These impacts were substantially offset by:
•Organic growth initiatives in special waste, recycled metals and other; •Escalations in service fee contracts; and •New units coming online.
Excluding certain items(2), operating expenses were $1,420 million for 2012 compared to $1,427 million for 2011. The $7 million decrease was primarily due to:
•The benefits from various operational improvements.
•Expenses related to Hurricane Sandy for repairs at facilities; and •Lower alternative fuel tax credits.
Excluding the items noted above, and the net operating income negative effect of Hurricane Sandy of $9 million in 2012, operating income was $233 million for the year ended December 31, 2012, or an increase of $10 million compared to the prior year period. Operating income improved due to:
•Organic growth initiatives; and •New units coming online.
Partially offset by:
•Lower debt service pass through revenue; •Lower pricing for EfW energy and recycled metal; and •Lower alternative fuel tax credits.
Adjusted EBITDA declined $2 million to $492 million primarily due to lower debt service pass through revenue, lower EfW energy and lower recycled metal pricing, lower alternative fuel tax credits, and the impact of Hurricane Sandy, mostly offset by organic growth initiatives, and new units coming online.
Free Cash Flow was $262 million, down $20 million versus 2011. The decline was primarily due to net effect of Hurricane Sandy, increased maintenance capital expenditures and higher interest expense.
Adjusted EPS of $0.52 declined by $0.02 compared to $0.54 in 2011, due to a higher effective tax rate, increased interest expense and the negative impact of Hurricane Sandy. These factors were partially offset by higher pre-tax income, increased equity income, and a lower number of shares outstanding due to the Company's stock buyback program.
(2) Includes pension plan settlement expense, net (gains) write-offs and impact of adverse loss development and transition to run-off of our insurance business. For additional information, see Exhibit 4A - Note (a) - (f) of this press release.
Shareholder Returns and Liquidity
In 2012, the Company doubled its annual cash dividend to $0.60 per share and returned $169 million to shareholders, consisting of $81 million in cash dividends and $88 million in share repurchases (3.9% of common stock outstanding). Since the inception of its buyback program the Company has repurchased 25.8 million shares, or 16.7% of shares outstanding, at a weighted average cost of $16.00. As of December 31, 2012, Covanta had $87 million of share repurchase authorization remaining.
Sanjiv Khattri, Covanta's Chief Financial Officer, commented, "2012 was a solid year for us. We were very active in returning capital to shareholders through our dividend and stock repurchase program. We also took advantage of strong debt markets, financing over $1.9 billion of capital. We have a strong balance sheet with flexibility and ample liquidity. As a result of the financing, as well as increased depreciation associated with our Delaware Valley facility acquisition, our 2013 net income and EPS will be negatively impacted by higher interest expense and depreciation. Our other key financial metrics, Adjusted EBITDA and Free Cash Flow, remain strong and we have some nice growth prospects for 2013 and beyond."
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