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The terms “we,” “our,” “ours,” “us”, "Covanta" and “Company” refer to Covanta Holding Corporation and its subsidiaries; the term “Covanta Energy” refers to our subsidiary Covanta Energy, LLC 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 “WtE”), and also owns and operates related waste transport, processing and disposal assets. WtE serves 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 WtE facilities earn revenue from both the disposal of waste and the generation of electricity and/or steam as well as from the sale of metal recovered during the WtE process. We process approximately 21 million tons of solid waste annually. We operate and/or have ownership positions in 41 waste-to-energy facilities, which are primarily located in North America and Ireland. In total, these assets produce approximately 10 million megawatt hours (“MWh”) of baseload electricity annually. We operate a waste management infrastructure that is complementary to our core WtE business. We also have ownership positions in several projects currently in development and/or under construction in the United Kingdom.

In addition, we offer a variety of sustainable waste management solutions in response to customer demand, including industrial, consumer products and healthcare waste handling, treatment and assured destruction, industrial wastewater treatment and disposal, product depackaging and recycling, on-site cleaning services, and transportation services. Together with our processing of non-hazardous "profiled waste" for purposes of assured destruction or sustainability goals in our WtE facilities, we offer these services under our Covanta Environmental Solutions ("CES") brand.

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 notes thereto required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included in our condensed consolidated financial statements. All intercompany 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 year ending December 31, 2020. The condensed consolidated balance sheet at December 31, 2019, was derived from audited annual consolidated financial statements, but does not contain all of the notes thereto from the annual consolidated financial statements. This Form 10-Q should be read in conjunction with the Audited Consolidated Financial Statements and accompanying Notes in our 2019 Annual Report on Form 10-K.

Accounting Pronouncements Recently Adopted

In August 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. We adopted this guidance on January 1, 2020 on a prospective basis. The adoption of this guidance did not have a material impact on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which amends the impairment model to utilize an expected loss methodology in place of the incurred loss methodology for financial instruments and off balance sheet credit exposures. The amendment requires entities to consider a broader range of information to estimate expected credit losses, which may result in earlier recognition of losses. We adopted this guidance on January 1, 2020 using a modified retrospective approach. The adoption of this guidance did not have a material impact on our consolidated financial statements.

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Goodwill

Goodwill is the excess of our purchase price over the fair value of the net assets of acquired businesses. We do not amortize goodwill, but we assess our goodwill for impairment at least annually. The evaluation of goodwill requires the use of estimates of future cash flows to determine the estimated fair value of the reporting unit. All goodwill is related to our one reportable segment, which is comprised of two reporting units, North America WtE and CES. If the carrying value of the reporting unit exceeds the fair value, an impairment charge is recognized to reduce the carrying value to the fair value.

The goodwill recorded for our CES reporting unit totaled $46 million as of December 31, 2019, and resulted from previously acquired materials processing facilities that are specially designed to process, treat, recycle, and dispose of solid and liquid wastes, which includes waste from the commercial sector. We performed the required annual impairment review of our recorded goodwill as of October 1, 2019. Based on the results of the test performed, we determined that the estimated fair value of the CES reporting unit exceeded the carrying value by 5%; therefore, we did not record a goodwill impairment charge for the year ended December 31, 2019. 

Due to the marginal outcome of our review of goodwill recorded for our CES reporting unit as of October 1, 2019, we continued to monitor the CES reporting unit for impairment through the end of the first quarter of 2020. We considered the economic impacts of the novel coronavirus ("COVID-19") pandemic and the decline in waste volumes from the commercial and industrial sectors to be a triggering event and reviewed the goodwill held at the CES reporting unit. We performed an interim impairment test via a quantitative valuation as of March 31, 2020. As a result, in the first quarter of 2020, we recorded an impairment of $16 million, net of tax benefit of $3 million, which represents the carrying amount of our CES reporting unit in excess of its estimated fair value as of the testing date.

For our CES reporting unit, we determined an estimate of the fair value of this reporting unit by combining both the income and market approaches. The market approach was based on current trading multiples of EBITDA for companies operating in businesses similar to our CES reporting unit. In performing the test under the income approach, we utilized a discount rate of 12% and a long-term terminal growth rate of 2.5% beyond our planning period. The assumptions used in evaluating goodwill for impairment are subject to change and are tracked against historical performance.

 

While we believe the assumptions used were reasonable and commensurate with the views of a market participant, as we continue to monitor the CES reporting unit for impairment through the end of 2020, changes in key assumptions, including increasing the discount rate, lowering forecasts for revenue, operating margin or lowering the long-term growth rate for our CES reporting unit, could result in further impairments.

We did not determine there to be a triggering event for our North America WtE reporting unit and concluded that the fair value of this reporting unit was not likely to be lower than the carrying value as of the interim testing date.

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The following table summarizes recent ASU's issued by the FASB that could have a material impact on our consolidated financial statements.

Standard	Description	Effective Date	Effect on the financial statements or other significant matters
ASU 2020-04 Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting	This standard provides optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting due to the cessation of the London Interbank Offered Rate (LIBOR). The amendments are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued.	First quarter of 2020 through December 31, 2022.	Generally, our debt agreements and interest rate derivatives contracts include a transition clause in the event LIBOR is discontinued, as such, we do not expect the transition of LIBOR to have a material impact on our financial statements. During Q2 2020 the Company elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. In addition, the Company elected to apply the expedient to not reassess the conclusions reached on embedded derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
ASU 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes	This standard was issued with the intent to simplify various aspects of income taxes. The standard requires a prospective basis of adoption and a retrospective basis adjustment for amendments related to franchise taxes.	First quarter of 2021, early adoption is permitted.	We are currently evaluating the impact this standard will have on our consolidated financial statements.

NOTE 3. NEW BUSINESS AND ASSET MANAGEMENT

Zhao County, China Venture

On December 31, 2019, we made an equity investment in a venture that signed a concession agreement with Zhao County, China for the construction and operation of a new 1,200 ton-per-day WtE facility located approximately 200 miles from Beijing ("Zhao County"). The project is being developed jointly by Covanta and a strategic local partner, Longking Energy Development Co. Ltd. Construction began in April 2020, with completion expected in 2021.

As of June 30, 2020 and December 31, 2019, our equity investment in the venture totaled RMB 35 million ($5 million), which amounted to a 26% ownership interest. We are required to contribute an additional RMB 61 million ($9 million) by the end of 2021, when our eventual ownership interest in the venture is expected to be 49%.

In January 2020, in connection with our Zhao County agreement, we obtained local equity financing in the amount of RMB 61 million ($9 million), the proceeds of which we provided to the project in the form of a shareholder loan. The loan is due in January 2022 and is collateralized through a pledge of our equity in the project.

This investment is accounted for under the equity method of accounting and was included in Other assets on our consolidated balance sheets.

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Green Investment Group ("GIG") Joint Venture

Newhurst

In February 2020, we reached financial close on the Newhurst Energy Recovery Facility (“Newhurst”), a 350,000 metric ton-per-year, 42 megawatt WtE facility under construction in Leicestershire, England. Through a 50/50 jointly-owned and governed entity (“Covanta Green”), we and GIG own a 50% interest in Newhurst, with Biffa plc, a UK waste services provider, holding the remaining 50% interest. Biffa will provide approximately 70% of the waste supply to the project, and we will provide operations and maintenance services, in each case under a 20-year arrangement. Newhurst is expected to commence commercial operations in 2023.

In connection with the transaction, we received $8 million (£5 million) of total consideration for the value of our development costs incurred to date and related fees and for GIG’s right to invest 25% in the project (50% investment in Covanta Green). For the six months ended June 30, 2020, as a result of this consideration and a step-up in the fair value of our retained equity investment, we recorded a gain of $9 million (£7 million) in Net gain on sale of business and investments in our condensed consolidated statement of operations. As of June 30, 2020, $4 million of the consideration received remains in Covanta Green.

As of June 30, 2020, our equity method investment in the JV of $6 million was included in Other assets in our condensed consolidated balance sheet. The fair value of our retained equity investment in Covanta Green was determined by the fair value of the consideration received from GIG for the right to invest in 25% in the project.

Rookery

In March 2019, we reached financial close on the Rookery South Energy Recovery Facility (“Rookery”), a 1,600 metric ton-per-day, 60 megawatt WtE facility under construction in Bedfordshire, England. Through Covanta Green, we and GIG own an 80% interest in the project. We co-developed the project with Veolia ES (UK) Limited (“Veolia”), who owns the remaining 20%. We provide technical oversight during construction and will provide operations and maintenance (“O&M”) services for the facility, and Veolia will be responsible for providing at least 70% of the waste supply for the project. The facility is expected to commence commercial operations in 2022.

In connection with the transaction, we received $44 million (£34 million) of total consideration for the value of our development costs incurred to date and related fees and for GIG’s right to invest 40% in the project (50% investment in Covanta Green). For the six months ended June 30, 2019, as a result of this consideration and a step-up in the fair value of our retained equity investment, we recorded a gain of $57 million in Net gain on sale of business and investments in our condensed consolidated statement of operations. As of June 30, 2020, $17 million of the consideration received remains in Covanta Green. As of June 30, 2020 and December 31, 2019, our equity method investment of $2 million and $9 million, respectively, was included in Other assets on our condensed consolidated balance sheets. The fair value of our retained equity investment in Covanta Green was determined by the fair value of the consideration received from GIG for the right to invest in 40% in the project.

Divestiture of Springfield and Pittsfield WtE facilities

During the second quarter of 2019, as part of our ongoing asset rationalization and portfolio optimization efforts, we divested our Pittsfield and Springfield WtE facilities. During the three and six months ended June 30, 2019, we recognized a loss of $3 million and $12 million, respectively, which was included in Net (loss) gain on sale of business and investments in our condensed consolidated statement of operations.

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Earnings Per Share

We calculate basic Earnings Per Share ("EPS") using net earnings for the period and the weighted average number of outstanding shares of our common stock, par value $0.10 per share, during the period. 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 and restricted stock units whether or not currently exercisable. Diluted earnings per share does not include securities if their effect was anti-dilutive.

Basic and diluted weighted average shares outstanding were as follows (in millions):

		Three Months Ended June 30,						Six Months Ended June 30,
		2020			2019			2020			2019
Basic weighted average common shares outstanding		132			131			132			131
Dilutive effect of stock options, restricted stock and restricted stock units		—			—			—			—
Diluted weighted average common shares outstanding		132			131			132			131
Anti-dilutive stock options, restricted stock and restricted stock units excluded from the calculation of EPS		4			2			3			2

Equity

Accumulated Other Comprehensive (Loss) Income ("AOCI")

The changes in accumulated other comprehensive loss are as follows (in millions):

		Foreign Currency Translation				Pension and Other Postretirement Plan Unrecognized Net Gain				Net Unrealized (Loss) Gain On Derivatives				Total
Balance at December 31, 2018		$	(23	)		$	2			$	(12	)		$	(33	)
Cumulative effect change in accounting for ASU 2018-02		—				1				—				1
Balance at January 1, 2019		(23		)		3				(12		)		(32		)
Other comprehensive (loss) income		(2		)		—				6				4
Balance at June 30, 2019		$	(25	)		$	3			$	(6	)		$	(28	)
Balance at December 31, 2019		$	(30	)		$	3			$	(8	)		$	(35	)
Other comprehensive loss		—				(1		)		(15		)		(16		)
Balance at June 30, 2020		$	(30	)		$	2			$	(23	)		$	(51	)

Disaggregation of revenue

A disaggregation of revenue from contracts with customers is presented in our condensed consolidated statements of operations for the three and six months ended June 30, 2020 and 2019. We have one reportable segment which comprises our entire operating business.

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Performance Obligations and Transaction Price Allocated to Remaining Performance Obligations

ASC 606 requires disclosure of the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of June 30, 2020. The guidance provides certain conditions (identified as "practical expedients") that limit this disclosure requirement. We have contracts that meet the following practical expedients provided by ASC 606:

1.	The performance obligation is part of a contract that has an original expected duration of one year or less;

2.	Revenue is recognized from the satisfaction of the performance obligations in the amount billable to our customer that corresponds directly with the value to the customer of our performance completed to date (i.e. “right-to-invoice” practical expedient); and/or

3.	The variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct service or a series of distinct services that are substantially the same and that have the same pattern of transfer to our customer (i.e. “series practical expedient”).

Our remaining performance obligation primarily consists of the fixed consideration contained in our contracts. As of June 30, 2020 our total remaining performance obligation was $6.1 billion, of which we expect to recognize 6% for the remainder of 2020 and 10% in 2021.

Contract Balances

The following table reflects the balance in our contract assets, which we classify as accounts receivable unbilled and present net in Receivables, and our contract liabilities, which we classify as deferred revenue and present in Accrued expenses and other current liabilities in our condensed consolidated balance sheet (in millions):

		June 30, 2020				December 31, 2019
Unbilled receivables		$	20			$	16
Deferred revenue		$	15			$	18

For the six months ended June 30, 2020, revenue recognized that was included in deferred revenue in our condensed consolidated balance sheet at the beginning of the period totaled $6 million.

During the six months ended June 30, 2020, we awarded certain employees grants of 1,687,293 restricted stock units ("RSUs"). The RSUs will be expensed over the requisite service period. The terms of the RSUs include vesting provisions based solely on continued service. If the service criteria are satisfied, the RSUs will generally vest during March of 2021, 2022, and 2023.

During the six months ended June 30, 2020, we awarded 158,148 RSUs and 26,160 restricted stock awards ("RSAs") for annual director compensation. In addition, during the six months ended June 30, 2020, we issued 15,667 RSUs for quarterly director fees to certain of our directors who elected to receive RSUs in lieu of cash payments. We determined the service vesting condition of these RSU's to be non-substantive and, in accordance with accounting principles for stock compensation, recorded the entire fair value of the awards as compensation expense on the grant date.

During the six months ended June 30, 2020, we awarded certain employees grants of 629,094 Free Cash Flow per share ("FCF") and total shareholder return ("TSR") performance awards. The FCF awards and the TSR awards will each cliff vest at the end of the 3 year performance period, however, the number of shares delivered will vary based upon the attained level of performance and may range from 0 to 2 times the number of target units awarded.

During the six months ended June 30, 2020, we withheld 432,344 shares of our common stock in connection with tax withholdings for vested stock awards.

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Compensation expense related to our stock-based awards was as follows (in millions):

		Three Months Ended June 30,								Six Months Ended June 30,
		2020				2019				2020				2019
Share based compensation expense		$	6			$	7			$	14			$	15

Unrecognized stock-based compensation expense and weighted-average years to be recognized are as follows (in millions, except for weighted average years):

		As of June 30, 2020
		Unrecognized stock- based  compensation				Weighted-average years     to be recognized
Restricted stock units		$	16			1.6
Performance awards		$	9			2.0
Restricted stock awards		$	—			0.7

Pass through costs

Pass through costs are costs for which we receive a direct contractually committed reimbursement from the public sector client that sponsors a WtE project. These costs generally include utility charges, insurance premiums, ash residue transportation and disposal, and certain chemical costs. These costs are recorded net of public sector client reimbursements as a reduction to Plant operating expense in our condensed consolidated statement of operations.

Pass through costs were as follows (in millions):

		Three Months Ended June 30,								Six Months Ended June 30,
		2020				2019				2020				2019
Pass through costs		$	10			$	12			$	23			$	25

Related Party Note Payable

During June 2020, we issued a £8 million ($9 million) note to a related party on market terms. The note is expected to be redeemed within 12 months and is classified within Accrued expenses and other current liabilities on our balance sheet as of June 30, 2020. If the note is not redeemed within 12 months, the final redemption date is December 2024.

We generally record our interim tax provision based upon a projection of the Company’s annual effective tax rate ("AETR"). This AETR is applied to the year-to-date consolidated pre-tax income to determine the interim provision for income taxes before discrete items. We update the AETR on a quarterly basis as the pre-tax income projections are revised and tax laws are enacted. The effective tax rate ("ETR") each period is impacted by a number of factors, including the relative mix of domestic and international earnings, adjustments to the valuation allowances and discrete items. The currently forecasted ETR may vary from the actual year-end due to the changes in these factors.

The Company’s global ETR for the six months ended June 30, 2020 and 2019 was 16% and 7%, respectively, including discrete tax items. The current year increase in the ETR was primarily due to the combined effect of (i) the overall increase in pre-tax loss; (ii) the impact of a smaller gain on the Newhurst transaction in 2020 compared to gain on the Rookery transaction in 2019; (iii) a discrete tax expense in 2020 related to the reduction in the value of stock based compensation from grant date; and (iv) a discrete tax benefit adjustment in 2020 related to tax carryforwards.

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NOTE 9. ACCOUNTS RECEIVABLE SECURITIZATION

In December 2019, we entered into an agreement whereby we will regularly sell certain receivables on a revolving basis to third-party financial institutions (the “Purchasers”) up to an aggregate purchase limit of $100 million (the “Receivables Purchase Agreement" or “RPA”). Transfers under the RPA meet the requirements to be accounted for as sales in accordance with the Transfers and Servicing topic of FASB Accounting Standards Codification. We receive a discounted purchase price for each receivable sold under the RPA and will continue to service and administer the subject receivables. The weighted-average discount rate paid on accounts receivable sold was 1.70% for the six months ended June 30, 2020.

Amounts recognized in connection with the RPA were as follows (in millions):

	Six Months Ended June 30,
	2020				2019
Accounts receivable sold and derecognized	$	373			$	—
Cash proceeds received (1)	$	372			$	—
	June 30, 2020				December 31, 2019
Pledged receivables (2)	$	121			$	142

(1)	Represents proceeds from collections reinvested in revolving-period transfers, net of discount. This amount was included in Net cash provided by operating activities on our consolidated statement of cash flows.

(2)	Secures our obligations under the RPA and provides a guarantee for the prompt payment, not collection, of all payment obligations relating to the sold receivables.

NOTE 10. CREDIT LOSSES

We are exposed to credit losses primarily from our trade receivables from waste disposal services, sale of electricity and/or steam and the sale of ferrous and non-ferrous metals.

For our trade receivables, we assess each counterparty’s ability to pay for service by conducting a credit review. The credit review considers the counterparty’s established credit rating or our assessment of the counterparty’s creditworthiness based on our analysis of their financial statements when a credit rating is not available.

We monitor our ongoing credit exposure through active review of counterparty balances against contract terms and due dates. Our activities include timely account reconciliation, dispute resolution, payment confirmation and monitoring current economic conditions and future forecast of economic conditions, to the extent that they impact the credit loss determination and can be reasonably estimated.

Changes in the allowance for credit losses of our trade receivables for the six months ended June 30, 2020 were as follows (in millions):

Balance as of December 31, 2019		$	9
Provision for expected credit losses		1
Write-offs charged against the allowance		(4		)
Balance as of June 30, 2020		$	6

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The Company held the followings shareholder loans in connection with our equity method investments (in millions):

		June 30, 2020				December 31, 2019
Included in prepaid expenses and other assets		$	21			$	22
Included in other assets - long term		25				15
		$	46			$	37

We assess the collectability of the shareholder loans each reporting period through the impairment analysis procedures of our equity method investments which considers the loss history of the investments and the viability of the associated development projects. As of June 30, 2020 there were no credit losses recorded associated with our shareholder loans.

Fair Value Measurements

Authoritative guidance associated with fair value measurements provides a framework for measuring fair value and establishes a fair value hierarchy that prioritizes the inputs used to measure fair value, giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs), then significant other observable inputs (Level 2 inputs) and the lowest priority to significant unobservable inputs (Level 3 inputs). The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

•	For marketable securities, the carrying value of these amounts is a reasonable estimate of their fair value.

•	Fair values for long-term debt and project debt are determined using quoted market prices (Level 1).

•

The fair value of our floating to fixed rate interest rate swaps is determined using discounted cash flow valuation methodologies that apply the appropriate forward floating rate curve observable in the market to the contractual terms of our swap agreements. The fair value of the interest rate swaps is adjusted to reflect counterparty risk of non-performance and is based on the counterparty’s credit spread in the credit derivatives market.

•	The fair values of our energy hedges were determined using the spread between our fixed price and the forward curve information available within the market.

The estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that we would realize in a current market exchange and are based on pertinent information available to us as of June 30, 2020. Such amounts have not been comprehensively revalued for purposes of these financial statements and current estimates of fair value may differ significantly from the amounts presented herein.

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The following table presents information about the fair value measurement of our assets and liabilities as of June 30, 2020 and December 31, 2019 (in millions):

Financial Instruments Recorded at Fair Value on a Recurring Basis:		Fair Value Measurement Level		June 30, 2020				December 31, 2019
Assets:
Investments — mutual and bond funds (1)		1		$	2			$	2
Derivative asset — energy hedges (2)		2		13				12
Total assets				$	15			$	14
Liabilities:
Derivative liability — interest rate swaps (3)		2		$	11			$	2
Total liabilities				$	11			$	2

(1)	Included in Other assets in the condensed consolidated balance sheets.

(2)	The short-term balance was included in Prepaid expenses and other current assets and the long-term balance was included in Other assets in the consolidated balance sheets.

(3)	The short-term balance was included in Accrued expenses and other current liabilities and the long-term balance was included in Other liabilities in the condensed consolidated balance sheets.

The following financial instruments are recorded at their carrying amount (in millions):

		As of June 30, 2020								As of December 31, 2019
Financial Instruments Recorded at Carrying Amount:		Carrying Amount				Estimated Fair Value				Carrying Amount				Estimated Fair Value
Liabilities:
Long-term debt		$	2,405			$	2,414			$	2,383			$	2,459
Project debt		$	128			$	134			$	133			$	138

We are required to disclose the fair value of financial instruments for which it is practicable to estimate that value. The fair value of short-term financial instruments such as cash and cash equivalents, restricted cash, accounts receivables, prepaid expenses and other assets, accounts payable and accrued expenses approximates their carrying value on the condensed consolidated balance sheets due to their short-term nature.

In addition to the recurring fair value measurements, certain assets are measured at fair value on a non-recurring basis when an indication of impairment is identified. Long-lived assets, such as property and equipment and identifiable intangibles with finite useful lives, are periodically evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For the purpose of impairment testing, we review the recoverable amount of individual assets or groups of assets at the lowest level of which there are there are identifiable cash flows, which is generally at the facility level. Assets are reviewed using factors including, but not limited to, our future operating plans and projected cash flows. The determination of whether impairment has occurred is based on the assets fair value as compared to the carrying value. Fair value is generally determined using an income approach, which requires discounting the estimated future cash flows associated with the asset. If the asset carrying amount exceeds its fair value, an impairment charge is recognized in the amount by which the carrying amount exceeds the fair value of the asset.

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Energy Price Risk

We have entered into a variety of contractual hedging arrangements, designated as cash flow hedges, in order to mitigate our exposure to energy market risk, and will continue to do so in the future. Our efforts in this regard involve only mitigation of price volatility for the energy we produce and do not involve taking positions (either long or short) on energy prices in excess of our physical generation. The amount of energy generation which we have hedged on a forward basis under agreements with various financial institutions as of June 30, 2020 is indicated in the following table (in millions):

Calendar Year		Hedged MWh
2020		1.7
2021		2.0
2022		0.2
Total		3.9

As of June 30, 2020, the fair value of the energy derivative asset was $13 million. The change in fair value was recorded as a component of AOCI.

During the six months ended June 30, 2020, cash provided by and used in energy derivative settlements of $27 million and zero, respectively, was included in net cash provided by operating activities on our condensed consolidated statement of cash flows.

During the six months ended June 30, 2019, cash provided by and used in energy derivative settlements of $12 million and $1 million, respectively, was included in net cash provided by operating activities on our condensed consolidated statement of cash flows.

Interest Rate Swaps

We may utilize derivative instruments to reduce our exposure to fluctuations in cash flows due to changes in variable interest rates paid on our direct borrowings under the senior secured revolving credit facility and the term loan of our subsidiary Covanta Energy (collectively referred to as the "Credit Facilities"). To achieve that objective, we entered into pay-fixed, receive-variable swap agreements on $200 million notional amount of our variable rate debt under the Credit Facilities during 2019. The interest rate swaps are designated specifically to the Credit Facilities as a cash flow hedge and are recorded at fair value with changes in fair value recorded as a component of AOCI. For further information on our Credit Facilities see Note 13. Consolidated Debt.

As of June 30, 2020, the fair value of the interest rate swap derivative liability was $11 million. The change in fair value was recorded as a component of AOCI.

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Consolidated debt is as follows (in millions):

	Average  Rate (1)		June 30, 2020				December 31, 2019
LONG-TERM DEBT:
Revolving credit facility	2.95%		$	202			$	183
Term loan, net	3.38%		379				384
Credit Facilities subtotal			581				567
Senior Notes, net of deferred financing costs			1,187				1,186
Tax-Exempt Bonds, net of deferred financing costs			540				539
China venture loan			9				—
Equipment financing arrangements			81				85
Finance Leases (2)			7				6
Total long-term debt			2,405				2,383
Less: Current portion			(18		)		(17		)
Noncurrent long-term debt			$	2,387			$	2,366
PROJECT DEBT:
Total project debt, net of deferred financing costs and unamortized debt premium			$	128			$	133
Less: Current portion			(9		)		(8		)
Noncurrent project debt			$	119			$	125
TOTAL CONSOLIDATED DEBT			$	2,533			$	2,516
Less: Current debt			(27		)		(25		)
TOTAL NONCURRENT CONSOLIDATED DEBT			$	2,506			$	2,491

(1)	As of June 30, 2020 and December 31, 2019, we entered into interest rate swap agreements to swap the LIBOR portion of our floating interest rate to a fixed rate for our variable rate debt under the Credit Facilities. See Note 12. Derivative Instruments for further information.

(2)	Excludes Union County WtE facility finance lease which is presented within project debt.

Our subsidiary, Covanta Energy, has a senior secured credit facility consisting of a revolving credit facility (the “Revolving Credit Facility”) and a term loan (the “Term Loan”). The nature and terms of our Credit Facilities, Senior Notes, Tax-Exempt Bonds, project debt and other long-term debt are described in detail in Note 15. Consolidated Debt in our 2019 Annual Report on Form 10-K.

Zhao County, China Venture Loan

In January 2020, in connection with our Zhao County agreement, we obtained local equity bridge financing in the amount of RMB 61 million ($9 million). This financing is due to be repaid in January 2022 and is collateralized through a pledge of our equity in the project. We contributed the entire amount of the proceeds to the project in the form of a shareholder loan. See Note 3. New Business and Asset Management for further information.

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Revolving Credit Facility

As of June 30, 2020, we had unutilized capacity under the Revolving Credit Facility as follows (in millions):

	Total Facility Commitment				Expiring		Direct Borrowings				Outstanding Letters of Credit				Unutilized Capacity
Revolving Credit Facility	$	900			2023		$	202			$	236			$	462

Credit Agreement Covenants

The loan documentation governing the Credit Facilities contains various affirmative and negative covenants, as well as financial maintenance covenants (financial ratios), 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 June 30, 2020.

NOTE 14. LEASES

The components of lease expense were as follows (in millions):

		Three Months Ended June 30,								Six Months Ended June 30,
		2020				2019				2020				2019
Finance lease:
Amortization of assets, included in Depreciation and amortization expense		$	2			$	2			$	4			$	4
Interest on lease liabilities, included in Interest expense		1				1				2				2
Operating lease:
Amortization of assets, included in Total operating expense		2				2				4				4
Interest on lease liabilities, included in Total operating expense		—				—				1				1
Total net lease cost		$	5			$	5			$	11			$	11

 

Supplemental balance sheet information related to leases was as follows (in millions, except lease term and discount rate):

		June 30, 2020				December 31, 2019
Operating leases:
Operating lease ROU assets, included in Other assets		$	46			$	46
Current operating lease liabilities, included in Accrued expenses and other current liabilities		$	6			$	6
Noncurrent operating lease liabilities, included in Other liabilities		46				46
Total operating lease liabilities		$	52			$	52
Finance leases:
Property and equipment, at cost		$	170			$	168
Accumulated amortization		(29		)		(25		)
Property and equipment, net		$	141			$	143
Current obligations of finance leases, included in Current portion of long-term debt		$	7			$	6
Finance leases, net of current obligations, included in Long-term debt		81				84
Total finance lease liabilities		$	88			$	90

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Supplemental cash flow and other information related to leases was as follows (in millions):

		Six Months Ended June 30,
		2020				2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows related to operating leases		$	(4	)		$	(5	)
Financing cash flows related to finance leases		$	(3	)		$	(3	)
Weighted average remaining lease term (in years):
Operating leases		11.4				12.8
Finance leases		31.5				33.7
Weighted average discount rate:
Operating leases		4.59		%		4.66		%
Finance leases		5.06		%		5.06		%

Maturities of lease liabilities were as follows (in millions):

	June 30, 2020
	Operating Leases				Finance Leases
Remainder of 2020	$	5			$	5
2021	9				12
2022	8				12
2023	7				12
2024	6				11
2025 and thereafter	33				105
Total lease payments	68				157
Less: Amounts representing interest	(16		)		(69		)
Total lease obligations	$	52			$	88

We and/or our subsidiaries are party to a number of claims, lawsuits and pending actions, most of which are routine and all of which are incidental to our business. We assess the likelihood of potential losses on an ongoing basis to determine whether losses are considered probable and reasonably estimable prior to recording an estimate of the outcome. If we can only estimate the range of a possible loss, an amount representing the low end of the range of possible outcomes is recorded. The final consequences of these proceedings are not presently determinable with certainty. As of June 30, 2020 and December 31, 2019, accruals for our loss contingencies recorded in Accrued expenses and other current liabilities in our condensed consolidated balance sheets were $3 million and $3 million, respectively.

Environmental Matters

Our operations are subject to environmental regulatory laws and environmental remediation laws. Although our operations are occasionally subject to proceedings and orders pertaining to emissions into the environment and other environmental violations, which may result in fines, penalties, damages or other sanctions, we believe that we are in substantial compliance with existing environmental laws and regulations.

We may be identified, along with other entities, as being among parties potentially responsible for contribution to costs associated with the correction and remediation of environmental conditions at disposal sites subject to federal and/or analogous state laws.

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In certain instances, we may be exposed to joint and several liabilities for remedial action or damages. Our liability in connection with such environmental claims will depend on many factors, including our volumetric share of waste, the total cost of remediation, and the financial viability of other companies that also sent waste to a given site and, in the case of divested operations, the contractual arrangement with the purchaser of such operations.

The potential costs related to the matters described below and the possible impact on future operations are uncertain due in part to the complexity of governmental laws and regulations and their interpretations, the varying costs and effectiveness of cleanup technologies, the uncertain level of insurance or other types of recovery and the questionable level of our responsibility. Although the ultimate outcome and expense of any litigation, including environmental remediation, is uncertain, we believe that the following proceedings will not have a material adverse effect on our consolidated results of operations, financial position or cash flows.

Lower Passaic River Matter. In August 2004, the United States Environmental Protection Agency (the “EPA”) notified our subsidiary, Covanta Essex Company (“Essex”) that it was a potentially responsible party (“PRP”) for Superfund response actions in the Lower Passaic River Study Area (“LPRSA”), a 17 mile stretch of river in northern New Jersey. Essex’s LPRSA costs to date are not material to its financial position and results of operations; however, to date the EPA has not sought any LPRSA remedial costs or natural resource damages against PRPs. In March 2016, the EPA released the Record of Decision (“ROD”) for its Focused Feasibility Study of the lower 8 miles of the LPRSA; the EPA’s selected remedy includes capping/dredging of sediment, institutional controls and long-term monitoring. In June 2018, PRP Occidental Chemical Corporation (“OCC”) filed a federal Superfund lawsuit against 120 PRPs including Essex with respect to past and future response costs expended by OCC with respect to the LPRSA. The Essex facility started operating in 1990 and Essex does not believe there have been any releases to the LPRSA, but in any event believes any releases would have been de minimis considering the history of the LPRSA; however, it is not possible at this time to predict that outcome or to estimate the range of possible loss relating to Essex’s liability in the matter, including for LPRSA remedial costs and/or natural resource damages.

Other Commitments

Other commitments as of June 30, 2020 were as follows (in millions):

Letters of credit issued under the Revolving Credit Facility		$	236
Letters of credit - other		38
Surety bonds		129
Total other commitments — net		$	403

The letters of credit were issued to secure our performance under various contractual undertakings related to our domestic and international projects or to secure obligations under our insurance program. Each letter of credit relating to a project is required to be maintained in effect for the period specified in related project contracts, and generally may be drawn if it is not renewed prior to expiration of that period.

We believe that we will be able to fully perform under our contracts to which these existing letters of credit relate, and that it is unlikely that letters of credit would be drawn because of a default of our performance obligations. If any of these letters of credit were to be drawn by the beneficiary, the amount drawn would be immediately repayable by us to the issuing bank. If we do not immediately repay such amounts drawn under letters of credit issued under the Revolving Credit Facility, unreimbursed amounts would be treated under the Credit Facilities as either additional term loans or as revolving loans.

The surety bonds listed in the table above relate primarily to construction and performance obligations and support for other obligations, including closure requirements of various energy projects when such projects cease operating. Were these bonds to be drawn upon, we would have a contractual obligation to indemnify the surety company. The bonds do not have stated expiration dates. Rather, we are released from the bonds as the underlying performance is completed.

We have certain contingent obligations related to our Senior Notes and Tax-Exempt Bonds. Holders may require us to repurchase their Senior Notes and Tax-Exempt Bonds if a fundamental change occurs. For specific criteria related to the redemption features of the Senior Notes and Tax-Exempt Bonds, see Note 13. Consolidated Debt of this report and Item 8. Financial Statements And Supplementary Data — Note 15. Consolidated Debt of our 2019 Annual Report on Form 10-K.

We have issued or are party to guarantees and related contractual support obligations undertaken pursuant to agreements to construct and operate waste and energy facilities. For some projects, such performance guarantees include obligations to repay certain financial obligations if the project revenue is insufficient to do so, or to obtain or guarantee financing for a project. With respect

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to our businesses, we have issued guarantees to municipal clients and other parties that our subsidiaries will perform in accordance with contractual terms, including, where required, the payment of damages or other obligations. Additionally, damages payable under such guarantees for our waste-to-energy facilities could expose us to recourse liability on project debt. If we must perform under one or more of such guarantees, our liability for damages upon contract termination would be reduced by funds held in trust and proceeds from sales of the facilities securing the project debt and is presently not estimable. Depending upon the circumstances giving rise to such damages, the contractual terms of the applicable contracts, and the contract counterparty’s choice of remedy at the time a claim against a guarantee is made, the amounts owed pursuant to one or more of such guarantees could be greater than our then-available sources of funds. To date, we have not incurred material liabilities under such guarantees.

We have entered into certain guarantees of performance in connection with our recent divestiture activities. Under the terms of the arrangements, we guarantee performance should the guaranteed party fail to fulfill its obligations under the specified arrangements.

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•	Eliminating all non-essential travel and reducing discretionary spend;

•	Enacting a hiring freeze for new corporate employees;

•	Lowering compensation through a 50% reduction in payment of CEO's base salary amount, a 25% reduction in payment of executive leadership base salary amounts, and a 20% reduction in cash compensation for all corporate support employees through a combination of wage reductions and furloughs. These measures remained place through mid-July 2020;

•	Lowering the cash portion of board of directors' fees by 60% during the same time period as management reductions and furloughs;

•	Focusing growth investments for the remainder of 2020 primarily on UK projects and the start-up of our first Total Ash Processing System and remaining highly disciplined in making any additional discretionary investments; and

•	Lowering the annualized dividend payout to $0.32 per share.

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(1)	Represents the year-over-year percent change in the Headline CPI number. The Consumer Price Index (CPI-U) data is provided by the U.S. Department of Labor Bureau of Labor Statistics.

(2)	Average price per MWh for Q2 2020 and Q2 2019. Pricing for the PJM PSEG Zone is provided by the PJM ISO.

(3)	Average price per MWh for Q2 2020 and Q2 2019. Pricing for the Mass Hub Zone is provided by the NE ISO.

(4)	Average price per MMBtu for Q2 2020 and Q2 2019. The Henry Hub Pricing data is provided by the Natural Gas Weekly Update, U.S. Energy Information Administration.

(5)	Average price per gross ton for Q2 2020 and Q2 2019. The #1 Heavy Melt Steel ("HMS") composite index ($/gross ton) price as published by American Metal Market.

(6)	Average price per pound for Q2 2020 and Q2 2019. Calculated using the high price of Old Cast Aluminum Scrap ($/lb.) as published by American Metal Market.

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•	$9 million for growth investments, including $8 million in our UK business development projects.

•	In February 2020, we reached financial close on the Newhurst project, a 350,000 metric ton-per-year, 42 megawatt WtE facility under construction in Leicestershire, England. The facility is expected to commence commercial operations in 2023.

•	“Organic growth”: reflects the performance of the business on a comparable period-over-period basis, excluding the impacts of transactions and contract transitions.

•	“Transactions”: includes the impacts of acquisitions, divestitures, and the addition or loss of operating contracts.

•	Contract “transitions”: includes the impact of the expiration of: (a) long-term major waste and service contracts, most typically representing the transition to a new contract structure, and (b) long-term energy contracts.

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(a)	During the six months ended June 30, 2020, we recorded a $19 million non-cash impairment charge related to our CES reporting unit. For additional information see Item 1. Financial Statements —Note 3. New Business and Asset Management.

(b)	During the six months ended June 30, 2020, we recorded a $9 million gain related to the Newhurst Energy Recovery Facility development project. For additional information see Item 1. Financial Statements —Note 3. New Business and Asset Management.

(c)	During the six months ended June 30, 2019, we recorded $8 million of costs related to our ongoing asset rationalization and portfolio optimization efforts, early retirement program, and certain organizational restructuring activities

(d)	Adjustment for capital equipment related expenditures at our service fee operated facilities which are capitalized at facilities that we own.

(e)	Includes certain other items that are added back under the definition of Adjusted EBITDA in Covanta Energy, LLC's credit agreement.

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(1)	We have a 50% indirect ownership of Dublin WtE, through our 50/50 joint venture with GIG, Covanta Europe Assets Ltd.

(2)	We have a 25% indirect ownership of Earls Gate, through our 50/50 joint venture with GIG, Covanta Green Jersey Assets Ltd., which owns 50% of Earls Gate. The total estimated project cost is £210 million ($277 million); £147 million ($194 million) is financed through non-recourse project-based debt.

(3)	We have a 40% indirect ownership of Rookery through our 50/50 joint venture with GIG, Covanta Green UK Ltd. The total estimated project cost is £457 million ($603 million); £310 million ($409 million) is financed through non-recourse project-based debt.

(4)	We have 26% interest in Zhao County through our venture with Longking Energy Development Co. Ltd. The total estimated project cost is RMB 650 million ($93 million), RMB 455 million ($65 million) is financed through non-recourse project debt.

(5)	We have a 25% indirect ownership of Newhurst through our 50/50 joint venture with GIG, Covanta Green, The total estimated project cost is £341 million ($422 million); £251 million ($311 million) of which is financed through non-recourse project-based debt.

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•	Hired information technology managers for all previously vacant positions and assigned these individuals specific internal control ownership and oversight;

•	Trained all information technology employees on information technology general controls and policies;

•	Centralized the formerly disparate processes to manage and control user accounts within our financial reporting systems;

•	Trained information technology managers on the process for providing, modifying and terminating application access;

•	Implemented monitoring procedures to ensure that the management of user accounts is performed in compliance with internal control requirements;

•	Initiated the design of an enhanced process to periodically reassess the propriety of users’ access to our financial reporting systems;

•	Designed and implemented change management and access management controls for financially relevant applications;

•	Trained business application owners on information technology change management procedures and controls; and

•	Documented and communicated with business application owners information technology change management procedures.

•	Moving all applications to Single Sign On (SSO) so as to better control termination of access;

•	Developing enhanced risk assessment procedures related to changes in the information technology systems environment; and

•	Developing new and enhancing existing logging and reporting capabilities so that changes to applications can be recorded and monitored for propriety.

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