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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
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 StreetMorristown,NJ07960
(Address of Principal Executive Office) (Zip Code)
(862345-5000
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.10 par value per shareCVANew York Stock Exchange
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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated FilerAccelerated
filer
Non-accelerated
filer
Smaller reporting 
company
Emerging growth
company
þoo
(Do not check if a smaller
 reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨  
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 23, 2020
Common Stock, $0.10 par value  131,981,775


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COVANTA HOLDING CORPORATION AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED SEPTEMBER 30, 2020
 
 Page
OTHER
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. Forward-looking statements are those that address activities, events or developments that we or our management intends, expects, projects, believes or anticipates will or may occur in the future. They are based on management’s assumptions and assessments in light of past experience and trends, current economic and industry conditions, expected future developments and other relevant factors. They are not guarantees of future performance and actual results. Developments and business decisions may differ from those envisaged by our forward-looking statements. Our forward-looking statements are also subject to risks and uncertainties, which can affect our performance in both the near and long-term. These forward-looking statements should be considered in light of the information included in this report and our other filings with the Securities and Exchange Commission, including, without limitation, the Risk Factors, as well as the description of trends and other factors in Management’s Discussion and Analysis of Financial Condition and Results of Operations, set forth in our 2019 Annual Report on Form 10-K as well as Part 1, Item 2 and Part II, Item 1A - Risk Factors of this Quarterly Report on Form 10-Q for the period ended September 30, 2020.
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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,
2020201920202019
(Unaudited)
(In millions, except per share amounts)
OPERATING REVENUE:
Waste and service revenue$366 $353 $1,056 $1,039 
Energy revenue93 81 264 247 
Recycled metals revenue20 19 57 61 
Other operating revenue12 12 36 38 
Total operating revenue491 465 1,413 1,385 
OPERATING EXPENSE:
Plant operating expense349 325 1,050 1,038 
Other operating expense, net11 10 37 43 
General and administrative expense27 29 83 90 
Depreciation and amortization expense54 55 168 165 
Impairment charges 2 19 3 
Total operating expense441 421 1,357 1,339 
Operating income50 44 56 46 
OTHER (EXPENSE) INCOME:
Interest expense(32)(36)(100)(108)
Net gain on sale of business and investments 1 9 49 
Loss on extinguishment of debt(12) (12) 
Other (expense) income, net (1)(2)1 
Total expense(44)(36)(105)(58)
Income (loss) before income tax (expense) benefit and equity in net income from unconsolidated investments6 8 (49)(12)
Income tax (expense) benefit(3)5 6 6 
Equity in net income from unconsolidated investments 2 1 3 4 
Net income (loss)$5 $14 $(40)$(2)
Weighted Average Common Shares Outstanding:
Basic132 131 132 131 
Diluted134 133 132 131 
Earnings (Loss) Per Share:
Basic$0.04 $0.11 $(0.30)$(0.02)
Diluted$0.04 $0.10 $(0.30)$(0.02)
Cash Dividend Declared Per Share$0.08 $0.25 $0.41 $0.75 


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,
 2020201920202019
 (Unaudited, in millions)
Net income (loss)$5 $14 $(40)$(2)
Foreign currency translation10 (10)10 (12)
Pension and postretirement plan unrecognized benefits  (1) 
Net unrealized loss on derivative instruments, net of tax (benefit) expense of ($3), ($3), ($5) and $2, respectively(4)(14)(19)(8)
Other comprehensive income (loss)6 (24)(10)(20)
Comprehensive income (loss)$11 $(10)$(50)$(22)

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
 September 30, 2020December 31, 2019
 (Unaudited) 
 (In millions, except per
share amounts)
ASSETS
Current:
Cash and cash equivalents$34 $37 
Restricted funds held in trust11 18 
Receivables (less allowances of $6 and $9, respectively)247 240 
Prepaid expenses and other current assets94 105 
Total Current Assets386 400 
Property, plant and equipment, net2,420 2,451 
Restricted funds held in trust6 8 
Intangible assets, net242 258 
Goodwill302 321 
Other assets300 277 
Total Assets$3,656 $3,715 
LIABILITIES AND EQUITY
Current:
Current portion of long-term debt$18 $17 
Current portion of project debt9 8 
Accounts payable66 36 
Accrued expenses and other current liabilities254 292 
Total Current Liabilities347 353 
Long-term debt2,417 2,366 
Project debt118 125 
Deferred income taxes360 372 
Other liabilities130 123 
Total Liabilities3,372 3,339 
Commitments and Contingencies (Note 15)
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 shares, outstanding 132 shares)14 14 
Additional paid-in capital871 857 
Accumulated other comprehensive loss(45)(35)
Accumulated deficit(556)(460)
Treasury stock, at par  
Total equity284 376 
Total Liabilities and Equity$3,656 $3,715 
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 FLOW
Nine Months Ended September 30,
20202019
(Unaudited, in millions)
OPERATING ACTIVITIES:
Net loss$(40)$(2)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization expense168 165 
Amortization of deferred debt financing costs3 3 
Net gain on sale of business and investments(9)(49)
Impairment charges19 3 
Loss on extinguishment of debt12  
Stock-based compensation expense19 20 
Provision for expected credit losses1 2 
Equity in net income from unconsolidated investments(3)(4)
Deferred income taxes(7)(9)
Dividends from unconsolidated investments 3 5 
Other, net4 3 
Change in working capital, net of effects of acquisitions and dispositions18 (33)
Changes in noncurrent assets and liabilities, net3 8 
Net cash provided by operating activities191 112 
INVESTING ACTIVITIES:
Purchase of property, plant and equipment(117)(121)
Acquisition of businesses, net of cash acquired 2 
Proceeds from the sale of assets, net of restricted cash 3 28 
Investment in equity affiliates(11)(9)
Other, net(10)(1)
Net cash used in investing activities(135)(101)
FINANCING ACTIVITIES:
Proceeds from borrowings on long-term debt538 75 
Proceeds from borrowings on revolving credit facility631 441 
Payments on long-term debt(551)(12)
Payments on revolving credit facility (574)(375)
Payments on project debt (6)(16)
Payment of deferred financing costs(8)(1)
Cash dividends paid to stockholders(78)(100)
Proceeds from related party note9  
Payment of insurance premium financing(24)(20)
Other, net(5)(8)
Net cash used in financing activities(68)(16)
Effect of exchange rate changes on cash, cash equivalents and restricted cash (2)
Net decrease in cash, cash equivalents and restricted cash(12)(7)
Cash, cash equivalents and restricted cash at beginning of period63 105 
Cash, cash equivalents and restricted cash at end of period$51 $98 
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents$34 $65 
Restricted funds held in trust- short term11 25 
Restricted funds held in trust- long term6 8 
Total cash, cash equivalents and restricted cash $51 $98 
The accompanying notes are an integral part of the condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
 Total
Common StockAdditional
Paid-In
Capital
Accumulated
Other
Comprehensive
Loss
Accumulated
Earnings (Deficit)
Treasury Stock
 SharesAmountSharesAmount
 (Unaudited, in millions)
Balance as of December 31, 2019
136 $14 $857 $(35)$(460)5 $ $376 
Stock-based compensation expense— — 8 — — — — 8 
Dividend declared— — — — (34)— — (34)
Shares repurchased for tax withholdings for vested stock awards— — (5)— — (1)— (5)
Comprehensive loss, net of income taxes— — — (10)(32)— — (42)
Balance as of March 31, 2020136 $14 $860 $(45)$(526)4 $ $303 
Stock-based compensation expense— — 6 — — — — 6 
Dividend declared— — — — (11)— — (11)
Other— — 1 — — — — 1 
Comprehensive loss, net of income taxes— — — (6)(13)— — (19)
Balance as of June 30, 2020136 14 867 (51)(550)4  $280 
Stock-based compensation expense— — 5 — — — — 5 
Dividend declared— — — — (11)— — (11)
Other— — (1)—  —  (1)
Comprehensive loss, net of income taxes— — — 6 5 — — 11 
Balance as of September 30, 2020136 $14 $871 $(45)$(556)4 $ $284 
Balance as of December 31, 2018
136 $14 $841 $(33)$(334)5 $(1)$487 
Cumulative effect change in accounting for ASU 2018-02— — — 1 (1)— —  
Stock-based compensation expense— — 8 — — — — 8 
Dividend declared— — — — (34)— — (34)
Shares repurchased for tax withholdings for vested stock awards
— — (8)— —  — (8)
Other— —  —  — 1 1 
Comprehensive (loss) income, net of income taxes
— — — (5)5 — —  
Balance as of March 31, 2019
136 $14 $841 $(37)$(364)5 $ $454 
Stock-based compensation expense— — 7 — — — — 7 
Dividend declared— — — — (34)— — (34)
Other— — — — 1 —  1 
Comprehensive income (loss), net of income taxes— — — 9 (21)— — (12)
Balance as of June 30, 2019
136 $14 $848 $(28)$(418)5 $ $416 
Stock-based compensation expense— — 5 — — — — 5 
Dividend declared— — — — (34)— — (34)
Comprehensive (loss) income, net of income taxes— — — (24)14 — — (10)
Balance as of September 30, 2019
136 $14 $853 $(52)$(438)5 $ $377 
The accompanying notes are an integral part of the condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION
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 (“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 the disposal of waste, the generation of electricity and/or steam, and 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, 39 located in North America, Ireland and Italy. In total, these assets produce approximately 10 million megawatt hours (“MWh”) of baseload electricity annually. We operate 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, 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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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
The following table summarizes recent ASU's issued by the FASB that could have a material impact on our consolidated financial statements.
StandardDescriptionEffective 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 ReportingThis 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 September 30, 2020 and December 31, 2019, our equity investment in the venture totaled RMB 40 million ($6 million) and RMB 35 million ($5 million), respectively, which represented a 26% ownership interest. We are required to contribute an additional RMB 61 million ($9 million) by the end of 2021, at which point our eventual ownership interest in the venture is expected to increase to 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 nine months ended September 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 September 30, 2020, $4 million of the consideration received remains in Covanta Green and is expected to be utilized for future equity contributions in new projects in the United Kingdom.

As of September 30, 2020, our equity method investment of $8 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 nine months ended September 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 September 30, 2020, $17 million of the consideration received remains in Covanta Green and is expected to be utilized for future equity contributions in new projects in the United Kingdom.

As of September 30, 2020 and December 31, 2019, our equity method investment of $5 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 nine months ended September 30, 2019, we recognized a loss of $11 million, which was included in Net gain on sale of business and investments in our condensed consolidated statement of operations.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)

NOTE 4. EARNINGS PER SHARE AND EQUITY
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 September 30,Nine Months Ended September 30,
 2020201920202019
Basic weighted average common shares outstanding132 131 132 131 
Dilutive effect of stock options, restricted stock and restricted stock units
2 2   
Diluted weighted average common shares outstanding134 133 132 131 
Anti-dilutive stock options, restricted stock and restricted stock units excluded from the calculation of EPS
1  3 2 

Equity
Accumulated Other Comprehensive (Loss) Income ("AOCI")
The changes in accumulated other comprehensive loss are as follows (in millions):
Foreign Currency TranslationPension and Other Postretirement Plan Unrecognized Net Gain (Loss)Net Unrealized Loss On DerivativesTotal
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(12) (8)(20)
Balance at September 30, 2019$(35)$3 $(20)$(52)
Balance at December 31, 2019$(30)$3 $(8)$(35)
Other comprehensive income (loss)10 (1)(19)(10)
Balance at September 30, 2020$(20)$2 $(27)$(45)

NOTE 5. REVENUE
Disaggregation of revenue
A disaggregation of revenue from contracts with customers is presented in our condensed consolidated statements of operations for the three and nine months ended September 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 September 30, 2020. The guidance provides certain conditions (identified as "practical expedients") that limit this disclosure requirement. We exclude from our disclosures 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 obligations primarily consist of the fixed consideration contained in our contracts. As of September 30, 2020 our total remaining performance obligations were $6.0 billion, of which we expect to recognize 3% for the remainder of 2020 and 11% 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):
September 30, 2020December 31, 2019
Unbilled receivables$22 $16 
Deferred revenue$16 $18 

For the nine months ended September 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.

NOTE 6. STOCK-BASED AWARD PLANS
During the nine months ended September 30, 2020, we awarded certain employees grants of 1,692,739 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 nine months ended September 30, 2020, we awarded 158,148 RSUs and 26,160 restricted stock awards ("RSAs") for annual director compensation. In addition, during the nine months ended September 30, 2020, we issued 28,923 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 nine months ended September 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 nine months ended September 30, 2020, we withheld 432,967 shares of our common stock in connection with tax withholdings for vested stock awards.

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

Compensation expense related to our stock-based awards was as follows (in millions):
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Stock-based compensation expense $5 $5 $19 $20 

Unrecognized stock-based compensation expense and weighted-average years to be recognized are as follows (in millions, except for weighted average years):
 As of September 30, 2020
 Unrecognized stock-based compensationWeighted-average years to be recognized
Restricted stock units$13 1.5
Performance awards$7 1.8
Restricted stock awards$ 0.5

NOTE 7. SUPPLEMENTARY INFORMATION
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 September 30,Nine Months Ended September 30,
2020201920202019
Pass through costs$13 $12 $36 $37 

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 September 30, 2020. If the note is not redeemed within 12 months, the final redemption date is December 2024.

NOTE 8. INCOME TAXES
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 nine months ended September 30, 2020 and 2019 was 11% and 48%, respectively. The decline in ETR was driven by differences in the magnitude of taxable gains in the periods, as well as the low level of pre-tax book income which can yield large fluctuations in the ETR on a year-over-year basis.

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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 1.42% for the nine months ended September 30, 2020.

Amounts recognized in connection with the RPA were as follows (in millions):
Nine Months Ended
September 30,
20202019
Accounts receivable sold and derecognized $570 $ 
Cash proceeds received (1)
$569 $ 
September 30, 2020December 31,
2019
Pledged receivables (2)
$123 $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.

We are not required to offer to sell any receivables and the Purchasers are not committed to purchase any receivable offered. The RPA has a scheduled termination date of December 5, 2020,which we intend to renew prior to maturity. Additionally, we may terminate the RPA at any time upon 30 days’ prior written notice. The agreement governing the RPA contains certain covenants and termination events. An occurrence of an event of default or the occurrence of a termination event could lead to the termination of the RPA. As of September 30, 2020, we were in compliance with the covenants, and no termination events had occurred. As of September 30, 2020, $100 million, the maximum amount available under the RPA, was fully utilized.

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 nine months ended September 30, 2020 were as follows (in millions):
Balance as of December 31, 2019$9 
Provision for expected credit losses1 
Write-offs charged against the allowance(4)
Balance as of September 30, 2020$6 

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The Company held the following shareholder loans in connection with our equity method investments (in millions):
September 30, 2020December 31, 2019
Included in prepaid expenses and other assets$21 $22 
Included in other assets - long term26 15 
$47 $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 September 30, 2020 there were no expected credit losses associated with our shareholder loans.

NOTE 11. FINANCIAL INSTRUMENTS
Fair Value Measurements
Authoritative guidance associated with fair value measurements provides a framework for measuring fair value and establishes a fair value hierarchy that prioritizes the inputs used to measure fair value, giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs), then significant other observable inputs (Level 2 inputs) and the lowest priority to significant unobservable inputs (Level 3 inputs). The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

For 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 September 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.

The following table presents information about the fair value measurement of our assets and liabilities as of September 30, 2020 and December 31, 2019 (in millions):
Financial Instruments Recorded at Fair Value on a Recurring Basis:Fair Value Measurement LevelSeptember 30, 2020December 31, 2019
Assets:
Investments — mutual and bond funds (1)
1$2 $2 
Derivative asset — energy hedges (1)
22 12 
Total assets$4 $14 
Liabilities:
Derivative liability — interest rate swaps (2)
2$10 $2 
Total liabilities$10 $2 
(1)Included in Other assets in the condensed consolidated balance sheets.
(2)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.

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

The following financial instruments are recorded at their carrying amount (in millions):
 As of September 30, 2020As of December 31, 2019
Financial Instruments Recorded at Carrying Amount:Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
Liabilities:
Long-term debt 
$2,435 $2,464 $2,383 $2,459 
Project debt$127 $132 $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 fair value of assets as compared to their 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.

NOTE 12. DERIVATIVE INSTRUMENTS
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 September 30, 2020 is indicated in the following table (in millions):
Calendar YearHedged MWh
20200.9
20212.0
20220.2
Total3.1

As of September 30, 2020, the fair value of the energy derivative asset was $2 million. The change in fair value was recorded as a component of AOCI.

During the nine months ended September 30, 2020, cash provided by and used in energy derivative settlements of $32 million and zero, respectively, was included in net cash provided by operating activities on our condensed consolidated statement of cash flows.

During the nine months ended September 30, 2019, cash provided by and used in energy derivative settlements of $16 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
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COVANTA HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (Continued)

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 and 2020. 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 September 30, 2020, the fair value of the interest rate swap derivative liability was $10 million. The change in fair value was recorded as a component of AOCI.

NOTE 13. CONSOLIDATED DEBT
Consolidated debt is as follows (in millions):
 
Average
 Rate (1)
September 30, 2020December 31, 2019
LONG-TERM DEBT:
Revolving credit facility2.66%$240 $183 
Term loan, net3.23%377 384 
Credit Facilities subtotal617