NOTE 17. STOCK-BASED AWARD PLANS

Stock-Based Award Plans

We adopted the Covanta Holding Corporation Equity Award Plan for Employees and Officers (the “Employees Plan”) and the Covanta Holding Corporation Equity Award Plan for Directors (the “Directors Plan”) (collectively, the “Award Plans”), effective with stockholder approval on October 5, 2004.

The purpose of the Award Plans is to promote our interests (including our subsidiaries and affiliates) and our stockholders’ interests by using equity interests to attract, retain and motivate our management, non-employee directors and other eligible persons and to encourage and reward their contributions to our performance and profitability. The Award Plans provide for awards to be made in the form of (a) shares of restricted stock, (b) restricted stock units, (c) incentive stock options, (d) non-qualified stock options, (e) stock appreciation rights, (f) performance awards, or (g) other stock-based awards which relate to or serve a similar function to the awards described above. Awards may be made on a standalone, combination or tandem basis. The maximum aggregate number of shares of common stock available for issuance is 12,000,000 under the Employees Plan and 700,000 under the Directors Plan. The maximum number of shares that may be granted to any participant in any calendar year is 250,000 shares of restricted stock, 250,000 restricted stock units or performance shares and options to purchase 650,000 shares of our common stock.

Stock-Based Compensation

We recognize stock-based compensation expense in accordance with the accounting standards for stock-based compensation in effect at the date of grant. We recognize compensation costs using the graded vesting attribution method over the requisite service period of the award, which is generally three to five years. We recognize compensation expense based on the number of stock options and restricted stock awards expected to vest by using an estimate of expected forfeitures. We review the forfeiture rates at least annually and revise compensation expense, if necessary. During 2012, the average forfeiture rates were 12% for restricted stock awards and 15% for stock options and restricted stock units. Stock-based compensation expense is as follows (in millions, except for weighted average years):



							As of December 31, 2012
	Total Compensation Expense for the Years Ended December 31,						Unrecognized stock-based compensation expense		Weighted-average years to be recognized
	2012		2011		2010		Unrecognized stock-based compensation expense		Weighted-average years to be recognized
Restricted Stock Awards	$	13	$	14	$	13	$	7	1
Restricted Stock Units	$	4	$	3	$	2	$	2	2
Stock Options	$	—	$	1	$	2	$	—	—

Restricted Stock Awards

Restricted stock awards that have been issued to employees typically vest over a three year period. Restricted stock awards are stock-based awards for which the employee or director does not have a vested right to the stock (“nonvested”) until the requisite service period has been rendered or the required financial performance factor has been reached for each pre-determined vesting date. Stock-based compensation expense for each financial performance factor is recognized beginning in the period when management has determined it is probable the financial performance factor will be achieved for the respective vesting period. The fair value of shares vested during the year was $12 million.

Restricted stock awards to employees are subject to forfeiture if the employee is not employed on the vesting date. Restricted stock awards issued to directors are not subject to forfeiture in the event a director ceases to be a member of the Board of Directors, except in limited circumstances. Restricted stock awards will be expensed over the requisite service period, subject to an assumed forfeiture rate. Prior to vesting, restricted stock awards have all of the rights of common stock (other than the right to sell or otherwise transfer or to receive unrestricted dividends, when issued). We calculate the fair value of share-based stock awards based on the closing price on the date the award was granted.

During the year ended December 31, 2012, we awarded certain employees 719,566 restricted stock awards. The restricted stock awards will be expensed over the requisite service period, subject to an assumed 12% average forfeiture rate. The terms of the restricted stock awards include vesting provisions based solely on continued service. If the service criteria are satisfied, the restricted stock awards vest during March of 2013, 2014, and 2015.

On May 9, 2012, in accordance with our existing program for annual director compensation, we awarded 59,158 shares of restricted stock under the Directors Plan. We determined that the service vesting condition of these restricted stock awards to be non-substantive and, in accordance with accounting principles for stock compensation, recorded the entire fair value of the award as compensation expense on the grant date.

Changes in nonvested restricted stock awards were as follows (in thousands, except per share amounts):



	As of December 31,
	2012				2011				2010
	Number of Shares		Weighted- Average Grant Date Fair Value		Number of Shares		Weighted- Average Grant Date Fair Value		Number of Shares		Weighted- Average Grant Date Fair Value
Nonvested at the beginning of the year	1,435		$	16.54	1,392		$	17.35	1,130		$	19.72
Granted	779		$	16.22	765		$	16.61	943		$	16.41
Vested	(727	)	$	16.52	(654	)	$	18.35	(522	)	$	20.66
Forfeited	(69	)	$	16.38	(68	)	$	16.60	(159	)	$	17.76
Nonvested at the end of the year	1,418		$	16.38	1,435		$	16.54	1,392		$	17.35

Restricted Stock Units

In 2010, we adopted a Growth Equity Plan, which is to be used for awards pursuant to our Equity Award Plan for Employees and Officers. The Growth Equity Plan provides for the award of restricted stock units (“RSUs”) to certain employees in connection with specified growth-based acquisitions that have been completed or development projects that have commenced.

The Growth Equity Plan provides that as of the award date of the RSUs, the Compensation Committee shall determine the net present value of cash flows for the applicable acquisitions or development projects (“Projected NPV”). Vesting of RSUs will not occur until at least three years have passed following an acquisition or upon the later of three years from the grant date or one year following the commencement of commercial operations for development projects. Upon the vesting date, the Compensation Committee will re-calculate the net present values of the cash flows (“Bring Down NPV”). If the ratio of the Bring Down NPV to the Projected NPV is greater than 95% all of the RSUs related to the particular project will vest. If the ratio is less than 95%, the number of RSUs originally issued will be proportionately reduced.

Changes in nonvested restricted stock units were as follows (in thousands, except per share amounts):



	As of December 31,
	2012				2011			2010
	Number of Shares		Weighted- Average Grant Date Fair Value		Number of Shares	Weighted- Average Grant Date Fair Value		Number of Shares		Weighted- Average Grant Date Fair Value
Nonvested at the beginning of the year	1,004		$	16.64	968	$	16.64	—		$	—
Granted	108		$	16.24	36	$	16.57	1,085		$	16.64
Vested	(96	)	$	16.64	—	$	—	—		$	—
Forfeited	—		$	—	—	$	—	(117	)	$	16.64
Nonvested at the end of the year	1,016		$	16.59	1,004	$	16.64	968		$	16.64

Stock Options

We have also awarded stock options to certain employees and directors. Stock options awarded to directors vest immediately. Stock options awarded to employees have typically vested annually over 3 to 5 years and expire over 10 years . We calculate the fair value of our share-based option awards using the Black-Scholes option pricing model which requires estimates of the expected life of the award and stock price volatility. During the years ended December 31, 2012, 2011 and 2010, we did not grant options to purchase shares of common stock to employees or directors.

For the 1995 Plan, the remaining 70,000 options for shares as of December 31, 2010 were exercised in 2010 at a weighted average exercise price of $3.06. There are no remaining outstanding options for shares under the 1995 Plan since 2010. The following table summarizes activity and balance information of the options under the 2004 Stock Option Plan:



	As of December 31,
	2012				2011				2010
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
2004 Stock Option Plan	(in thousands, except per share amounts)
Outstanding at the beginning of the year	2,052		$	18.24	2,264		$	18.04	2,681		$	18.83
Granted	—		$	—	—		$	—	—		$	—
Exercised	(263	)	$	6.21	(68	)	$	5.93	(219	)	$	6.30
Expired	—		$	—	(144	)	$	20.84	(54	)	$	22.41
Forfeited	—		$	—	—		$	—	(144	)	$	23.04
Outstanding at the end of the year	1,789		$	20.01	2,052		$	18.24	2,264		$	18.04
Options exercisable at year end	1,750		$	19.90	1,469		$	17.09	1,354		$	15.97
Options available for future grant	2,395				3,282				4,082

As of December 31, 2012, options for shares were in the following price ranges (in thousands, except years and per share amounts):



				Weighted Average Remaining Contractual Life (Years)
	Options Outstanding				Options Exercisable
Exercise Price Range	Number of Shares	Weighted Average Exercise Price			Number of Shares	Weighted Average Exercise Price
$5.93	76	$	5.93	1.8	76	$	5.93
$11.40	80	$	11.40	2.7	80	$	11.40
$20.52	1,403	$	20.52	4.2	1,403	$	20.52
$23.30 — $26.84	230	$	24.57	5.4	191	$	24.53
	1,789				1,750

The total received from the exercise of stock options was approximately $2 million, less than $1 million, and $1 million for the years ended December 31, 2012, 2011 and 2010, respectively. The tax benefits related to the exercise of the non-qualified stock options and the vesting of the restricted stock award were not recognized during 2012, 2011 and 2010 due to our NOLs. When the NOLs have been fully utilized by us, we will recognize a tax benefit and an increase in additional paid-in capital for the excess tax deductions received on the exercised non-qualified stock options and vested restricted stock. Future realization of the tax benefit will be presented in cash flows from financing activities in the consolidated statements of cash flows in the period the tax benefit is recognized. Previously recorded tax benefits that are in excess of the realized tax benefit on a particular non-qualified stock option or restricted stock are recorded as an increase to income tax expense since there is no additional paid-in capital pool available to offset these reduced tax benefits.

The aggregate intrinsic value as of December 31, 2012 for options exercisable was $2 million for options outstanding and options vested and $0 for options expected to vest. The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the closing stock price on the last trading day of 2012 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on the last trading day of 2012 (December 31, 2012). The intrinsic value changes based on the fair market value of our common stock. The total intrinsic value of options exercised for the years ended as of December 31, 2012, 2011, and 2010 was $3 million, $1 million, and $3 million, respectively.

As of December 31, 2012, there were options to purchase 2 million shares of common stock that had vested and were expected to vest in future periods at a weighted average exercise price of $20.01. The fair value of options vested during the years ended December 31, 2012, 2011, and 2010 was $9 million, $6 million, and $7 million, respectively.