STOCK-BASED AWARD PLANS

Stock-Based Award Plans

In May 2014, the stockholders of the Company approved the Covanta Holding Corporation 2014 Equity Award Plan (the “Plan”) to provide incentive compensation to non-employee directors, officers and employees, and to consolidate the two previously existing equity compensation plans into a single plan: the Company’s Equity Award Plan for Employees and Officers (the “Former Employee Plan”) and the Company’s Equity Award Plan for Directors (the “Former Director Plan,” and together with the Former Employee Plan, the “Former Plans”). Shares that were available for issuance under the Former Plans will be available for issuance under the Plan. The stockholders of the Company also approved the authorization of 6 million new shares of our common stock for issuance under the Plan.

The purpose of the Plan 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 Plan provides 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.

Stock-Based Compensation

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, restricted stock awards and restricted stock units 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 2016, the average forfeiture rates were 12% for restricted stock awards and 15% for restricted stock units. Stock-based compensation expense is as follows (in millions, except for weighted average years):



							As of December 31, 2016
	Total Compensation Expense for the Years Ended December 31,						Unrecognized stock-based compensation expense		Weighted-average years to be recognized
	2016		2015		2014		Unrecognized stock-based compensation expense		Weighted-average years to be recognized
Restricted Stock Awards	$	10	$	11	$	11	$	7	1.4
Restricted Stock Units	$	6	$	6	$	6	$	8	2.1

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 $9 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 estimated 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, 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 2016 we awarded certain employees 752,426 shares of restricted stock. The restricted stock awards will be expensed over the requisite service period, subject to an estimated 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 generally during March of 2017, 2018, and 2019.

During 2016, we awarded 9,000 shares of restricted stock for annual director compensation. 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,
	2016				2015				2014
	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	1,060		$	19.79	1,240		$	17.67	1,166		$	17.85
Granted	761		$	15.14	573		$	21.88	721		$	17.20
Vested	(532	)	$	19.36	(661	)	$	17.69	(608	)	$	17.27
Forfeited	(69	)	$	17.51	(92	)	$	19.36	(39	)	$	17.80
Nonvested at the end of the year	1,220		$	17.20	1,060		$	19.79	1,240		$	17.67

Restricted Stock Units

In 2010, we awarded restricted stock units (“RSUs”) to certain employees in connection with specified growth-based acquisitions or development projects. Vesting of the RSUs is based on the net present value of projected cash flows of the applicable acquisition or development project, calculated as of the award date versus the vesting date. Vesting will occur after 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. For certain stock unit awards, dividends accrue prior to vesting and are paid when the awards vest. We calculate the fair value of share-based stock awards based on the closing price on the date the award was granted.

In January, 2016, we awarded certain employees 356,622 RSUs related to a special retention bonus that will vest after a three-year period.

In March, 2016, we awarded certain employees 471,381 RSUs, 390,728 of which will vest based upon the Company’s cumulative Free Cash Flow per share over a three-year performance period.

In May, 2016, we awarded 54,591 restricted stock units for annual director compensation. We determined the service vesting condition of these restricted stock awards and restricted stock units 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.

In September, 2016, the Board of Directors appointed two new board members. We awarded 5,550 restricted stock units for the prorated portion of the annual director compensation with respect to these directors. We determined the service vesting condition of these restricted stock awards and restricted stock units 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.

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



	As of December 31,
	2016				2015				2014
	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	1,189		$	17.60	894		$	15.93	691		$	16.66
Granted	888		$	14.65	322		$	21.95	247		$	14.60
Vested	(51	)	$	20.24	(21	)	$	17.94	(44	)	$	16.51
Forfeited	(223	)	$	16.29	(6	)	$	21.99	—		$	—
Nonvested at the end of the year	1,803		$	16.25	1,189		$	17.60	894		$	15.93

Stock Options

We have also awarded stock options to certain employees and directors. Stock options awarded to directors vested immediately. Stock options awarded to employees have typically vested annually over three to five years and expire over ten 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.

The following table summarizes activity and balance information of the options under the 2014 Stock Option Plan:



	As of December 31,
	2016				2015				2014
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
2014 Stock Option Plan	(in thousands, except per share amounts)
Outstanding at the beginning of the year	1,100		$	21.37	1,113		$	21.25	1,686		$	20.42
Granted	—		$	—	—		$	—	25		$	20.58
Exercised	—		$	—	(13	)	$	11.40	(532	)	$	18.53
Expired	(20	)	$	—	—		$	—	(66	)	$	20.52
Forfeited	—		$	—	—		$	—	—		$	—
Outstanding at the end of the year	1,080		$	21.38	1,100		$	21.37	1,113		$	21.25
Options exercisable at year end	1,080		$	21.38	1,100		$	21.37	1,100		$	21.26
Options available for future grant	4,003				5,652				6,548

As of December 31, 2016, 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
$20.52 — $20.58	850	$	20.52	0.4	850	$	20.52
$23.30 — $24.76	230	$	24.57	1.4	230	$	24.57
	1,080				1,080

The total cash received from the exercise of stock options was zero, less than $1 million and $10 million, for the years ended December 31, 2016, 2015 and 2014, 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 the years ended December 31, 2016, 2015 and 2014 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, 2016 for options exercisable was $0 for options outstanding and options vested. All options outstanding as of December 31, 2016 are fully vested. The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the closing stock price on the last trading day of 2016 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 2016 (December 30, 2016). 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, 2016, 2015 and 2014 was $0, $0, and $1 million, respectively.

As of December 31, 2016, there were options to purchase 1 million shares of common stock that had vested at a weighted average exercise price of $21.38.