electricity annually. We also operate a waste management infrastructure that is complementary to our core EfW business.
We own and hold equity interests in energy-from-waste facilities in China and Italy. We also have investments in subsidiaries engaged in insurance operations in California, primarily in property and casualty insurance, whose remaining business was transitioned into run-off in 2012, and collectively account for less than 1% of our consolidated revenue.
We have one reportable segment which is Americas and is comprised of waste and energy services operations primarily in the United States and Canada. For additional information, see Note 5. Financial Information by Business Segments.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information and footnotes required by GAAP for complete condensed consolidated financial statements. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for fair presentation have been included in our condensed consolidated financial statements. All intra-entity accounts and transactions have been eliminated. Operating results for the interim period are not necessarily indicative of the results that may be expected for the fiscal year ended December 31, 2013. This Form 10-Q should be read in conjunction with the Audited Consolidated Financial Statements and accompanying Notes in our Annual Report on Form 10-K for the year ended December 31, 2012 (“Form 10-K”).
We use the equity method to account for our investments for which we have the ability to exercise significant influence over the operating and financial policies of the investee. Consolidated net income includes our proportionate share of the net income or loss of these companies. Such amounts are classified as “equity in net income from unconsolidated investments” in our condensed consolidated financial statements. Investments in companies in which we do not have the ability to exercise significant influence are carried at the lower of cost or estimated realizable value. We monitor investments for other-than-temporary declines in value and make reductions when appropriate.

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In March 2013, the Financial Accounting Standards Board ("FASB") issued updates concerning parent's accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries of groups of assets within a foreign entity or of an investment in a foreign entity. This update was issued to resolve diversity in practice and requires the release of cumulative translation adjustment into net income when a parent sells a part or all of its investment within a foreign entity, no longer holds a controlling interest in an investment in a foreign entity or obtains control of an investment in a foreign entity that was previously recognized as an equity method investment (step acquisition). We are required to adopt this standard prospectively for the first quarter of 2014; however, we have early adopted this standard, as permitted, during the third quarter of 2013. This update is consistent with how we currently account for the cumulative translation adjustment upon derecognition of certain subsidiaries of groups of assets within a foreign entity or of an investment in a foreign entity, therefore adoption of this update resulted in no impact on our condensed consolidated financial statements.



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COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)


In July 2013, the FASB issued an update concerning the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This update provides for the presentation of all or a portion of an unrecognized tax benefit as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward unless such balances are not available at the reporting date at which point the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. We are required to adopt this standard prospectively to all unrecognized tax benefits that exist for the first quarter of 2014; however, we have early adopted this standard, as permitted, during the third quarter of 2013. This update is consistent with how we currently present unrecognized tax benefits, therefore adoption of this update resulted in no impact on our condensed consolidated financial statements.
In July 2013, the FASB issued an update concerning the inclusion of the Fed Funds Effective Swap Rate (OIS) as a permitted U.S. benchmark interest rate for hedge accounting purposes under ASC 815 Derivatives and Hedging. This update is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. We do not currently participate in hedging of interest rates and as such there is no immediate impact on our condensed consolidated financial statements.

NOTE 3. ACQUISITIONS, BUSINESS DEVELOPMENT AND DISPOSITIONS
Acquisitions
Camden Energy-from-Waste Facility
In August 2013, we acquired the Camden Resource Recovery Facility located in Camden, New Jersey for cash consideration of $49 million. The 1,050 ton-per-day EfW facility provides sustainable waste management services to Camden County and surrounding communities while generating approximately 21 megawatts of renewable energy, which is sold at prevailing market rates. The majority of the purchase price allocation included $53 million of plant, property & equipment and a $5 million intangible liability related to a long-term above market contract. The acquired intangible liability will be amortized as a contra-expense to the contract expiration date of December 2019. The preliminary purchase price allocation, which includes no goodwill, is based on estimates and assumptions, any changes to which could affect the reported amounts of assets and liabilities resulting from this acquisition.
Business Development, Asset Management and Organic Growth
Huntington Energy-from-Waste Facility
In January 2013, we purchased the remaining equity interests in the Huntington EfW facility from two minority partners for approximately $14 million, increasing our ownership interest to 100%.
MacArthur Energy-from-Waste Facility
In May 2013, we extended the service agreement for the MacArthur EfW facility from 2015 to 2030 on substantially the same terms as the existing agreement. The Town of Islip will supply virtually all of the facility's waste capacity.
Southeast Connecticut Energy-from-Waste Facility
In May 2013, our service fee contract with the Southeastern Connecticut Regional Resource Recovery Authority (“SCRRRA”) was extended from 2015 to 2017 pursuant to an option held by SCRRRA. The terms of the contract remain unchanged under the extension. The project debt on the facility will be repaid by February 2015, at which time SCRRA will have paid debt service as a component of the service fee during the term of the original contract. SCRRRA will effectively retain the benefit of the debt repayment during the two year extension period.
New York City Waste Transport and Disposal Contract
In August 2013, New York City's Department of Sanitation awarded Covanta a contract to handle waste transport and disposal from two marine transfer stations located in Queens and Manhattan. Covanta plans to utilize capacity at existing facilities for the disposal of approximately 800,000 tons per year of New York City's municipal solid waste. Service for the Queens marine transfer station is expected to begin in early 2015, with service for the Manhattan marine transfer station expected to follow in 2016 when construction work is expected to be completed by New York City. The contract is for 20 years, effective from the date operations commence at the Queens marine transfer station, with options for New York City to extend the term for two additional five-year periods, and calls for waste to be transported using a multi-modal approach. We plan to purchase equipment, including barges, railcars, containers, and intermodal equipment. We expect our total investment to purchase this equipment will be approximately $110 million, plus enhancements of approximately $30 million to existing facilities that will be part of the network of assets supporting this contract. These investments will be made over several years beginning in 2013.

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Marion Energy-from-Waste Facility
In September 2013, we extended the service agreement for the Marion EfW facility effective at the end of the current agreement which ends in September 2014, with the new agreement term ending in 2017 on substantially the same terms as the existing agreement. Marion County will supply virtually all of the facility's waste capacity. The agreement also provides Marion County with the option to extend the agreement to 2019.
Organic Growth Investments
During the nine months ended September 30, 2013, we invested approximately $76 million in various organic growth initiatives, including increasing metals recovery, enhancing the capabilities of our existing assets, deploying new or improved technologies targeted at increasing revenue and/or reducing expenses, and expanding our specialty waste and other waste management services. 

Dispositions
During 2011, we sold the majority of our interests in certain fossil fuel independent power production facilities in the Philippines and India, and in April 2012, we completed the sale of the remaining independent power production assets in Bangladesh. For additional information, refer to Note 4. Dispositions of the Notes to Consolidated Financial Statements in our Form 10-K. The results of operations of these businesses are included in the condensed consolidated statements of income as “Income from discontinued operations, net of tax.” The cash flows of these businesses are also presented separately in our condensed consolidated statements of cash flows. The following table summarizes the operating results of the discontinued operations for the periods indicated (in millions):
 
Three Months Ended
September 30, 2012
 
Nine Months Ended
September 30, 2012
Revenues
$

 
$

Operating expenses
$

 
$
(3
)
Loss before income tax expense and equity in net income from unconsolidated investments
$

 
$
(3
)
Equity in net income from unconsolidated investments
$

 
$
2

Loss from discontinued operations, net of income tax expense of $0 and $1, respectively
$

 
$
(2
)


NOTE 4. EQUITY AND EARNINGS PER SHARE (“EPS”)
Equity
During the nine months ended September 30, 2013, we granted 634,107 restricted stock awards and 219,484 restricted stock units. For information related to stock-based award plans, see Note 10. Stock-Based Compensation.
During the nine months ended September 30, 2013, we repurchased 479,204 shares of our common stock in connection with tax withholdings for vested stock awards.
Dividends declared to stockholders are as follows (in millions, except per share amounts):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Regular cash dividend
 
 
 
 
 
 
 
Declared
$
21

 
$
20

 
$
65

 
$
61

Per Share
$
0.165

 
$
0.15

 
$
0.495

 
$
0.45


We increased the current share repurchase authorization to a total of $150 million during the nine months ended September 30, 2013. Under the program, common stock repurchases may be made in the open market, in privately negotiated transactions from time to time, or by other available methods, at management’s discretion in accordance with applicable federal securities laws. The timing and amounts of any repurchases will depend on many factors, including our capital structure, the market price of our common stock and overall market conditions. As of September 30, 2013, the amount remaining under our currently authorized share repurchase program was $116 million.

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Common stock repurchased is as follows (in millions, except per share amounts):
 
Amount
 
Shares
Repurchased
 
Weighted
Average Cost
per Share
Three Months Ended March 31, 2013
$
24

 
1.2

 
$
19.27

Three Months Ended June 30, 2013
10

 
0.5

 
$
19.62

Three Months Ended September 30, 2013

 

 
$

Nine Months Ended September 30, 2013
$
34

 
1.7

 
$
19.37

Noncontrolling interests in subsidiaries
Noncontrolling interests in subsidiaries is as follows (in millions):
 
 
As of September 30,
 
 
2013
 
2012
Noncontrolling interests in subsidiaries, balance as of beginning of period
 
$
7

 
$
5

Acquisition of noncontrolling interests in subsidiaries
 
(2
)
 

Net (loss) income
 
(1
)
 
1

Noncontrolling interests in subsidiaries, balance as of end of period
 
$
4

 
$
6

Earnings Per Share
Per share data is based on the weighted average number of outstanding shares of our common stock, par value $0.10 per share, during the relevant period. Basic earnings per share are calculated using only the weighted average number of outstanding shares of common stock. Diluted earnings per share computations, as calculated under the treasury stock method, include the weighted average number of shares of additional outstanding common stock issuable for stock options, restricted stock awards, restricted stock units and warrants whether or not currently exercisable. Diluted earnings per share for all the periods presented does not include securities if their effect was anti-dilutive (in millions, except per share amounts).
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Net income (loss) from continuing operations
$
28

 
$
26

 
$
(35
)
 
$
34

Net loss from discontinued operations

 

 

 
(2
)
Net income (loss) attributable to Covanta Holding Corporation
$
28

 
$
26

 
$
(35
)
 
$
32

 
 
 
 
 
 
 
 
Basic earnings (loss) per share:
 
 
 
 
 
 
 
Weighted average basic common shares outstanding
129

 
131

 
129

 
133

Continuing operations
$
0.22

 
$
0.20

 
$
(0.27
)
 
$
0.25

Discontinued operations

 

 

 
(0.01
)
Basic earnings (loss) per share
$
0.22

 
$
0.20

 
$
(0.27
)
 
$
0.24

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
Weighted average basic common shares outstanding
129

 
131

 
129

 
133

Dilutive effect of stock options

 

 

 

Dilutive effect of restricted stock
1

 
1

 

 
1

Dilutive effect of convertible securities

 

 

 

Dilutive effect of warrants

 

 

 

Weighted average diluted common shares outstanding
130

 
132

 
129

 
134

Continuing operations
$
0.22

 
$
0.19

 
$
(0.27
)
 
$
0.25

Discontinued operations

 

 

 
(0.01
)
Diluted earnings (loss) per share
$
0.22

 
$
0.19

 
$
(0.27
)
 
$
0.24

 
 
 
 
 
 
 
 

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Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Securities excluded from the weighted average dilutive common shares outstanding because their inclusion would have been anti-dilutive:
 
 
 
 
 
 
 
Stock options
1

 
2

 
1

 
2

Restricted stock

 

 
1

 

Restricted stock units

 

 

 

Warrants
29

 
28

 
29

 
28


In 2009, we entered into privately negotiated warrant transactions in connection with the issuance of 3.25% Cash Convertible Senior Notes due 2014. These warrants could have a dilutive effect to the extent that the price of our common stock exceeds the applicable strike price of $21.67. As of September 30, 2013, the warrants did not have a dilutive effect on earnings per share because the average market price during the periods presented was below the strike price.

NOTE 5. FINANCIAL INFORMATION BY BUSINESS SEGMENTS
We have one reportable segment which is Americas and is comprised of waste and energy services operations primarily in the United States and Canada. The results of our reportable segment are as follows (in millions):
 
Americas    
 
All Other  (1)
 
Total      
Three Months Ended September 30, 2013
 
 
 
 
 
Operating revenues
$
417

 
$
10

 
$
427

Depreciation and amortization expense
51

 
1

 
52

Net write-offs (gains)
12

 

 
12

Operating income (loss)
83

 
(3
)
 
80

Three Months Ended September 30, 2012
 
 
 
 
 
Operating revenues
$
402

 
$
10

 
$
412

Depreciation and amortization expense
46

 

 
46

Net write-offs (gains)
(13
)
 
11

 
(2
)
Operating income (loss)
105

 
(24
)
 
81

 
Americas    
 
All Other  (1)
 
Total      
Nine Months Ended September 30, 2013
 
 
 
 
 
Operating revenues
$
1,182

 
$
31

 
$
1,213

Depreciation and amortization expense
155

 
2

 
157

Net write-offs (gains)
16

 
47

 
63

Operating income (loss)
140

 
(61
)
 
79

Nine Months Ended September 30, 2012
 
 
 
 
 
Operating revenues
$
1,183

 
$
31

 
$
1,214

Depreciation and amortization expense
143

 
2

 
145

Net write-offs (gains)
(13
)
 
11

 
(2
)
Operating income (loss)
176

 
(36
)
 
140

(1)
All other is comprised of the financial results of our insurance subsidiaries’ operations and all assets outside of North America.



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NOTE 6. CONSOLIDATED DEBT
Consolidated debt is as follows (in millions):
 
As of
 
September 30,
2013

December 31,
2012
LONG-TERM DEBT:
 
 
 
Revolving credit facility
$
126

 
$
60

 
 
 
 
Term loan due 2019
295

 
298

Debt discount related to Term loan
(1
)
 
(1
)
Term loan, net
294

 
297

Credit Facilities Sub-total
$
420

 
$
357

7.25% Senior Notes due 2020
$
400

 
$
400

6.375% Senior Notes due 2022
400

 
400

 
 
 
 
3.25% Cash Convertible Senior Notes due 2014
460

 
460

Debt discount related to 3.25% Cash Convertible Senior Notes
(21
)
 
(42
)
Cash conversion option derivative at fair value
176

 
105

3.25% Cash Convertible Senior Notes, net
615

 
523

Notes Sub-total
$
1,415

 
$
1,323

4.00% - 5.25% Tax-Exempt Bonds due from 2024 to 2042
$
335

 
$
335

Variable Rate Tax-Exempt Bonds due 2043
22

 

Tax-Exempt Bonds Sub-total
$
357

 
$
335

Total long-term debt
$
2,192

 
$
2,015

Less: current portion (includes $21 and $0 of unamortized discount, respectively, and $176 and $0 of cash conversion option derivative at fair value, respectively)
(618
)
 
(3
)
Noncurrent long-term debt
$
1,574

 
$
2,012

PROJECT DEBT:
 
 
 
Americas project debt
 
 
 
4.00% - 7.00% Americas project debt related to Service Fee structures due 2013 through 2022
$
195

 
$
223

5.248% - 8.375% Americas project debt related to Tip Fee structures due 2013 through 2020
45

 
68

Unamortized debt premium, net
2

 
3

Total Americas project debt
242

 
294

Other project debt
23

 
23

Total project debt
265

 
317

Less: Current project debt (includes $1 and $1 of unamortized premium, respectively)
(59
)
 
(80
)
Noncurrent project debt
$
206

 
$
237

TOTAL CONSOLIDATED DEBT
$
2,457

 
$
2,332

Less: Current debt
(677
)
 
(83
)
TOTAL NONCURRENT CONSOLIDATED DEBT
$
1,780

 
$
2,249


The 3.25% Cash Convertible Senior Notes mature on June 1, 2014, and therefore the outstanding balance for the 3.25% Cash Convertible Senior Notes is included in the current portion of long-term debt on the condensed consolidated balance sheet as of September 30, 2013.
Credit Facilities
Our subsidiary, Covanta Energy, has credit facilities, which are comprised of a $900 million revolving credit facility that expires in 2017 (the “Revolving Credit Facility”) and a $300 million term loan due 2019 (the “Term Loan”) (collectively referred to as the "Credit Facilities").
The Revolving Credit Facility is available for the issuance of letters of credit up to the full amount of the facility, provides for a $50 million sub-limit for the issuance of swing line loans (a loan that can be requested in US Dollars on a same day basis for a short drawing period); and is available in US Dollars, Euros, Pounds Sterling, Canadian Dollars and certain other currencies to

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be agreed upon, in each case for either borrowings or for the issuance of letters of credit. The proceeds under the Revolving Credit Facility are available for working capital and general corporate purposes of Covanta Energy and its subsidiaries.
We have the option to establish additional term loan commitments and/or increase the size of the Revolving Credit Facility (collectively, the “Incremental Facilities”), subject to the satisfaction of certain conditions and obtaining sufficient lender commitments, in an amount up to the greater of $500 million and the amount that, after giving effect to the incurrence of such Incremental Facilities, would not result in a leverage ratio, as defined in the credit agreement governing our Credit Facilities (the “Credit Agreement”), exceeding 2.75:1.00.
 
Availability under Revolving Credit Facility
As of September 30, 2013, we had availability under the Revolving Credit Facility as follows (in millions):
 
Total
Available
Under  Credit Facility
 
Maturing      
 
Outstanding Borrowings as of
September 30, 2013
 
Outstanding Letters of Credit as of
September 30, 2013
 
Availability as of
September 30, 2013
Revolving Credit Facility
$
900

 
2017
 
$
126

 
$
281

 
$
493

During the nine months ended September 30, 2013, we borrowed $462 million under the Revolving Credit Facility, of which we subsequently repaid $396 million during the period.
Repayment Terms
As of September 30, 2013, the Term Loan has mandatory amortization payments of $3 million in each of the years 2014 to 2018 and $280 million in 2019. The Credit Facilities (both the Term Loan and Revolving Credit Facility) are pre-payable at our option at any time.
Under certain circumstances, the Credit Facilities obligate us to apply 25% of our excess cash flow (as defined in the Credit Agreement) for each fiscal year commencing in 2013, as well as net cash proceeds from specified other sources, such as asset sales or insurance proceeds, to prepay the Term Loan, provided that this excess cash flow percentage shall be reduced to 0% in the event the Leverage Ratio (as defined below under Credit Agreement Covenants) is at or below 3.00:1.00.
Interest and Fees
Borrowings under the Credit Facilities bear interest, at our option, at either a base rate or a Eurodollar rate plus an applicable margin determined by pricing grids, which are based on Covanta Energy’s leverage ratio. Base rate is defined as the higher of (i) the Federal Funds Effective Rate plus 0.50%, (ii) the rate the administrative agent announces from time to time as its per annum “prime rate” or (iii) the one-month LIBOR rate plus 1.00%. Eurodollar rate borrowings bear interest at the British Bankers’ Association LIBOR Rate, commonly referred to as “LIBOR”, for the interest period selected by us. Base rate borrowings under the Revolving Credit Facility shall bear interest at the base rate plus an applicable margin ranging from 1.25% to 1.75%. Eurodollar borrowings under the Revolving Credit Facility shall bear interest at LIBOR plus an applicable margin ranging from 2.00% to 2.75%. Fees for issuances of letters of credit include fronting fees equal to 0.125% per annum and a participation fee for the lenders equal to the applicable interest margin for LIBOR rate borrowings. We will incur an unused commitment fee ranging from 0.375% to 0.50% on the unused amount of commitments under the Revolving Credit Facility. The Term Loan bore interest, at our option, at either (i) the base rate plus an applicable margin ranging from 1.75% to 2.00%, or (ii) LIBOR plus an applicable margin ranging from 2.75% to 3.00%, subject to a LIBOR floor of 1.00%. Effective March 29, 2013, we modified the Term Loan and it now bears interest at LIBOR plus 2.75% with a 0.75% LIBOR floor.
Guarantees and Security
The Credit Facilities are guaranteed by us and by certain of our subsidiaries. The subsidiaries that are party to the Credit Facilities agreed to secure all of the obligations under the Credit Facilities by granting, for the benefit of secured parties, a first priority lien on substantially all of their assets, to the extent permitted by existing contractual obligations; a pledge of substantially all of the capital stock of each of our domestic subsidiaries and 65% of substantially all the capital stock of each of our foreign subsidiaries which are directly owned, in each case to the extent not otherwise pledged.
Credit Agreement Covenants
The loan documentation governing the Credit Facilities contains various affirmative and negative covenants, as well as financial maintenance covenants, that limit our ability to engage in certain types of transactions. We were in compliance with all of the affirmative and negative covenants under the Credit Facilities as of September 30, 2013.
The negative covenants of the Credit Facilities limit our and our restricted subsidiaries’ ability to, among other things:
incur additional indebtedness (including guarantee obligations);
create certain liens against or security interests over certain property;
pay dividends on, redeem, or repurchase our capital stock or make other restricted junior payments; 

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enter into agreements that restrict the ability of our subsidiaries to make distributions or other payments to us;
make investments;
consolidate, merge or transfer all or substantially all of our assets and the assets of our subsidiaries on a consolidated basis;
dispose of certain assets; and
make certain acquisitions.
The financial maintenance covenants of the Credit Facilities, which are measured on a trailing four quarter period basis, include the following:
a maximum Leverage Ratio of 4.00 to 1.00 for the trailing four quarter period, which measures the principal amount of Covanta Energy’s consolidated debt less certain restricted funds dedicated to repayment of project debt principal and construction costs (“Consolidated Adjusted Debt”) to its adjusted earnings before interest, taxes, depreciation and amortization, as calculated in the Credit Agreement (“Adjusted EBITDA”). The definition of Adjusted EBITDA in the Credit Facilities excludes certain non-recurring and non-cash charges.
a minimum Interest Coverage Ratio of 3.00 to 1.00, which measures Covanta Energy’s Adjusted EBITDA to its consolidated interest expense plus certain interest expense of ours, to the extent paid by Covanta Energy as calculated in the Credit Agreement.
7.25% Senior Notes due 2020 (the “7.25% Notes”)
For specific criteria related to redemption features of the 7.25% Notes, refer to Note 11. Consolidated Debt of the Notes to Consolidated Financial Statements in our Form 10-K.
6.375% Senior Notes due 2022 (the "6.375% Notes")
For specific criteria related to redemption features of the 6.375% Notes, refer to Note 11. Consolidated Debt of the Notes to Consolidated Financial Statements in our Form 10-K.
3.25% Cash Convertible Senior Notes due 2014 (the “3.25% Notes”)
The 3.25% Cash Convertible Senior Notes mature on June 1, 2014, and therefore the outstanding balance for the 3.25% Cash Convertible Senior Notes is included in the current portion of long-term debt on the condensed consolidated balance sheet as of September 30, 2013.
Under limited circumstances and subject to certain customary adjustments as provided in the indenture for the 3.25% Notes, the 3.25% Notes are convertible by the holders thereof into cash only (the "Cash Conversion Option"), based on a conversion rate, effective as of September 26, 2013, of 64.0526 shares of our common stock per $1,000 principal amount of 3.25% Notes (which represents a conversion price of approximately $15.61 per share). We will not deliver common stock (or any other securities) upon conversion under any circumstances. During the fourth quarter of 2013, holders of the 3.25% Notes have the right to cash convert the 3.25% Notes as a result of our common stock price having traded at more than 130% of the conversion price of the 3.25% Notes for at least 20 trading days during the period of 30 consecutive trading days ending September 30, 2013.
In connection with the issuance of the 3.25% Notes, we also sold warrants (the “Warrants”), correlating to the number of shares underlying the 3.25% Notes, which currently have a strike price of $21.67 and settle on a net share basis. As the 3.25% Notes convert only into cash, the strike price of the Warrants effectively represents the conversion price above which we may issue shares in connection with these two issuances. For additional information, see Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our Form 10-K.
The debt discount related to the 3.25% Notes is accreted over their term and recognized as non-cash convertible debt related expense. The amount of the debt discount accretion expected to be included in our consolidated financial statements is $8 million and $13 million for the remainder of 2013 and for the year ended December 31, 2014, respectively.
For specific criteria related to contingent interest, conversion or redemption features of the 3.25% Notes and details related to the Cash Conversion Option, cash convertible note hedge and Warrants related to the 3.25% Notes, refer to Note 11. Consolidated Debt of the Notes to Consolidated Financial Statements in our Form 10-K. For details related to the fair value for the contingent interest feature, cash conversion option, and cash convertible note hedge related to the 3.25% Notes, see Note 12. Derivative Instruments.
4.00% - 5.25% Tax-Exempt Bonds due from 2024 to 2042 ("Tax Exempt Bonds")
For specific criteria related to redemption features of the Tax Exempt Bonds, refer to Note 11. Consolidated Debt of the Notes to Consolidated Financial Statements in our Form 10-K.

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Tax-Exempt Variable Rate Demand Bonds due 2043 ("Variable Rate Bonds")
On July 1, 2013, we issued $22 million of new tax-exempt corporate variable-rate demand bonds, which are secured by a letter of credit issued under our Revolving Credit Facility and will mature on July 1, 2043. Proceeds from the offering were utilized to refinance $22 million of the tax-exempt project debt at our Delaware Valley facility which matured on July 1, 2013. Financing costs were not material.
The Variable Rate Bonds are unsecured obligations which are guaranteed by Covanta Energy Corporation, and are not secured by project assets. Except for amounts payable out of drawings under the letter of credit, principal and interest on the Variable Rate Bonds will be payable solely from, and secured solely by, a pledge of payments derived under a loan agreement between us and the Delaware County Industrial Development Agency as Issuer.
The Variable Rate Bonds bear interest either on a daily or weekly interest rate as determined by the remarketing agent on the basis of examination of bonds comparable to the Variable Rate Bonds known by the remarketing agent to have been priced or traded under then prevailing market conditions. As of September 30, 2013, the weekly interest rate was 0.11%. Interest on the Variable Rate Bonds is paid monthly on the first business day of each month beginning on August 1, 2013.
The Variable Rate Bonds are subject to redemption at our option, in whole or in part, at a redemption price of 100% of the principal amount, plus accrued interest. The Variable Rate Bonds also contain a mandatory tender for purchase feature, contingent upon a conversion of the interest rate period or failure to procure a renewal or alternate letter of credit, at a purchase price of 100% of the principal amount, plus accrued interest.

NOTE 7. INCOME TAXES
We record our interim tax provision based upon our estimated annual effective tax rate (“ETR”) and account for the tax effects of discrete events in the period in which they occur. We file a federal consolidated income tax return with our eligible subsidiaries. Our federal consolidated income tax return also includes the taxable results of certain grantor trusts described below.
The ETR was approximately (28)% and 55% for the nine months ended September 30, 2013 and 2012, respectively. The non-cash write-off of United Kingdom development costs recorded in the second quarter of 2013 has no corresponding tax benefit. The ETR for the nine month period ended September 30, 2013, excluding the impact of the non-cash write-off of United Kingdom development costs and other foreign losses for which we cannot recognize a tax benefit, would have been approximately 32%. For additional information, see Note 8. Supplementary Information.
We currently estimate our ETR for the year ending December 31, 2013 will be approximately 180%. The ETR estimate for the year December 31, 2013, excluding the impact of the non-cash write-off of United Kingdom development costs and foreign losses for which we cannot recognize a tax benefit, would have been approximately 45%.
Uncertain tax positions, exclusive of interest and penalties, were $122 million and $124 million as of September 30, 2013 and December 31, 2012, respectively. Included in the balance of unrecognized tax benefits as of September 30, 2013 are potential benefits of $122 million that, if recognized, would impact the effective tax rate. For both the three and nine months ended September 30, 2013 and 2012, we recognized a net tax benefit for uncertain tax positions of $2 million and a net tax expense of $1 million, respectively, including interest and penalties. We have accrued interest and penalties associated with liabilities for uncertain tax positions of $1 million for both September 30, 2013 and December 31, 2012. We continue to reflect tax related interest and penalties as part of the tax provision.
In the ordinary course of our business, the Internal Revenue Service (“IRS”) and state tax authorities will periodically audit our federal and state tax returns. As issues are examined by the IRS and state auditors, we may decide to adjust the existing liability for uncertain tax positions for issues that were not previously deemed an exposure. Federal income tax returns for Covanta Energy are closed for the years through 2003. However, to the extent net operating loss carryforwards (“NOLs”) are utilized from earlier years, federal income tax returns for Covanta Holding Corporation, formerly known as Danielson Holding Corporation, are still open. The IRS is currently auditing our tax returns for the years 2004 through 2009, which includes years during the carryforward period including returns in which some of the losses giving rise to the NOLs that were reported. In connection with this audit, the IRS has proposed certain adjustments to our 2008 tax return.  We do not believe such proposed adjustments are consistent with applicable rules, and we have challenged them through the IRS's administrative appeals procedures.  If we are unsuccessful in challenging such adjustments, some portion of the NOLs would not be available to offset consolidated taxable income, and/or we could be required to pay federal income taxes (and potentially interest and penalties) for prior years. State income tax returns are generally subject to examination for a period of three to five years after the filing of the respective return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. We have various state income tax returns in the process of examination, administrative appeals or litigation.

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Our NOLs predominantly arose from our predecessor insurance entities, formerly named Mission Insurance Group, Inc., (“Mission”). These Mission insurance entities have been in state insolvency proceedings in California and Missouri since the late 1980's. The amount of NOLs available to us will be reduced by any taxable income or increased by any taxable losses generated by current members of our consolidated tax group, which include grantor trusts associated with the Mission insurance entities.
While we cannot predict what amounts, if any, may be includable in taxable income as a result of the final administration of these grantor trusts, substantial actions toward such final administration have been taken and we believe that neither arrangements with the California Commissioner of Insurance nor the final administration by the Director of the Division of Insurance for the State of Missouri will result in a material reduction in available NOLs.
We had consolidated federal NOLs estimated to be approximately $392 million for federal income tax purposes as of December 31, 2012, based on the income tax returns filed and projected to be filed. The federal NOLs will expire in various amounts from December 31, 2023 through December 31, 2031, if not used. In addition to the consolidated federal NOLs, as of December 31, 2012, we had state NOL carryforwards of approximately $303 million, which expire between 2013 and 2031, net foreign NOL carryforwards of approximately $29 million expiring between 2015 and 2031, federal tax credit carryforwards, including production tax credits of $48 million expiring between 2014 and 2022, and minimum tax credits of $7 million with no expiration. These deferred tax assets are offset by a valuation allowance of approximately $34 million. For further information, refer to Note 15. Income Taxes of the Notes to the Consolidated Financial Statements in our Form 10-K.

NOTE 8. SUPPLEMENTARY INFORMATION
Operating Revenues
The components of waste and service revenues are as follows (in millions):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Waste and service revenue unrelated to project debt
$
248

 
$
235

 
$
718

 
$
710

Revenue earned explicitly to service project debt - principal
8

 
10

 
25

 
31

Revenue earned explicitly to service project debt - interest
1

 
2

 
4

 
6

Total waste and service revenue
$
257

 
$
247

 
$
747

 
$
747

Under some of our service agreements, we bill municipalities fees to service project debt (principal and interest). The amounts billed are based on the actual principal amortization schedule for the project bonds. Regardless of the amounts billed to client communities relating to project debt principal, we recognize revenue earned explicitly to service project debt principal on a levelized basis over the term of the applicable agreement. In the beginning of the agreement, principal billed is less than the amount of levelized revenue recognized related to principal and we record an unbilled service receivable asset. At some point during the agreement, the amount we bill will exceed the levelized revenue and the unbilled service receivable begins to reduce, and ultimately becomes nil at the end of the contract.
In the final year(s) of a contract, cash may be utilized from available debt service reserve accounts to pay remaining principal amounts due to project bondholders and such amounts are no longer billed to or paid by municipalities. Generally, therefore, in the last year of the applicable agreement, little or no cash is received from municipalities relating to project debt, while our levelized service revenue continues to be recognized until the expiration date of the term of the agreement.
Operating Costs
Pass through costs
Pass through costs are costs for which we receive a direct contractually committed reimbursement from the municipal client which sponsors an energy-from-waste project. These costs generally include utility charges, insurance premiums, ash residue transportation and disposal and certain chemical costs. These costs are recorded net of municipal client reimbursements in our condensed consolidated financial statements. Total pass through costs were $17 million and $15 million for the three months ended September 30, 2013 and 2012, respectively and $52 million and $54 million for the nine months ended September 30, 2013 and 2012, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)


Other operating expenses
The components of other operating expenses are as follows (in millions):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Construction costs
$
32

 
$
25

 
$
86

 
$
95

Insurance subsidiary operating expenses (1)
1

 
8

 
3

 
13

Defined benefit pension plan settlement gain (2)

 

 
(6
)
 

Insurance recoveries (3)
(4
)
 

 
(4
)
 
(5
)
Other (4)
(3
)
 
(2
)
 
(12
)
 
(3
)
Total other operating expenses
$
26

 
$
31

 
$
67

 
$
100

(1)
Insurance subsidiary operating expenses are primarily comprised of incurred but not reported loss reserves, loss adjustment expenses and policy acquisition costs. During the three months ended September 30, 2012, we transitioned our remaining insurance business to run-off and recorded losses and reserve increases of $7 million primarily relating to adverse loss development.
(2)
During the first quarter of 2013, we had final settlement of our defined benefit pension plan. For additional information see Note 9. Benefit Obligations.
(3)
See Stanislaus Energy-from-Waste Facility discussion below.
(4)
During the three and nine months ended September 30, 2013, we recognized a gain of $3 million related to a contract amendment. During the nine months ended September 30, 2013, we recognized a gain of $8 million related to early termination of a power purchase agreement.
Stanislaus Energy-from-Waste Facility
In January 2012, our Stanislaus, California energy-from-waste facility experienced a turbine generator failure. Damage to the turbine generator was extensive and operations at the facility were suspended promptly to assess the cause and extent of damage. The facility is capable of processing waste without utilizing the turbine generator to generate electricity, and we resumed waste processing operations during the first quarter of 2012. The facility began to generate electricity during the fourth quarter of 2012 and is fully operational. During 2012, total capital expenditures related to the repair of the turbine generator was $12 million. The cost of repair or replacement, and business interruption losses, were insured under the terms of applicable insurance policies, subject to deductibles. We recorded insurance recoveries in our condensed consolidated statements of income as follows (in millions):
 
 
Twelve Months Ended
December 31, 2012
 
Nine Months Ended
September 30, 2013
Insurance Recoveries for Repair and reconstruction costs (net of write-down of assets, recorded to Other operating expenses)
 
$
7

 
$
4

Insurance Recoveries for Business Interruption and Clean-up costs, net of costs incurred (reduction to Plant operating expenses)
 
$

 
$
3

Amortization of waste, service and energy contracts
Our waste, service, energy and other contract intangibles are intangible assets and liabilities relating to long-term operating contracts at acquired facilities and are recorded upon acquisition at their estimated fair market values based upon discounted cash flows. Intangible assets and liabilities are amortized using the straight line method over their remaining useful lives.
The following table details the amount of the actual/estimated amortization expense and contra-expense associated with these intangible assets and liabilities as of September 30, 2013 included or expected to be included in our condensed consolidated statements of operations for each of the years indicated (in millions):

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)


 
Waste, Service and
Energy Contract Intangibles
  (Amortization Expense)  
 
Waste, Service and Other
Contract Intangibles
    (Contra-Expense)
Nine Months Ended September 30, 2013
$
23

 
$
(7
)
Remainder of 2013
$
8

 
$
(3
)
2014
29

 
(10
)
2015
26

 
(6
)
2016
23

 
(6
)
2017
15

 
(4
)
Thereafter
272

 
(3
)
Total
$
373

 
$
(32
)
Net write-offs (gains)
The components of net write-offs are as follows (in millions):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Americas segment:
 
 
 
 
 
 
 
Write-down of Wallingford EfW facility assets (1)
$
9

 
$

 
$
9

 
$

Write-down of equity investment in biomass facility (2)
3

 

 
3

 

Write-off of loan issued for the Harrisburg EfW facility to fund certain facility improvements (3)

 

 
4

 

Write-off of intangible liability (4)

 
(29
)
 

 
(29
)
Write-down of renewable fuels project (5)

 
16

 

 
16

Sub-total:
12

 
(13
)
 
16

 
(13
)
Other:
 
 
 
 
 
 
 
Development costs - UK (6)

 
11

 
47

 
11

Total net write-offs (gains)
$
12

 
$
(2
)
 
$
63

 
$
(2
)
(1)
During the three and nine months ended September 30, 2013, we recorded a non-cash write-down of $9 million resulting from an impairment charge related to our Wallingford EfW facility assets in Connecticut.
(2)
During the three and nine months ended September 30, 2013, we recorded a non-cash write-down of $3 million related to our 55% equity investment in the Pacific Ultrapower Chinese Station biomass facility in California.
(3)
See Harrisburg Energy-from-Waste Facility discussion below.
(4)
During the nine months ended September 30, 2012, our service contract for the Essex EfW facility was amended and we recorded a non-cash write-off of an intangible liability of $29 million related to the below-market service contract which was recorded at fair value upon acquisition of the facility.
(5)
During the nine months ended September 30, 2012, we suspended construction of a facility that transformed waste materials into renewable liquid fuels. We recorded a non-cash write-off of $16 million representing the capitalized costs related to this project.
(6)
See Development Costs - United Kingdom discussion below.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)


Harrisburg Energy-from-Waste Facility
In 2008, we entered into a ten year agreement with The Harrisburg Authority to maintain and operate an 800 ton per day energy-from-waste facility located in Harrisburg, Pennsylvania. We also agreed to provide construction management services and to advance up to $26 million in funding to The Harrisburg Authority for certain facility improvements required to enhance facility performance, which improvements were substantially completed during 2010. The repayment of this funding was guaranteed by the City of Harrisburg, but was otherwise unsecured, and junior to project bondholders' rights. We advanced $22 million, of which $20 million was outstanding as of December 31, 2010 under this funding arrangement. On October 5, 2010, we filed suit against the City of Harrisburg in the Dauphin County Court of Common Pleas seeking to enforce our rights under the City's guaranty. On December 15, 2010, the City of Harrisburg was formally admitted to the State oversight program for distressed municipalities known as Act 47. In 2010, we recorded a non-cash impairment charge of $7 million, pre-tax, to write-down the receivable to $13 million, which was calculated based on a range of potential outcomes utilizing various estimated cash flows for the receivable. In June 2012, the Lancaster County Solid Waste Management Authority ("LCSWMA") was selected by the Office of the Receiver for the City of Harrisburg as the winner of a competitive bidding process to enter into immediate negotiations for the purchase of the Harrisburg energy-from-waste facility. During the quarter ended June 30, 2013, we engaged in negotiations with the Office of the Receiver for a final settlement regarding repayment of our receivable. Based on a range of potential outcomes with respect to such repayment, we recorded an additional non-cash write-off of $4 million, pre-tax, to write-down the receivable to $9 million during the quarter ended June 30, 2013. During the quarter ended September 30, 2013, we entered into an amended and restated agreement with LCSWMA that will replace our original ten year agreement with The Harrisburg Authority upon closing of the sale of the Harrisburg energy-from-waste facility from The Harrisburg Authority to LCSWMA.  This closing is conditioned on reaching a complex global settlement among all Harrisburg stakeholders. The receipt of $9 million from the receiver for the outstanding receivable, as well as the complex global settlement, are both conditions to the amended and restated agreement with LCSWMA. The amended and restated agreement expires December 31, 2017 and its terms are similar to the original agreement. 
Development Costs - United Kingdom
On April 19, 2013, we received notification that we were not selected as the preferred bidder for the Merseyside Recycling and Waste Authority's (“MRWA”) waste procurement. The MRWA waste procurement would have accounted for a significant portion of the capacity at a project to be located at Ince Park, Cheshire, England. Based on this triggering event, we evaluated the recoverability of our capitalized development costs related to our United Kingdom development efforts. During the nine months ended September 30, 2013, we recorded a non-cash write-off of approximately $47 million comprised of capitalized development costs and land related to United Kingdom development projects which we ceased to pursue in their current form, based on an analysis of potential outcomes regarding the recoverability of the assets. We also incurred approximately $3 million in severance and other restructuring expenses related to our United Kingdom development office which was recorded as general and administrative expenses.
During the nine months ended September 30, 2012, we recorded a non-cash write-off of $11 million of capitalized development costs related to a development project which we ceased to pursue in the United Kingdom.
Non-Cash Convertible Debt Related Expense
The components of non-cash convertible debt related expense are as follows (in millions):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Debt discount accretion related to the 3.25% Notes
$
7

 
$
7

 
$
21

 
$
20

Fair value changes related to the cash convertible note hedge
(35
)
 
8

 
(71
)
 
(33
)
Fair value changes related to the cash conversion option derivative
35

 
(9
)
 
71

 
32

Total non-cash convertible debt related expense
$
7

 
$
6

 
$
21

 
$
19

Other Income, Net
For the nine months ended September 30, 2013 and 2012, other income included $0 and $3 million, respectively, of foreign currency gains related to intercompany loans.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)


Accumulated Other Comprehensive Income (Loss) ("AOCI")
The changes in accumulated other comprehensive income (loss) are as follows (in millions):
 
Foreign Currency Translation
 
Pension and Other Postretirement Plan Unrecognized Net Gain (Loss)
 
Net Unrealized Gain on Derivatives
 
Net Unrealized Gain (Loss) on Securities
 
Total
Balance December 31, 2012
$
4

 
$
2

 
$

 
$
1

 
$
7

Other comprehensive (loss) income before reclassifications
(3
)
 
3

 
1

 
(1
)
 

Amounts reclassified from accumulated other comprehensive income

 
(4
)
 

 

 
(4
)
Net current period comprehensive (loss) income
(3
)
 
(1
)
 
1

 
(1
)
 
(4
)
Balance September 30, 2013
$
1

 
$
1

 
$
1

 
$

 
$
3


Reclassifications out of accumulated other comprehensive income (loss) are as follows (in millions):
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
Accumulated Other Comprehensive Income Component
 
September 30, 2013
 
Affected Line Item in the Condensed Consolidated Statement of Operations
Defined benefit pension plan
 
 
 
 
 
 
Prior service costs
 
$

 
$
(9
)
 
Other operating expenses
Net actuarial loss
 

 
3

 
Other operating expenses
 
 

 
(6
)
 
Total before tax
 
 

 
2

 
Tax benefit
 
 
$

 
$
(4
)
 
Net of tax
NOTE 9. BENEFIT OBLIGATIONS
Defined Benefit Pension Plan
The components of net periodic benefit costs, interest costs and the expected return on plan assets for the pension and other post-retirement benefits were not material for the three and nine months ended September 30, 2013 and 2012.
During 2012, the IRS approved the defined benefit pension plan termination. Employees were given two disbursement elections, either a lump sum payment or an annuity option. Approximately 72% of plan participants elected the lump sum payment option, and during the fourth quarter of 2012, $62 million was distributed to such participants. During the first quarter of 2013, $35 million of annuity contracts were purchased on behalf of participants choosing the annuity option. During the first quarter of 2013, we recorded a pre-tax defined benefit pension plan settlement gain of $6 million which was recorded as other operating income in our condensed consolidated statements of operations. The defined benefit pension plan termination concluded with the purchase of the annuities during the first quarter of 2013. Accordingly, we have no future obligations related to the defined benefit pension plan, including future funding requirements.
Defined Contribution Plans
Substantially all of our employees in the United States are eligible to participate in defined contribution plans we sponsor. Our costs related to defined contribution plans were $4 million for both the three months ended September 30, 2013 and 2012 and $12 million for both the nine months ended September 30, 2013 and 2012.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)



NOTE 10. STOCK-BASED COMPENSATION
During the nine months ended September 30, 2013, we awarded certain employees 580,207 restricted stock awards and 24,003 restricted stock units ("RSUs"). The restricted stock awards will be expensed over the requisite service period, subject to an assumed 12% average forfeiture rate. The terms of the restricted stock awards include vesting provisions based solely on continued service. If the service criteria are satisfied, the restricted stock awards generally vest during March of 2014, 2015, and 2016. The RSUs were expensed during the three months ended March 31, 2013.
During the three months ended March 31, 2013, we awarded an additional 195,481 RSUs that will vest based upon the total stockholder return (“TSR”) performance of our common stock over a three year period relative to companies included in published indices for the waste and disposal industry, the conventional electricity utilities industry and other similarly sized “mid-cap”companies (the “TSR Equity Awards”). We recognize compensation expense for the TSR Equity Awards based on the grant date fair value of the award which was determined using a Monte Carlo model.
On May 10, 2013, in accordance with our existing program for annual director compensation, we awarded 53,900 shares of restricted stock under the Directors Plan. We determined that the service vesting condition of these restricted stock awards to be non-substantive and, in accordance with accounting principles for stock compensation, recorded the entire fair value of the award as compensation expense on the grant date.
Compensation expense related to our stock-based awards totaled $3 million for both the three months ended September 30, 2013 and 2012, and $12 million and $13 million for the nine months ended September 30, 2013 and 2012, respectively. Unrecognized stock-based compensation expense and weighted-average years to be recognized are as follows (in millions, except for weighted average years):
 
As of September 30, 2013
 
Unrecognized stock-
based compensation    
 
    Weighted-average years    
to be recognized
Restricted Stock Awards
$ 10
 
1.5
Restricted Stock Units
$ 3
 
2.3

NOTE 11. FINANCIAL INSTRUMENTS
Fair Value Measurements
Authoritative guidance associated with fair value measurements provides a framework for measuring fair value and establishes a fair value hierarchy that prioritizes the inputs used to measure fair value, giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs), then significant other observable inputs (Level 2 inputs) and the lowest priority to significant unobservable inputs (Level 3 inputs).The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
For cash and cash equivalents, restricted funds, and marketable securities, the carrying value of these amounts is a reasonable estimate of their fair value. The fair value of restricted funds held in trust is based on quoted market prices of the investments held by the trustee.
Fair values for long-term debt and project debt are determined using quoted market prices.
The fair value of the note hedge and the cash conversion option are determined using an option pricing model based on observable inputs such as implied volatility, risk free interest rate, and other factors. The fair value of the note hedge is adjusted to reflect counterparty risk of non-performance, and is based on the counterparty’s credit spread in the credit derivatives market. The contingent interest features related to the Debentures and the 3.25% Notes are valued quarterly using the present value of expected cash flow models incorporating the probabilities of the contingent events occurring.
The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is necessarily required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we would realize in a current market exchange. The fair-value estimates presented herein are based on pertinent information available to us as of September 30, 2013. Such amounts have not been comprehensively revalued for purposes of these financial statements since September 30, 2013, and current estimates of fair value may differ significantly from the amounts presented herein. 





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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)


The following table presents information about the fair value measurement of our assets and liabilities as of September 30, 2013 and December 31, 2012:
 
 
 
 
As of
Financial Instruments Recorded at Fair Value on a Recurring Basis:
 
Fair Value Measurement Level
 
September 30, 2013
 
December 31, 2012
 
 
 
 
(In millions)
Assets:
 
 
 
 
 
 
Cash and cash equivalents:
 
 
 
 
 
 
Bank deposits and certificates of deposit
 
1
 
$
246

 
$
240

Money market funds
 
1
 
6

 
6

Total cash and cash equivalents:
 
 
 
252

 
246

Restricted funds held in trust:
 
 
 
 
 
 
Bank deposits and certificates of deposit
 
1
 
2

 
2

Money market funds
 
1
 
63

 
64

U.S. Treasury/Agency obligations (1)
 
1
 
15

 
17

State and municipal obligations
 
1
 
112

 
119

Commercial paper/Guaranteed investment contracts/Repurchase agreements
 
1
 
2

 
12

Total restricted funds held in trust:
 
 
 
194

 
214

Restricted funds — other:
 
 
 
 
 
 
Bank deposits and certificates of deposit (2)(3)
 
1
 
1

 
5

Money market funds (3)
 
1
 
7

 
8

Residential mortgage-backed securities (3) 
 
1
 
1

 
1

Total restricted funds other:
 
 
 
9

 
14

Investments:
 
 
 
 
 
 
Mutual and bond funds (2)(3)
 
1
 
13

 
2

Investments available for sale:
 
 
 
 
 
 
U.S. Treasury/Agency obligations (4)
 
1
 
6

 
6

Residential mortgage-backed securities (4)
 
1
 
10

 
11

Other government obligations (4)
 
1
 
4

 
5

Corporate investments (4)
 
1
 
13

 
14

Equity securities (3)
 
1
 
4

 
3

Total investments:
 
 
 
50

 
41

Derivative Asset — Note Hedge
 
2
 
175

 
104

Total assets:
 
 
 
$
680

 
$
619

Liabilities:
 
 
 
 
 
 
Derivative Liability — Cash Conversion Option
 
2
 
$
176

 
$
105

Derivative Liabilities — Contingent interest features of the 3.25% Notes and Debentures
 
2
 
0

 
0

Derivative Liability — Energy Hedges
 
2
 

 
1

Total liabilities:
 
 
 
$
176

 
$
106

 
The following financial instruments are recorded at their carrying amount (in millions).
 
 
As of September 30, 2013
 
As of December 31, 2012
Financial Instruments Recorded at Carrying Amount:
 
Carrying
Amount
 
Estimated
Fair Value
 
Carrying
Amount
 
Estimated
Fair Value
Assets:
 
 
 
 
 
 
 
 
Accounts receivables (5)
 
$
291

 
$
291

 
$
283

 
$
283

Liabilities:
 
 
 
 
 
 
 
 
Long-term debt 
 
$
2,192

 
$
2,137

 
$
2,015

 
$
2,081

Project debt
 
$
265

 
$
277

 
$
317

 
$
329


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)



(1)
The U.S. Treasury/Agency obligations in restricted funds held in trust are primarily comprised of Federal Home Loan Mortgage Corporation securities at fair value.
(2)
Included in other noncurrent assets in the condensed consolidated balance sheets.
(3)
Included in prepaid expenses and other current assets in the condensed consolidated balance sheets.
(4)
Included in investments in fixed maturities at market in the condensed consolidated balance sheets.
(5)
Includes $23 million and $27 million of noncurrent receivables in other noncurrent assets in the condensed consolidated balance sheets as of September 30, 2013 and December 31, 2012, respectively.

Investments
Our insurance subsidiaries’ fixed maturity debt and equity securities portfolio are classified as “available-for-sale” and are carried at fair value. Other investments, such as investments in companies in which we do not have the ability to exercise significant influence, are carried at the lower of cost or estimated realizable value.
As of September 30, 2013 and December 31, 2012, the cost or amortized cost of our investments approximated their fair value as unrealized gains and losses were not material. The change in net unrealized gain on securities included as a separate component of AOCI in the consolidated statements of comprehensive income was not material for the three and nine months ended September 30, 2013 and 2012, respectively.
The expected maturities of fixed maturity securities, by amortized cost and fair value are shown below (in millions):
 
As of September 30, 2013
 
Amortized Cost
 
Fair Value
Available-for-sale:
 
 
 
One year or less
$
4

 
$
4

Over one year to five years
16

 
16

Over five years to ten years
13

 
13

More than ten years

 

Total fixed maturities
$
33

 
$
33

Our fixed maturities held by our insurance subsidiary include mortgage-backed securities and collateralized mortgage obligations, collectively (“MBS”) representing 32% and 31% of the total fixed maturities as of September 30, 2013 and December 31, 2012, respectively. Our MBS holdings are issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, or the Government National Mortgage Association all of which are rated “AAA” by Moody’s Investors Services. MBS and callable bonds, in contrast to other bonds, are more sensitive to market value declines in a rising interest rate environment than to market value increases in a declining interest rate environment.
As of both September 30, 2013 and