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. Forfeitures are accounted for as they occur. Stock-based compensation expense is as follows (in millions, except for weighted average years):



							As of December 31, 2017
	Total Compensation Expense Year Ended December 31,						Unrecognized stock-based compensation expense		Weighted-average years to be recognized
	2017		2016		2015		Unrecognized stock-based compensation expense		Weighted-average years to be recognized
Restricted Stock Awards	$	11	$	10	$	11	$	8	1.4
Restricted Stock Units	$	7	$	6	$	6	$	5	1.4
Tax benefit related to compensation expense	$	10	$	10	$	15

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.

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. 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 the year ended December 31, 2017 we awarded certain employees grants of 813,816 shares of restricted stock. The restricted stock awards will be expensed over the requisite service period. 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 will generally vest during March of 2018, 2019, and 2020.

In May 2017, we awarded 14,286 shares of restricted stock for annual director compensation. We determined 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 awards as compensation expense on the grant date.

During the year ended December 31, 2017, we withheld 235,066 shares of our common stock in connection with tax withholdings for vested stock awards.

Changes in nonvested restricted stock awards as of December 31, 2017 were as follows (in thousands, except per share amounts):



	Number of Shares		Weighted-Average Grant Date Fair Value
Nonvested at the beginning of the year	1,220		$	17.20
Granted	828		$	16.22
Vested	(585	)	$	16.53
Forfeited	(74	)	$	17.67
Nonvested at the end of the year	1,389		$	16.46

The weighted-average grant-date fair value of RSAs granted during the years ended December 31 2017, 2016, and 2015 was $16.22, $15.14, and $21.88 respectively. The total fair value of shares vested during the years ended December 31, 2017, 2016, and 2015, was $10 million, $9 million, and $9 million, respectively.

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.

Annually we award units for which the employee does not have a vested right to the stock (“nonvested”) until the required financial performance metric has been reached for each pre-determined vesting date. Stock-based compensation expense for each financial performance metric is recognized beginning in the period when management has determined it is probable the financial performance metric will be achieved for the respective vesting period.

During the year ended December 31, 2017 we awarded certain employees grants of 78,636 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 2018, 2019, and 2020.

During the year, ended December 31, 2017, we awarded certain employees grants of 440,070 performance based RSUs that will vest based upon the Company’s cumulative Free Cash Flow per share over a three year performance period. Stock-based compensation expense for each financial performance metric is recognized beginning in the period when management has determined that it is probable the performance objectives will be achieved.

During the year ended December 31, 2017 we awarded 82,144 RSUs for annual director compensation and 23,151 RSUs, for quarterly director fees for certain of our directors who elected to receive RSUs in lieu of cash payments. We determined the service vesting condition of these 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 as of December 31, 2017 were as follows (in thousands, except per share amounts):



	Number of Shares		Weighted-Average Grant Date Fair Value
Nonvested at the beginning of the year	1,803		$	16.25
Granted	624		$	15.94
Vested	(71	)	$	18.35
Forfeited	(541	)	$	17.09
Nonvested at the end of the year	1,815		$	15.80

The weighted-average grant-date fair value of RSUs granted during the years ended December 31 2017, 2016, and 2015 was $15.94, $14.65, and $21.95, respectively. The total fair value of shares vested during the years ended December 31, 2017, 2016, and 2015, was $1 million, $1 million, and zero, respectively.

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, 2017:



	Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value ⁽²⁾
2014 Stock Option Plan	(in thousands, except per share amounts)
Outstanding at the beginning of the year	1,080		$	21.38
Granted	—		$	—
Exercised	—		$	—
Expired	(855	)	$	20.62
Forfeited	—		$	—
Outstanding at the end of the year ⁽¹⁾	225		$	24.30	1.06	$	—
Options exercisable at year end	225		$	24.30	1.06	$	—


(1)	All options outstanding as of December 31, 2017 are fully vested.

(2)

The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the closing stock price on the last trading day of 2017 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 2017 (December 29, 2017). The intrinsic value changes based on the fair market value of our common stock.

Effective January 1, 2017 we adopted FASB issued ASU2016-09 Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting to simplify the accounting for employee share-based payments, including income tax impacts, classification on the statement of cash flows, and forfeitures. For additional information see Note 1. Organization and Summary of Significant Accounting Policies The new guidance requires excess tax benefits and deficiencies to be recognized in the statement of operations. We recognized tax expense in our provision for income taxes during the year ended December 31, 2017. Excess tax benefits were not recognized $1 million for financial reporting purposes in the prior periods. 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.