PART I
– FINANCIAL INFORMATION
Item 1.
Financial Statements
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share and per share amounts)
|
|
December 31,
2007
|
|
|
September 30,
2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and equivalents
|
|
$ |
10,298 |
|
|
$ |
366,124 |
|
Accounts
receivable, net of allowance for doubtful accounts of $4,387 and $3,605 at
December 31, 2007 and
September 30,
2008, respectively
|
|
|
123,882 |
|
|
|
125,729 |
|
Deferred
income taxes
|
|
|
14,732 |
|
|
|
17,006 |
|
Prepaid
expenses and other current assets
|
|
|
21,953 |
|
|
|
24,787 |
|
Total current
assets
|
|
|
170,865 |
|
|
|
533,646 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
865,330 |
|
|
|
882,877 |
|
Goodwill
|
|
|
811,049 |
|
|
|
825,370 |
|
Intangible
assets, net
|
|
|
93,957 |
|
|
|
106,694 |
|
Restricted
assets
|
|
|
19,300 |
|
|
|
20,591 |
|
Other
assets, net
|
|
|
21,457 |
|
|
|
21,595 |
|
|
|
$ |
1,981,958 |
|
|
$ |
2,390,773 |
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
59,912 |
|
|
$ |
65,405 |
|
Book
overdraft
|
|
|
8,835 |
|
|
|
- |
|
Accrued
liabilities
|
|
|
69,578 |
|
|
|
81,299 |
|
Deferred
revenue
|
|
|
44,074 |
|
|
|
44,012 |
|
Current
portion of long-term debt and notes payable
|
|
|
13,315 |
|
|
|
7,390 |
|
Total current
liabilities
|
|
|
195,714 |
|
|
|
198,106 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt and notes payable
|
|
|
719,518 |
|
|
|
635,226 |
|
Other
long-term liabilities
|
|
|
38,053 |
|
|
|
34,116 |
|
Deferred
income taxes
|
|
|
223,308 |
|
|
|
250,527 |
|
Total
liabilities
|
|
|
1,176,593 |
|
|
|
1,117,975 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 13)
|
|
|
|
|
|
|
|
|
Minority
interests
|
|
|
30,220 |
|
|
|
32,980 |
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock: $0.01 par value per share; 7,500,000 shares authorized; none issued
and outstanding
|
|
|
- |
|
|
|
- |
|
Common
stock: $0.01 par value per share; 150,000,000 shares authorized;
67,052,135 and 79,716,100 shares issued and
outstanding
at December 31, 2007 and September 30, 2008,
respectively
|
|
|
670 |
|
|
|
797 |
|
Additional
paid-in capital
|
|
|
254,284 |
|
|
|
643,194 |
|
Retained
earnings
|
|
|
524,481 |
|
|
|
602,106 |
|
Accumulated
other comprehensive loss
|
|
|
(4,290 |
) |
|
|
(6,279 |
) |
Total stockholders’
equity
|
|
|
775,145 |
|
|
|
1,239,818 |
|
|
|
$ |
1,981,958 |
|
|
$ |
2,390,773 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share and per share amounts)
|
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
Revenues
|
|
$ |
250,775 |
|
|
$ |
272,702 |
|
|
$ |
710,811 |
|
|
$ |
790,035 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of operations
|
|
|
145,790 |
|
|
|
164,548 |
|
|
|
416,234 |
|
|
|
473,542 |
|
Selling,
general and administrative
|
|
|
25,782 |
|
|
|
27,009 |
|
|
|
74,482 |
|
|
|
81,164 |
|
Depreciation
and amortization
|
|
|
22,196 |
|
|
|
24,389 |
|
|
|
62,716 |
|
|
|
71,677 |
|
Loss
(gain) on disposal of assets
|
|
|
(97 |
) |
|
|
61 |
|
|
|
95 |
|
|
|
569 |
|
Operating
income
|
|
|
57,104 |
|
|
|
56,695 |
|
|
|
157,284 |
|
|
|
163,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(8,717 |
) |
|
|
(8,742 |
) |
|
|
(24,830 |
) |
|
|
(26,981 |
) |
Other
income (expense), net
|
|
|
(174 |
) |
|
|
(448 |
) |
|
|
243 |
|
|
|
(115 |
) |
Income
before income taxes and minority interests
|
|
|
48,213 |
|
|
|
47,505 |
|
|
|
132,697 |
|
|
|
135,987 |
|
Minority
interests
|
|
|
(4,175 |
) |
|
|
(3,813 |
) |
|
|
(11,145 |
) |
|
|
(10,992 |
) |
Income
from operations before income taxes
|
|
|
44,038 |
|
|
|
43,692 |
|
|
|
121,552 |
|
|
|
124,995 |
|
Income
tax provision
|
|
|
(15,356 |
) |
|
|
(15,419 |
) |
|
|
(45,225 |
) |
|
|
(47,370 |
) |
Net
income
|
|
$ |
28,682 |
|
|
$ |
28,273 |
|
|
$ |
76,327 |
|
|
$ |
77,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$ |
0.42 |
|
|
$ |
0.42 |
|
|
$ |
1.12 |
|
|
$ |
1.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share
|
|
$ |
0.41 |
|
|
$ |
0.41 |
|
|
$ |
1.08 |
|
|
$ |
1.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in calculating basic income per share
|
|
|
68,022,587 |
|
|
|
66,897,781 |
|
|
|
68,358,534 |
|
|
|
66,745,119 |
|
Shares
used in calculating diluted income per share
|
|
|
69,868,793 |
|
|
|
68,532,005 |
|
|
|
70,350,770 |
|
|
|
68,192,175 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
WASTE
CONNECTIONS, INC.
Nine
months ended September 30, 2008
(Unaudited)
(In
thousands, except share amounts)
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
Comprehensive
Income
|
|
Common
Stock
|
|
Additional
Paid-In
Capital
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
Retained
Earnings
|
|
Total
|
|
Shares
|
|
|
Amount
|
|
Balances
at December 31, 2007
|
|
|
|
|
67,052,135 |
|
|
$ |
670 |
|
$ |
254,284 |
|
|
$ |
(4,290 |
) |
$ |
524,481 |
|
$ |
775,145 |
|
Vesting
of restricted stock
|
|
|
|
|
219,275 |
|
|
|
2 |
|
|
(2 |
) |
|
|
- |
|
|
- |
|
|
- |
|
Cancellation
of restricted stock
|
|
|
|
|
(70,783 |
) |
|
|
(1 |
) |
|
(2,150 |
) |
|
|
- |
|
|
- |
|
|
(2,151 |
) |
Stock-based
compensation
|
|
|
|
|
- |
|
|
|
- |
|
|
5,903 |
|
|
|
- |
|
|
- |
|
|
5,903 |
|
Exercise
of stock options and warrants
|
|
|
|
|
906,744 |
|
|
|
9 |
|
|
17,195 |
|
|
|
- |
|
|
- |
|
|
17,204 |
|
Issuance
of common stock, net of issuance costs of $17,195
|
|
|
|
|
12,650,000 |
|
|
|
127 |
|
|
393,803 |
|
|
|
- |
|
|
- |
|
|
393,930 |
|
Excess
tax benefit associated with equity-based compensation
|
|
|
|
|
- |
|
|
|
- |
|
|
5,647 |
|
|
|
- |
|
|
- |
|
|
5,647 |
|
Repurchase
of common stock
|
|
|
|
|
(1,041,271 |
) |
|
|
(10 |
) |
|
(31,517 |
) |
|
|
- |
|
|
- |
|
|
(31,527 |
) |
Issuance
of common stock warrants to consultants
|
|
|
|
|
- |
|
|
|
- |
|
|
31 |
|
|
|
- |
|
|
- |
|
|
31 |
|
Amounts
reclassified into earnings, net of taxes
|
|
|
|
|
- |
|
|
|
- |
|
|
- |
|
|
|
2,889 |
|
|
- |
|
|
2,889 |
|
Change
in fair value of interest rate swaps, net of taxes
|
|
|
|
|
- |
|
|
|
- |
|
|
- |
|
|
|
(4,878 |
) |
|
- |
|
|
(4,878 |
) |
Net
income
|
|
$ |
77,625 |
|
|
- |
|
|
|
- |
|
|
- |
|
|
|
- |
|
|
77,625 |
|
|
77,625 |
|
Other
comprehensive loss
|
|
|
(3,244 |
) |
|
- |
|
|
|
- |
|
|
- |
|
|
|
- |
|
|
- |
|
|
- |
|
Income
tax effect of other comprehensive loss
|
|
|
1,255 |
|
|
- |
|
|
|
- |
|
|
- |
|
|
|
- |
|
|
- |
|
|
- |
|
Comprehensive
income
|
|
$ |
75,636 |
|
|
- |
|
|
|
- |
|
|
- |
|
|
|
- |
|
|
- |
|
|
- |
|
Balances
at September 30, 2008
|
|
|
|
|
|
79,716,100 |
|
|
$ |
797 |
|
$ |
643,194 |
|
|
$ |
(6,279 |
) |
$ |
602,106 |
|
$ |
1,239,818 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands)
|
|
Nine
months ended September 30,
|
|
|
|
2007
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
76,327 |
|
|
$ |
77,625 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Loss
on disposal of assets
|
|
|
95 |
|
|
|
569 |
|
Depreciation
|
|
|
59,553 |
|
|
|
67,459 |
|
Amortization
of intangibles
|
|
|
3,163 |
|
|
|
4,218 |
|
Deferred
income taxes, net of acquisitions
|
|
|
7,984 |
|
|
|
25,550 |
|
Minority
interests
|
|
|
11,145 |
|
|
|
10,992 |
|
Amortization
of debt issuance costs
|
|
|
1,695 |
|
|
|
1,450 |
|
Stock-based
compensation
|
|
|
4,636 |
|
|
|
5,903 |
|
Interest
income on restricted assets
|
|
|
(332 |
) |
|
|
(392 |
) |
Closure
and post-closure accretion
|
|
|
769 |
|
|
|
1,066 |
|
Excess
tax benefit associated with equity-based compensation
|
|
|
(10,190 |
) |
|
|
(5,647 |
) |
Net
change in operating assets and liabilities, net of
acquisitions
|
|
|
15,220 |
|
|
|
5,868 |
|
Net
cash provided by operating activities
|
|
|
170,065 |
|
|
|
194,661 |
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Payments
for acquisitions, net of cash acquired
|
|
|
(85,652 |
) |
|
|
(35,177 |
) |
Capital
expenditures for property and equipment
|
|
|
(96,106 |
) |
|
|
(79,536 |
) |
Proceeds
from disposal of assets
|
|
|
955 |
|
|
|
1,499 |
|
Increase
in restricted assets, net of interest income
|
|
|
(750 |
) |
|
|
(900 |
) |
Increase
in other assets
|
|
|
(512 |
) |
|
|
(49 |
) |
Net
cash used in investing activities
|
|
|
(182,065 |
) |
|
|
(114,163 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from long-term debt
|
|
|
574,000 |
|
|
|
127,000 |
|
Principal
payments on notes payable and long-term debt
|
|
|
(549,748 |
) |
|
|
(219,510 |
) |
Change
in book overdraft
|
|
|
6,495 |
|
|
|
(8,835 |
) |
Proceeds
from option and warrant exercises
|
|
|
24,829 |
|
|
|
17,204 |
|
Excess
tax benefit associated with equity-based compensation
|
|
|
10,190 |
|
|
|
5,647 |
|
Distributions
to minority interest holders
|
|
|
(10,437 |
) |
|
|
(8,232 |
) |
Payments
for repurchase of common stock
|
|
|
(64,038 |
) |
|
|
(31,527 |
) |
Proceeds
from secondary stock offering, net
|
|
|
- |
|
|
|
393,930 |
|
Debt
issuance costs
|
|
|
(1,151 |
) |
|
|
(349 |
) |
Net
cash provided by (used in) financing activities
|
|
|
(9,860 |
) |
|
|
275,328 |
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and equivalents
|
|
|
(21,860 |
) |
|
|
355,826 |
|
Cash
and equivalents at beginning of period
|
|
|
34,949 |
|
|
|
10,298 |
|
Cash
and equivalents at end of period
|
|
$ |
13,089 |
|
|
$ |
366,124 |
|
|
|
|
|
|
|
|
|
|
Non-cash
financing activity:
|
|
|
|
|
|
|
|
|
Liabilities
assumed and notes payable issued to sellers of businesses
acquired
|
|
$ |
44,861 |
|
|
$ |
3,789 |
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
WASTE
CONNECTIONS, INC.
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
1. BASIS
OF PRESENTATION AND SUMMARY
The
accompanying condensed consolidated financial statements relate to Waste
Connections, Inc. and its subsidiaries (“WCI” or the “Company”) for the nine
month periods ended September 30, 2007 and 2008. In the opinion of
management, the accompanying balance sheets and related interim statements of
income, cash flows and stockholders’ equity include all adjustments, consisting
only of normal recurring items, necessary for their fair presentation in
conformity with U.S. generally accepted accounting principles (“GAAP”).
The Company’s condensed consolidated balance sheet as of December 31, 2007
was derived from audited financial statements, but does not include all
disclosures required by GAAP. Preparing financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses. Examples include accounting for
landfills, self-insurance, income taxes, allocation of acquisition purchase
price and asset impairments. An additional area that involves estimation
is when the Company estimates the amount of potential exposure it may have with
respect to litigation, claims and assessments in accordance with Financial
Accounting Standards Board (“FASB”) Statement No. 5, Accounting for Contingencies.
Actual results for all estimates could differ materially from the estimates and
assumptions that the Company uses in the preparation of its condensed
consolidated financial statements.
Interim
results are not necessarily indicative of results for a full year. The
information included in this Quarterly Report on Form 10-Q should be read
in conjunction with Management’s Discussion and Analysis of Financial Condition
and Results of Operations and the financial statements and notes thereto
included in the Company’s 2007 Annual Report on
Form 10-K.
2. NEW
ACCOUNTING STANDARDS
SFAS 141(R).
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations
(“SFAS 141(R)”). SFAS 141(R) will have a material impact on the
Company as it establishes principles and requirements for how the Company:
(a) recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree; (b) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and (c) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination.
SFAS 141(R) requires contingent consideration to be recognized at its fair
value on the acquisition date and, for certain arrangements, changes in fair
value to be recognized in earnings until settled. SFAS 141(R) also
requires acquisition-related transaction and restructuring costs to be expensed
rather than treated as part of the cost of the acquisition.
SFAS 141(R) applies prospectively to business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008.
SFAS 157.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”), which defines fair value, establishes a framework for
measuring fair value in accordance with GAAP, and expands disclosures about fair
value measurements. SFAS 157 applies under other existing accounting
pronouncements that require or permit fair value measurements, as the FASB
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, SFAS 157 does not
require any new fair value measurements. Effective January 1, 2008,
the Company adopted SFAS 157 as it relates to financial assets and
liabilities. The new disclosures required by SFAS 157 are included in
Note 9.
WASTE
CONNECTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
FSP
157-2. In February
2008, the FASB issued FASB Staff Position No. 157-2, Effective
Date of FASB Statement No. 157 (“FSP 157-2”), which
delays the effective date of SFAS 157 for nonfinancial assets and
nonfinancial liabilities. Therefore, the Company has delayed
application of SFAS 157 to its nonfinancial assets and nonfinancial
liabilities, which include assets and liabilities acquired in connection with a
business combination, goodwill, intangible assets and asset retirement
obligations recognized in connection with final capping, closure and
post-closure landfill obligations, until January 1, 2009. The Company
is currently evaluating the impact of SFAS 157 for nonfinancial assets and
liabilities on the Company's financial position and results of operations.
SFAS 159.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities - Including an Amendment of FASB Statement
No. 115 (“SFAS 159”). SFAS 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value that are not currently required to be measured at fair value.
SFAS 159 permits all entities to choose, at specified election dates, to
measure eligible items at fair value (the “fair value option”). A business
entity shall report unrealized gains and losses on items for which the fair
value option has been elected in earnings at each subsequent reporting
date. Upfront costs and fees related to items for which the fair value
option is elected are recognized in earnings as incurred and not deferred.
SFAS 159 also establishes presentation and disclosure requirements designed
to facilitate comparisons between entities that choose different measurement
attributes for similar types of assets and liabilities. SFAS 159 is
effective as of the beginning of an entity’s first fiscal year that begins after
November 15, 2007. The Company did not adopt the fair value option
permitted under this statement.
SFAS 160.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - an Amendment of ARB No. 51
(“SFAS 160”), which establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 clarifies that a noncontrolling interest in a
subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements. SFAS 160
also requires consolidated net income to be reported at amounts that include the
amounts attributable to both the parent and the noncontrolling interest.
It also requires disclosure, on the face of the consolidated statement of
income, of the amounts of consolidated net income attributable to the parent and
to the noncontrolling interest. SFAS 160 also provides guidance when
a subsidiary is deconsolidated and requires expanded disclosures in the
consolidated financial statements that clearly identify and distinguish between
the interests of the parent’s owners and the interests of the noncontrolling
owners of a subsidiary. SFAS 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008. The Company is currently evaluating the impact
this statement will have on its financial position and results of
operations.
SFAS 161.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities – an amendment of FASB Statement No.
133 (“SFAS 161”), which amends and expands the disclosure
requirements of FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”), with the intent to
provide users of financial statements with an enhanced understanding of:
(a) how and why an entity uses derivative instruments; (b) how
derivative instruments and related hedged items are accounted for under
SFAS 133 and its related interpretations; and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance and cash flows. SFAS 161 requires qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair value amounts of and gains and losses on derivative
instruments and disclosures about credit-risk-related contingent features in
derivative instruments. This statement applies to all entities and all
derivative instruments. SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008.
WASTE
CONNECTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
FSP No. APB
14-1. In May 2008, the FASB issued FASB Staff Position No.
APB 14-1, Accounting for
Convertible Debt Instruments That May Be Settled in Cash Upon Conversion
(Including Partial Cash Settlement) (“FSP No. APB 14-1”). FSP
No. APB 14-1 applies to convertible debt instruments that, by their stated
terms, may be settled in cash (or other assets) upon conversion, including
partial cash settlement, unless the embedded conversion option is required to be
separately accounted for as a derivative under SFAS 133. FSP No.
APB 14-1 specifies that issuers of convertible debt instruments should
separately account for the liability and equity components in a manner that will
reflect the entity’s nonconvertible debt borrowing rate when interest cost is
recognized in subsequent periods. FSP No. APB 14-1 is effective for
financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years. FSP No. APB 14-1
shall be applied retrospectively to all periods presented. The cumulative
effect of the change in accounting principle on periods prior to those presented
shall be recognized as of the beginning of the first period presented. An
offsetting adjustment shall be made to the opening balance of retained earnings
for that period, presented separately.
The
adoption of FSP No. APB 14-1 will not affect the Company’s cash flows;
however, it will impact the Company’s results of operations by increasing
interest expense associated with the Company’s 3.75% Convertible Senior Notes
due 2026 (“2026 Notes”) by adding a non-cash component to amortize a debt
discount calculated based on the difference between the cash coupon of the
convertible debt instrument and the estimated non-convertible debt borrowing
rate. The 2026 Notes were issued in March 2006 and bear interest at a
rate of 3.75% per annum. At the date of issuance, the Company’s borrowing
rate for similar debt instruments with no conversion rights was estimated at
6.5% per annum. The adoption of FSP No. APB 14-1 will require the
Company to record a debt discount, which will be amortized to interest expense
through April 1, 2011, representing the first date on which holders of the
2026 Notes may require the Company to repurchase all or a portion of their
notes. Upon the adoption of FSP No. APB 14-1, the annual decrease to
net income as a result of amortizing the non-cash debt discount, net of the
expected income tax benefit, will be as follows:
|
Year
ended December 31, 2006
|
$ |
1,800 |
|
|
Year
ended December 31, 2007
|
$ |
2,500 |
|
|
Year
ended December 31, 2008
|
$ |
2,600 |
|
|
Year
ended December 31, 2009
|
$ |
2,800 |
|
|
Year
ended December 31, 2010
|
$ |
3,000 |
|
|
Year
ended December 31, 2011
|
$ |
800 |
|
Upon
conversion of a convertible debt instrument, the Company must allocate the fair
value of the consideration transferred and any transaction costs incurred
between the equity and liability components. This is done by first
allocating to the liability component an amount equal to the fair value of the
liability component immediately prior to its conversion, with the residual
consideration allocated to the equity component. Any gain or loss equal to
the difference between the consideration allocated to the liability component
and the carrying value of the liability component, including any unamortized
debt discount or issuance costs, is recorded in earnings.
FSP No.
FAS 142-3. In April 2008, the FASB issued FSP No. 142-3,
Determination of the Useful
Life of Intangible Assets (“FSP FAS 142-3”), which amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under FASB
Statement No. 142, Goodwill and Other Intangible Assets
(“SFAS 142”). The intent of FSP FAS 142-3 is to improve
the consistency between the useful life of a recognized intangible asset under
SFAS 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS 141(R) and other U.S. generally accepted
accounting principles. FSP FAS 142-3 requires an entity to disclose
information for a recognized intangible asset that enables users of the
financial statements to assess the extent to which the expected future cash
flows associated with the asset are affected by the entity’s intent and/or
ability to renew or extend the arrangement. FSP FAS 142-3 is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. The
Company does not expect the adoption of FSP FAS 142-3 to have a material
impact on the Company’s financial position or results of
operations.
WASTE
CONNECTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
3. STOCK-BASED
COMPENSATION
A summary
of activity related to restricted stock and restricted stock units under the
2002 Restricted Stock Plan and the Second Amended and Restated 2004 Equity
Incentive Plan, as of December 31, 2007, and changes during the nine month
period ended September 30, 2008, is presented below:
|
|
|
Unvested
Shares
|
|
|
Outstanding
at December 31, 2007
|
|
|
804,748 |
|
|
Granted
|
|
|
379,949 |
|
|
Forfeited
|
|
|
(54,649 |
) |
|
Vested
|
|
|
(219,275 |
) |
|
Outstanding
at September 30, 2008
|
|
|
910,773 |
|
The
weighted average grant date fair value per share for the 379,949 shares of
common stock underlying the restricted stock units granted during the nine month
period ended September 30, 2008 was $28.99. During the nine months
ended September 30, 2007 and 2008, the Company's stock-based compensation
expense from restricted stock and restricted stock units was $4,139 and $5,405,
respectively.
4. LANDFILL
ACCOUNTING
At
September 30, 2008, the Company owned 26 landfills, and operated, but
did not own, three landfills under life-of-site operating agreements and
seven landfills under limited-term operating agreements. The
Company’s landfills had site costs with a net book value of $491,188 at
September 30, 2008. With the exception of two owned landfills
that only accept construction and demolition waste, all landfills that the
Company owns or operates are municipal solid waste landfills. For the
Company’s seven landfills operated under limited-term operating agreements,
the owner of the property (generally a municipality) usually owns the permit and
is generally responsible for final capping, closure and post-closure
obligations. The Company is responsible for all final capping, closure and
post-closure liabilities for the three landfills that it operates under
life-of-site operating agreements.
The
Company performs surveys at least annually to estimate the disposal capacity at
its landfills. Many of the Company’s existing landfills have the potential
for expanded disposal capacity beyond the amount currently permitted. The
Company’s landfill depletion rates are based on the remaining disposal capacity,
considering both permitted and probable expansion airspace at the landfills it
owns, and landfills it operates, but does not own, under life-of-site
agreements. Expansion airspace consists of additional disposal capacity
being pursued through means of an expansion but is not actually permitted.
Expansion airspace that meets certain internal criteria is included in the
estimate of total landfill airspace. The Company’s landfill depletion
rates are based on the term of the operating agreement at its operated landfills
that have capitalized expenditures.
Based on
remaining permitted capacity as of September 30, 2008, and projected annual
disposal volumes, the average remaining landfill life for the Company’s owned
landfills and landfills operated under life-of-site operating agreements is
approximately 46 years. The Company is currently seeking to expand
permitted capacity at four of its owned landfills and one landfill that it
operates under a life-of-site operating agreement, and considers the achievement
of these expansions to be probable. Although the Company cannot be certain
that all future expansions will be permitted as designed, the average remaining
life, when considering remaining permitted capacity, probable expansion capacity
and projected annual disposal volume, of the Company’s owned landfills and
landfills operated under life-of-site operating agreements is 51 years,
with lives ranging from 2 to 206 years.
WASTE
CONNECTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
During
the nine months ended September 30, 2007 and 2008, the Company expensed
approximately $15,436 and $16,831, respectively, or an average of $2.53 and
$2.63 per ton consumed, respectively, related to landfill depletion at
owned landfills and landfills operated under life-of-site
agreements.
The
Company reserves for final capping, closure and post-closure maintenance
obligations at the landfills it owns and landfills it operates under
life-of-site operating agreements. The Company calculates the net present
value of its final capping, closure and post-closure commitments recorded in
2008 assuming a 2.5% inflation rate and a 7.5% discount rate. The
resulting final capping, closure and post-closure obligation is recorded on the
balance sheet as an addition to site costs and amortized to depletion expense as
the landfill’s airspace is consumed. Interest is accreted on the recorded
liability using the corresponding discount rate. During the nine months
ended September 30, 2007 and 2008, the Company expensed approximately $769
and $1,066, respectively, or an average of $0.13 and $0.17 per ton
consumed, respectively, related to final capping, closure and post-closure
accretion expense.
The
following is a reconciliation of the Company’s final capping, closure and
post-closure liability balance from December 31, 2007 to September 30,
2008:
|
Final
capping, closure and post-closure liability at December 31,
2007
|
$
|
17,853
|
|
|
Adjustments
to final capping, closure and post-closure liabilities
|
|
1,696
|
|
|
Liabilities
incurred
|
|
1,244
|
|
|
Accretion
expense
|
|
1,066
|
|
|
Closure
payments
|
|
(518
|
) |
|
Final
capping, closure and post-closure liability at September 30,
2008
|
$
|
21,341
|
|
The
Company recorded adjustments in its final capping, closure and post-closure
liabilities due primarily to revisions in cost estimates and changes in the
timing of capping events at an owned landfill, partially offset by an increase
in airspace at a landfill where an expansion is being pursued. The Company
performs its annual review of its cost and capacity estimates in the first
quarter of each year.
At
September 30, 2008, $18,344 of the Company’s restricted assets balance was
for purposes of settling future final capping, closure and post-closure
liabilities.
WASTE
CONNECTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
5. LONG-TERM
DEBT
Long-term
debt consists of the following:
|
|
|
December 31,
2007
|
|
|
September 30,
2008
|
|
|
Revolver
under Credit Facility, bearing interest ranging from 3.01% to
7.25%*
|
|
$ |
479,000 |
|
|
$ |
400,000 |
|
|
2026
Convertible Senior Notes, bearing interest at 3.75%
|
|
|
200,000 |
|
|
|
200,000 |
|
|
2001
Wasco Bonds, bearing interest from 7.0% to 7.25%*
|
|
|
11,285 |
|
|
|
10,800 |
|
|
California
Tax-Exempt Bonds, bearing interest ranging from 1.10% to
8.47%*
|
|
|
33,225 |
|
|
|
24,900 |
|
|
Notes
payable to sellers in connection with acquisitions, bearing interest at
5.5% to 7.5%*
|
|
|
3,994 |
|
|
|
3,278 |
|
|
Notes
payable to third parties, bearing interest at 6.0% to
11.0%*
|
|
|
5,329 |
|
|
|
3,638 |
|
|
|
|
|
732,833 |
|
|
|
642,616 |
|
|
Less – current
portion
|
|
|
(13,315 |
) |
|
|
(7,390 |
) |
|
|
|
$ |
719,518 |
|
|
$ |
635,226 |
|
|
* Interest
rates in the table above represent the range of interest rates incurred
during the nine month period ended September 30,
2008.
|
In June
2008, the Company increased maximum borrowings available under its credit
facility by $45,000 to $845,000. No changes were made to the pricing,
terms, conditions and covenants of the credit facility.
On
July 15, 2008, the Company entered into a Master Note Purchase Agreement
with certain accredited institutional investors pursuant to which the Company
issued and sold to the investors at a closing on October 1, 2008, $175,000
of senior uncollateralized notes due October 1, 2015 (the “Notes”) in a
private placement. The Notes bear interest at the fixed rate of 6.22% per
annum with interest payable in arrears semi-annually on April 1 and
October 1 beginning on April 1, 2009, and with principal payable at
the maturity of the Notes on October 1, 2015.
The Notes
are uncollateralized obligations and rank equally with obligations under the
Company’s senior uncollateralized revolving credit facility. The Company
intends to use proceeds from the sale of the Notes for general corporate
purposes.
The Notes
are subject to representations, warranties, covenants and events of default
customary for a private placement of senior uncollateralized notes. Upon
the occurrence of an event of default, payment of the Notes may be accelerated
by the holders of the Notes. The Notes may also be prepaid by the Company
at any time at par plus a make whole amount determined in respect of the
remaining scheduled interest payments on the Notes, using a discount rate of the
then current market standard for United States treasury bills plus 0.50%.
In addition, the Company will be required to offer to prepay the Notes upon
certain changes in control.
WASTE
CONNECTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
The
Company may issue additional series of senior uncollateralized notes pursuant to
the terms and conditions of the Agreement, provided that the purchasers of the
Notes shall not have any obligation to purchase any additional notes issued
pursuant to the Agreement and the aggregate principal amount of the Notes and
any additional notes issued pursuant to the Agreement shall not exceed
$500,000.
6. ACQUISITIONS
Acquisitions
are accounted for under the purchase method of accounting. The results of
operations of the acquired businesses have been included in the Company’s
consolidated financial statements from their respective acquisition
dates.
During
the nine months ended September 30, 2007, the Company acquired eight
non-hazardous solid waste collection, transfer, disposal and recycling
businesses. Aggregate consideration for the acquisitions consisted of
$84,889 in cash (net of cash acquired), common stock warrants valued at $53 and
the assumption of debt totaling $35,442. During the nine months ended
September 30, 2007, the Company paid or adjusted $763 of
acquisition-related liabilities accrued at December 31,
2006.
During
the nine months ended September 30, 2008, the Company acquired seven
non-hazardous solid waste collection and recycling businesses. Aggregate
consideration for the acquisitions consisted of $34,139 in cash (net of cash
acquired), common stock warrants valued at $31 and the assumption of debt
totaling $2,293. During the nine months ended September 30, 2008, the
Company paid or adjusted $1,038 of acquisition-related liabilities accrued at
December 31, 2007.
The
purchase prices have been allocated to the identified intangible assets and
tangible assets acquired and liabilities assumed based on their estimated fair
values at the dates of acquisition, with any residual amounts allocated to
goodwill. Substantially all of the goodwill is expected to be deductible
for tax purposes. The purchase price allocations are considered
preliminary until the Company is no longer waiting for information that it has
arranged to obtain and that is known to be available or obtainable.
Although the time required to obtain the necessary information will vary with
circumstances specific to an individual acquisition, the “allocation period” for
finalizing purchase price allocations does not exceed one year from the
consummation of a business combination.
As of
September 30, 2008, the Company had five acquisitions for which
purchase price allocations were preliminary, mainly as a result of pending
working capital valuations. The Company believes the potential changes to
its preliminary purchase price allocations will not have a material impact on
its financial condition, results of operations or cash flows.
WASTE
CONNECTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
A summary
of the purchase price allocations for acquisitions consummated in the nine
months ended September 30, 2007 and preliminary purchase price allocations
for acquisitions consummated in the nine months ended September 30, 2008
are as follows:
|
|
|
2007
Acquisitions
|
|
|
2008
Acquisitions
|
|
|
|
Acquired
Assets:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$ |
5,338 |
|
|
$ |
1,316 |
|
|
|
Prepaid
expenses and other current assets
|
|
|
683 |
|
|
|
351 |
|
|
|
Property
and equipment
|
|
|
81,913 |
|
|
|
4,873 |
|
|
|
Goodwill
|
|
|
34,552 |
|
|
|
14,463 |
|
|
|
Long-term
franchise agreements and contracts
|
|
|
2,921 |
|
|
|
16,052 |
|
|
|
Other
intangibles
|
|
|
540 |
|
|
|
869 |
|
|
|
Non-competition
agreements
|
|
|
3,856 |
|
|
|
35 |
|
|
|
Assumed
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(2,009 |
) |
|
|
(137 |
) |
|
|
Accrued
liabilities
|
|
|
(2,926 |
) |
|
|
(90 |
) |
|
|
Debt
and long-term liabilities assumed
|
|
|
(35,442 |
) |
|
|
(2,293 |
) |
|
|
Deferred
revenue
|
|
|
(3,649 |
) |
|
|
(618 |
) |
|
|
Deferred
income taxes
|
|
|
(835 |
) |
|
|
(651 |
) |
|
|
Total
consideration, net
|
|
$ |
84,942 |
|
|
$ |
34,170 |
|
|
The
acquisitions completed during the nine months ended September 30, 2007 and
2008, were not material to the Company’s results of
operations.
7. INTANGIBLE
ASSETS
Intangible
assets, exclusive of goodwill, consisted of the following at September 30,
2008:
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
|
Amortizable
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
franchise agreements and contracts
|
|
$ |
78,310 |
|
|
$ |
(11,479 |
) |
|
$ |
66,831 |
|
|
|
Non-competition
agreements
|
|
|
9,737 |
|
|
|
(4,997 |
) |
|
|
4,740 |
|
|
|
Other
|
|
|
17,932 |
|
|
|
(6,657 |
) |
|
|
11,275 |
|
|
|
|
|
|
105,979 |
|
|
|
(23,133 |
) |
|
|
82,846 |
|
|
|
Nonamortized
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived
intangible assets
|
|
|
23,848 |
|
|
|
- |
|
|
|
23,848 |
|
|
|
Intangible
assets, exclusive of goodwill
|
|
$ |
129,827 |
|
|
$ |
(23,133 |
) |
|
$ |
106,694 |
|
|
The
weighted-average amortization periods of long-term franchise agreements and
contracts, non-competition agreements and other intangibles acquired during the
nine months ended September 30, 2008 are 40 years, 7 years and
7 years, respectively.
WASTE
CONNECTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In
thousands, except share, per share and per ton
amounts)
8. NET
INCOME PER SHARE INFORMATION
The
following table sets forth the calculation of the numerator and denominator used
in the computation of basic and diluted net income per common share for the
three and nine months ended September 30, 2007 and 2008:
|
|
|
Three
months ended
September 30,
|
|
|
Nine
months ended
September 30,
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for basic and diluted earnings per share
|
|
$ |
28,682 |
|
|
$ |
28,273 |
|
|
$ |
76,327 |
|
|
$ |
77,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
shares outstanding
|
|
|
68,022,587 |
|
|
|
66,897,781 |
|
|
|
68,358,534 |
|
|
|
66,745,119 |
|
|
Dilutive
effect of 2026 Notes
|
|
|
- |
|
|
|
165,081 |
|
|
|
- |
|
|
|
55,027 |
|
|
Dilutive
effect of stock options and warrants
|
|
|
1,483,459 |
|
|
|
1,242,770 |
|
|
|
1,662,071 |
|
|
|
1,215,636 |
|
|
Dilutive
effective of restricted stock
|
|
|
362,747 |
|
|
|
226,373 |
|
|
|
330,165 |
|
|
|
176,393 |
|
|
Diluted
shares outstanding
|
|
|
69,868,793 |
|
|
|
68,532,005 |
|
|
|
70,350,770 |
|
|
|
68,192,175 |
|
The
Company’s 2026 Notes are convertible, under certain circumstances, into a
maximum of 5,882,354 shares of common stock. The 2026 Notes
require (subject to certain exceptions) payment of the principal value in cash
and net share settle of the conversion value in excess of the principal value of
the notes upon conversion. The 2026 Notes became dilutive in the third
quarter of 2008. Therefore, in accordance with EITF 04-8, The Effect of Contingently
Convertible Investments on Diluted Earnings Per Share, the Company has
included within diluted shares outstanding the dilutive effect of the conversion
value in excess of the principal value of the notes. In addition, the
conversion feature of the 2026 Notes meets all the requirements of
EITF 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock, to be accounted for as an equity interest and not as
a derivative. Therefore, in the event the 2026 Notes become
convertible, a holder electing to convert will receive a cash payment for the
principal amount of the debt and net shares of the Company’s common stock equal
to the value of the conversion spread, which the Company will account for as a
debt repayment with no gain or loss if the conversion occurs prior to
December 31, 2008, and the issuance of common stock will be recorded in
stockholders’ equity. For conversions that occur after December 31,
2008, the Company will apply the provisions of FSP No. APB 14-1 to compute
any gain or loss upon conversion, as disclosed in
Note 2.
For the
three months ended September 30, 2007 and 2008, none of the outstanding
stock options and warrants to purchase shares of common stock were excluded from
the computation of diluted earnings per share on the basis that they were
anti-dilutive. For the nine months ended September 30, 2007 and 2008,
stock options and warrants to purchase 4,608 and 177 shares of common
stock, respectively, were excluded from the computation of diluted earnings per
share as they were anti-dilutive.
9. FAIR
VALUE OF FINANCIAL INSTRUMENTS
As
discussed in Note 2, effective January 1, 2008, the Company adopted
SFAS 157 as it relates to financial assets and liabilities that are being
measured and reported at fair value on a recurring basis. Although the
adoption of SFAS 157 did not materially impact its financial condition,
results of operations, or cash flows, the Company is now required to provide
additional disclosures as part of its financial statements. In accordance
with FSP 157-2, the Company deferred adoption of SFAS 157 as it
relates to nonfinancial assets and liabilities measured at fair value on a
nonrecurring basis.
WASTE
CONNECTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
SFAS 157
defines fair value, establishes a framework for measuring fair value in
accordance with GAAP, and expands disclosure about fair value
measurements. This statement is intended to enable the reader of the
financial statements to assess the inputs used to develop those measurements by
establishing a hierarchy for ranking the quality and reliability of the
information used to determine fair values. The statement requires that
assets and liabilities carried at fair value be classified and disclosed in a
three-tier fair value hierarchy. These tiers include: Level 1,
defined as quoted market prices in active markets for identical assets or
liabilities; Level 2, defined as inputs other than Level 1 that are
observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities, quoted prices in markets that are not active, model-based
valuation techniques for which all significant assumptions are observable in the
market, or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities; and
Level 3, defined as unobservable inputs that are not corroborated by market
data.
The
Company’s financial assets and liabilities recorded at fair value on a recurring
basis include derivative instruments and certain investments included in
restricted assets. The Company’s derivative instruments are pay-fixed,
receive-variable interest rate swaps. The Company’s restricted assets
measured at fair value are invested in fixed-income securities. The
Company utilizes the market approach to measure fair value for both its interest
rate swaps and its restricted assets measured at fair value. The market
approach uses prices and other relevant information generated by market
transactions involving identical or comparable assets or
liabilities.
The
Company’s assets and liabilities measured at fair value on a recurring basis
subject to the disclosure requirements of SFAS 157 at September 30,
2008, were as follows:
|
|
|
Fair
Value Measurement at
Reporting
Date Using
|
|
|
|
|
Total
|
|
|
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Interest
rate swap derivative instruments – liability position
|
|
$ |
(10,243 |
) |
|
$ |
- |
|
|
$ |
(10,243 |
) |
|
$ |
- |
|
|
Restricted
assets
|
|
$ |
12,822 |
|
|
$ |
12,822 |
|
|
$ |
- |
|
|
$ |
- |
|
WASTE
CONNECTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
10. COMPREHENSIVE
INCOME
Comprehensive
income includes changes in the fair value of interest rate swaps that qualify
for hedge accounting. The difference between net income and comprehensive
income for the three and nine months ended September 30, 2007 and 2008 is
as follows:
|
|
|
Three
months ended
September 30,
|
|
|
Nine
months ended
September 30,
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Net
income
|
|
$ |
28,682 |
|
|
$ |
28,273 |
|
|
$ |
76,327 |
|
|
$ |
77,625 |
|
|
Unrealized
loss on interest rate swaps, net of tax benefit of $1,761 and $490 for the
three months ended September 30, 2007 and 2008, respectively, and
$1,801 and $1,255 for the nine months ended September 30, 2007 and
2008, respectively
|
|
|
(2,789 |
) |
|
|
(777 |
) |
|
|
(2,886 |
) |
|
|
(1,989 |
) |
|
Comprehensive
income
|
|
$ |
25,893 |
|
|
$ |
27,496 |
|
|
$ |
73,441 |
|
|
$ |
75,636 |
|
The
components of other comprehensive loss and related tax effects for the three and
nine months ended September 30, 2007 and 2008 are as follows:
|
|
Three
months ended September 30, 2007
|
|
|
|
|
Gross
|
|
Tax
effect
|
|
Net
of tax
|
|
|
|
Amounts
reclassified into earnings
|
|
$ |
(987 |
) |
|
$ |
382 |
|
|
$ |
(605 |
) |
|
|
Changes
in fair value of interest rate swaps
|
|
|
(3,563 |
) |
|
|
1,379 |
|
|
|
(2,184 |
) |
|
|
|
|
$ |
(4,550 |
) |
|
$ |
1,761 |
|
|
$ |
(2,789 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended September 30, 2008
|
|
|
|
|
Gross
|
|
Tax
effect
|
|
Net
of tax
|
|
|
|
Amounts
reclassified into earnings
|
|
$ |
2,066 |
|
|
$ |
(799 |
) |
|
$ |
1,267 |
|
|
|
Changes
in fair value of interest rate swaps
|
|
|
(3,333 |
) |
|
|
1,289 |
|
|
|
(2,044 |
) |
|
|
|
|
$ |
(1,267 |
) |
|
$ |
490 |
|
|
$ |
(777 |
) |
|
WASTE
CONNECTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
|
|
Nine
months ended September 30, 2007
|
|
|
|
|
Gross
|
|
Tax
effect
|
|
Net
of tax
|
|
|
|
Amounts
reclassified into earnings
|
|
$ |
(3,245 |
) |
|
$ |
1,256 |
|
|
$ |
(1,989 |
) |
|
|
Changes
in fair value of interest rate swaps
|
|
|
(1,442 |
) |
|
|
545 |
|
|
|
(897 |
) |
|
|
|
|
$ |
(4,687 |
) |
|
$ |
1,801 |
|
|
$ |
(2,886 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
months ended September 30, 2008
|
|
|
|
|
Gross
|
|
Tax
effect
|
|
Net
of tax
|
|
|
|
Amounts
reclassified into earnings
|
|
$ |
4,714 |
|
|
$ |
(1,825 |
) |
|
$ |
2,889 |
|
|
|
Changes
in fair value of interest rate swaps
|
|
|
(7,958 |
) |
|
|
3,080 |
|
|
|
(4,878 |
) |
|
|
|
|
$ |
(3,244 |
) |
|
$ |
1,255 |
|
|
$ |
(1,989 |
) |
|
The
estimated net amount of the existing unrealized losses as of September 30,
2008 (based on the interest rate yield curve at that date) included in
accumulated other comprehensive loss expected to be reclassified into pre-tax
earnings within the next 12 months is $6,456. The timing of actual
amounts reclassified into earnings is dependent on future movements in interest
rates.
11. SALE
OF COMMON STOCK
On
September 24, 2008, the Company entered into an underwriting agreement with
J.P. Morgan Securities Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Banc of America Securities LLC and Credit Suisse Securities (USA)
LLC, as representatives of the several underwriters involved, in connection with
the offer and sale by the Company of 11,000,000 shares of its common stock, par
value $0.01 per share, at a price of $32.50 per share. The Company granted
the underwriters an option to purchase up to 1,650,000 additional shares of its
common stock to cover over-allotments, which the underwriters exercised in full
on September 25, 2008. The offering closed on September 30, 2008 and
the Company received net proceeds of $393,930 after deducting underwriting
discounts and commissions of $16,445, and estimated transaction expenses payable
by the Company of approximately $750.
12. SHARE
REPURCHASE PROGRAM
The
Company’s Board of Directors has authorized a common stock repurchase program
for the repurchase of up to $500,000 of its common stock through
December 31, 2008. Under the program, stock repurchases may be made
in the open market or in privately negotiated transactions from time to time at
management’s discretion. The timing and amounts of any repurchases will
depend on many factors, including the Company’s capital structure, the market
price of the common stock and overall market conditions. During the nine
months ended September 30, 2007 and 2008, the Company repurchased 2,098,330
and 1,041,271 shares, respectively, of its common stock under this program
at a cost of $64,038 and $31,527, respectively. As of September 30,
2008, the remaining maximum dollar value of shares available for purchase under
the program was approximately $80,217. The Company’s policy related to
repurchases of its common stock is to charge any excess of cost over par value
entirely to additional paid-in capital.
WASTE
CONNECTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
13. COMMITMENTS
AND CONTINGENCIES
The
Company’s subsidiary, High Desert Solid Waste Facility, Inc. (formerly known as
Rhino Solid Waste, Inc.), owns undeveloped property in Chaparral, New Mexico,
for which it sought a permit to operate a municipal solid waste landfill.
After a public hearing, the New Mexico Environment Department (the “Department”)
approved the permit for the facility on January 30, 2002. Colonias
Development Council (“CDC”), a nonprofit organization, opposed the permit at the
public hearing and appealed the Department’s decision to the courts of New
Mexico, primarily on the grounds that the Department failed to consider the
social impact of the landfill on the community of Chaparral, and failed to
consider regional planning issues. On July 18, 2005, in Colonias Dev. Council v. Rhino
Envtl. Servs., Inc. (In re Rhino Envtl. Servs.), 2005 NMSC 24, 117 P.3d 939,
the New Mexico Supreme Court remanded the matter back to the Department to
conduct a limited public hearing on certain evidence that CDC claims were
wrongfully excluded from consideration by the hearing officer, and to allow the
Department to reconsider the evidence already proffered concerning the impact of
the landfill on the surrounding community’s quality of life. The parties
have agreed to postpone the hearing until January 2009 at the earliest to allow
the Company time to explore a possible relocation of the landfill. At
September 30, 2008, the Company had $9,526 of capitalized expenditures
related to this landfill development project. If the Company is not
ultimately issued a permit to operate the landfill, the Company will be required
to expense in a future period the $9,526 of capitalized expenditures, less the
recoverable value of the undeveloped property and other amounts recovered, which
would likely have a material adverse effect on the Company’s reported income for
that period.
The
Company opened a municipal solid waste landfill in Harper County, Kansas in
January 2006, following the issuance by the Kansas Department of Health and
Environment (“KDHE”) of a final permit to operate the landfill. On
October 3, 2005, landfill opponents filed a suit (Board of Comm’rs of Sumner County,
Kansas, Tri-County Concerned Citizens and Dalton Holland v. Roderick Bremby,
Sec’y of the Kansas Dep’t of Health and Env’t, et al.) in the District
Court of Shawnee County, Kansas (Case No. 05-C-1264), seeking a judicial review
of the order, alleging that a site analysis prepared for the Company and
submitted to the KDHE as part of the process leading to the issuance of the
permit was deficient in several respects. The action sought to stay the
effectiveness of the permit and to nullify it. On April 7, 2006, the
District Court issued an order denying the plaintiffs’ request for judicial
review on the grounds that they lack standing to bring the action. The
plaintiffs appealed this decision to the Kansas Court of Appeals. Oral
arguments were held on June 7, 2007, and on October 12, 2007, the
Court of Appeals issued an opinion reversing and remanding the District Court’s
decision. The Company appealed the decision to the Kansas Supreme Court,
which granted the Company’s petition for review. Oral arguments on the
matter were held on May 12, 2008, and on July 25, 2008, the Supreme
Court affirmed the decision of the Court of Appeals and remanded the case to the
District Court for further proceedings on the merits. While the Company
believes that it will prevail in this case, a final adverse determination with
respect to the permit would likely have a material adverse effect on the
Company’s reported income in the future. The Company cannot estimate the
amount of any such material adverse effect.
On
October 25, 2006, a purported shareholder derivative complaint captioned
Travis v. Mittelstaedt, et al.
was filed in the United States District Court for the Eastern District of
California, naming certain of the Company’s directors and officers as
defendants, and naming the Company as a nominal defendant. On
January 30, 2007, a similar purported derivative action, captioned Pierce and Banister v. Mittelstaedt,
et al., was
filed in the same federal court as the Travis case. The Travis and Pierce and Banister cases
have been consolidated. The consolidated complaint in the action alleges
violations of various federal and California securities laws, breach of
fiduciary duty, waste, and related claims in connection with the timing of
certain stock option grants. The consolidated complaint names as
defendants certain of the Company’s current and former directors and officers,
and names the Company as a nominal defendant. On June 22, 2007, the
Company and the individual defendants filed motions to dismiss the consolidated
action. On March 19, 2008, the Court granted the Company’s motion to
dismiss and provided the plaintiffs leave to file an amended consolidated
complaint, which the plaintiffs filed with the Court on April 8,
2008.
On
October 30, 2006, the Company was served with another purported shareholder
derivative complaint, naming certain of the Company’s current and former
directors and officers as defendants, and naming the Company as a nominal
defendant. The suit, captioned Nichols v. Mittelstaedt, et
al. and filed in the Superior Court of California, County of Sacramento,
contains allegations substantially similar to the consolidated federal action
described above. On April 3, 2007, a fourth purported derivative
action, captioned Priest v.
Mittelstaedt, et al., was filed in the Superior Court of California,
County of Sacramento, and contains allegations substantially similar to the
consolidated federal action and the Nichols suit. The Nichols and Priest suits have been
consolidated and captioned In
re Waste Connections, Inc. Shareholder Derivative Litigation and stayed
pending the outcome of the consolidated federal action.
WASTE
CONNECTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
In July
2008, the Company reached a preliminary agreement with the parties to settle all
of these derivative actions and in August 2008 the consolidated federal action
was stayed. Under the terms of the preliminary agreement, the Company
agreed to reaffirm and/or implement certain corporate governance measures and
the defendants’ insurance carrier agreed to pay not more than $3,000 to
plaintiffs’ counsel to cover plaintiffs’ counsel’s fees and costs, which are
subject to court approval. The defendants expressly deny any wrongdoing
and will receive a complete release of all claims. The preliminary
agreement is subject to standard conditions, including final court
approval. There can be no assurance that final court approval will be
obtained.
In 2006,
the Company completed a review of its historical stock option granting
practices, including all option grants since its initial public offering in May
1998, and reported the results of the review to the Audit Committee of its Board
of Directors. The review identified a small number of immaterial
exceptions to non-cash compensation expense attributable to administrative and
clerical errors. These exceptions are not material to the Company’s
current and historical financial statements, and the Audit Committee concluded
that no further action was necessary. As with any litigation proceeding,
the Company cannot predict with certainty the eventual outcome of the pending
federal and state derivative litigation, nor can it estimate the amount of any
losses that might result.
In the
normal course of its business and as a result of the extensive governmental
regulation of the solid waste industry, the Company is subject to various other
judicial and administrative proceedings involving federal, state or local
agencies. In these proceedings, an agency may seek to impose fines on the
Company or to revoke or deny renewal of an operating permit held by the
Company. From time to time, the Company may also be subject to actions
brought by citizens’ groups or adjacent landowners or residents in connection
with the permitting and licensing of landfills and transfer stations, or
alleging environmental damage or violations of the permits and licenses pursuant
to which the Company operates.
In
addition, the Company is a party to various claims and suits pending for alleged
damages to persons and property, alleged violations of certain laws and alleged
liabilities arising out of matters occurring during the normal operation of the
waste management business. Except as noted in the legal cases
described above, as of September 30, 2008, there is no current proceeding
or litigation involving the Company that the Company believes will have a
material adverse impact on its business, financial condition, results of
operations or cash flows.
WASTE
CONNECTIONS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In
thousands, except share, per share and per ton amounts)
14. REVENUE
BY SERVICE TYPE
The
following table shows the Company’s total reported revenues by service line and
intercompany eliminations:
|
|
|
Three
months ended
September 30,
|
|
|
Nine
months ended
September 30,
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Collection
|
|
$ |
180,333 |
|
|
$ |
200,423 |
|
|
$ |
512,886 |
|
|
$ |
582,631 |
|
|
Disposal
and transfer
|
|
|
78,861 |
|
|
|
80,895 |
|
|
|
224,072 |
|
|
|
232,965 |
|
|
Recycling
and other
|
|
|
24,605 |
|
|
|
25,506 |
|
|
|
69,765 |
|
|
|
74,793 |
|
|
Total
|
|
$ |
283,799 |
|
|
$ |
306,824 |
|
|
$ |
806,723 |
|
|
$ |
890,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
elimination
|
|
$ |
33,024 |
|
|
$ |
34,122 |
|
|
$ |
95,912 |
|
|
$ |
100,354 |
|
15. SUBSEQUENT
EVENTS
On
October 1, 2008, the Company issued and sold to investors $175,000 of senior
uncollateralized notes in a private placement. Refer to
Note 5 for further details of this transaction.
In
October 2008, the Company entered into multiple commodity swap agreements
related to forecasted diesel fuel purchases. Under SFAS 133, the
swaps qualified for and were designated as effective hedges of changes in the
prices of forecasted diesel fuel purchases (“fuel hedges”).
The
following table summarizes the fuel hedges entered into by the Company (amounts
are not in thousands):
Date
Entered
|
|
Notional
Amount
(in
gallons per
month)
|
|
Diesel
Rate
Paid
Fixed
|
|
Diesel
Rate Received
Variable
|
|
Effective
Date
|
|
Expiration
Date
|
October
2008
|
|
250,000
|
|
3.750
|
|
DOE
Diesel Fuel Index*
|
|
January
2009
|
|
December
2010
|
October
2008
|
|
100,000
|
|
3.745
|
|
DOE
Diesel Fuel Index*
|
|
January
2009
|
|
December
2010
|
October
2008
|
|
250,000
|
|
3.500
|
|
DOE
Diesel Fuel Index*
|
|
January
2009
|
|
December
2010
|
*If the
national U.S. on-highway average price for a gallon of diesel fuel (“average
price”), as published by the Department of Energy, exceeds the contract price
per gallon, the Company receives the difference between the average price and
the contract price (multiplied by the notional gallons) from the
counterparty. If the national U.S. on-highway average price for a gallon
of diesel fuel is less than the contract price per gallon, the Company pays the
difference to the counterparty.
All the
fuel hedge agreements are considered highly effective as cash flow hedges for a
portion of the Company’s forecasted diesel fuel purchases, and the Company will
apply hedge accounting to account for these
instruments.
FORWARD-LOOKING
STATEMENTS
Certain
statements contained in this Quarterly Report on Form 10-Q are
forward-looking in nature. These statements can be identified by the use
of forward-looking terminology such as “believes,” “expects,” “may,” “will,”
“should,” or “anticipates,” or the negative thereof or comparable terminology,
or by discussions of strategy. Our business and operations are subject to
a variety of risks and uncertainties and, consequently, actual results may
differ materially from those projected by any forward-looking statements.
Factors that could cause actual results to differ from those projected include,
but are not limited to, those listed below in Part II, Item 1A of this
Quarterly Report on Form 10-Q under “Risk Factors” and elsewhere in this
report and in our other filings with the Securities and Exchange Commission, or
SEC, including our most recent Annual Report on Form 10-K. There may be
additional risks of which we are not presently aware or that we currently
believe are immaterial which could have an adverse impact on our business.
We make no commitment to revise or update any forward-looking statements in
order to reflect events or circumstances that may change.
OVERVIEW
The solid
waste industry is a local and highly competitive business, requiring substantial
labor and capital resources. The participants compete for collection
accounts primarily on the basis of price and, to a lesser extent, the quality of
service, and compete for landfill business on the basis of tipping fees,
geographic location and quality of operations. The solid waste industry
has been consolidating and continues to consolidate as a result of a number of
factors, including the increasing costs and complexity associated with waste
management operations and regulatory compliance. Many small independent
operators and municipalities lack the capital resources, management, operating
skills and technical expertise necessary to operate effectively in such an
environment. The consolidation trend has caused solid waste companies to
operate larger landfills that have complementary collection routes that can use
company-owned disposal capacity. Controlling the point of transfer from
haulers to landfills has become increasingly important as landfills continue to
close and disposal capacity moves further from collection
markets.
Generally,
the most profitable industry operators are those companies that are vertically
integrated or enter into long-term collection contracts. A vertically
integrated operator will benefit from: (1) the internalization
of waste, which is bringing waste to a company-owned landfill; (2) the
ability to charge third-party haulers tipping fees either at landfills or at
transfer stations; and (3) the efficiencies gained by being able to
aggregate and process waste at a transfer station prior to
landfilling.
We are an
integrated solid waste services company that provides solid waste collection,
transfer, disposal and recycling services in mostly secondary markets in the
Western and Southern U.S. We also provide intermodal services for the rail
haul movement of cargo containers in the Pacific Northwest through a network of
five intermodal facilities. We seek to avoid highly competitive,
large urban markets and instead target markets where we can provide either solid
waste services under exclusive arrangements, or markets where we can be
integrated and attain high market share. In markets where waste collection
services are provided under exclusive arrangements, or where waste disposal is
municipally funded or available at multiple municipal sources, we believe that
controlling the waste stream by providing collection services under exclusive
arrangements is often more important to our growth and profitability than owning
or operating landfills. As of September 30, 2008, we served
approximately 1.5 million residential, commercial and industrial customers
from a network of operations in 23 states: Alabama, Arizona,
California, Colorado, Idaho, Illinois, Iowa, Kansas, Kentucky, Minnesota,
Mississippi, Montana, Nebraska, Nevada, New Mexico, Oklahoma, Oregon, South
Dakota, Tennessee, Texas, Utah, Washington and Wyoming. As of that date,
we owned or operated a network of 127 solid waste collection operations,
48 transfer stations, 29 recycling operations, 34 municipal solid
waste landfills and two construction and demolition
landfills.
RECENT
DEVELOPMENTS
On August
1, 2008, we entered into a Stock Purchase Agreement pursuant to which we agreed
to purchase all of the outstanding capital stock of Harold LeMay Enterprises,
Incorporated from its shareholders for a purchase price of $203.3 million
(including potentially the assumption of indebtedness), subject to
adjustments. Harold LeMay Enterprises, Incorporated provides solid
waste collection, recycling and transfer services, a majority of which are under
exclusive G Certificates for the counties of Gray’s Harbor, Lewis, Pierce and
Thurston in the State of Washington. These operations are contiguous
to our existing Pierce County operations.
Concurrently,
on August 1, 2008, Waste Connections of Washington, Inc., our subsidiary,
entered into an Equity Purchase Agreement with entities affiliated with Harold
LeMay Enterprises, Incorporated to acquire the remaining interests in Pierce
County Recycling, Composting and Disposal, LLC and Pierce County Landfill
Management, Inc. for a purchase price of $100.0 million. Pierce
County Recycling, Composting and Disposal, LLC is a provider of solid waste
disposal, transfer, recycling and composting services. Pierce County
Recycling, Composting and Disposal, LLC and Pierce County Landfill Management,
Inc., which are currently our majority-owned subsidiaries, will become our
wholly-owned subsidiaries upon closing of this transaction.
The
closing of each transaction, which is conditioned on the closing of the other,
is subject to the receipt of necessary consents, regulatory approvals,
satisfactory completion of due diligence review and other closing
conditions. The transactions are expected to close in the fourth
quarter of 2008. We intend to use a combination of cash and
borrowings under our credit facility to pay the purchase price of the
acquisitions.
CRITICAL
ACCOUNTING ESTIMATES AND ASSUMPTIONS
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires estimates and assumptions that affect the
reported amounts of assets and liabilities, revenues and expenses, and related
disclosures of contingent assets and liabilities in the consolidated financial
statements. As described by the SEC, critical accounting estimates and
assumptions are those that may be material due to the levels of subjectivity and
judgment necessary to account for highly uncertain matters or the susceptibility
of such matters to change, and that have a material impact on the financial
condition or operating performance of a company. Refer to our most recent
Annual Report on Form 10-K for a complete description of our critical
accounting estimates and assumptions.
GENERAL
The table
below shows for the periods indicated our total reported revenues attributable
to services provided (dollars in thousands).
|
Three
months ended September 30,
|
|
|
Nine
months ended September 30,
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
Collection
|
$
|
180,333
|
63.5
|
% |
|
$
|
200,423
|
65.3
|
% |
|
$
|
512,886
|
63.6
|
% |
|
$
|
582,631
|
65.4
|
% |
Disposal
and transfer
|
|
78,861
|
27.8
|
|
|
|
80,895
|
26.4
|
|
|
|
224,072
|
27.8
|
|
|
|
232,965
|
26.2
|
|
Recycling
and other
|
|
24,605
|
8.7
|
|
|
|
25,506
|
8.3
|
|
|
|
69,765
|
8.6
|
|
|
|
74,793
|
8.4
|
|
Total
|
$
|
283,799
|
100.0
|
% |
|
$
|
306,824
|
100.0
|
% |
|
$
|
806,723
|
100.0
|
% |
|
$
|
890,389
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
elimination
|
$
|
33,024
|
|
|
|
$
|
34,122
|
|
|
|
$
|
95,912
|
|
|
|
$
|
100,354
|
|
|
The
disposal tonnage that we received in the nine months ended September 30,
2007 and 2008, at all of our landfills during the respective period, is shown
below (tons in thousands):
|
|
|
Nine
months ended September 30,
|
|
|
|
2007
|
|
2008
|
|
|
|
Number
of
Sites
|
|
Total
Tons
|
|
Number
of
Sites
|
|
Total
Tons
|
|
Owned
landfills and landfills operated under life-of-site
agreements
|
|
30
|
|
6,102
|
|
29
|
|
6,411
|
|
Operated
landfills
|
|
7
|
|
750
|
|
7
|
|
694
|
|
|
|
37
|
|
6,852
|
|
36
|
|
7,105
|
NEW
ACCOUNTING PRONOUNCEMENTS
For a
description of the new accounting standards that affect us, see Note 2 to
our Condensed Consolidated Financial Statements included under Part I,
Item 1 of this Quarterly Report on Form 10-Q.
RESULTS
OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND
2008
The
following table sets forth items in our condensed consolidated statements of
income as a percentage of revenues for the periods indicated.
|
|
|
Three
months ended
September 30,
|
|
|
Nine
months ended
September 30,
|
|
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
Revenues
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
Cost
of operations
|
|
|
58.1 |
|
|
|
60.4 |
|
|
|
58.6 |
|
|
|
59.9 |
|
|
Selling,
general and administrative
|
|
|
10.3 |
|
|
|
9.9 |
|
|
|
10.5 |
|
|
|
10.3 |
|
|
Depreciation
and amortization
|
|
|
8.8 |
|
|
|
8.9 |
|
|
|
8.8 |
|
|
|
9.1 |
|
|
Loss
on disposal of assets
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
0.1 |
|
|
Operating
income
|
|
|
22.8 |
|
|
|
20.8 |
|
|
|
22.1 |
|
|
|
20.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(3.5 |
) |
|
|
(3.2 |
) |
|
|
(3.5 |
) |
|
|
(3.4 |
) |
|
Other
income (expense), net
|
|
|
(0.1 |
) |
|
|
(0.2 |
) |
|
|
0.1 |
|
|
|
- |
|
|
Minority
interests
|
|
|
(1.7 |
) |
|
|
(1.4 |
) |
|
|
(1.6 |
) |
|
|
(1.4 |
) |
|
Income
tax expense
|
|
|
(6.1 |
) |
|
|
(5.6 |
) |
|
|
(6.4 |
) |
|
|
(6.0 |
) |
|
Net
income
|
|
|
11.4 |
% |
|
|
10.4 |
% |
|
|
10.7 |
% |
|
|
9.8 |
% |
Revenues. Total
revenues increased $21.9 million, or 8.7%, to $272.7 million for the
three months ended September 30, 2008, from $250.8 million for the
three months ended September 30, 2007. Acquisitions closed during, or
subsequent to, the three months ended September 30, 2007, increased
revenues by approximately $12.2 million. During the three months
ended September 30, 2008, increased prices charged to our customers
increased revenue by $14.6 million. Volume decreases in our existing
business during the three months ended September 30, 2008 reduced revenue
by approximately $5.3 million. The net decrease in volume was
attributable to declines in roll off activity and landfill volumes for landfills
owned in the comparable periods. Increased recyclable commodity prices and
volume during the three months ended September 30, 2008, increased revenues
by $0.2 million. Other revenues increased by $0.2 million during
the three months ended September 30, 2008.
Total
revenues increased $79.2 million, or 11.1%, to $790.0 million for the
nine months ended September 30, 2008, from $710.8 million for the nine
months ended September 30, 2007. Acquisitions closed during, or
subsequent to, the nine months ended September 30, 2007, increased revenues
by approximately $40.7 million. During the nine months ended
September 30, 2008, increased prices charged to our customers increased
revenue by $39.2 million. During the nine months ended
September 30, 2008, revenues generated from a long-term contract that
commenced in March 2007 resulted in a net revenue increase of approximately
$3.9 million. Volume decreases in our existing business during the
nine months ended September 30, 2008 reduced revenue by approximately
$8.0 million. The net decrease in volume was primarily attributable
to a decline in roll off hauling revenue. Increased recyclable commodity
prices and volume during the nine months ended September 30, 2008,
increased revenues by $3.9 million. Other revenues decreased by
$0.5 million during the nine months ended September 30,
2008.
Cost of
Operations. Total cost of operations increased $18.7 million,
or 12.9%, to $164.5 million for the three months ended September 30,
2008, from $145.8 million for the three months ended September 30,
2007. The increase was attributable to operating costs associated with
acquisitions closed during, or subsequent to, the three months ended
September 30, 2007, increased diesel fuel expense resulting from higher
fuel costs, increased labor expenses resulting from employee pay rate increases,
increased employee medical benefit expenses resulting from an increase in
medical claims cost and severity, increased franchise taxes, increased third
party trucking and transportation expenses and increased disposal expenses,
partially offset by a decrease in major vehicle and equipment
repairs.
Total
cost of operations increased $57.3 million, or 13.8%, to
$473.5 million for the nine months ended September 30, 2008, from
$416.2 million for the nine months ended September 30, 2007. The
increase was attributable to operating costs associated with acquisitions closed
during, or subsequent to, the nine months ended September 30, 2007,
operating costs incurred to support a long-term contract that commenced in March
2007, increased diesel fuel expense resulting from higher fuel costs, increased
labor expenses resulting from employee pay rate increases, increased employee
medical benefit expenses resulting from an increase in medical claims cost and
severity, increased franchise taxes, increased third party trucking and
transportation expenses and increased disposal expenses, partially offset by a
decrease in major vehicle and equipment repairs and decreases in auto and
workers’ compensation claims under our high deductible insurance
program.
Cost of
operations as a percentage of revenues increased 2.3 percentage points to
60.4% for the three months ended September 30, 2008, from 58.1% for the
three months ended September 30, 2007. The increase as a percentage
of revenues was primarily attributable to increased diesel fuel expense,
partially offset by decreased major vehicle and equipment repairs expense, and
increased prices charged to our customers being higher, on a percentage basis,
than certain expense increases recognized subsequent to September 30,
2007.
Cost of
operations as a percentage of revenues increased 1.3 percentage points to
59.9% for the nine months ended September 30, 2008, from 58.6% for the nine
months ended September 30, 2007. The increase as a percentage of
revenues was primarily attributable to increased diesel fuel expense and
increased employee medical benefit expense, partially offset by decreased major
vehicle and equipment repairs expense, increased prices charged to our customers
being higher, on a percentage basis, than certain expense increases recognized
subsequent to September 30, 2007, and decreased auto and workers’
compensation insurance claims expense.
SG&A.
SG&A expenses increased $1.2 million, or 4.8%, to $27.0 million
for the three months ended September 30, 2008, from $25.8 million for
the three months ended September 30, 2007. SG&A expenses
increased $6.7 million, or 9.0%, to $81.2 million for the nine months
ended September 30, 2008, from $74.5 million for the nine months ended
September 30, 2007. The increases in SG&A expenses were primarily
the result of additional personnel from acquisitions closed during, or
subsequent to, the nine months ended September 30, 2007, increased payroll
expense due to increased headcount to support our base operations, increased
medical benefit expense and increased equity compensation expense, partially
offset by decreased bad debt expense and incentive compensation
expense.
SG&A
expenses as a percentage of revenues decreased 0.4 percentage points to
9.9% for the three months ended September 30, 2008, from 10.3% for the
three months ended September 30, 2007. SG&A expenses as a
percentage of revenues decreased 0.2 percentage points to 10.3% for the
nine months ended September 30, 2008, from 10.5% for the nine months ended
September 30, 2007. The decreases as a percentage of revenues were
primarily attributable to the aforementioned decreases in bad debt expense and
incentive compensation expense, partially offset by increased payroll expense
and equity compensation expense.
Depreciation and
Amortization. Depreciation and amortization expense increased
$2.2 million, or 9.9%, to $24.4 million for the three months ended
September 30, 2008, from $22.2 million for the three months ended
September 30, 2007. Depreciation and amortization expense increased
$9.0 million, or 14.3%, to $71.7 million for the nine months ended
September 30, 2008, from $62.7 million for the nine months ended
September 30, 2007. The increases were primarily attributable to
depreciation and amortization associated with acquisitions closed during, or
subsequent to, the nine months ended September 30, 2007, additions to our
fleet and equipment purchased to support our existing operations, and higher
landfill depletion expense due to increased landfill construction and closure
costs.
Depreciation
and amortization expense as a percentage of revenues increased
0.1 percentage points to 8.9% for the three months ended September 30,
2008, from 8.8% for the three months ended September 30, 2007.
Depreciation and amortization expense as a percentage of revenues increased
0.3 percentage points to 9.1% for the nine months ended September 30,
2008, from 8.8% for the nine months ended September 30, 2007. The
increases in depreciation and amortization expense as a percentage of revenues
for the three and nine months ended September 30, 2008 were the result of
amortization expense associated with intangible assets acquired during, or
subsequent to, the nine months ended September 30, 2007, and fleet and
equipment purchased to support our existing operations.
Operating
Income. Operating income decreased $0.4 million, or 0.7%, to
$56.7 million for the three months ended September 30, 2008, from
$57.1 million for the three months ended September 30, 2007.
Operating income increased $5.8 million, or 3.7%, to $163.1 million
for the nine months ended September 30, 2008, from $157.3 million for
the nine months ended September 30, 2007. The decrease for the three
months ended September 30, 2008 was primarily attributable to increased
operating costs, increased SG&A expense and increased depreciation and
amortization expense, offset by increased revenues. The increase for
the nine months ended September 30, 2008 was primarily attributable to increased
revenues, offset by increased operating costs, increased SG&A expenses to
support the revenue growth and increased depreciation and amortization
expenses.
Operating
income as a percentage of revenues decreased 2.0 percentage points to 20.8%
for the three months ended September 30, 2008, from 22.8% for the three
months ended September 30, 2007. Operating income as a percentage of
revenues decreased 1.5 percentage points to 20.6% for the nine months ended
September 30, 2008, from 22.1% for the nine months ended September 30,
2007. The decreases as a percentage of revenues were due to the previously
described percentage of revenue increases in cost of operations and depreciation
and amortization expense, partially offset by decreased SG&A
expense.
Interest
Expense. Interest expense was $8.7 million for the three months
ended September 30, 2008 and 2007. Interest expense increased
$2.2 million, or 8.7%, to $27.0 million for the nine months ended
September 30, 2008, from $24.8 million for the nine months ended
September 30, 2007. The increase for the nine months ended
September 20, 2008 was attributable to increased average debt balances,
partially offset by reduced average borrowing rates on the portion of our credit
facility borrowings not fixed under interest rate swap
agreements.
Minority
Interests. During the three months ended September 30, 2008,
decreased earnings by our majority-owned subsidiaries resulted in minority
interests decreasing $0.4 million, or 8.7%, to $3.8 million, from
$4.2 million for the three months ended September 30, 2007.
During the nine months ended September 30, 2008, decreased earnings by our
majority-owned subsidiaries resulted in minority interests decreasing
$0.1 million, or 1.4%, to $11.0 million, from $11.1 million for
the nine months ended September 30, 2007.
Income Tax
Provision. Income taxes were $15.4 million for the three months
ended September 30, 2008 and 2007. Income taxes increased
$2.2 million, or 4.7%, to $47.4 million for the nine months ended
September 30, 2008, from $45.2 million for the nine months ended
September 30, 2007.
Our
effective tax rates for the three months ended September 30, 2007 and 2008,
were 34.9% and 35.3%, respectively, and 37.2% and 37.9%, for the nine months
ended September 30, 2007 and 2008, respectively.
During
the three and nine months ended September 30, 2007, we recorded adjustments
to income tax expense of $2.0 million and $2.2 million, respectively,
resulting from the reconciliation of our current and deferred income tax
liability accounts, the expiration of certain statutes of limitations, and the
reconciliation of the income tax provision to the 2006 federal tax return, which
was filed in September 2007.
During
the three and nine months ended September 30, 2008, we recorded a reduction to
the liability for uncertain tax positions under FASB Interpretation No. 48 of
approximately $5.1 million due to the expiration of certain statutes of
limitations, of which $2.0 million was recorded as a reduction to income tax
expense.
LIQUIDITY
AND CAPITAL RESOURCES
Our
business is capital intensive. Our capital requirements include
acquisitions and fixed asset purchases. We expect that we will also make
capital expenditures for landfill cell construction, landfill closure activities
and intermodal facility construction in the future. We plan to meet our
capital needs through various financing sources, including internally generated
funds, and debt and equity financings.
As of
September 30, 2008, we had working capital of $335.5 million,
including cash and equivalents of $366.1 million. Our working capital
increased $360.3 million from a working capital deficit of
$24.8 million at December 31, 2007. To date, we have experienced
no loss or lack of access to our invested cash or cash equivalents;
however, we can provide no assurances that access to our invested cash and cash
equivalents will not be impacted by adverse conditions in the financial markets.
Our strategy in managing our working capital is generally to apply the cash
generated from our operations that remains after satisfying our working capital
and capital expenditure requirements to reduce our indebtedness under our credit
facility and to minimize our cash balances. The increase to a positive
working capital position from our working capital deficit for the prior year,
resulted primarily from the proceeds received in September 2008 from the sale of
12,650,000 shares our common stock in a public offering. For additional
information regarding the sale of our common stock, see Note 11 of the Notes to
the Condensed Consolidated Financial Statements in Part I, Item 1 of this
Quarterly Report on Form 10-Q.
For the
nine months ended September 30, 2008, net cash provided by operating
activities was $194.7 million, including $5.9 million provided by
working capital for the period. The primary components of the
reconciliation of net income to net cash provided by operating activities for
the nine months ended September 30, 2008, consist of $71.7 million of
depreciation and amortization, $25.6 million in deferred income taxes,
$11.0 million of minority interests expense, $5.9 million of stock
compensation expense and $1.5 million of debt issuance cost amortization,
less $5.6 million of excess tax benefit associated with equity-based
compensation reclassified to cash flows from financing
activities.
For the
nine months ended September 30, 2007, net cash provided by operating
activities was $170.1 million, including $15.2 million provided by
working capital for the period. The primary components of the
reconciliation of net income to net cash provided by operating activities for
the nine months ended September 30, 2007, consist of $62.7 million of
depreciation and amortization, $11.1 million of minority interests expense,
$1.7 million of debt issuance cost amortization, $8.0 million in
deferred income taxes, and $4.6 million of stock compensation expense, less
$10.2 million of excess tax benefit associated with equity-based
compensation reclassified to cash flows from financing
activities.
For the
nine months ended September 30, 2008, net cash used in investing activities
was $114.2 million. Of this amount, $35.2 million was used to
fund the cash portion of acquisitions and to pay a portion of acquisition costs
that were included as a component of accrued liabilities at December 31,
2007. Cash used for capital expenditures was $79.5 million, which was
primarily for investments in fixed assets, consisting of trucks, containers,
other equipment and landfill development. The decrease in capital
expenditures of $16.6 million for the nine months ended September 30,
2008, as compared to the nine months ended September 30, 2007, was due
primarily to capital expenditures incurred during the nine months ended
September 30, 2007 associated with a new long-term contract in
California.
For the
nine months ended September 30, 2007, net cash used in investing activities
was $182.1 million. Of this amount, $85.7 million was used to
fund the cash portion of acquisitions and to pay a portion of acquisition costs
that were included as a component of accrued liabilities at December 31,
2006. Cash used for capital expenditures was $96.1 million, which was
primarily for investments in fixed assets, consisting of trucks, containers,
other equipment and landfill development.
For the
nine months ended September 30, 2008, net cash provided by financing
activities was $275.3 million, which included $393.9 million of net
proceeds from the sale of stock in a public offering, $17.2 million of
proceeds from stock option and warrant exercises, and $5.6 million of
excess tax benefit associated with equity-based compensation, less
$92.5 million of net payments under our various debt arrangements,
$8.2 million of cash distributions to minority interest holders, $8.8
million change in book overdraft, and $31.5 million of repurchases of our
common stock.
For the
nine months ended September 30, 2007, net cash used in financing activities
was $9.9 million, which included $24.8 million of proceeds from stock
option and warrant exercises, a $6.5 million change in book overdraft,
$10.2 million of excess tax benefit associated with equity-based
compensation, and $24.3 million of net proceeds under our various debt
arrangements, less $10.4 million of cash distributions to minority interest
holders, and $64.0 million of repurchases of our common
stock.
We made
$79.5 million in capital expenditures during the nine months ended
September 30, 2008. We expect to make capital expenditures between
$110 million and $115 million in 2008 in connection with our existing
business. We intend to fund our planned 2008 capital expenditures
principally through existing cash, internally generated funds, and borrowings
under our existing credit facility. We intend to fund the purchase of the
outstanding stock of Harold LeMay Enterprises, Incorporated and the purchase of
the remaining interests in Pierce County Recycling, Composting and Disposal, LLC
and Pierce County Landfill Management, Inc. with a combination of cash and
borrowings under our senior revolving credit facility. These two
transactions are expected to close in the fourth quarter of 2008. In
addition, we may make substantial additional capital expenditures in acquiring
other solid waste collection and disposal businesses. If we acquire
additional landfill disposal facilities, we may also have to make significant
expenditures to bring them into compliance with applicable regulatory
requirements, obtain permits or expand our available disposal capacity. We
cannot currently determine the amount of these expenditures because they will
depend on the number, nature, condition and permitted status of any acquired
landfill disposal facilities. We believe that our cash and equivalents,
credit facility and the funds we expect to generate from operations will provide
adequate cash to fund our working capital and other cash needs for the
foreseeable future.
As of
September 30, 2008, we had $400.0 million outstanding under our credit
facility, exclusive of outstanding stand-by letters of credit of
$64.2 million. As of September 30, 2008, we were in compliance
with all applicable covenants in our credit facility.
As of
September 30, 2008, we had the following contractual obligations (in
thousands):
|
|
|
Payments
Due by Period
|
|
Recorded
Obligations
|
|
|
Total
|
|
|
Less
Than
1
Year
|
|
|
1
to 3
Years
|
|
|
3
to 5
Years
|
|
|
Over
5
Years
|
|
Long-term
debt
|
|
|
$ |
642,616 |
|
|
$ |
7,390 |
|
|
$ |
204,025 |
|
|
$ |
403,285 |
|
|
$ |
27,916 |
|
Long-term
debt payments include:
|
(1)
|
$400.0 million
in principal payments due in 2012 related to our credit facility.
Our credit facility bears interest, at our option, at either the base rate
plus the applicable base rate margin (approximately 5.0% at
September 30, 2008) on base rate loans, or the Eurodollar rate plus
the applicable Eurodollar margin (approximately 3.11% at
September 30, 2008) on Eurodollar loans. As of
September 30, 2008, our credit facility allowed us to borrow up to
$845.0 million.
|
|
(2)
|
$200.0 million
in principal payments due in 2026 related to our 2026 Notes.
Holders of the 2026 Notes may require us to purchase their notes in
cash at a purchase price of 100% of the principal amount of the
2026 Notes plus accrued and unpaid interest, if any, upon a change in
control, as defined in the indenture, or, for the first time, on
April 1, 2011. The 2026 Notes bear interest at a rate of
3.75%.
|
|
(3)
|
$10.8 million
in principal payments related to our 2001 Wasco bonds. Our 2001
Wasco bonds consist of $2.3 million of bonds that bear interest at a
rate of 7.0% and mature on March 1, 2012, and $8.5 million of
bonds that bear interest at a rate of 7.25% and mature on March 1,
2021.
|
|
(4)
|
$24.9 million
in principal payments related to our California tax-exempt bonds.
Our California tax-exempt bonds bear interest at variable rates (8.47% at
September 30, 2008) and have maturity dates ranging from 2012 to
2018.
|
|
(5)
|
$3.3 million
in principal payments related to our notes payable to sellers. Our
notes payable to sellers bear interest at rates between 5.5% and 7.5% at
September 30, 2008, and have maturity dates ranging from 2009 to
2036.
|
|
(6)
|
$3.6 million
in principal payments related to our notes payable to third parties.
Our notes payable to third parties bear interest at rates between 6.0% and
10.5% at September 30, 2008, and have maturity dates ranging from
2008 to 2010.
|
The total
liability for uncertain tax positions under FASB Interpretation No. 48 at
September 30, 2008 is approximately $2.0 million. We are not
able to reasonably estimate the amount by which the liability will increase or
decrease over time; however, at this time, we do not expect a significant
payment related to these obligations within the next year.
|
|
Amount
of Commitment Expiration Per Period
|
|
|
(amounts
in thousands)
|
Unrecorded
Obligations(1)
|
|
Total
|
|
Less
Than
1
Year
|
|
1
to 3
Years
|
|
3
to 5
Years
|
|
Over
5
Years
|
Operating
leases
|
|
$
|
69,760
|
|
$
|
7,294
|
|
$
|
15,036
|
|
$
|
13,136
|
|
$
|
34,294
|
Unconditional
purchase obligations
|
|
|
7,195
|
|
|
7,195
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
$
|
76,955
|
|
$
|
14,489
|
|
$
|
15,036
|
|
$
|
13,136
|
|
$
|
34,294
|
(1)
|
|
We
are party to operating lease agreements and unconditional purchase
obligations. These lease agreements and purchase obligations are
established in the ordinary course of our business and are designed to
provide us with access to facilities and products at competitive,
market-driven prices. At September 30, 2008, our unconditional
purchase obligations consist of multiple fixed-price fuel purchase
contracts under which we have 1.7 million gallons remaining to be
purchased for a total of $7.2 million, plus taxes and transportation
upon delivery. The current fuel purchase contracts expire on or
before December 31, 2008. These arrangements have not materially
affected our financial position, results of operations or liquidity during
the nine months ended September 30, 2008, nor are they expected to
have a material impact on our future financial position, results of
operations or liquidity.
|
We have
obtained financial surety bonds, primarily to support our financial assurance
needs and landfill operations. We provided customers and various
regulatory authorities with surety bonds in the aggregate amounts of
approximately $164.3 million and $166.3 million at December 31,
2007 and September 30, 2008, respectively. These arrangements have
not materially affected our financial position, results of operations or
liquidity during the nine months ended September 30, 2008, nor are they
expected to have a material impact on our future financial position, results of
operations or liquidity.
The
minority interests holders of one of our majority-owned subsidiaries, Pierce
County Recycling, Composting and Disposal, LLC, or PCRCD, have a currently
exercisable put option to require us to complete the acquisition of PCRCD by
purchasing their minority ownership interests for fair market value. The
put option calculates the fair market value of PCRCD based on its current
operating income before depreciation and amortization, as defined in the put
option agreement. The put option does not have a stated termination
date. At September 30, 2008, the minority interests holders’ pro rata
share of PCRCD’s fair market value is estimated to be worth
$100 million. Because the put is calculated at fair market value, no
amounts have been accrued relative to the put option. On August 1,
2008, Waste Connections of Washington, Inc., or WCWI, a wholly-owned subsidiary
of ours, entered into an Equity Purchase Agreement with the minority
interests holders of PCRCD, Land Recovery, Inc. and Resource Investments, Inc.,
and their shareholders. Pursuant to the Equity Purchase Agreement, WCWI
agreed to purchase from the minority interests holders all of their membership
interests of PCRCD and all of their shares of capital stock of Pierce County
Landfill Management, Inc., PCRCD’s Manager, for a purchase price of $100
million. PCRCD and Pierce County Landfill Management, Inc., which are
currently majority-owned subsidiaries of ours, will become wholly-owned
subsidiaries of ours upon the closing of this transaction. The
closing, which is expected to occur in the fourth quarter of 2008, is subject to
the receipt of necessary consents, regulatory approvals and other closing
conditions, including the closing of our acquisition of the capital stock of
Harold LeMay Enterprises, Incorporated. Upon the closing of the PCRCD
transaction, the put option will terminate and be of no further force or
effect.
From time
to time, we evaluate our existing operations and their strategic importance to
us. If we determine that a given operating unit does not have future
strategic importance, we may sell or otherwise dispose of those
operations. Although we believe our operations would not be impaired by
such dispositions, we could incur losses on them.
FREE CASH
FLOW
We are
providing free cash flow, a non-GAAP financial measure, because it is widely
used by investors as a valuation and liquidity measure in the solid waste
industry. This measure should be used in conjunction with GAAP financial
measures. Management uses free cash flow as one of the principal measures
to evaluate and monitor the ongoing financial performance of our
operations. We define free cash flow as net cash provided by operating
activities plus proceeds from disposal of assets and excess tax benefit
associated with equity-based compensation, plus or minus change in book
overdraft, less capital expenditures for property and equipment and
distributions to minority interest holders. Other companies may calculate
free cash flow differently. Our free cash flow for the nine months ended
September 30, 2007 and 2008, is calculated as follows (amounts in
thousands):
|
|
|
Nine
months ended
September 30,
|
|
|
|
|
2007
|
|
|
2008
|
|
|
Net
cash provided by operating activities
|
|
$ |
170,065 |
|
|
$ |
194,661 |
|
|
Change
in book overdraft
|
|
|
6,495 |
|
|
|
(8,835 |
) |
|
Plus:
Proceeds from disposal of assets
|
|
|
955 |
|
|
|
1,499 |
|
|
Plus:
Excess tax benefit associated with equity-based
compensation
|
|
|
10,190 |
|
|
|
5,647 |
|
|
Less:
Capital expenditures for property and equipment
|
|
|
(96,106 |
) |
|
|
(79,536 |
) |
|
Less:
Distributions to minority interest holders
|
|
|
(10,437 |
) |
|
|
(8,232 |
) |
|
Free
cash flow
|
|
$ |
81,162 |
|
|
$ |
105,204 |
|
INFLATION
Other
than volatility in fuel prices, inflation has not materially affected our
operations. Consistent with industry practice, many of our contracts allow
us to pass through certain costs to our customers, including increases in
landfill tipping fees and, in some cases, fuel costs. Therefore, we
believe that we should be able to increase prices to offset many cost increases
that result from inflation in the ordinary course of business. However,
competitive pressures or delays in the timing of rate increases under our
contracts may require us to absorb at least part of these cost increases,
especially if cost increases, such as recent increases in the price of fuel,
exceed the average rate of inflation. Management's estimates associated
with inflation have an impact on our accounting for landfill
liabilities.
SEASONALITY
Based on
historic trends, we expect our operating results to vary seasonally, with
revenues typically lowest in the first quarter, higher in the second and third
quarters and lower in the fourth quarter than in the second and third
quarters. We expect the fluctuation in our revenues between our highest
and lowest quarters to be approximately 9% to 11%. This seasonality
reflects the lower volume of solid waste generated during the late fall, winter
and early spring because of decreased construction and demolition activities
during winter months in the U.S. In addition, some of our operating costs
may be higher in the winter months. Adverse winter weather conditions slow
waste collection activities, resulting in higher labor and operational
costs. Greater precipitation in the winter increases the weight of
collected waste, resulting in higher disposal costs, which are calculated on a
per ton basis.
In the
normal course of business, we are exposed to market risk, including changes in
interest rates and prices of certain commodities. We use hedge agreements
to manage a portion of our risks related to interest rates. While we are
exposed to credit risk in the event of non-performance by counterparties to our
hedge agreements, in all cases such counterparties are highly rated financial
institutions and we do not anticipate non-performance. We do not hold or
issue derivative financial instruments for trading purposes. We monitor
our hedge positions by regularly evaluating the positions at market and by
performing sensitivity analyses.
At
September 30, 2008, our derivative instruments consisted of nine interest
rate swap agreements that effectively fix the interest rate on the applicable
notional amounts of our variable rate debt as follows (dollars in
thousands):
|
Date
Entered
|
|
Notional
Amount
|
|
|
Fixed
Interest
Rate Paid*
|
|
|
Variable
Interest Rate
Received
|
|
Effective
Date
|
|
Expiration
Date
|
|
September
2005
|
|
$ |
175,000 |
|
|
4.33%
|
|
|
1-month
LIBOR
|
|
February
2007
|
|
February
2009
|
|
September
2005
|
|
$ |
75,000 |
|
|
4.34%
|
|
|
1-month
LIBOR
|
|
March 2007
|
|
March
2009
|
|
December
2005
|
|
$ |
150,000 |
|
|
4.76%
|
|
|
1-month
LIBOR
|
|
June 2006
|
|
June
2009
|
|
November
2007
|
|
$ |
50,000 |
|
|
4.37%
|
|
|
1-month
LIBOR
|
|
February
2009
|
|
February
2011
|
|
November
2007
|
|
$ |
50,000 |
|
|
4.37%
|
|
|
1-month
LIBOR
|
|
February
2009
|
|
February
2011
|
|
November
2007
|
|
$ |
75,000 |
|
|
4.37%
|
|
|
1-month
LIBOR
|
|
February
2009
|
|
February
2011
|
|
November
2007
|
|
$ |
75,000 |
|
|
4.40%
|
|
|
1-month
LIBOR
|
|
March 2009
|
|
March
2011
|
|
November
2007
|
|
$ |
50,000 |
|
|
4.29%
|
|
|
1-month
LIBOR
|
|
June 2009
|
|
June
2011
|
|
November
2007
|
|
$ |
100,000 |
|
|
4.35%
|
|
|
1-month
LIBOR
|
|
June 2009
|
|
June
2011
|
* plus
applicable margin.
All the
interest rate swap agreements are considered highly effective as cash flow
hedges for a portion of our variable rate debt, and we apply hedge accounting to
account for these instruments. The notional amounts and all other
significant terms of the swap agreements are matched to the provisions and terms
of the variable rate debt being hedged.
We have
performed sensitivity analyses to determine how market rate changes will affect
the fair value of our market risk sensitive hedge positions and all other
debt. Such an analysis is inherently limited in that it reflects a
singular, hypothetical set of assumptions. Actual market movements may
vary significantly from our assumptions. Fair value sensitivity is not
necessarily indicative of the ultimate cash flow or earnings effect we would
recognize from the assumed market rate movements. We are exposed to cash
flow risk due to changes in interest rates with respect to the unhedged floating
rate balances owed at December 31, 2007, and September 30, 2008, of
$114.8 million and $26.5 million, respectively, including floating
rate debt under our credit facility, various floating rate notes payable to
third parties and floating rate municipal bond obligations. A one percent
increase in interest rates on our variable-rate debt as of December 31,
2007, and September 30, 2008, would decrease our annual pre-tax income by
approximately $1.1 million and $0.3 million, respectively. All of our
remaining debt instruments are at fixed rates, or effectively fixed under the
interest rate swap agreements described above; therefore, changes in market
interest rates under these instruments would not significantly impact our cash
flows or results of operations.
The
market price of diesel fuel is unpredictable and can fluctuate
significantly. A significant increase in the price of fuel could adversely
affect our business and reduce our operating margins. If we purchase all
of our fuel at market prices, a $0.10 per gallon increase in the price of
fuel over a one-year period would decrease our annual pre-tax income by
approximately $2.2 million. We purchase a majority of our fuel
at market prices; however, in order to mitigate the impact of adverse fuel price
changes, in the second quarter of 2008, we entered into multiple fixed-price
fuel purchase contracts which expire on or before December 31, 2008. As of
September 30, 2008, we had 1.7 million gallons remaining to be
purchased for a total unconditional purchase obligation of $7.2 million,
plus taxes and transportation upon delivery.
In
October 2008, we entered into multiple commodity swap agreements related to
forecasted diesel fuel purchases. Under SFAS 133, the swaps qualified
for and were designated as effective hedges of changes in the prices of
forecasted diesel fuel purchases (“fuel hedges”).
The
following table summarizes the fuel hedges we entered into:
|
Date
Entered
|
|
Notional
Amount
(in
gallons per
month)
|
|
Diesel
Rate
Paid
Fixed
|
|
Diesel
Rate Received
Variable
|
|
Effective
Date
|
|
Expiration
Date
|
|
October
2008
|
|
250,000
|
|
3.750
|
|
DOE
Diesel Fuel Index*
|
|
January
2009
|
|
December
2010
|
|
October
2008
|
|
100,000
|
|
3.745
|
|
DOE
Diesel Fuel Index*
|
|
January
2009
|
|
December
2010
|
|
October
2008
|
|
250,000
|
|
3.500
|
|
DOE
Diesel Fuel Index*
|
|
January
2009
|
|
December
2010
|
*If the
national U.S. on-highway average price for a gallon of diesel fuel (“average
price”), as published by the Department of Energy, exceeds the contract price
per gallon, we receive the difference between the average price and the contract
price (multiplied by the notional gallons) from the counterparty. If the
national U.S. on-highway average price for a gallon of diesel fuel is less than
the contract price per gallon, we pay the difference to the
counterparty.
All the
fuel hedges are considered highly effective as cash flow hedges for a portion of
our forecasted diesel fuel purchases, and we will apply hedge accounting to
account for these instruments.
We market
a variety of recyclable materials, including cardboard, office paper, plastic
containers, glass bottles and ferrous and aluminum metals. We own and
operate 29 recycling processing operations and sell other collected
recyclable materials to third parties for processing before resale.
Certain of our municipal recycling contracts in the state of Washington specify
benchmark resale prices for recycled commodities. If the prices we
actually receive for the processed recycled commodities collected under the
contract exceed the prices specified in the contract, we share the excess with
the municipality, after recovering any previous shortfalls resulting from actual
market prices falling below the prices specified in the contract. To
reduce our exposure to commodity price risk with respect to recycled materials,
we have adopted a pricing strategy of charging collection and processing fees
for recycling volume collected from third parties. In the event of a
decline in recycled commodity prices, a 10% decrease in average recycled
commodity prices from the prices that were in effect at September 30, 2007
and 2008, would have resulted in a decrease in revenues of $2.8 million and
$3.3 million, respectively, for the nine months ended September 30,
2007 and 2008.
As
required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as
amended, or the Exchange Act, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures (as such term is
defined in Rule 13a-15(e) under the Exchange Act) as of the end of the
fiscal quarter covered by this quarterly report on Form 10-Q. Based
on this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded as of September 30, 2008, that our disclosure controls and
procedures were effective at the reasonable assurance level such that
information required to be disclosed in our Exchange Act reports:
(1) is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms; and (2) is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
During
the quarter ended September 30, 2008, there was no change in our internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
PART II
– OTHER INFORMATION
No
material developments occurred during the quarterly period ended September 30,
2008 in the legal proceeding involving Colonias Dev. Council v. Rhino
Envtl. Servs., Inc. (In re Rhino Envtl. Servs.) described in our
quarterly report on Form 10-Q for the quarterly period ended June 30,
2008. Refer to Note 13 of the Notes to Condensed Consolidated
Financial Statements in Part I of this Quarterly Report on Form 10-Q for a
description of this legal proceeding.
No
material developments occurred during the quarterly period ended September 30,
2008 in the legal proceeding involving Board of Comm’rs of Sumner County,
Kansas, Tri-County Concerned Citizens and Dalton Holland v. Roderick Bremby,
Sec’y of the Kansas Dep’t of Health and Env’t, et al. described in our
quarterly report on Form 10-Q for the quarterly period ended June 30,
2008. Refer to Note 13 of the Notes to Condensed Consolidated
Financial Statements in Part I of this Quarterly Report on Form 10-Q for a
description of this legal proceeding.
No
material developments occurred during the quarterly period ended September 30,
2008 in the legal proceeding involving the Travis v. Mittelstaedt, et
al. and Pierce and
Banister v. Mittelstaedt, et al. and In re Waste Connections, Inc.
Shareholder Derivative Litigation derivative
lawsuits described in our quarterly report on Form 10-Q for the quarterly period
ended June 30, 2008, except that in August 2008 the consolidated federal
action, Travis v.
Mittelstaedt, et al. and Pierce and Banister v. Mittelstaedt,
et al. was stayed as a result of the preliminary agreement reached by the
parties. Refer to Note 13 of the Notes to Condensed Consolidated
Financial Statements in Part I of this Quarterly Report on Form 10-Q for a
description of this legal proceeding.
In the
normal course of our business and as a result of the extensive governmental
regulation of the solid waste industry, we are subject to various other judicial
and administrative proceedings involving federal, state or local agencies.
In these proceedings, an agency may seek to impose fines on us or to revoke or
deny renewal of an operating permit held by us. From time to time we may
also be subject to actions brought by citizens’ groups or adjacent landowners or
residents in connection with the permitting and licensing of landfills and
transfer stations, or alleging environmental damage or violations of the permits
and licenses pursuant to which we operate.
In
addition, we are a party to various claims and suits pending for alleged damages
to persons and property, alleged violations of certain laws and alleged
liabilities arising out of matters occurring during the normal operation of the
waste management business. Except as noted in the legal cases described
above, and in Note 13 of the Notes to Condensed Consolidated Financial
Statements in Part I of this Quarterly Report on Form 10-Q, as of
September 30, 2008, there is no current proceeding or litigation involving
us that we believe will have a material adverse impact on our business,
financial condition, results of operations or cash flows.
Certain
statements contained in this Quarterly Report on Form 10-Q are forward-looking
in nature. These statements can be identified by the use of
forward-looking terminology such as “believes,” “expects,” “may,” “will,”
“should,” or “anticipates,” or the negative thereof or comparable terminology,
or by discussions of strategy. Our business and operations are subject to
a variety of risks and uncertainties and, consequently, actual results may
differ materially from those projected by any forward-looking statements.
Factors that could cause actual results to differ from those projected include,
but are not limited to, those listed below and elsewhere in this report and in
our other filings with the SEC, including our most recent Annual Report on Form
10-K. There may be additional risks of which we are not presently aware or
that we currently believe are immaterial which could have an adverse impact on
our business. We make no commitment to revise or update any
forward-looking statements in order to reflect events or circumstances that may
change.
Risks
Related to Our Business
We may be unable to compete
effectively with larger and better capitalized companies and governmental
service providers.
Our
industry is highly competitive and requires substantial labor and capital
resources. Some of the markets in which we compete or will likely compete
are served by one or more large, national companies, as well as by regional and
local companies of varying sizes and resources, some of which we believe have
accumulated substantial goodwill in their markets. Some of our competitors
may also be better capitalized than we are, have greater name recognition than
we do, or be able to provide or be willing to bid their services at a lower
price than we may be willing to offer. Our inability to compete
effectively could hinder our growth or negatively impact our operating
results.
We also
compete with counties, municipalities and solid waste districts that maintain or
could in the future choose to maintain their own waste collection and disposal
operations. These operators may have financial advantages over us because
of their access to user fees and similar charges, tax revenues and tax-exempt
financing.
Downturns in the U.S.
economy adversely affect operating results.
Weakness
in the U.S. economy has had a negative effect on our operating results,
including decreases in volume generally associated with the construction
industry. In an economic slowdown, we may also experience the negative
effects of increased competitive pricing pressure and customer turnover.
Worsening economic conditions or a prolonged or recurring recession could
adversely affect our operating results. Further, we cannot assure you that
an improvement in economic conditions will result in an immediate, if at all
positive, improvement in our operating results or cash flows.
Our results are vulnerable
to economic conditions and seasonal factors affecting the regions in which we
operate.
Our
business and financial results would be harmed by downturns in the general
economy of the regions in which we operate and other factors affecting those
regions, such as state regulations affecting the solid waste services industry
and severe weather conditions. Based on historic trends, we expect our
operating results to vary seasonally, with revenues typically lowest in the
first quarter, higher in the second and third quarters, and lower in the fourth
quarter than in the second and third quarters. We expect the fluctuation
in our revenues between our highest and lowest quarters to be in the range of
approximately 9% to 11%. This seasonality reflects the lower volume of
solid waste generated during the late fall, winter and early spring because of
decreased construction and demolition activities during the winter months.
In addition, some of our operating costs may be higher in the winter
months. Adverse winter weather conditions slow waste collection
activities, resulting in higher labor and operational costs. Greater
precipitation in the winter increases the weight of collected waste, resulting
in higher disposal costs, which are calculated on a per ton basis. Because
of these factors, we expect operating income to be generally lower in the winter
months, and our stock price may be negatively affected by these
variations.
We may lose contracts
through competitive bidding, early termination or governmental
action.
We derive
a significant portion of our revenues from market areas where we have exclusive
arrangements, including franchise agreements, municipal contracts and G
Certificates. Many of these arrangements are for a specified term and will
be subject to competitive bidding in the future. Although we intend to bid
on additional municipal contracts and franchise agreements, we may not be the
successful bidder. In addition, some of our customers may terminate their
contracts with us before the end of the contract term.
Government
action may also affect our exclusive arrangements. Municipalities may
annex unincorporated areas within counties where we provide collection
services. As a result, our customers in annexed areas may be required to
obtain services from competitors that have been franchised by the annexing
municipalities to provide those services. In addition, municipalities in
which services are currently provided on a competitive basis may elect to
franchise collection services. Unless we are awarded franchises by these
municipalities, we will lose customers. Municipalities may also decide to
provide services to their residents themselves, on an optional or mandatory
basis, causing us to lose customers. Municipalities in Washington may, by
law, annex any unincorporated territory, which could remove such territory from
an area covered by a G Certificate issued to us by the WUTC. Such
occurrences could subject more of our Washington operations to competitive
bidding. Moreover, legislative action could amend or repeal the laws
governing WUTC regulation, which could harm our competitive position by
subjecting more areas to competitive bidding. If we are not able to
replace revenues from contracts lost through competitive bidding or early
termination or from the renegotiation of existing contracts with other revenues
within a reasonable time period, our revenues could decline.
Price increases may not be
adequate to offset the impact of increased costs or may cause us to lose
volume.
We seek
to secure price increases necessary to offset increased costs (including fuel
costs), to improve operating margins and to obtain adequate returns on our
deployed capital. Contractual, general economic or market-specific
conditions may limit our ability to raise prices. As a result of these
factors, we may be unable to offset increases in costs, improve operating
margins and obtain adequate investment returns through price increases. We
may also lose volume to lower-cost competitors.
Increases in the price of
fuel may adversely affect our business and reduce our operating
margins.
The
market price of fuel is volatile and has risen substantially in recent
years. We generally purchase diesel fuel at market prices, and such prices
can fluctuate significantly. A significant increase in our fuel cost could
adversely affect our business and reduce our operating margins and reported
earnings.
Increases in labor and
disposal and related transportation costs could impact our financial
results.
Our
continued success will depend on our ability to attract and retain qualified
personnel. We compete with other businesses in our markets for qualified
employees. From time to time, the labor supply is tight in some of our
markets. A shortage of qualified employees would require us to enhance our
wage and benefits packages to compete more effectively for employees, to hire
more expensive temporary employees or to contract for services with more
expensive third-party vendors. Labor is one of our highest costs and
relatively small increases in labor costs per employee could materially affect
our cost structure. If we fail to attract and retain qualified employees,
control our labor costs or recover any increased labor costs through increased
prices we charge for our services or otherwise offset such increases with cost
savings in other areas, our operating margins could suffer. Disposal and
related transportation costs are our second highest cost category. If we
incur increased disposal and related transportation costs to dispose of solid
waste, and if, in either case, we are unable to pass these costs on to our
customers, our operating results would suffer.
Increases in insurance costs
and the amount that we self-insure for various risks could reduce our operating
margins and reported earnings.
We
maintain insurance policies for automobile, general, employer’s, environmental
and directors and officers’ liability as well as for employee group health
insurance, property insurance and workers’ compensation. We are
effectively self-insured for automobile liability, property, general liability,
workers’ compensation, employer’s liability and employee group health insurance
by carrying high dollar per incident deductibles. We carry umbrella
policies for certain types of claims to provide excess coverage over the
underlying policies and per incident deductibles. The increased amounts
that we self-insure could cause significant volatility in our operating margins
and reported earnings based on the occurrence and claim costs of incidents,
accidents and injuries. Our insurance accruals are based on claims filed
and estimates of claims incurred but not reported and are developed by our
management with assistance from our third-party actuary and our third-party
claims administrator. To the extent these estimates are inaccurate, we may
recognize substantial additional expenses in future periods that would reduce
operating margins and reported earnings. From time to time, actions filed
against us include claims for punitive damages, which are generally excluded
from coverage under all of our liability insurance policies. A punitive
damage award could have an adverse effect on our reported earnings in the period
in which it occurs. Significant increases in premiums on insurance that we
retain also could reduce our margins.
Efforts by labor unions
could divert management attention and adversely affect operating
results.
From time
to time, labor unions attempt to organize our employees. Some groups of
our employees are represented by unions, and we have negotiated collective
bargaining agreements with most of these groups. We are currently engaged
in negotiations with other groups of employees represented by unions.
Additional groups of employees may seek union representation in the
future. Negotiating collective bargaining agreements with these groups
could divert management attention and adversely affect operating results.
If we are unable to negotiate acceptable collective bargaining agreements, we
might have to wait through “cooling off” periods, which are often followed by
union-initiated work stoppages, including strikes or lock-outs.
Additionally, any significant work stoppage or slowdown at ports or by railroad
workers could reduce or interrupt the flow of cargo containers through our
intermodal facilities. Depending on the type and duration of any labor
disruptions, our operating expenses could increase significantly, which could
adversely affect our financial condition, results of operations and cash
flows.
Competition for acquisition
candidates, consolidation within the waste industry and economic and market
conditions may limit our ability to grow through
acquisitions.
Most of
our growth since our inception has been through acquisitions. Although we
have identified numerous acquisition candidates that we believe are suitable, we
may not be able to acquire them at prices or on terms and conditions favorable
to us.
Other
companies have adopted or may in the future adopt our strategy of acquiring and
consolidating regional and local businesses. We expect that increased
consolidation in the solid waste services industry will continue to reduce the
number of attractive acquisition candidates. Moreover, general economic
conditions and the environment for attractive investments may affect the desire
of the owners of acquisition candidates to sell their companies. As a
result, fewer acquisition opportunities may become available to us, which could
cause us to reduce our rate of growth from acquisitions or make acquisitions on
less attractive terms than we have in the past, such as at higher purchase
prices.
Our growth and future
financial performance depend significantly on our ability to integrate acquired
businesses into our organization and operations.
A
component of our growth strategy involves achieving economies of scale and
operating efficiencies by growing through acquisitions. We may not achieve
these goals unless we effectively combine the operations of acquired businesses
with our existing operations. In addition, we are not always able to
control the timing of our acquisitions. Our inability to complete
acquisitions within the time frames that we expect may cause our operating
results to be less favorable than expected, which could cause our stock price to
decline.
Our acquisitions may not be
successful, resulting in changes in strategy, operating losses or a loss on sale
of the business acquired.
Even if
we are able to make acquisitions on advantageous terms and are able to integrate
them successfully into our operations and organization, some acquisitions may
not fulfill our objectives in a given market due to factors that we cannot
control, such as market position or customer base. As a result, operating
margins could be less than we originally anticipated when we made those
acquisitions. In addition, we may change our strategy with respect to that
market or those businesses and decide to sell the operations at a loss, or keep
those operations and recognize an impairment of goodwill and/or intangible
assets.
Our indebtedness could
adversely affect our financial condition; we may incur substantially more debt
in the future.
As of
September 30, 2008, we had $642.6 million of total indebtedness
outstanding. On October 1, 2008, we issued and sold to investors $175
million of senior uncollateralized notes in a private placement. We may incur
substantial additional debt in the future. The terms of our senior
revolving credit facility and outstanding notes do not fully prohibit us from
doing so. The incurrence of substantial additional indebtedness could have
important consequences to you. For example, it could:
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·
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increase
our vulnerability to general adverse economic and industry
conditions;
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limit
our ability to obtain additional
financing;
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·
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require
the dedication of a substantial portion of our cash flow from operations
to the payment of principal of, and interest on, our indebtedness, thereby
reducing the availability of such cash flow to fund our growth strategy,
working capital, capital expenditures and other general corporate
purposes;
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·
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limit
our flexibility in planning for, or reacting to, changes in our business
and the industry; and
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·
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place
us at a competitive disadvantage relative to our competitors with less
debt.
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Each business that we
acquire or have acquired may have liabilities that we fail or are unable to
discover, including environmental liabilities.
It is
possible that the corporate entities or sites we have acquired, or which we may
acquire in the future, have liabilities in respect of former or existing
operations or properties, or otherwise, which we have not been able to identify
and assess through our due diligence investigations. As a successor owner,
we may be legally responsible for those liabilities that arise from businesses
that we acquire. Even if we obtain legally enforceable representations,
warranties and indemnities from the sellers of such businesses, they may not
cover the liabilities fully. Some environmental liabilities, even if we do
not expressly assume them, may be imposed on us under various regulatory schemes
and other applicable laws. In addition, our insurance program may not
cover such sites and will not cover liabilities associated with some
environmental issues that may exist prior to attachment of coverage. A
successful uninsured claim against us could harm our financial condition or
operating results.
Liabilities for
environmental damage may adversely affect our financial condition, business and
earnings.
We may be
liable for any environmental damage that our current or former facilities cause,
including damage to neighboring landowners or residents, particularly as a
result of the contamination of soil, groundwater or surface water, and
especially drinking water, or to natural resources. We may be liable for
damage resulting from conditions existing before we acquired these
facilities. We may also be liable for any on-site environmental
contamination caused by pollutants or hazardous substances whose transportation,
treatment or disposal we or our predecessors arranged or conducted. If we
were to incur liability for environmental damage, environmental cleanups,
corrective action or damage not covered by insurance or in excess of the amount
of our coverage, our financial condition or operating results could be
materially adversely affected.
Our accruals for our
landfill site closure and post-closure costs may be
inadequate.
We are
required to pay capping, closure and post-closure maintenance costs for landfill
sites that we own or operate. We have currently accrued $21.3 million
for these costs (as of September 30, 2008). Our obligations to pay
closure or post-closure costs may exceed the amount we have accrued and reserved
and other amounts available from funds or reserves established to pay such
costs. In addition, the completion or closure of a landfill site does not
end our environmental obligations. After completion or closure of a
landfill site there exists the potential for unforeseen environmental problems
to occur that could result in substantial remediation costs. Paying
additional amounts for closure or post-closure costs and/or for environmental
remediation could harm our financial condition or operating
results.
We depend significantly on
the services of the members of our senior, regional and district management
team, and the departure of any of those persons could cause our operating
results to suffer.
Our
success depends significantly on the continued individual and collective
contributions of our senior, regional and district management team. Key
members of our management have entered into employment agreements, but we may
not be able to enforce these agreements. The loss of the services of any
member of our senior, regional or district management or the inability to hire
and retain experienced management personnel could harm our operating
results.
Our decentralized
decision-making structure could allow local managers to make decisions that
adversely affect our operating results.
We manage
our operations on a decentralized basis. Local managers have the authority
to make many decisions concerning their operations without obtaining prior
approval from executive officers, subject to compliance with general
company-wide policies. Poor decisions by local managers could result in
the loss of customers or increases in costs, in either case adversely affecting
operating results.
We may be subject in the
normal course of business to judicial, administrative or other third party
proceedings that could interrupt our operations, require expensive remediation,
result in adverse judgments, settlements or fines and create negative
publicity.
Governmental
agencies may, among other things, impose fines or penalties on us relating to
the conduct of our business, attempt to revoke or deny renewal of our operating
permits, franchises or licenses for violations or alleged violations of
environmental laws or regulations, require us to install additional pollution
control equipment or require us to remediate potential environmental problems
relating to any real property that we or our predecessors ever owned, leased or
operated or any waste that we or our predecessors ever collected, transported,
disposed of or stored. Individuals or citizens groups may also bring
actions against us in connection with our operations. Any adverse outcome
in such proceedings could harm our operations and financial results and create
negative publicity, which could damage our reputation, competitive position and
stock price.
Because we depend on
railroads for our intermodal operations, our operating results and financial
condition are likely to be adversely affected by any reduction or deterioration
in rail service.
We depend
on two major railroads for the intermodal services we provide – the Burlington
Northern Santa Fe and Union Pacific. Consequently, a reduction in, or
elimination of, rail service to a particular market is likely to adversely
affect our ability to provide intermodal transportation services to some of our
customers. In addition, the railroads are relatively free to adjust
shipping rates up or down as market conditions permit when existing contracts
expire. Rate increases would result in higher intermodal transportation
costs, reducing the attractiveness of intermodal transportation compared to
solely truck or other transportation modes, which could cause a decrease in
demand for our services. Our business could also be adversely affected by
harsh weather conditions or other factors that hinder the railroads’ ability to
provide reliable transportation services.
We may incur additional
charges related to capitalized expenditures, which would decrease our
earnings.
In
accordance with U.S. generally accepted accounting principles, we capitalize
some expenditures and advances relating to acquisitions, pending acquisitions
and landfill development projects. We expense indirect acquisition costs
such as executive salaries, general corporate overhead and other corporate
services as we incur those costs. We charge against earnings any
unamortized capitalized expenditures and advances (net of any amount that we
estimate we will recover, through sale or otherwise) that relate to any
operation that is permanently shut down or determined to be impaired, any
pending acquisition that is not consummated and any landfill development project
that we do not expect to complete. Any such charges against earnings could
decrease our stock price.
Our financial results are
based upon estimates and assumptions that may differ from actual
results.
In
preparing our consolidated financial statements in accordance with U.S.
generally accepted accounting principles, several estimates and assumptions are
made that affect the accounting for and recognition of assets, liabilities,
revenues and expenses. These estimates and assumptions must be made
because certain information that is used in the preparation of our financial
statements is dependent on future events, cannot be calculated with a high
degree of precision from data available or is not capable of being readily
calculated based on generally accepted methodologies. In some cases, these
estimates are particularly difficult to determine and we must exercise
significant judgment. The estimates and the assumptions having the
greatest amount of uncertainty, subjectivity and complexity are related to our
accounting for landfills, self-insurance, intangibles, allocation of acquisition
purchase price, income taxes, asset impairments and litigation, claims and
assessments. Actual results for all estimates could differ materially from
the estimates and assumptions that we use, which could have an adverse effect on
our financial condition and results of operations.
The adoption of new
accounting standards or interpretations could adversely affect our financial
results.
Our
implementation of and compliance with changes in accounting rules and
interpretations could adversely affect our operating results or cause
unanticipated fluctuations in our results in future periods. The
accounting rules and regulations that we must comply with are complex and
continually changing. Recent actions and public comments from the SEC have
focused on the integrity of financial reporting generally. The Financial
Accounting Standards Board, or FASB, has recently introduced several new or
proposed accounting standards, or is developing new proposed standards, which
would represent a significant change from current industry practices. For
example, Statement of Financial Accounting Standards No. 141 (revised
2007), Business
Combinations, which is effective for us on January 1, 2009, changes
how the purchase price is calculated and fair values determined in connection
with an acquisition and also requires acquisition-related transaction and
restructuring costs to be expensed rather than treated as part of the cost of
the acquisition. In addition, many companies’ accounting policies are being
subject to heightened scrutiny by regulators and the public. While we
believe that our financial statements have been prepared in accordance with U.S.
generally accepted accounting principles, we cannot predict the impact of future
changes to accounting principles or our accounting policies on our financial
statements going forward.
Risks
Related to Our Industry
Our financial and operating
performance may be affected by the inability to renew landfill operating
permits, obtain new landfills and expand existing
ones.
We
currently own and/or operate a number of landfills. Our ability to meet
our financial and operating objectives may depend in part on our ability to
renew landfill operating permits, acquire, lease and expand existing landfills
and develop new landfill sites. It has become increasingly difficult and
expensive to obtain required permits and approvals to build, operate and expand
solid waste management facilities, including landfills and transfer
stations. Operating permits for landfills in states where we operate must
generally be renewed every five to ten years, although some permits are required
to be renewed more frequently. These operating permits often must be
renewed several times during the permitted life of a landfill. The permit
and approval process is often time consuming, requires numerous hearings and
compliance with zoning, environmental and other requirements, is frequently
challenged by citizens, public interest and other groups, and may result in the
denial of a permit or renewal, or burdensome terms and conditions being imposed
on our operations. We may not be able to obtain new landfill sites or
expand the permitted capacity of our landfills when necessary. Obtaining
new landfill sites is important to our expansion into new, non-exclusive
markets. If we do not believe that we can obtain a landfill site in a
non-exclusive market, we may choose not to enter that market. Expanding
existing landfill sites is important in those markets where the remaining lives
of our landfills are relatively short. We may choose to forego
acquisitions and internal growth in these markets because increased volumes
would further shorten the lives of these landfills. Any of these
circumstances could adversely affect our operating results.
Future changes in laws
regulating the flow of solid waste in interstate commerce could adversely affect
our operating results.
The U.S.
Supreme Court has held that states may not regulate the flow of solid waste in
interstate commerce if the effect would be to discriminate between interstate
and intrastate commerce with respect to private facilities. In 2007, the
U.S. Supreme Court upheld a flow control scheme directing waste to be processed
at a municipally owned transfer station. If one or more of the
municipalities or states in which we dispose of interstate waste takes action
that would prohibit or increase the costs of our continued disposal of
interstate waste, our operating results could be adversely
affected.
Extensive and evolving
environmental and health and safety laws and regulations may restrict our
operations and growth and increase our costs.
Existing
environmental laws and regulations have become more stringently enforced in
recent years because of greater public interest in protecting the
environment. In addition, our industry is subject to regular enactment of
new or amended federal, state and local environmental and health and safety
statutes, regulations and ballot initiatives, such as those regulating
greenhouse gas emissions, as well as judicial decisions interpreting these
requirements. These requirements impose substantial capital and operating
costs and operational limitations on us and may adversely affect our
business. In addition, federal, state and local governments may change the
rights they grant to, and the restrictions they impose on, solid waste services
companies, and those changes could restrict our operations and
growth.
Extensive regulations that
govern the design, operation and closure of landfills may restrict our landfill
operations or increase our costs of operating
landfills.
Regulations
that govern landfill design, operation and closure include the regulations that
establish minimum federal requirements adopted by the EPA in October 1991 under
Subtitle D of RCRA. If we fail to comply with these regulations or
their state counterparts, we could be required to undertake investigatory or
remedial activities, curtail operations or close landfills temporarily or
permanently. Future changes to these regulations may require us to modify,
supplement or replace equipment or facilities at substantial costs. If
regulatory agencies fail to enforce these regulations vigorously or
consistently, our competitors whose facilities are not forced to comply with the
Subtitle D regulations or their state counterparts may obtain an advantage
over us. Our financial obligations arising from any failure to comply with
these regulations could harm our business and operating
results.
Unusually adverse weather
conditions may interfere with our operations, harming our operating
results.
Our
operations could be adversely affected, beyond the normal seasonal variations
described above, by unusually long periods of inclement weather, which could
interfere with collection, landfill and intermodal operations, reduce the volume
of waste generated by our customers, delay the development of landfill capacity,
and increase the costs we incur in connection with the construction of landfills
and other facilities. Periods of particularly harsh weather may force us
to temporarily suspend some of our operations.
Fluctuations in prices for
recycled commodities that we sell and rebates we offer to customers may cause
our revenues and operating results to decline.
We
provide recycling services to some of our customers. The sale prices of
and demands for recyclable commodities, particularly paper products, are
frequently volatile and when they decline, our revenues and operating results
may decline. Our recycling operations offer rebates to suppliers, based on
the market prices of commodities we buy to process for resale. Therefore,
if we recognize increased revenues resulting from higher prices for recyclable
commodities, the rebates we pay to suppliers will also increase, which also may
impact our operating results.
See
Exhibit Index immediately following the signature page of this Quarterly Report
on Form 10-Q.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
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WASTE
CONNECTIONS, INC.
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Date: October 21,
2008
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BY:
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/s/ Ronald J.
Mittelstaedt
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Ronald
J. Mittelstaedt,
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Chief
Executive Officer
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Date: October 21,
2008
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BY:
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/s/ Worthing F.
Jackman
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Worthing
F. Jackman,
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Executive
Vice President and
Chief
Financial Officer
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Exhibit Number
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Description of Exhibits
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2.1
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Stock
Purchase Agreement dated as of August 1, 2008 by and among Waste
Connections, Inc., on the one hand, and Harold LeMay Enterprises,
Incorporated and its shareholders, on the other hand (incorporated by
reference to the exhibit filed with the Registrant's Form 8-K filed on
August 7, 2008)
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2.2
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Equity
Purchase Agreement dated as of August 1, 2008 by and among Waste
Connections of Washington, Inc., Land Recovery, Inc., Resource
Investments, Inc. and the shareholders of Land Recovery, Inc. and Resource
Investments, Inc. (incorporated by reference to the exhibit filed with the
Registrant's Form 8-K filed on August 7, 2008)
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3.1
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Amended
and Restated Certificate of Incorporation of the Registrant (incorporated
by reference to the exhibit filed with the Registrant's Form 10-Q
filed on July 24, 2007)
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3.2
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Amended
and Restated Bylaws of the Registrant (incorporated by reference to the
exhibit filed with the Registrant’s Form 10-Q filed on July 22,
2004)
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10.1
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Master
Note Purchase Agreement, dated July 15, 2008 (incorporated by reference to
the exhibit filed with the Registrant’s Form 8-K filed on
July 18, 2008)
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31.1
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Certification
of Chief Executive Officer pursuant to Exchange Act
Rules 13a-14(a)/15d-14(a)
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31.2
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Certification
of Chief Financial Officer pursuant to Exchange Act
Rules 13a-14(a)/15d-14(a)
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32.1
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Certifications
of Chief Executive Officer and Chief Financial Officer pursuant to
18 U.S.C. §1350
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Page
43