CVA-9.30.14-10Q
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, 2014
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 16, 2014  
Common Stock, $0.10 par value
  
131,066,483





Table of Contents


COVANTA HOLDING CORPORATION AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
For the Quarter Ended September 30, 2014
 
 
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;
our ability to renew or replace expiring contracts at comparable prices and with other acceptable terms;
adoption of new laws and regulations in the United States and abroad, including energy laws, environmental laws, labor laws and healthcare laws;
our ability to utilize net operating loss carryforwards;
failure to maintain historical performance levels at our facilities and our ability to retain the rights to operate facilities we do not own;
our ability to avoid adverse publicity relating to our business;
advances in technology;
difficulties in the operation of our facilities, including fuel supply and energy delivery interruptions, failure to obtain regulatory approvals, equipment failures, labor disputes and work stoppages, and weather interference and catastrophic events;
difficulties in the financing, development and construction of new projects and expansions, including increased construction costs and delays;
limits of insurance coverage;
our ability to avoid defaults under our long-term contracts;
performance of third parties under our contracts and such third parties' observance of laws and regulations;
concentration of suppliers and customers;
geographic concentration of facilities;
increased competitiveness in the energy and waste industries;
changes in foreign currency exchange rates;
limitations imposed by our existing indebtedness and our ability to perform our financial obligations and guarantees and to refinance our existing indebtedness;
exposure to counterparty credit risk and instability of financial institutions in connection with financing transactions;
the scalability of our business;
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, 2013 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,
 
2014
 
2013
 
2014
 
2013
 
(Unaudited)
(In millions, except per share amounts)
OPERATING REVENUES:
 
 
 
 
 
 
 
Waste and service revenues
$
252

 
$
255

 
$
760

 
$
742

Recycled metals revenues
26

 
19

 
72

 
52

Energy revenues
120

 
117

 
350

 
322

Other operating revenues
16

 
34

 
65

 
92

Total operating revenues
414

 
425

 
1,247

 
1,208

OPERATING EXPENSES:
 
 
 
 
 
 
 
Plant operating expenses
248

 
230

 
798

 
760

Other operating expenses
19

 
27

 
66

 
69

General and administrative expenses
26

 
20

 
73

 
62

Depreciation and amortization expense
52

 
52

 
158

 
157

Net interest expense on project debt
3

 
3

 
8

 
10

Net write-offs
48

 
12

 
64

 
16

Total operating expenses
396

 
344

 
1,167

 
1,074

Operating income
18

 
81

 
80

 
134

Other expenses:
 
 
 
 
 
 
 
Interest expense
(30
)

(30
)

(92
)

(88
)
Non-cash convertible debt related expense


(7
)

(13
)

(21
)
Loss on extinguishment of debt




(2
)

(1
)
Total other expenses
(30
)
 
(37
)
 
(107
)
 
(110
)
(Loss) income from continuing operations before income tax benefit (expense) and equity in net income from unconsolidated investments
(12
)
 
44

 
(27
)
 
24

Income tax benefit (expense)
16


(20
)

20


(11
)
Equity in net income from unconsolidated investments
2

 
4

 
5

 
4

Income (loss) from continuing operations
6

 
28

 
(2
)
 
17

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

 

 

 
(53
)
NET INCOME (LOSS)
6

 
28

 
(2
)
 
(36
)
Less: Net loss from continuing operations attributable to noncontrolling interests in subsidiaries

 

 

 
1

NET INCOME (LOSS) ATTRIBUTABLE TO COVANTA HOLDING CORPORATION
$
6

 
$
28

 
$
(2
)
 
$
(35
)
 
 
 
 
 
 
 
 
Amounts Attributable to Covanta Holding Corporation stockholders:
 
 
 
 
 
 
 
Continuing operations
$
6

 
$
28

 
$
(2
)
 
$
18

Discontinued operations

 

 

 
(53
)
Net Income (Loss) Attributable to Covanta Holding Corporation
$
6

 
$
28

 
$
(2
)
 
$
(35
)
 
 
 
 
 
 
 
 


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,
 
2014
 
2013
 
2014
 
2013
 
(Unaudited)
(In millions, except per share amounts)
Income (Loss) Per Share Attributable to Covanta Holding Corporation stockholders:
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
Continuing operations
$
0.05

 
$
0.22

 
$
(0.02
)
 
$
0.14

Discontinued operations

 

 

 
(0.41
)
Covanta Holding Corporation
$
0.05

 
$
0.22

 
$
(0.02
)
 
$
(0.27
)
Weighted Average Shares
130

 
129

 
130

 
129

 
 
 
 
 
 
 
 
Diluted
 
 
 
 
 
 
 
Continuing operations
$
0.05

 
$
0.22

 
$
(0.02
)
 
$
0.14

Discontinued operations

 

 

 
(0.41
)
Covanta Holding Corporation
$
0.05

 
$
0.22

 
$
(0.02
)
 
$
(0.27
)
Weighted Average Shares
131

 
130

 
130

 
130

 
 
 
 
 
 
 
 
Cash Dividend Declared Per Share:
$
0.25


$
0.165


$
0.61


$
0.495



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,
 
2014

2013

2014

2013
 
(Unaudited)
(In millions)
Net income (loss)
$
6

 
$
28

 
$
(2
)
 
$
(36
)
Foreign currency translation
(5
)
 
2

 
(7
)
 
(3
)
Adjustment for defined benefit pension plan settlement, net of tax benefit of $0, $0, $0 and $2, respectively

 

 

 
(4
)
Pension and postretirement plan unrecognized benefits, net of tax expense of $0, $0, $0 and $1, respectively

 

 

 
3

Net unrealized (loss) gain on derivative instruments, net of tax benefit of $1, $0, $4 and $0, respectively
(6
)
 
1

 
(11
)
 
1

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

 
(1
)
Other comprehensive (loss) income attributable to Covanta Holding Corporation
(12
)
 
2

 
(18
)
 
(4
)
Comprehensive (loss) income
(6
)
 
30

 
(20
)
 
(40
)
Less:
 
 
 
 
 
 
 
Net loss attributable to noncontrolling interests in subsidiaries

 

 

 
1

Comprehensive loss attributable to noncontrolling interests in subsidiaries

 

 

 
1

Comprehensive (loss) income attributable to Covanta Holding Corporation
$
(6
)
 
$
30

 
$
(20
)
 
$
(39
)


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,
2014
 
December 31,
2013
 
(Unaudited)
 
 
 
(In millions, except per
share amounts)
ASSETS
 
 
 
Current:
 
 
 
Cash and cash equivalents
$
87

 
$
195

Restricted funds held in trust
68

 
41

Receivables (less allowances of $6 and $4, respectively)
282

 
264

Unbilled service receivables
9

 
16

Deferred income taxes
39

 
25

Note Hedge

 
78

Prepaid expenses and other current assets
102

 
100

   Assets held for sale
52

 
71

Total Current Assets
639

 
790

Property, plant and equipment, net
2,621

 
2,636

Restricted funds held in trust
161

 
126

Unbilled service receivables
9

 
13

Waste, service and energy contracts, net
324

 
364

Other intangible assets, net
18

 
20

Goodwill
302

 
249

Investments in investees and joint ventures
42

 
47

Other assets
171

 
133

Total Assets
$
4,287

 
$
4,378

LIABILITIES AND EQUITY
 
 
 
Current:
 
 
 
Current portion of long-term debt
$
4

 
$
528

Current portion of project debt
39

 
55

Accounts payable
43

 
24

Accrued expenses and other current liabilities
264

 
250

Liabilities held for sale
45

 
49

Total Current Liabilities
395

 
906

Long-term debt
1,989

 
1,557

Project debt
226

 
181

Deferred income taxes
768

 
722

Waste and service contracts, net
22

 
30

Other liabilities
79

 
71

Total Liabilities
3,479

 
3,467

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 136 shares, respectively; outstanding 131 and 130 shares, respectively)
14

 
14

Additional paid-in capital
789

 
790

Accumulated other comprehensive loss
(20
)
 
(2
)
Accumulated earnings
24

 
106

Treasury stock, at par
(1
)
 
(1
)
Total Covanta Holding Corporation stockholders equity
806

 
907

Noncontrolling interests in subsidiaries
2

 
4

Total Equity
808

 
911

Total Liabilities and Equity
$
4,287

 
$
4,378


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,
 
2014
 
2013
 
(Unaudited, in millions)
OPERATING ACTIVITIES:
 
 
 
Net loss
$
(2
)
 
$
(36
)
Less: Loss from discontinued operations, net of tax expense

 
(53
)
(Loss) income from continuing operations
(2
)
 
17

Adjustments to reconcile net (loss) income from continuing operations to net cash provided by operating activities from continuing operations:
 
 
 
Depreciation and amortization expense
158

 
157

Amortization of long-term debt deferred financing costs
5

 
6

Amortization of debt premium and discount
(1
)
 
(1
)
Net write-offs
64

 
16

Pension plan settlement gain

 
(6
)
Loss on extinguishment of debt
2

 
1

Non-cash convertible debt related expense
13

 
21

Stock-based compensation expense
15

 
12

Equity in net income from unconsolidated investments
(5
)
 
(4
)
Dividends from unconsolidated investments
10

 
7

Deferred income taxes
(13
)
 
8

Other, net
3

 
(10
)
Change in restricted funds held in trust
14

 
17

Change in working capital
1

 
34

Total adjustments for continuing operations
266

 
258

Net cash provided by operating activities from continuing operations
264

 
275

Net cash provided by (used in) operating activities from discontinued operations
1

 
(8
)
Net cash provided by operating activities
265

 
267

INVESTING ACTIVITIES:
 
 
 
Proceeds from the sale of investment securities
6

 
6

Purchase of investment securities
(4
)
 
(15
)
Purchase of property, plant and equipment
(152
)
 
(140
)
Change in restricted funds held in trust
(20
)
 

Acquisition of business, net of cash acquired
(13
)
 
(49
)
Acquisition of noncontrolling interest in subsidiary
(12
)
 
(14
)
Property insurance proceeds

 
4

Other, net
(6
)
 
(2
)
Net cash used in investing activities from continuing operations
(201
)
 
(210
)
Net cash provided by investing activities from discontinued operations

 

Net cash used in investing activities
(201
)
 
(210
)
FINANCING ACTIVITIES:
 
 
 
Proceeds from borrowings on long-term debt
412

 
22

Payment of deferred financing costs
(36
)
 
(1
)
Principal payments on long-term debt
(557
)
 
(2
)
Payments related to Cash Conversion Option
(83
)
 

Proceeds from settlement of Note Hedge
83

 

Principal payments on project debt
(33
)
 
(53
)
Payments of borrowings on revolving credit facility
(361
)
 
(396
)
Proceeds from borrowings on revolving credit facility
431

 
462

Proceeds from borrowings on project debt
63

 

Proceeds from equipment financing capital lease
47

 

Change in restricted funds held in trust
(57
)
 
3

Cash dividends paid to stockholders
(69
)
 
(45
)
Common stock repurchased

 
(34
)
Other, net
(7
)
 
(18
)
Net cash used in financing activities from continuing operations
(167
)
 
(62
)
Net cash (used in) provided by financing activities from discontinued operations
(2
)
 
10

Net cash used in financing activities
(169
)
 
(52
)
Effect of exchange rate changes on cash and cash equivalents
(3
)
 
1

Net (decrease) increase in cash and cash equivalents
(108
)
 
6

Cash and cash equivalents at beginning of period
200

 
246

Cash and cash equivalents at end of period
92

 
252

Less: Cash and cash equivalents of assets held for sale and discontinued operations at end of period
5

 
10

Cash and cash equivalents of continuing operations at end of period
$
87

 
$
242


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”), and also owns and operates related waste transport and disposal and other renewable energy production businesses. EfW serves two key markets as both a sustainable waste management solution that is environmentally superior to landfilling and as a source of clean energy that reduces overall greenhouse gas emissions and is considered renewable under the laws of many states and under federal law. Our facilities are critical infrastructure assets that allow our customers, which are principally municipal entities, to provide an essential public service.
Our EfW facilities earn revenue from both the disposal of waste and the generation of electricity and/or steam, generally under contracts, as well as from the sale of metal recovered during the EfW process. We process approximately 20 million tons of solid waste annually. We operate and/or have ownership positions in 45 energy-from-waste facilities, which are primarily located in North America, and 11 other energy generation facilities, primarily consisting of renewable energy production facilities in North America (wood biomass and hydroelectric). In total, these assets produce approximately 10 million megawatt hours (“MWh”) of baseload electricity annually. We also operate a waste management infrastructure that is complementary to our core EfW business.
We have one reportable segment, North America, which is comprised of waste and energy services operations located primarily in the United States and Canada. We own or hold equity interests in EfW facilities in China and Italy. For additional information, see Note 6. Financial Information by Business Segments.
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. During the third quarter of 2014, we entered into an agreement to sell our insurance business. For additional information, see Note 4. Assets Held for Sale and Discontinued Operations.
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 ending December 31, 2014. 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, 2013 (“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.
Reclassification
During the three and nine months ended September 30, 2014, certain amounts have been reclassified in our prior period condensed consolidated statement of operations to conform to current year presentation and such amounts were not material to current and prior periods.
During the third quarter of 2014, we entered into an agreement to sell our insurance business, subject to regulatory approval, and determined the assets related to our insurance subsidiary met the criteria for classification as Assets Held for Sale. The assets and liabilities associated with this businesses are presented in our condensed consolidated balance sheets as Current "Assets Held for Sale” and Current "Liabilities Held for Sale”. For additional information, see Note 4. Assets Held for Sale and Discontinued Operations.

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


NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2014, the Financial Accounting Standards Board ("FASB") issued guidance for accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The standard states that a performance target in a share-based payment that affects vesting and that could be achieved after the requisite service period should be accounted for as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. We are required to adopt this standard in the first quarter of fiscal 2016 and early adoption is permitted. This standard will not have an impact on our condensed consolidated financial statements.
In May 2014, the FASB issued amended guidance for recognizing revenue which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance. The core principle of this update is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. Further, the guidance requires disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. We are required to adopt this standard in the first quarter of fiscal 2017. Early adoption is not permitted. The amended guidance permits the initial application to be applied either retrospectively to each prior reporting period presented, or retrospectively with a cumulative effect adjustment made at the date of initial application. We are currently evaluating the impact of adopting this guidance on our condensed consolidated financial statements.
In April 2014, the FASB issued an update modifying the criteria under which asset disposal activities qualify for presentation as a discontinued operation. The amendment restricts presentation as a discontinued operation to disposals that represent a strategic shift that has, or will have, a major effect on an entity's operations and financial results. The amendments in this update are to be applied prospectively to all disposals or classifications as held for sale of components of an entity. We are required to adopt this standard for the first quarter of 2015. Early adoption is permitted. We have early adopted this standard in the first quarter of 2014.
In January 2014, the FASB issued an update concerning accounting for service concession arrangements. The amendments apply to an operating entity of a service concession arrangement entered into with a public-sector entity grantor when the arrangement meets both of the following conditions: (i) the grantor controls or has the ability to modify or approve the services that the operating entity must provide with the infrastructure, to whom it must provide them, and at what price; and (ii) the grantor controls, through ownership, beneficial entitlement, or otherwise, any residual interest in the infrastructure at the end of the term of the arrangement. The amendments in this update are to be applied on a modified retrospective basis to service concession arrangements that exist at the beginning of an entity’s fiscal year of adoption. We are required to adopt this standard for the first quarter of 2015. Early adoption is permitted. Since many of our agreements are with public-sector entities, we are currently evaluating the requirements of this update to determine the effect on our condensed consolidated financial statements.

NOTE 3. BUSINESS DEVELOPMENT AND ORGANIC GROWTH
Business Development
Fairfax Energy-from-Waste Facility
In April 2014, we entered into a waste disposal agreement with our client at the Fairfax EfW facility, extending our relationship under a tip fee arrangement effective at the end of the current service agreement in February 2016. The initial term of the new agreement will end in 2021, with two additional five year renewal periods upon mutual agreement of the parties. Beginning in 2016, the client will provide approximately 60% of the facility's waste capacity under the new agreement.
York Energy-from-Waste Facility
In May 2014, we extended the service agreement for the York EfW facility from 2015 to 2020 on substantially the same terms as the existing agreement.
Indianapolis Energy-from-Waste Facility and Advanced Recycling Center
In August 2014, we extended our existing waste disposal agreement with the City of Indianapolis from 2018 to 2028, under which it will continue to supply approximately 35% of the facility’s waste capacity. The agreement also contemplates the construction and operation of an Advanced Recycling Center ("ARC") adjacent to our Indianapolis EfW facility, which will recover recyclables from mixed municipal solid waste using state-of-the-art sorting technology. Once necessary permits are received, we expect to invest approximately $45 million to build the ARC facility.

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


Dublin Energy-from-Waste Facility
In September 2014, we entered into an agreement with the Dublin City Council ("Dublin") to build, own and operate a new 600,000 tonne-per-year, 58 megawatt facility in Dublin, Ireland (the “Dublin Waste-to-Energy Facility”). The project will source residential, commercial and industrial waste from Dublin and the surrounding areas and will sell electricity into the local electricity grid, with over 50% of the facility’s generation expected to qualify for preferential pricing under Ireland’s renewable feed-in tariff.  We have commenced construction of the facility, which will take approximately three years to complete, with operational commencement expected in late 2017.  We will operate the facility under a 45-year public-private-partnership, after which ownership of the facility will transfer to Dublin. Our total investment in the project is expected to be approximately €500 million, funded by a combination of third party non-recourse project financing (€375 million) and project equity (approximately €125 million). For additional information related to funding for this project, see Note 7. Consolidated Debt - Dublin Project Financing.
Garco Industrial TSDF Acquisition
In September 2014, we acquired Garco, Inc., a treatment, storage and disposal facility ("TSDF") located in Asheboro, North Carolina, specializing in the treatment, management, transportation and disposal of non-hazardous industrial waste and field/facility remediation projects. This acquisition is not material to our condensed consolidated financial statements and therefore, disclosures of pro forma financial information have not been presented.
Other Ongoing Projects
Durham-York EfW Facility
We are constructing a municipally-owned 140,000 tonne-per-year EfW facility to be built in Clarington, Ontario, located in Durham Region, Canada. The project is expected to begin operations in early 2015, after which we will operate the facility under a 20 year contract.
New York City Waste Transport and Disposal Contract
In 2013, New York City awarded us a contract to handle waste transport and disposal from two marine transfer stations located in Queens and Manhattan. We plan to utilize capacity at existing facilities for the disposal of approximately 800,000 tons per year of New York City's municipal solid waste relating to this contract. 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 pending notice to proceed yet to be issued by New York City. The contract is for 20 years, effective from the date operations commence, with options for New York City to extend the term for two additional five-year periods, and requires waste to be transported using a multi-modal approach. We have begun to purchase equipment, including barges, railcars, containers, and intermodal equipment to support this contract. We expect to invest approximately $140 million in new equipment and enhancements to existing facilities that support service under this contract. These investments commenced in 2013 and will be made over several years. During the nine months ended September 30, 2014 and for the twelve months ended December 31, 2013, we invested $45 million and $23 million, respectively, in property, plant and equipment relating to this contract.
Niagara Energy-from-Waste Facility
At our Niagara EfW facility, we installed a new natural gas package boiler to augment the steam generation from our EfW boilers, as well as a steam line connection to new customers. The improvements, which began in 2012, were essentially complete by the second quarter of 2014 and the boiler became fully operational during the third quarter of 2014. Capital expenditures related to these improvements were approximately $4 million for the nine months ended September 30, 2014 and $13 million for the twelve months ended December 31, 2013.
Essex Energy-from-Waste Facility
We are implementing significant operational improvements at our Essex EfW facility, including a state-of-the-art particulate emissions control system, at a total estimated cost of $90 million. Construction on the system commenced in 2014 and is expected to be completed by 2016. Capital expenditures related to these improvements totaled approximately $12 million during the nine months ended September 30, 2014. The facility's environmental performance is currently compliant with all environmental permits and will be further improved with the installation of this equipment.


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


NOTE 4. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
Assets Held for Sale
During the third quarter of 2014, we entered into an agreement to sell our insurance business, subject to regulatory approval, and determined the assets related to our insurance subsidiary met the criteria for classification as Assets Held for Sale, but does not meet the criteria for classification as Discontinued Operations. During the fourth quarter of 2013, assets related to our development activities in the United Kingdom met the criteria for classification as Assets Held for Sale and Discontinued Operations.
The assets and liabilities associated with these businesses are presented in our condensed consolidated balance sheets as Current "Assets Held for Sale” and Current "Liabilities Held for Sale.” All corresponding prior year periods presented in our condensed consolidated balance sheet and related information in the accompanying notes have been reclassified to reflect the Assets Held for Sale presentation. The following table sets forth the assets and liabilities of the Assets Held for Sale included in the condensed consolidated balance sheets as of the dates indicated (in millions):
 
As of September 30, 2014
 
As of December 31, 2013
 
UK Development
 
Insurance Business
 
Total
 
UK Development
 
Insurance Business
 
Total
Cash and cash equivalents
$
1

 
$
4

 
$
5

 
$
2

 
$
3

 
$
5

Accounts receivable

 
1

 
1

 
2

 
1

 
3

Prepaid expenses and other current assets

 
6

 
6

 

 
10

 
10

Investments in fixed maturities at market (cost: $32 and $32, respectively)

 
32

 
32

 

 
32

 
32

Other noncurrent assets (1)
3

 
17

 
20

 
3

 
18

 
21

Write-down of assets to fair value (2)

 
(12
)
 
(12
)
 

 

 

Assets held for sale
$
4

 
$
48

 
$
52

 
$
7

 
$
64

 
$
71

 
 
 
 
 
 
 
 
 
 
 
 
Accrued expenses and other
$
1

 
$
1

 
$
2

 
$
2

 
$

 
$
2

Other liabilities (3)

 
43

 
43

 

 
47

 
47

Liabilities held for sale
$
1

 
$
44

 
$
45

 
$
2

 
$
47

 
$
49

(1)
Other noncurrent assets of our insurance business primarily include reinsurance recoverables.
(2)
We recorded a non-cash write-down of $14 million comprised of the write-down of the carrying amount in excess of the realizable fair value of $12 million, plus $2 million in disposal costs. For additional information see Note 9. Supplementary Information Net Write-offs.
(3)
Other liabilities of our insurance business primarily include unpaid loss and loss adjustment expenses.
Discontinued Operations
The results of operations related to our development activities in the United Kingdom for 2013 are included in the condensed consolidated statements of operations as “Loss from discontinued operations, net of tax” and the related 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,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Revenues
$

 
$
2

 
$
1

 
$
5

Operating expenses
$

 
$
2

 
$
1

 
$
59

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

 
$

 
$

 
$
(54
)
Loss from discontinued operations, net of income tax benefit of $0, $0, $0 and $1, respectively
$

 
$

 
$

 
$
(53
)
Write-off of capitalized development costs included in Operating expenses
$

 
$

 
$

 
$
47



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



NOTE 5. EARNINGS PER SHARE (“EPS”) AND EQUITY
Earnings Per Share
Per share data is based on the weighted average number of outstanding shares of our common stock, par value $0.10 per share, during the relevant period. Basic earnings per share are calculated using only the weighted average number of 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 of 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,
 
2014

2013

2014

2013
Net income (loss) from continuing operations
$
6

 
$
28

 
$
(2
)
 
$
18

Net loss from discontinued operations

 

 

 
(53
)
Net income (loss) attributable to Covanta Holding Corporation
$
6

 
$
28

 
$
(2
)
 
$
(35
)
 
 
 
 
 
 
 
 
Basic income (loss) per share:
 
 
 
 
 
 
 
Weighted average basic common shares outstanding
130

 
129

 
130

 
129

Continuing operations
$
0.05

 
$
0.22

 
$
(0.02
)
 
$
0.14

Discontinued operations

 

 

 
(0.41
)
Basic income (loss) per share
$
0.05

 
$
0.22

 
$
(0.02
)
 
$
(0.27
)
 
 
 
 
 
 
 
 
Diluted income (loss) per share:
 
 
 
 
 
 
 
Weighted average basic common shares outstanding
130

 
129

 
130

 
129

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
131

 
130

 
130

 
130

Continuing operations
$
0.05

 
$
0.22

 
$
(0.02
)
 
$
0.14

Discontinued operations

 

 

 
(0.41
)
Diluted income (loss) per share
$
0.05

 
$
0.22

 
$
(0.02
)
 
$
(0.27
)
 
 
 
 
 
 
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Securities excluded from the weighted average dilutive common shares outstanding because their inclusion would have been anti-dilutive:
 
 
 
 
 
 
 
Stock options
1

 
1

 
1

 
1

Restricted stock

 

 
1

 

Restricted stock units

 

 

 

Warrants

 
29

 

 
29

In 2009, we issued warrants in connection with the issuance of 3.25% Cash Convertible Senior Notes which matured on June 1, 2014. The warrants are exercisable only at expiration in equal tranches over a 60 day period which began on September 2, 2014 and ends on November 26, 2014. The warrants are net share settled, which means that, with respect to any exercise date, we will deliver to the warrant holders a number of shares for each warrant equal to the excess (if any) of the volume-weighted average price of our common stock on each exercise date over the then effective strike price of the warrants, divided by such volume- weighted average price of our common stock, with a cash payment in lieu of fractional shares.

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


During the three months ended September 30, 2014, 156,732 shares of our common stock were issuable in connection with warrant exercises. The remaining warrants will have a dilutive effect to the extent that the volume-weighted average price of our common stock on any daily expiration through November 26, 2014 exceeds the then effective warrant strike price ($20.80 effective as of September 25, 2014). As of September 30, 2014, the dilutive effect of the remaining warrants on earnings per share was not material.
Equity
In May 2014, the stockholders of the Company approved the Covanta Holding Corporation 2014 Equity Award Plan (the “Plan”), to provide incentive compensation to non-employee directors, officers and employees, and to consolidate the two previously existing equity compensation plans into a single plan: the Company’s Equity Award Plan for Employees and Officers (the “Former Employee Plan”) and the Company’s Equity Award Plan for Directors (the “Former Director Plan,” and together with the Former Employee Plan, the “Former Plans”). Shares that were available for issuance under the Former Plans will be available for issuance under the Plan. The stockholders of the Company also approved the authorization of 6 million new shares of our common stock for issuance under the Plan.
During the nine months ended September 30, 2014, we granted awards of 720,217 shares of restricted stock, 246,825 restricted stock units and 25,000 stock options. For information related to stock-based award plans, see Note 10. Stock-Based Compensation. During the nine months ended September 30, 2014, we withheld 216,477 shares of our common stock in connection with tax withholdings for vested stock awards.
Dividends declared to stockholders were as follows (in millions, except per share amounts):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
Cash dividend
 
 
 
 
 
 
 
Declared
$
33

 
$
21

 
$
81

 
$
65

Per Share
$
0.25

 
$
0.165

 
$
0.61

 
$
0.495

Noncontrolling interests in subsidiaries
Noncontrolling interests in subsidiaries were as follows (in millions):
 
 
As of September 30,
 
 
2014
 
2013
Noncontrolling interests in subsidiaries, balance as of beginning of period
 
$
4

 
$
7

Acquisition of noncontrolling interests in subsidiaries
 
(2
)
 
(2
)
Net loss
 

 
(1
)
Noncontrolling interests in subsidiaries, balance as of end of period
 
$
2

 
$
4

In June 2014, we exercised our option to acquire a nominal general partner interest held by a third party in our subsidiary which owns and operates the Southeast Massachusetts energy-from-waste facility.
In August 2014, we purchased the interest held by our partner in a joint venture which was originally formed to pursue the development of the Dublin Waste-to-Energy Facility.

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


NOTE 6. FINANCIAL INFORMATION BY BUSINESS SEGMENTS
We have one reportable segment, North America, which is comprised of waste and energy services operations located primarily in the United States and Canada. The results of our reportable segment are as follows (in millions):
 
North America  
 
All Other  (1)
 
Total      
Three Months Ended September 30, 2014
 
 
 
 
 
Operating revenues
$
403

 
$
11

 
$
414

Depreciation and amortization expense
52

 

 
52

Net write-offs
34

 
14

 
48

Operating income (loss)
33

 
(15
)
 
18

Three Months Ended September 30, 2013
 
 
 
 
 
Operating revenues
$
417

 
$
8

 
$
425

Depreciation and amortization expense
51

 
1

 
52

Net write-offs
12

 

 
12

Operating income (loss)
83

 
(2
)
 
81

 
 
 
 
 
 
 
North America  
 
All Other  (1)
 
Total      
Nine Months Ended September 30, 2014
 
 
 
 
 
Operating revenues
$
1,214

 
$
33

 
$
1,247

Depreciation and amortization expense
156

 
2

 
158

Net write-offs
50

 
14

 
64

Operating income (loss)
95

 
(15
)
 
80

Nine Months Ended September 30, 2013
 
 
 
 
 
Operating revenues
$
1,182

 
$
26

 
$
1,208

Depreciation and amortization expense
155

 
2

 
157

Net write-offs
16

 

 
16

Operating income (loss)
140

 
(6
)
 
134

(1)
All other is comprised of the financial results of our insurance subsidiaries’ operations and our international assets.

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



NOTE 7. CONSOLIDATED DEBT
Consolidated debt is as follows (in millions):
 
As of
 
September 30,
2014

December 31,
2013
LONG-TERM DEBT:
 
 
 
Revolving Credit Facility expiring 2019
$
180

 
$
110

Term Loan due 2019
198

 
294

Debt discount related to Term Loan
(1
)
 
(1
)
Term Loan, net
197

 
293

Credit Facilities Sub-total
$
377

 
$
403

7.25% Senior Notes due 2020
$
400

 
$
400

6.375% Senior Notes due 2022
400

 
400

5.875% Senior Notes due 2024
400

 

3.25% Cash Convertible Senior Notes due 2014

 
460

Debt discount related to 3.25% Cash Convertible Senior Notes

 
(13
)
Cash conversion option derivative at fair value

 
78

3.25% Cash Convertible Senior Notes, net

 
525

Notes Sub-total
$
1,200

 
$
1,325

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

 
$
335

Variable Rate Tax-Exempt Bonds due 2043
34

 
22

Tax-Exempt Bonds Sub-total
$
369

 
$
357

3.63% - 4.52% Equipment Financing Capital Leases due 2024 through 2026
$
47

 
$

Total long-term debt
$
1,993

 
$
2,085

Less: current portion (includes $1 and $13 of unamortized discount, respectively, and $0 and $78 of cash conversion option derivative at fair value, respectively)
(4
)
 
(528
)
Noncurrent long-term debt
$
1,989

 
$
1,557

PROJECT DEBT:
 
 
 
North America project debt:
 
 
 
4.00% - 7.00% project debt related to Service Fee structures due 2014 through 2022
$
153

 
$
167

5.248% - 8.375% project debt related to Tip Fee structures due 2014 through 2020
29

 
45

Unamortized debt premium, net
1

 
1

Total North America project debt
183

 
213

Other project debt:
 
 
 
Dublin Junior Term Loan due 2022
$
63

 
$

   Debt discount related to Dublin Junior Term Loan
(3
)
 

Dublin Junior Term Loan, net
60

 

China project debt
22

 
23

Total Other project debt
82

 
23

Total project debt
$
265

 
$
236

Less: Current project debt (includes $1 and $1 of unamortized premium, respectively)
(39
)
 
(55
)
Noncurrent project debt
$
226

 
$
181

TOTAL CONSOLIDATED DEBT
$
2,258

 
$
2,321

Less: Current debt
(43
)
 
(583
)
TOTAL NONCURRENT CONSOLIDATED DEBT
$
2,215

 
$
1,738



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



Credit Facilities
Our subsidiary, Covanta Energy, has senior secured credit facilities consisting of a $1.0 billion revolving credit facility expiring in 2019 (the “Revolving Credit Facility”) and a $198 million term loan due 2019 (the “Term Loan”) (collectively referred to as the "Credit Facilities").
On March 21, 2014, we amended the Credit Facilities to:
extend the termination date of the Revolving Credit Facility by two years from March 28, 2017 to March 21, 2019;
increase the aggregate amount of the Revolving Credit Facility by $100 million to $1.0 billion; and
reduce the applicable margin payable on the Term Loan by 25 basis points, as noted below under Interest and Fees.
We incurred approximately $3 million in costs related to this amendment which will be deferred and amortized over the remaining term of the Credit Facilities.
On March 20, 2014, we made a voluntary prepayment on the Term Loan of $95 million, reducing the outstanding principal to $200 million.
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 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.
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, 2014, we had availability under the Revolving Credit Facility as follows (in millions):
 
Total
Available
Under  Credit Facility
 
Expiring
 
Direct Borrowings
as of
September 30, 2014
 
Outstanding Letters of Credit as of
September 30, 2014
 
Availability as of
September 30, 2014
Revolving Credit Facility
$
1,000

 
2019
 
$
180

 
$
163

 
$
657

During the nine months ended September 30, 2014, borrowing under the Revolving Credit Facility increased by $70 million.
Repayment Terms
As of September 30, 2014, the Term Loan has mandatory amortization payments of $2 million in each of the years 2015 to 2018 and $190 million in 2019. The Credit Facilities 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 a pricing grid, in the case of the Revolving Credit Facility, which is 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 London Interbank Offered Rate, commonly referred to as “LIBOR”, or a comparable or successor rate, 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. Effective March 21, 2014 the Term Loan bears interest, at our option, at either (i) the base rate plus an applicable margin of 1.50% , or (ii) LIBOR plus an applicable margin of to 2.50%, subject to a LIBOR floor of 0.75%.

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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, 2014.
The negative covenants of the Credit Facilities limit our and our restricted subsidiaries’ ability to, among other things:
incur additional indebtedness (including guarantee obligations);
create certain liens against or security interests over certain property;
pay dividends on, redeem, or repurchase our capital stock or make other restricted junior payments; 
enter into agreements that restrict the ability of our subsidiaries to make distributions or other payments to us;
make investments;
consolidate, merge or transfer all or substantially all of our assets and the assets of our subsidiaries on a consolidated basis;
dispose of certain assets; and
make certain acquisitions.
The financial maintenance covenants of the Credit Facilities, which are measured on a trailing four quarter period basis, include the following:
a maximum Leverage Ratio of 4.00 to 1.00 for the trailing four quarter period, which measures the principal amount of Covanta Energy’s consolidated debt less certain restricted funds dedicated to repayment of project debt principal and construction costs (“Consolidated Adjusted Debt”) to its adjusted earnings before interest, taxes, depreciation and amortization, as calculated in the Credit Agreement (“Adjusted EBITDA”). The definition of Adjusted EBITDA in the Credit Facilities excludes certain non-recurring and non-cash charges.
a minimum Interest Coverage Ratio of 3.00 to 1.00, which measures Covanta Energy’s Adjusted EBITDA to its consolidated interest expense plus certain interest expense of ours, to the extent paid by Covanta Energy, as calculated in the Credit Agreement.
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.
5.875% Senior Notes due 2024 (the "5.875% Notes")
In March 2014, we sold $400 million aggregate principal amount of 5.875% Senior Notes due March 2024. Interest on the 5.875% Notes is payable semi-annually on March 1 and September 1 of each year, commencing on September 1, 2014, and the 5.875% Notes will mature on March 1, 2024 unless earlier redeemed or repurchased. Net proceeds from the sale of the 5.875% Notes were approximately $393 million, consisting of gross proceeds of $400 million net of approximately $7 million in offering expenses. We used the net proceeds of the 5.875% Notes offering for the repayment of the 3.25% Cash Convertible Notes at maturity on June 1, 2014.
The 5.875% Notes are senior unsecured obligations, ranking equally in right of payment with any of the current and future senior unsecured indebtedness of Covanta Holding Corporation. The 5.875% Notes are effectively junior to our existing and future secured indebtedness, including any guarantee of indebtedness under the Credit Facilities. The 5.875% Notes are not guaranteed by any of our subsidiaries and are effectively subordinated to all existing and future indebtedness and other liabilities of our subsidiaries.

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


The 5.875% Notes are subject to redemption at our option, at any time on or after March 1, 2019, in whole or in part, at the redemption prices set forth in the prospectus supplement, plus accrued and unpaid interest. At any time prior to March 1, 2017, we may redeem up to 35% of the original principal amount of the 5.875% Notes with the proceeds of certain equity offerings at a redemption price of 105.875% of the principal amount of the 5.875% Notes plus accrued and unpaid interest. At any time prior to March 1, 2019, we may also redeem the 5.875% Notes, in whole but not in part, at a price equal to 100% of the principal amount of the 5.875% Notes, plus accrued and unpaid interest and a “make-whole premium.” The occurrence of specific kinds of changes in control will be a triggering event requiring us to offer to purchase from the holders all or a portion of the 5.875% Notes at a price equal to 101% of the principal amount, plus accrued and unpaid interest. In addition, certain asset dispositions will be triggering events that may require us to use the proceeds from those asset dispositions to make an offer to purchase the 5.875% Notes at 100% of the principal amount, plus accrued and unpaid interest, if any, to the date of purchase if such proceeds are not otherwise used within 365 days to repay indebtedness or to invest or commit to invest such proceeds in additional assets related to our business or capital stock of a restricted subsidiary.
3.25% Cash Convertible Senior Notes due 2014 (the “3.25% Notes”)
On June 1, 2014, we repaid the $460 million of 3.25% Cash Convertible Senior Notes utilizing net proceeds from the March 2014 5.875% Notes issuance.
During the period from March 1, 2014 to May 30, 2014, and under certain additional limited circumstances, the 3.25% Notes were cash convertible by holders thereof (the "Cash Conversion Option"). The conversion rate was 64.6669 shares of our common stock (which represented a conversion price of approximately $15.46 per share) for the period from March 17, 2014 through March 21, 2014, and65.3501 shares of our common stock (which represented a conversion price of approximately $15.30 per share), as adjusted for the dividend paid on April 2, 2014, for the period from March 24, 2014 to May 30, 2014. We did not deliver common stock (or any other securities) upon conversion. Upon maturity, we were required to pay $83 million to satisfy the obligation under the Cash Conversion Option in addition to the principal amount of the 3.25% Notes. 
In connection with the issuance of 3.25% Notes offering, we entered into privately negotiated cash convertible note hedge transactions (the “Note Hedge”) with affiliates of certain of the initial purchasers of the 3.25% Notes (the “Option Counterparties”) which we cash-settled for $83 million upon maturity of the 3.25% Notes and effectively offset our liability under the Cash Conversion Option. The income recognized as a result of changes in the credit valuation adjustment related to the note hedge was not material.
In connection with the issuance of the 3.25% Notes, we also sold warrants, correlating to the number of shares underlying the 3.25% Notes, which currently have a strike price of approximately $20.80 and settle on a net share basis. The warrants are exercisable only at expiration in equal tranches over a 60 day period which began on September 2, 2014 and ends on November 26, 2014. During the three months ended September 30, 2014, 156,732 shares of our common stock were issuable in connection with warrant exercises. For additional information, see Note 5. Earnings per Share and Equity above and Item 3. Quantitative and Qualitative Disclosures About Market Risk in this Quarterly report on Form 10-Q and Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our Form 10-K.
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.
Variable Rate Tax-Exempt Demand Bonds due 2043 ("Variable Rate Bonds")
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, 2014, the weekly interest rate was 0.07%.
On July 1, 2014, we issued an additional $12 million of 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 $12 million of project debt at our Delaware Valley facility due on July 1, 2014. The terms of these bonds are identical to the variable rate bonds issued in July 2013. Interest on the bonds is paid monthly on the first business day of each month beginning on August 1, 2014. Financing costs were not material.
For specific criteria related to redemption features of the Variable Rate Bonds, refer to Note 11. Consolidated Debt of the Notes to Consolidated Financial Statements in our Form 10-K.


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


Equipment Financing Capital Leases
In 2014, we entered into equipment financing capital lease arrangements to finance the purchase of barges, railcars, containers and intermodal equipment related to our New York City contract. During the three months ended September 30, 2014, we borrowed $47 million under the equipment financing capital lease arrangements. The lease terms range from 10 years to 12 years and the fixed interest rates range from 3.63% to 4.52%, with payments commencing on October 1, 2014. As of September 30, 2014, the outstanding borrowings under the equipment financing capital leases have mandatory amortization payments remaining as follows (in millions):


2014

2015

2016

2017

2018

Thereafter
Annual Remaining Amortization

$
1

 
$
2

 
$
2

 
$
3

 
$
3

 
$
36


Dublin Project Financing
In September 2014, we executed agreements for project financing totaling €375 million to fund a majority of the construction costs of the Dublin Waste-to-Energy Facility. The project financing package includes: (i) €300 million of project debt to be borrowed under a credit facility agreement with various lenders (the “Dublin Credit Agreement”), which consists of a €250 million senior secured term loan (the “Dublin Senior Term Loan”) and a€50 million second lien term loan (the “Dublin Junior Term Loan”), and (ii) a €75 million convertible preferred investment (the “Dublin Convertible Preferred”), which has been committed by a leading global energy infrastructure investor. For additional information related to this project, see Note 3. Business Development and Organic Growth.
Dublin Senior Term Loan due 2021
The €250 million Dublin Senior Term Loan is expected to be drawn in 2016 and 2017 to fund remaining construction costs after our equity investment into the project (estimated at approximately €125 million), the Dublin Convertible Preferred, and the Dublin Junior Term Loan have been fully utilized. Key commercial terms of the Dublin Senior Term Loan include:
Final maturity on September 30, 2021 (approximately four years after the anticipated operational commencement date of the facility).
Scheduled repayments will be made semi-annually according to a 15-year amortization profile, beginning in 2018. The loan is pre-payable at our option following operational commencement.
Borrowings will bear interest at the Euro Interbank Offered Rate ("EURIBOR") plus an applicable margin, which will range from 4.00% to 4.50% according to a pre-determined schedule. Interest on outstanding borrowings will be payable in cash monthly prior to the operational commencement date of the facility, and payable in cash semi-annually after the operational commencement date, based on the prevailing one and six month EURIBOR rates, respectively. Undrawn commitments will accrue commitments fees at a rate of 2.25% per annum. We entered into interest rate swap agreements in order to hedge our exposure to adverse variable interest rate fluctuations under the Dublin Senior Term Loan. For additional information, see Note 12. Derivative Instruments.
The Dublin Senior Term Loan is a senior obligation of the project company and certain other related subsidiaries, all of which are wholly-owned by us, and is secured by a first priority lien on substantially all of the wholly-owned subsidiary assets. The Dublin Senior Term Loan is non-recourse to Covanta Energy or Covanta Holding Corp. See Note 13. Commitments and Contingencies for a description of the commitments of Covanta Energy related to the Dublin project financing.
The Dublin Credit Agreement contains positive, negative and financial maintenance covenants that are customary for a project financing of this type. Our ability to service the Dublin Junior Term Loan and the Dublin Convertible Preferred and to make cash distributions to common equity following the operational commencement date is subject to ongoing compliance with these covenants, including maintaining a minimum debt service coverage ratio and loan life coverage ratio on the Dublin Senior Term Loan.
Dublin Junior Term Loan due 2022
The €50 million Dublin Junior Term Loan was funded into an escrow account in September 2014, with proceeds expected to be drawn from the account to fund construction costs in 2015 and 2016 after our equity investment into the project and the Dublin Convertible Preferred have been fully utilized. As of September 30, 2014, $63 million (€50 million) is included in both project debt and noncurrent restricted funds held in trust on our condensed consolidated balance sheet. Key commercial terms of the Dublin Junior Term Loan include:
Final maturity on March 31, 2022 (six months after the maturity of the Dublin Senior Term Loan).
Scheduled repayments will be made semi-annually according to a 15-year amortization profile, beginning in 2018. The loan is pre-payable at our option following operational commencement.

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


Borrowings will bear interest at a fixed rate of 5.23% during the first six months of the loan, and thereafter at fixed rates from 9.23% to 9.73% according to a pre-determined schedule. Interest on outstanding borrowings will be payable 50% in cash and 50% accrued to the balance of the loan monthly prior to the operational commencement date of the facility, and payable 100% in cash semi-annually after the operational commencement date.
The Dublin Junior Term Loan is a junior obligation of the project company and certain other related subsidiaries, all of which are wholly-owned by us, and is secured by a second priority lien on substantially all of the wholly-owned subsidiary assets and a first priority lien on the assets of the top tier project holding company. The Dublin Junior Term Loan is non-recourse to Covanta Energy or Covanta Holding Corp.
Under the Dublin Credit Agreement, our ability to service the Dublin Convertible Preferred and to make cash distributions to common equity is subject to ongoing compliance with the covenants under the agreement, including maintaining a minimum debt service coverage ratio and loan life coverage ratio on the Dublin Junior Term Loan.
Dublin Convertible Preferred
The €75 million Dublin Convertible Preferred is expected to be drawn to fund construction costs in 2015 after our equity investment into the project has been fully utilized. The instrument will have: (i) liquidation preference equal to par value of the investment, (ii) a preferred claim on project cash flows during operations (after debt service) to pay a fixed dividend rate and repay principal according to an amortization schedule, and (iii) an option to convert loan principal into a common equity interest in the project.
The Dublin Convertible Preferred is structured as a shareholder loan (the “Stakeholder Loan”) with the concurrent issuance of warrants (the “Stakeholder Warrants”). Key commercial terms of the Dublin Convertible Preferred include:
The Stakeholder Loan will accrue dividends at a fixed rate of 13.50% per annum. The dividends are payable 50% in cash and 50% accrued to the principal balance on a monthly basis prior to the operational commencement date, and payable 100% in cash semi-annually thereafter, subject to available project cash flows after debt service.
Scheduled repayments of principal of the Stakeholder Loan will be made semi-annually according to a 13-year amortization profile beginning in 2020 (two years after the operational commencement date), with a final repayment date of September 30, 2032, all subject to available project cash flows after debt service.
Voluntary prepayments are not permitted during the first five years of the Stakeholder Loan, after which the principal is pre-payable at our option in increments of 33% of the aggregate outstanding principal balance per year.
The Stakeholder Loan is mandatorily pre-payable at the option of the Stakeholder Loan holder(s) under certain circumstances in the event of a refinancing of the Dublin Senior Term Loan and/or the Dublin Junior Term Loan.
The Stakeholder Warrants are exercisable into ordinary shares of our subsidiary holding company that owns 100% of the project company on five conversion dates, scheduled at six month intervals, beginning on the operational commencement date, or upon a refinancing of the Dublin Credit Agreement. The warrants contain customary anti-dilution protection and are exercisable on a cashless basis at a specified conversion price on each conversion date, representing a set premium to the original subscription price for common shares (i.e., Covanta’s subscription price) that increases over time. The number of shares that can potentially be issued upon exercise is limited to a maximum of 24.99% of the outstanding shares.
The Dublin Convertible Preferred holder(s) is entitled to nominate two out of five voting board members of the project subsidiary holding company. The right to nominate board members will be reduced with future reductions in the outstanding principal amount of the Stakeholder Loan and/or number of common shares held following conversion of the Stakeholder Warrants.
Financing Costs and Capitalized Interest
Financing costs related to the Dublin project financing totaled approximately $24 million. Interest expense paid on the Dublin project financing and costs amortized to interest expense will be capitalized during the construction phase of the project.
Loss on Extinguishment of Debt
During the nine months ended September 30, 2014 and 2013, we incurred approximately $2 million and $1 million, pre-tax, respectively, of loss on extinguishment of debt expense comprised of the write-off of unamortized discounts and deferred financing costs resulting from amendments to the Credit Facilities completed during the respective periods.

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


NOTE 8. 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.
We currently estimate that our ETR for the year ending December 31, 2014 will be approximately 89%. We review the annual effective tax rate on a quarterly basis as projections are revised and laws are enacted. The ETR was approximately 74% and 43% for the nine months ended September 30, 2014 and 2013, respectively. The increase in the effective tax rate primarily resulted from the impact of write-downs on net income.
During the second quarter of 2014, we increased goodwill and net non-current deferred income tax liabilities by $47 million to correct the purchase price allocation associated with the ARC Holdings acquisition in June 2005. This correction related to the deferred tax impact associated with partnership entities that were owned by ARC Holdings at the time of the acquisition and is immaterial to prior periods and for the nine months ended September 30, 2014.  The correction of this error increased income tax expense by $4 million and decreased earnings per share by $0.03 per share for the nine months ended September 30, 2014.
Uncertain tax positions, exclusive of interest and penalties, were $132 million and $128 million as of September 30, 2014 and December 31, 2013, respectively. The increase in this liability primarily relates to accelerated deductions associated with the ARC Holdings purchase price allocation adjustments and interest. Included in the balance of unrecognized tax benefits as of September 30, 2014 are potential benefits of $132 million that, if recognized, would impact the effective tax rate. For both the three and nine months ended September 30, 2014 and 2013, we recognized a net tax expense of $5 million and a net tax benefit of $2 million for uncertain tax positions, including interest and penalties. We have accrued interest and penalties associated with liabilities for uncertain tax positions of $2 million and $1 million at September 30, 2014 and December 31, 2013, respectively. 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 or all 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.
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 $557 million for federal income tax purposes as of December 31, 2013, based on the income tax returns filed and projected to be filed. The federal NOLs will expire in various amounts from December 31, 2028 through December 31, 2033, if not used. In addition to the consolidated federal NOLs, as of December 31, 2013, we had state NOL carryforwards of approximately $466 million, which expire between 2014 and 2033, net foreign NOL carryforwards of approximately $30 million expiring between 2014 and 2032, federal tax credit carryforwards, including production tax credits of $53 million expiring between 2024 and 2033, and minimum tax credits of $7 million with no expiration. These deferred tax assets are offset by a valuation allowance of approximately $42 million. For further information, refer to Note 15. Income Taxes of the Notes to the Consolidated Financial Statements in our Form 10-K.


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


NOTE 9. 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,
 
2014
 
2013
 
2014
 
2013
Waste and service revenue unrelated to project debt
$
247

 
$
246

 
$
743

 
$
713

Revenue earned explicitly to service project debt - principal
5

 
8

 
15

 
25

Revenue earned explicitly to service project debt - interest

 
1

 
2

 
4

Total waste and service revenue
$
252

 
$
255

 
$
760

 
$
742

Under some of our service agreements, we bill fees to municipalities 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
Renewable Energy Credits
Renewable Energy Credits (“RECs”) are environmental commodities that can be sold and traded in certain states, and represent the renewable energy attributes created when electricity is produced from an eligible renewable energy source. The RECs are recognized at fair value as a reduction to plant operating expense in the condensed consolidated statements of operations and as an intangible asset within other current assets in the consolidated balance sheets on the date the renewable energy is generated. The fair value amount recognized is reduced by a valuation allowance for those RECs which management believes will ultimately be sold at below market or depressed market prices. As the RECs are delivered, the intangible asset is relieved. Fair values for the RECs are based on prices established by executed contracts, pending contracts or management estimates of current market prices. The total RECs amount recognized as a reduction to plant operating expense in the condensed consolidated statements of operations was $7 million and $6 million for the three months ended September 30, 2014 and 2013, respectively, and $18 million and $11 million for the nine months ended September 30, 2014 and 2013, respectively.
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 $12 million and $17 million for the three months ended September 30, 2014 and 2013, respectively, and $42 million and $52 million for the nine months ended September 30, 2014 and 2013, 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,
 
2014
 
2013
 
2014
 
2013
Construction costs
$
18

 
$
32

 
$
63

 
$
86

Insurance subsidiary operating expenses
1

 

 
3

 
3

Defined benefit pension plan settlement gain (1)

 

 

 
(6
)
Insurance recoveries
(1
)
 
(4
)
 
(1
)
 
(4
)
Other (2)
1

 
(1
)
 
1

 
(10
)
Total other operating expenses
$
19

 
$
27

 
$
66

 
$
69

(1)
During the first quarter of 2013, we recorded a gain related to the final settlement of our defined benefit pension plan. For additional information, refer to Note 16. Employee Benefit Plans of the Notes to Consolidated Financial Statements in our Form 10-K.
(2)
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 operating income of $8 million related to early termination of a power purchase agreement.
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, 2014 included or expected to be included in our condensed consolidated statements of operations for each of the years indicated (in millions):
 
Waste, Service and
Energy Contract Intangibles
  (Amortization Expense)  
 
Waste, Service and Other
Contract Intangibles
    (Contra-Expense)
Nine Months Ended September 30, 2014
$
22

 
$
(8
)
Remainder of 2014
$
7

 
$
(3
)
2015
25

 
(6
)
2016
22

 
(6
)
2017
15

 
(4
)
2018
13

 
(2
)
Thereafter
242

 
(1
)
Total
$
324

 
$
(22
)
During the nine months ended September 30, 2014, we recorded non-cash impairment write-offs totaling $16 million related to service contract intangibles that were recorded upon acquisition in 2009. See Net Write-offs discussion below for additional information.

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


Net write-offs
The components of net write-offs are as follows (in millions):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2014
 
2013
 
2014
 
2013
North America segment:
 
 
 
 
 
 
 
Write-off of intangible asset - Hudson Valley EfW facility (1)
$

 
$

 
$
9

 
$

Write-off of intangible asset - Abington Transfer Station (2)

 

 
7

 

Write-down of insurance business (3)
14

 

 
14

 

Write-down of California biomass facilities (4)
34

 

 
34

 

Write-down of Wallingford EfW facility assets (5)

 
9

 

 
9

Write-down of equity investment in biomass facility (6)

 
3

 

 
3

Write-off of loan issued for the Harrisburg EfW facility (7)

 

 

 
4

Total net write-offs
$
48

 
$
12

 
$
64

 
$
16

(1)
See Hudson Valley Energy-from-Waste Facility discussion below.
(2)
See Abington Transfer Station discussion below.
(3)
During the third quarter of 2014, we entered into an agreement to sell our insurance subsidiary, subject to regulatory approval. We recorded a non-cash write-down of $14 million comprised of the write-down of the carrying amount in excess of the realizable fair value of $12 million, plus $2 million in disposal costs.
(4)
See California Biomass Facilities discussion below.
(5)
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. For additional details, refer to Note 14. Supplementary Information of the Notes to Consolidated Financial Statements in our Form 10-K.
(6)
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. For additional details, refer to Note 14. Supplementary Information of the Notes to Consolidated Financial Statements in our Form 10-K.
(7)
During the nine months ended September 30, 2013, we recorded a non-cash write-off of $4 million associated with funds advanced for certain improvements related to the Harrisburg EfW facility. For additional details, refer to Note 14. Supplementary Information of the Notes to Consolidated Financial Statements in our Form 10-K.

Hudson Valley Energy-from-Waste Facility
On June 30, 2014, our service agreement with the Dutchess County Resource Recovery Agency under which we operated the Hudson Valley EfW facility expired. We were notified in April 2014 that we will not receive an extension of this contract, therefore, during the three months ended March 31, 2014, we recorded a $9 million non-cash impairment write-off of the intangible asset that was recorded upon acquisition in 2009 based on the expected cash flows over the remaining life of the contract.
Abington Transfer Station
On April 3, 2014, the Montgomery County (PA) Commissioners (the “County”) unanimously voted to dissolve the Waste System Authority of Eastern Montgomery County (the “WSA”). The Abington transfer station was constructed by the County and subsequently deeded to the WSA, which was responsible for its operation. We expect to operate the transfer station through the end of the current contract, which expires on December 31, 2014. However, due to the dissolution of the WSA, it is not able to renew our current contract to operate the Abington transfer station. During the three months ended June 30, 2014, we recorded a non-cash impairment write-off of $7 million of the service contract intangible that was recorded upon acquisition in 2009 based on the expected cash flows over the remaining life of the contract.
California Biomass Facilities
During the three months ended September 30, 2014, we identified indicators of impairment associated with our California Biomass facilities, primarily that we have been unsuccessful to date to secure new long-term power purchase agreements to replace the current power purchase agreements which are approaching the end of their terms. Based on expected cash flows, we have recorded a non-cash write-down of $34 million to reduce the carrying value of the California Biomass assets to their estimated fair value.

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


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,
 
2014
 
2013
 
2014
 
2013
Debt discount accretion related to the 3.25% Notes
$

 
$
7

 
$
13

 
$
21

Fair value changes related to the cash convertible note hedge

 
(35
)
 
(5
)
 
(71
)
Fair value changes related to the cash conversion option derivative

 
35

 
5

 
71

Total non-cash convertible debt related expense
$

 
$
7

 
$
13

 
$
21


Goodwill
The following table details the changes in carrying value of goodwill (in millions):
 
Total
Balance as of December 31, 2013
$
249

Purchase price allocation correction associated with the ARC Holdings acquisition in June 2005 (See Note 8)
47

 Goodwill related to the acquisition of Garco, Inc. (See Note 3)
6

Balance as of September 30, 2014
$
302

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 (Loss) 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 loss

 
(4
)
 

 

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

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

 
$
1

 
$
1

 
$

 
$
3


 
 
 
 
 
 
 
 
 
Balance December 31, 2013
$

 
$
2

 
$
(5
)
 
$
1

 
$
(2
)
Other comprehensive loss before reclassifications
(7
)
 

 
(11
)
 

 
(18
)
Amounts reclassified from accumulated other comprehensive income (loss)

 

 

 

 

Net current period comprehensive loss
(7
)
 

 
(11
)
 

 
(18
)
Balance September 30, 2014
$
(7
)
 
$
2

 
$
(16
)
 
$
1

 
$
(20
)

26

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


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 (Loss) 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
 
 
$