Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ___________
Commission File No. 1-31507
WASTE CONNECTIONS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of incorporation or organization)
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94-3283464
(I.R.S. Employer Identification No.) |
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2295 Iron Point Road
Suite 200
Folsom, California
(Address of principal executive offices)
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95630
(Zip Code) |
(916) 608-8200
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, par value $.01 per share
(Title of each class)
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New York Stock Exchange
(Name of each exchange on which registered) |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13
or Section 15(d) of the Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
As of June 30, 2009, the aggregate market value of voting and non-voting common stock held by
non-affiliates of the registrant, based on the closing sales price for the registrants common
stock, as reported on the New York Stock Exchange, was $2,059,298,429.
Number of shares of common stock outstanding as of January 22, 2010: 78,672,369
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive Proxy Statement for the 2010 Annual Meeting of Stockholders
are incorporated by reference into Part III hereof.
WASTE CONNECTIONS, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
i
PART I
Our Company
Waste Connections, Inc. is 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 serve approximately two million residential, commercial and
industrial customers from a network of operations in 26 states: Alabama, Arizona, California,
Colorado, Idaho, Illinois, Iowa, Kansas, Kentucky, Michigan, Minnesota, Mississippi, Montana,
Nebraska, Nevada, New Mexico, North Carolina, Oklahoma, Oregon, South Carolina, South Dakota,
Tennessee, Texas, Utah, Washington and Wyoming. As of December 31, 2009, we owned or operated a
network of 134 solid waste collection operations, 55 transfer stations, 37 recycling operations and
43 active landfills. In addition, we provided intermodal services for the rail haul movement of
cargo and solid waste containers in the Pacific Northwest through a network of six intermodal
facilities.
We are a leading provider of solid waste services in most of our markets. We have focused on
secondary markets mostly in the Western and Southern U.S. because we believe that those areas
offer:
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opportunities to enter into exclusive arrangements; |
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more competitive barriers to entry; |
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less competition from larger solid waste services companies; |
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projected economic and population growth rates that will contribute to the growth of our
business; and |
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a number of independent solid waste services companies suitable for acquisition. |
Our senior management team has extensive experience in operating, acquiring and integrating
solid waste services businesses, and we intend to continue to focus our efforts on balancing
internal and acquisition-based growth. We anticipate that a part of our future growth will come
from acquiring additional solid waste collection, transfer and disposal businesses and, therefore,
we expect that additional acquisitions could continue to affect period-to-period comparisons of our
operating results.
Waste Connections, Inc. is a Delaware corporation organized in 1997.
Our Operating Strategy
Our operating strategy seeks to improve financial returns and deliver superior stockholder
value creation within the solid waste industry. We seek to avoid highly competitive, large urban
markets and instead target markets where we can provide non-integrated or integrated solid waste
services under exclusive arrangements or where we can operate on an integrated basis while
attaining high market share. The key components of our operating strategy, which are tailored to
the competitive and regulatory factors that affect our markets, are as follows:
Control the Waste Stream. 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 is often more important to our profitability and growth than owning or operating
landfills. In addition, contracts in some Western U.S. markets dictate the disposal facility to be
used. The large size of many western states increases the cost of interstate and long haul
disposal, heightening the effects of regulations that direct or otherwise restrict waste disposal,
which may make it more difficult for a landfill to obtain the disposal volume necessary to operate
profitably. In markets with these characteristics, we believe that landfill ownership or vertical
integration is not as critical to our success.
Provide Vertically Integrated Services. In markets where we believe that owning
landfills is a strategic element to a collection operation because of competitive and regulatory
factors, we generally focus on providing integrated services, from collection through disposal of
solid waste in landfills that we own or operate.
Manage on a Decentralized Basis. We manage our operations on a decentralized basis.
This places decision-making authority close to the customer, enabling us to identify and address
customers needs quickly in a cost-effective manner. We believe that decentralization provides a
low-overhead, highly efficient operational structure that allows us to expand into geographically
contiguous markets and operate in relatively small communities that larger competitors may not find
attractive. We believe that this structure gives us a strategic competitive advantage, given the
relatively rural nature of much of the Western and Southern U.S., and makes us an attractive buyer
to many potential acquisition candidates.
1
We currently deliver our services from approximately 165 operating locations grouped into
three regions. We manage and evaluate our business on the basis of the regions geographic
characteristics, interstate waste flow, revenue base, employee base, regulatory structure and
acquisition opportunities. Each region has a regional vice president and a regional controller,
reporting directly to our corporate management. These regional officers are responsible for
operations and accounting in their regions and supervise their regional staff. See Note 14 to the
consolidated financial statements for segment information related to our operations.
Each operating location has a district or site manager who has a high degree of autonomous
service and decision-making authority for his or her operations and is responsible for maintaining
service quality, promoting safety, implementing marketing programs and overseeing day-to-day
operations, including contract administration. Local managers also help identify acquisition
candidates and are responsible for integrating acquired businesses into our operations and
obtaining the permits and other governmental approvals required for us to operate.
Implement Operating Standards. We develop company-wide operating standards, which are
tailored for each of our markets based on industry norms and local conditions. We implement cost
controls and employee training and safety procedures and establish a sales and marketing plan for
each market. By internalizing the waste stream of acquired operations, we can further increase
operating efficiencies and improve capital utilization. We use a wide-area information system
network, implement financial controls and consolidate certain accounting, personnel and customer
service functions. While regional and district management operate with a high degree of autonomy,
our senior officers monitor regional and district operations and require adherence to our
accounting, purchasing, marketing and internal control policies, particularly with respect to
financial matters. Our executive officers regularly review the performance of regional officers,
district managers and operations. We believe we can improve the profitability of existing and
newly acquired operations by establishing operating standards, closely monitoring performance and
streamlining certain administrative functions.
Our Growth Strategy
We tailor the components of our growth strategy to the markets in which we operate and into
which we hope to expand.
Obtain Additional Exclusive Arrangements. Our operations include market areas where
we have exclusive arrangements, including franchise agreements, municipal contracts and
governmental certificates, under which we are the exclusive service provider for a specified
market. These exclusive rights and contractual arrangements create a barrier to entry that is
usually obtained through the acquisition of a company with such exclusive rights or contractual
arrangements or by a competitive bid.
We devote significant resources to securing additional franchise agreements and municipal
contracts through competitive bidding and by acquiring other companies. In bidding for franchises
and municipal contracts and evaluating acquisition candidates holding governmental certificates,
our management team draws on its experience in the waste industry and knowledge of local service
areas in existing and target markets. Our district management and sales and marketing personnel
maintain relationships with local governmental officials within their service areas, maintain,
renew and renegotiate existing franchise agreements and municipal contracts, and secure additional
agreements and contracts while targeting acceptable financial returns. Our sales and marketing
personnel also expand our presence into areas adjacent to or contiguous with our existing markets,
and market additional services to existing customers. We believe our ability to offer
comprehensive rail haul disposal services in the Pacific Northwest improves our competitive
position in bidding for such contracts in that region.
Generate Internal Growth. To generate internal revenue growth, our district
management and sales and marketing personnel focus on increasing market penetration in our current
and adjacent markets, soliciting new residential, commercial and industrial customers in markets
where such customers have the option to choose a particular waste collection service and marketing
upgraded or additional services (such as compaction or automated collection) to existing
customers. We also focus on raising prices and instituting surcharges, when appropriate, to offset
cost increases. Where possible, we intend to leverage our franchise-based platforms to expand our
customer base beyond our exclusive market territories. As customers are added in existing markets,
our revenue per routed truck increases, which generally increases our collection efficiencies and
profitability. In markets in which we have exclusive contracts, franchises and certificates, we
expect internal volume growth generally to track population and business growth.
Expand Through Acquisitions. We intend to expand the scope of our operations by
continuing to acquire solid waste companies in new markets and in existing or adjacent markets that
are combined with or tucked in to our existing operations. We focus our acquisition efforts on
markets that we believe provide significant growth opportunities for a well-capitalized market
entrant and where we can create economic and operational barriers to entry by new competitors.
This focus typically highlights markets in which we can either: (1) provide waste collection
services under exclusive arrangements such as franchise agreements, municipal contracts and
governmental certificates; or (2) gain a leading market position and provide vertically integrated
collection and disposal services. We believe that our experienced management, decentralized
operating strategy, financial strength, size and public company status make us
an attractive buyer to certain solid waste collection and disposal acquisition candidates. We
have developed an acquisition discipline based on a set of financial, market and management
criteria to evaluate opportunities. Once an acquisition is closed, we seek to integrate it while
minimizing disruption to the ongoing operations of both Waste Connections and the acquired
business.
2
In new markets, we often use an initial acquisition as an operating base and seek to
strengthen the acquired operations presence in that market by providing additional services,
adding new customers and making tuck-in acquisitions of other solid waste companies in that
market or adjacent markets. We believe that many suitable tuck-in acquisition opportunities
exist within our current and targeted market areas that may provide us with opportunities to
increase our market share and route density.
The U.S. solid waste services industry experienced significant consolidation during the
1990s. The consolidation trend has continued, most notably with the merger between Republic
Services, Inc. and Allied Waste Industries, Inc. in 2008. The solid waste services industry
remains regional in nature with acquisition opportunities available in selected markets. Some of
the remaining independent landfill and collection operators lack the capital resources, management
skills and/or technical expertise necessary to comply with stringent environmental and other
governmental regulations and compete with larger, more efficient, integrated operators. In
addition, many of the remaining independent operators may wish to sell their businesses to achieve
liquidity in their personal finances or as part of their estate planning. Due to the prevalence of
exclusive arrangements, we believe the Western markets contain the largest and most attractive
number of acquisition opportunities.
On November 3, 2008, we completed the acquisition of all of the outstanding capital stock of
Harold LeMay Enterprises, Incorporated for an aggregate purchase price of $210.9 million, which
amount included the assumption of $18.3 million of indebtedness. During the year ended
December 31, 2008, we completed 14 other acquisitions and acquired the remaining 49% interest in
Pierce County Recycling, Composting and Disposal, LLC and Pierce County Landfill Management, Inc.
(PCRCD), none of which individually or in the aggregate accounted for greater than 10% of our
total assets. During 2009, we completed the acquisition of 100% interests in certain operations
from Republic Services, Inc. and some of its subsidiaries and affiliates (Republic) for an
aggregate purchase price of $377.1 million. The operations were divested as a result of Republics
merger with Allied Waste Industries, Inc. During the year ended December 31, 2009, we completed
six other acquisitions, none of which individually or in the aggregate accounted for greater than
10% of our total assets.
SOLID WASTE SERVICES
Residential, Commercial and Industrial Collection Services
We serve approximately two million residential, commercial and industrial customers from
operations in 26 states. Our services are generally provided under one of the following
arrangements: (1) governmental certificates; (2) exclusive franchise agreements; (3) exclusive
municipal contracts; (4) residential subscriptions; (5) residential contracts; or (6) commercial
and industrial service agreements.
Governmental certificates, exclusive franchise agreements and exclusive municipal contracts
grant us rights to provide services within specified areas at established rates. Governmental
certificates, or G Certificates, are unique to the State of Washington. The Washington Utilities
and Transportation Commission, or the WUTC, awards G Certificates to solid waste collection service
providers in unincorporated areas and electing municipalities. These certificates typically grant
the holder the exclusive and perpetual right to provide specific residential, commercial and/or
industrial waste services in a defined territory at specified rates subject to divestiture and/or
cancellation by the WUTC on specified, limited grounds. Franchise agreements typically provide an
exclusive period of seven years or longer for a specified territory. These arrangements specify a
broad range of services to be provided, establish rates for the services and often give the service
provider a right of first refusal to extend the term of the agreement. Municipal contracts
typically provide a shorter service period and a more limited scope of services than franchise
agreements and generally require competitive bidding at the end of the contract term. We do not
expect that the loss of any current contracts in negotiation for renewal or contracts likely to
terminate in 2010 will have a material adverse effect on our revenues or cash flows. No single
contract or customer accounted for more than 10% of our total revenues at the consolidated or
reportable segment level for the years ended December 31, 2007, 2008 and 2009.
We provide residential solid waste services, other than those we perform under exclusive
arrangements, under contracts with homeowners associations, apartment owners, mobile home park
operators or on a subscription basis with individual households. We set base residential fees on a
contract basis primarily based on route density, the frequency and level of service, the distance
to the disposal or processing facility, weight and type of waste collected, type of equipment and
containers furnished, the cost of disposal or processing and prices charged by competitors in that
market for similar services. Collection fees are paid either by the municipalities from tax
revenues or directly by the residents receiving the services. We provide 20- to 96-gallon carts to
residential customers.
3
We provide commercial and industrial services, other than those we perform under exclusive
arrangements, under customer service agreements generally ranging from one to five years in
duration. We determine fees under these agreements by such factors as collection frequency, level
of service, route density, the type, volume and weight of the waste collected, type of equipment
and containers furnished, the distance to the disposal or processing facility, the cost of disposal
or processing and prices charged by competitors in our collection markets for similar services.
Collection of larger volumes of commercial and industrial waste streams generally helps improve our
operating efficiencies, and consolidation of these volumes allows us to negotiate more favorable
disposal prices. We provide one- to ten-cubic yard containers to commercial customers and ten- to
50-cubic yard containers to industrial customers. For an additional fee, we install on the
premises of large volume customers stationary compactors that compact waste prior to collection.
Landfill Disposal Services
We generally own solid waste landfills to achieve vertical integration in markets where the
economic and regulatory environments make landfill ownership attractive. We also own landfills in
certain markets where we do not provide collection services because we believe that the waste
volume generated in these markets makes landfill ownership attractive. Where our operations are
vertically integrated, we eliminate third-party disposal costs and generally realize higher margins
and stronger operating cash flows. The fees charged at disposal facilities, which are known as
tipping fees, are based on market factors and take into account the type and weight or volume of
solid waste deposited and the type and size of the vehicles used to transport waste.
Our landfill facilities consisted of the following at December 31, 2009:
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Owned and operated landfills |
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34 |
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Operated landfills under limited-term operating agreements |
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6 |
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Operated landfills under life-of-site agreements |
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3 |
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43 |
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We own landfills in California, Colorado, Illinois, Kansas, Kentucky, Michigan, Minnesota,
Mississippi, Nebraska, New Mexico, North Carolina, Oklahoma, Oregon, South Carolina, Tennessee,
Texas and Washington. In addition, we operate, but do not own, landfills in California,
Mississippi, Nebraska and New Mexico. With the exception of two landfills located in Mississippi
and Colorado, which only accept construction and demolition waste, all landfills that we own or
operate are municipal solid waste landfills.
Under landfill operating agreements, the owner of the property, generally a municipality,
usually owns the permit and we operate the landfill for a contracted term, which may be the life of
the landfill. Where the contracted term is not the life of the landfill, the property owner is
generally responsible for final capping, closure and post-closure obligations. We are responsible
for all final capping, closure and post-closure obligations at the three operated landfills for
which we have life-of-site agreements. Five of our six operating contracts for which the
contracted term is less than the life of the landfill have expiration dates from 2012 to 2018, with
the remaining contract operated on a month-to-month basis. For all other operated
landfills under limited-term operating agreements, we intend to seek renewal of these contracts
prior to, or upon, their expiration.
Based on remaining permitted capacity as of December 31, 2009, and projected annual disposal
volumes, the average remaining landfill life for our owned and operated landfills and landfills
operated, but not owned, under life-of-site agreements, is estimated to be approximately 42 years.
Many of our existing landfills have the potential for expanded disposal capacity beyond the amount
currently permitted. We regularly consider whether it is advisable, in light of changing market
conditions and/or regulatory requirements, to seek to expand or change the permitted waste streams
or to seek other permit modifications. We also monitor the available permitted in-place disposal
capacity of our landfills on an ongoing basis and evaluate whether to seek capacity expansion. In
making this evaluation, we consider various factors, including the following:
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whether the land where the expansion is being sought is contiguous to the current
disposal site, and whether we either own it or the property is under an option, purchase,
operating or other similar agreement; |
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whether total development costs, final capping costs, and closure/post-closure costs have
been determined; |
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whether internal personnel have performed a financial analysis of the proposed expansion
site and have determined that it has a positive financial and operational impact; |
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whether internal personnel or external consultants are actively working to obtain the
necessary approvals to obtain the landfill expansion permit; and |
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whether we consider it probable that we will achieve the expansion (for a pursued
expansion to be considered probable, there must be no significant known technical, legal,
community, business or political restrictions or similar issues existing that could impair
the success of the expansion). |
4
We are currently seeking to expand permitted capacity at eight of our landfills for which we
consider expansions to be probable. Although we cannot be certain that all future expansions will
be permitted as designed, the average remaining landfill life for our owned and operated landfills
and landfills operated, but not owned, under life-of-site agreements is estimated to be
approximately 52 years when considering remaining permitted capacity, probable expansion capacity
and projected annual disposal volume.
The following table reflects estimated landfill capacity and airspace changes, as measured in
tons, for owned and operated landfills and landfills operated, but not owned, under life-of-site
agreements (in thousands):
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2008 |
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2009 |
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Probable |
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Probable |
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Permitted |
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Expansion |
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Total |
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Permitted |
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Expansion |
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Total |
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Balance, beginning of year |
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401,095 |
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28,430 |
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429,525 |
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400,380 |
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36,858 |
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437,238 |
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Acquired landfills |
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5,100 |
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5,100 |
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132,892 |
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82,703 |
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215,595 |
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Permits granted |
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7,028 |
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(7,028 |
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Airspace consumed |
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(8,320 |
) |
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(8,320 |
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(10,914 |
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(10,914 |
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Pursued expansions |
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15,456 |
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15,456 |
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Changes in engineering
estimates |
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(4,523 |
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(4,523 |
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1,755 |
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(334 |
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1,421 |
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Balance, end of year |
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400,380 |
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36,858 |
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437,238 |
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524,113 |
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119,227 |
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643,340 |
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The estimated remaining operating lives for the landfills we own and landfills we operate
under life-of-site agreements, based on remaining permitted and probable expansion capacity and
projected annual disposal volume, in years, as of December 31, 2008, and December 31, 2009, are
shown in the tables below. The estimated remaining operating lives include assumptions that the
operating permits are renewed.
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2008 |
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0 to 5 |
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6 to 10 |
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11 to 20 |
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21 to 40 |
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41 to 50 |
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51+ |
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Total |
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Owned and operated landfills |
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1 |
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5 |
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7 |
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2 |
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12 |
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27 |
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Operated landfills under
life-of-site agreements |
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2 |
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1 |
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3 |
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1 |
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5 |
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9 |
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3 |
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12 |
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30 |
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2009 |
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0 to 5 |
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6 to 10 |
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11 to 20 |
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21 to 40 |
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41 to 50 |
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51+ |
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Total |
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Owned and operated landfills |
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1 |
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1 |
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5 |
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8 |
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4 |
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15 |
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34 |
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Operated landfills under
life-of-site agreements |
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2 |
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1 |
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3 |
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1 |
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|
1 |
|
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|
5 |
|
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|
10 |
|
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|
5 |
|
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|
15 |
|
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|
37 |
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5
The disposal tonnage that we received in 2008 and 2009 at all of our landfills is shown in the
tables below (tons in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
Twelve months |
|
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
2008 |
|
|
ended |
|
|
|
Number |
|
|
Total |
|
|
Number |
|
|
Total |
|
|
Number |
|
|
Total |
|
|
Number |
|
|
Total |
|
|
December 31, |
|
|
|
of Sites |
|
|
Tons |
|
|
of Sites |
|
|
Tons |
|
|
of Sites |
|
|
Tons |
|
|
of Sites |
|
|
Tons |
|
|
2008 |
|
Owned landfills
and landfills
operated under
life-of-site
agreements |
|
|
29 |
|
|
|
1,972 |
|
|
|
29 |
|
|
|
2,204 |
|
|
|
29 |
|
|
|
2,235 |
|
|
|
30 |
|
|
|
1,909 |
|
|
|
8,320 |
|
Operated landfills |
|
|
7 |
|
|
|
222 |
|
|
|
7 |
|
|
|
236 |
|
|
|
7 |
|
|
|
236 |
|
|
|
7 |
|
|
|
211 |
|
|
|
905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36 |
|
|
|
2,194 |
|
|
|
36 |
|
|
|
2,440 |
|
|
|
36 |
|
|
|
2,471 |
|
|
|
37 |
|
|
|
2,120 |
|
|
|
9,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
Twelve months |
|
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
ended |
|
|
|
Number |
|
|
Total |
|
|
Number |
|
|
Total |
|
|
Number |
|
|
Total |
|
|
Number |
|
|
Total |
|
|
December 31, |
|
|
|
of Sites |
|
|
Tons |
|
|
of Sites |
|
|
Tons |
|
|
of Sites |
|
|
Tons |
|
|
of Sites |
|
|
Tons |
|
|
2009 |
|
Owned landfills
and landfills
operated under
life-of-site
agreements |
|
|
30 |
|
|
|
1,954 |
|
|
|
37 |
|
|
|
2,950 |
|
|
|
37 |
|
|
|
3,018 |
|
|
|
37 |
|
|
|
2,992 |
|
|
|
10,914 |
|
Operated landfills |
|
|
7 |
|
|
|
203 |
|
|
|
7 |
|
|
|
223 |
|
|
|
7 |
|
|
|
165 |
|
|
|
6 |
|
|
|
141 |
|
|
|
732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37 |
|
|
|
2,157 |
|
|
|
44 |
|
|
|
3,173 |
|
|
|
44 |
|
|
|
3,183 |
|
|
|
43 |
|
|
|
3,133 |
|
|
|
11,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer Station Services
We have an active program to acquire, develop, own and operate transfer stations in markets
proximate to our collection operations. Transfer stations receive, compact and load solid waste to
be transported to landfills via truck, rail or barge. Transfer stations extend our direct-haul
reach and link collection operations with distant disposal facilities. We owned or operated
55 transfer stations at December 31, 2009. Currently, we own transfer stations in California,
Colorado, Kansas, Kentucky, Montana, Nebraska, North Carolina, Oklahoma, Oregon, South Carolina,
Tennessee, Texas and Washington. In addition, we operate, but do not own, transfer stations in
Idaho, Kentucky, Nebraska, Tennessee, Washington and Wyoming. We believe that transfer stations
benefit us by:
|
|
|
concentrating the waste stream from a wider area, which increases the volume of disposal
at our landfill facilities and gives us greater leverage in negotiating more favorable
disposal rates at other landfills; |
|
|
|
|
improving utilization of collection personnel and equipment; and |
|
|
|
|
building relationships with municipalities and private operators that deliver waste,
which can lead to additional growth opportunities. |
Recycling Services
We offer residential, commercial, industrial and municipal customers recycling services for a
variety of recyclable materials, including cardboard, office paper, plastic containers, glass
bottles and ferrous and aluminum metals. We own or operate 37 recycling processing operations and
sell other collected recyclable materials to third parties for processing before resale. The
majority of the recyclables we process for sale are paper products and are shipped to customers in
Asia. Changes in end market demand can cause fluctuations in the prices for such commodities,
which can affect revenue, operating income and cash flows. Certain of our municipal recycling
contracts in Washington specify certain benchmark resale prices for recycled commodities. To the
extent the prices we actually receive for the processed recycled commodities collected under those
contracts exceed the prices specified in the contracts, we share the excess with the municipality,
after recovering any previous shortfalls resulting from actual market prices falling below the
prices specified in the contracts. To reduce our exposure to commodity price volatility and 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. We believe that recycling will
continue to be an important component of local and state solid waste management plans due to the
publics increasing environmental awareness and expanding regulations that mandate or encourage
recycling.
6
INTERMODAL SERVICES
Intermodal logistics is the movement of containers using two or more modes of transportation,
usually including a rail or truck segment. We entered the intermodal services business in the
Pacific Northwest through the acquisition of Northwest Container
Services, Inc., which provides repositioning, storage, maintenance and repair of cargo
containers for international shipping companies. We provide these services for containerized cargo
primarily to international shipping companies importing and exporting goods through the Pacific
Northwest. We also operate two intermodal facilities primarily for the shipment of waste by rail
to distant disposal facilities that are not owned or operated by Waste Connections. As of
December 31, 2009, we owned or operated six intermodal operations in Washington and Oregon. Our
fleet of double-stack railcars provides dedicated direct-line haul services among terminals in
Portland, Tacoma and Seattle. We have contracts with the Burlington Northern Santa Fe and Union
Pacific railroads for the movement of containers among our six intermodal operations. We also
provide our customers container and chassis sales and leasing services.
We intend to further expand our intermodal business through cross-selling efforts with our
solid waste services operations. We believe that a significant amount of solid waste is
transported currently by truck, rail and barge from primarily the Seattle-Tacoma and Metro Portland
areas to remote landfills in Eastern Washington and Eastern Oregon. We believe our ability to
market both intermodal and disposal services will enable us to more effectively compete for these
volumes.
COMPETITION
The solid waste services industry is highly competitive and requires substantial labor and
capital resources. In addition to us, the industry includes: two national, publicly-held solid
waste companies Waste Management, Inc. and Republic Services, Inc.; several regional,
publicly-held and privately-owned companies; and several thousand small, local, privately-owned
companies. Certain of the markets in which we compete or will likely compete are served by one or
more large, national solid waste companies, as well as by numerous regional and local solid waste
companies of varying sizes and resources, some of which we believe have accumulated substantial
goodwill in their markets. We also compete with operators of alternative disposal facilities,
including incinerators, and with counties, municipalities and solid waste districts that maintain
their own waste collection and disposal operations. Public sector operators may have financial
advantages over us because of their access to user fees and similar charges, tax revenues and
tax-exempt financing.
We compete for collection, transfer and disposal volume based primarily on the price and, to a
lesser extent, quality of our services. From time to time, competitors may reduce the price of
their services in an effort to expand their market shares or service areas or to win competitively
bid municipal contracts. These practices may cause us to reduce the price of our services or, if
we elect not to do so, to lose business. We provide a significant amount of our residential,
commercial and industrial collection services under exclusive franchise and municipal contracts and
G Certificates. Exclusive franchises and municipal contracts may be subject to periodic
competitive bidding.
The U.S. solid waste services industry has undergone significant consolidation, and we
encounter competition in our efforts to acquire collection operations, transfer stations and
landfills. We generally compete for acquisition candidates with publicly-owned regional and
national waste management companies. Accordingly, it may become uneconomical for us to make
further acquisitions or we may be unable to locate or acquire suitable acquisition candidates at
price levels and on terms and conditions that we consider appropriate, particularly in markets we
do not already serve. Competition in the disposal industry is also affected by the increasing
national emphasis on recycling and other waste reduction programs, which may reduce the volume of
waste deposited in landfills.
The intermodal services industry is also highly competitive. We compete against other
intermodal rail services companies, trucking companies and railroads, many of which have greater
financial and other resources than we do. Competition is based primarily on price, reliability and
quality of service.
REGULATION
Introduction
Our operations, including landfills, solid waste transportation, transfer stations, intermodal
operations, vehicle maintenance shops and fueling facilities are all subject to extensive and
evolving federal, state and local environmental laws and regulations, the enforcement of which has
become increasingly stringent. The environmental regulations that affect us are administered by
the Environmental Protection Agency, or the EPA, and other federal, state and local environmental,
zoning, health and safety agencies. The WUTC regulates the portion of our collection business in
Washington performed under G Certificates. We currently comply in all material respects with
applicable federal, state and local environmental laws, permits, orders and regulations. In
addition, we attempt to anticipate future regulatory requirements and plan in advance as necessary
to comply with them. We do not presently anticipate incurring any material costs to bring our
operations into environmental compliance with existing or expected future regulatory requirements,
although we can give no assurance that this will not change in the future.
7
The principal federal, state and local statutes and regulations that apply to our operations
are described below. Certain of the statutes described below contain provisions that authorize,
under certain circumstances, lawsuits by private citizens to enforce the provisions of the
statutes. In addition to penalties, some of those statutes authorize an award of attorneys fees
to parties that successfully bring such an action. Enforcement actions under these statutes may
include both civil and criminal penalties, as well as injunctive relief in some instances.
The Resource Conservation and Recovery Act of 1976, or RCRA
RCRA regulates the generation, treatment, storage, handling, transportation and disposal of
solid waste and requires states to develop programs to ensure the safe disposal of solid waste.
RCRA divides solid waste into two groups, hazardous and nonhazardous. Wastes are generally
classified as hazardous if they either: (1) are specifically included on a list of hazardous
wastes; or (2) exhibit certain characteristics defined as hazardous. Household wastes are
specifically designated as nonhazardous. Wastes classified as hazardous under RCRA are subject to
much stricter regulation than wastes classified as nonhazardous, and businesses that deal with
hazardous waste are subject to regulatory obligations in addition to those imposed on handlers of
nonhazardous waste. From time to time, our intermodal services business transports hazardous
materials in compliance with federal transportation requirements. Some of our ancillary
operations, such as vehicle maintenance operations, may generate hazardous wastes. We manage these
wastes in substantial compliance with applicable laws.
In October 1991, the EPA adopted the Subtitle D Regulations governing solid waste landfills.
The Subtitle D Regulations, which generally became effective in October 1993, include location
restrictions, facility design standards, operating criteria, closure and post-closure requirements,
financial assurance requirements, groundwater monitoring requirements, groundwater remediation
standards and corrective action requirements. In addition, the Subtitle D Regulations require that
new landfill sites meet more stringent liner design criteria (typically, composite soil and
synthetic liners or two or more synthetic liners) intended to keep leachate out of groundwater and
have extensive collection systems to carry away leachate for treatment prior to disposal.
Groundwater monitoring wells must also be installed at virtually all landfills to monitor
groundwater quality and, indirectly, the effectiveness of the leachate collection system. The
Subtitle D Regulations also require, where certain regulatory thresholds are exceeded, that
facility owners or operators control emissions of methane gas generated at landfills in a manner
intended to protect human health and the environment. Each state is required to revise its
landfill regulations to meet these requirements or such requirements will be automatically imposed
by the EPA on landfill owners and operators in that state. Each state is also required to adopt
and implement a permit program or other appropriate system to ensure that landfills in the state
comply with the Subtitle D Regulations. Various states in which we operate or may operate in the
future have adopted regulations or programs as stringent as, or more stringent than, the Subtitle D
Regulations.
RCRA also regulates underground storage of petroleum and other regulated materials. RCRA
requires registration, compliance with technical standards for tanks, release detection and
reporting, and corrective action, among other things. Certain of our facilities and operations are
subject to these requirements.
The Federal Water Pollution Control Act of 1972, or the Clean Water Act
The Clean Water Act regulates the discharge of pollutants from a variety of sources, including
solid waste disposal sites and transfer stations, into waters of the United States. If run-off
from our owned or operated transfer stations or run-off or collected leachate from our owned or
operated landfills is discharged into streams, rivers or other surface waters, the Clean Water Act
would require us to apply for and obtain a discharge permit, conduct sampling and monitoring and,
under certain circumstances, reduce the quantity of pollutants in such discharge. Also, virtually
all landfills are required to comply with the EPAs storm water regulations issued in
November 1990, which are designed to prevent contaminated landfill storm water run-off from flowing
into surface waters. We believe that our facilities comply in all material respects with the Clean
Water Act requirements. Various states in which we operate or may operate in the future have been
delegated authority to implement the Clean Water Act permitting requirements, and some of these
states have adopted regulations that are more stringent than the federal Clean Water Act
requirements. For example, states often require permits for discharges that may impact ground
water as well as surface water.
8
The Comprehensive Environmental Response, Compensation, and Liability Act of 1980, or CERCLA
CERCLA established a regulatory and remedial program intended to provide for the investigation
and cleanup of facilities where or from which a release of any hazardous substance into the
environment has occurred or is threatened. CERCLAs primary mechanism for remedying such problems
is to impose strict joint and several liability for cleanup of facilities on current owners and
operators of the site, former owners and operators of the site at the time of the disposal of the
hazardous substances, any person who arranges for the transportation, disposal or treatment of the
hazardous substances, and the transporters who select the disposal and treatment facilities,
regardless of the care exercised by such persons. CERCLA also imposes liability for the cost of
evaluating and
remedying any damage to natural resources. The costs of CERCLA investigation and cleanup can
be very substantial. Liability under CERCLA does not depend on the existence or disposal of
hazardous waste as defined by RCRA; it can also be based on the release of even very small
amounts of the more than 700 hazardous substances listed by the EPA, many of which can be found
in household waste. In addition, the definition of hazardous substances in CERCLA incorporates
substances designated as hazardous or toxic under the federal Clean Water Act, Clear Air Act and
Toxic Substances Control Act. If we were found to be a responsible party for a CERCLA cleanup, the
enforcing agency could hold us, or any other generator, transporter or the owner or operator of the
contaminated facility, responsible for all investigative and remedial costs, even if others were
also liable. CERCLA also authorizes the imposition of a lien in favor of the United States on all
real property subject to, or affected by, a remedial action for all costs for which a party is
liable. Subject to certain procedural restrictions, CERCLA gives a responsible party the right to
bring a contribution action against other responsible parties for their allocable shares of
investigative and remedial costs. Our ability to obtain reimbursement from others for their
allocable shares of such costs would be limited by our ability to find other responsible parties
and prove the extent of their responsibility, their financial resources, and other procedural
requirements. Various state laws also impose strict joint and several liability for investigation,
cleanup and other damages associated with hazardous substance releases.
The Clean Air Act
The Clean Air Act generally, through state implementation of federal requirements, regulates
emissions of air pollutants from certain landfills based on factors such as the date of the
landfill construction and tons per year of emissions of regulated pollutants. Larger landfills and
landfills located in areas where the ambient air does not meet certain requirements of the Clean
Air Act may be subject to even more extensive air pollution controls and emission limitations. In
addition, the EPA has issued standards regulating the disposal of asbestos-containing materials.
Air permits may be required to construct gas collection and flaring systems and composting
operations, and operating permits may be required, depending on the potential air emissions. State
air regulatory programs may implement the federal requirements but may impose additional
restrictions. For example, some state air programs uniquely regulate odor and the emission of
toxic air pollutants.
Climate Change Laws and Regulations
On September 27, 2006, California enacted AB32, the Global Warming Solutions Act of 2006,
which established the first statewide program in the United States to limit greenhouse gas, or GHG,
emissions and impose penalties for non-compliance. Since then, the California Air Resources Board
has taken and plans to take various actions to implement the program, including the approval on
December 11, 2008, of an AB32 Scoping Plan summarizing the main GHG-reduction strategies for
California.
Because landfill and collection operations emit GHG, our operations in California are subject
to regulations issued under AB32. These regulations increase our costs for those operations. If
we are unable to pass such higher costs through to our customers, our business, financial condition
and operating results could be adversely affected.
Climate change laws and regulations could also affect our non-California operations. For
example, Californias AB32 Scoping Plan described above recommends a GHG cap and trade system in
conjunction with the Western Climate Initiative, which currently includes seven states and four
Canadian provinces.
In 2009, the EPA made an endangerment finding allowing carbon dioxide to be regulated under
the Clean Air Act. This finding allows the EPA to create regulations that will impact our
operations. The materiality of the impacts will not be known until the regulations are
promulgated. We believe this will occur in late 2010, with implementation dates in 2011 or
beyond.
The Occupational Safety and Health Act of 1970, or the OSH Act
The OSH Act is administered by the Occupational Safety and Health Administration, or OSHA, and
many state agencies whose programs have been approved by OSHA. The OSH Act establishes employer
responsibilities for worker health and safety, including the obligation to maintain a workplace
free of recognized hazards likely to cause death or serious injury, comply with adopted worker
protection standards, maintain certain records, provide workers with required disclosures and
implement certain health and safety training programs. Various OSHA standards may apply to our
operations, including standards concerning notices of hazards, safety in excavation and demolition
work, the handling of asbestos and asbestos-containing materials and worker training and emergency
response programs.
9
Flow Control/Interstate Waste Restrictions
Certain permits and approvals and state and local regulations may limit a landfills or
transfer stations ability to accept waste that originates from specified geographic areas, import
out-of-state waste or wastes originating outside the local jurisdictions or otherwise
discriminate against non-local waste. These restrictions, generally known as flow control
restrictions, are controversial, and some courts have held that some state and local flow control
schemes violate constitutional limits on state or local regulation of interstate commerce, while
other state and local flow control schemes do not. Certain state and local jurisdictions may seek
to enforce flow control restrictions through local legislation or contractually. These actions
could limit or prohibit the importation of out-of-state waste or direct that wastes be handled at
specified facilities. Such actions could adversely affect our transfer stations and landfills.
These restrictions could also result in higher disposal costs for our collection operations. If we
were unable to pass such higher costs through to our customers, our business, financial condition
and operating results could be adversely affected.
State and Local Regulations
Each state in which we now operate or may operate in the future has laws and regulations
governing the generation, storage, treatment, handling, transportation and disposal of solid waste,
occupational safety and health, water and air pollution and, in most cases, the siting, design,
operation, maintenance, closure and post-closure maintenance of landfills and transfer stations.
State and local permits and approval for these operations may be required and may be subject to
periodic renewal, modification or revocation by the issuing agencies. In addition, many states
have adopted statutes comparable to, and in some cases more stringent than, CERCLA. These statutes
impose requirements for investigation and cleanup of contaminated sites and liability for costs and
damages associated with such sites, and some provide for the imposition of liens on property owned
by responsible parties.
Many municipalities also have enacted or could enact ordinances, local laws and regulations
affecting our operations. These include zoning and health measures that limit solid waste
management activities to specified sites or activities, flow control provisions that direct or
restrict the delivery of solid wastes to specific facilities, laws that grant the right to
establish franchises for collection services and bidding for such franchises, and bans or other
restrictions on the movement of solid wastes into a municipality.
Various jurisdictions have enacted fitness regulations which allow agencies with authority
over waste service contracts or permits to deny or revoke such contracts or permits based on the
compliance history of the provider. Some jurisdictions also consider the compliance history of the
parent, subsidiaries, or affiliated companies of the provider in making these decisions.
Permits or other land use approvals with respect to a landfill, as well as state or local laws
and regulations, may specify the quantity of waste that may be accepted at the landfill during a
given time period and/or the types of waste that may be accepted at the landfill. Once an
operating permit for a landfill is obtained, it generally must be renewed periodically.
There has been an increasing trend at the state and local level to mandate and encourage waste
reduction at the source and waste recycling, and to prohibit or restrict the disposal in landfills
of certain types of solid wastes, such as yard wastes, leaves, tires, computers and other
electronic equipment waste, and painted wood and other construction and demolition debris. The
enactment of regulations reducing the volume and types of wastes available for transport to and
disposal in landfills could prevent us from operating our facilities at their full capacity.
Some state and local authorities enforce certain federal requirements in addition to state and
local laws and regulations. For example, in some states, local or state authorities enforce
requirements of RCRA, the OSH Act and parts of the Clean Air Act and the Clean Water Act instead of
the EPA or OSHA, as applicable, and in some states such laws are enforced jointly by state or local
and federal authorities.
Public Utility Regulation
In some states, public authorities regulate the rates that landfill operators may charge. The
adoption of rate regulation or the reduction of current rates in states in which we own or operate
landfills could adversely affect our business, financial condition and operating results.
Solid waste collection services in all unincorporated areas of Washington and in electing
municipalities in Washington are provided under G Certificates awarded by the WUTC. In association
with the regulation of solid waste collection service levels in these areas, the WUTC also reviews
and approves rates for regulated solid waste collection and transportation service.
10
RISK MANAGEMENT, INSURANCE AND FINANCIAL SURETY BONDS
Risk Management
We maintain environmental and other risk management programs that we believe are appropriate
for our business. Our environmental risk management program includes evaluating existing
facilities and potential acquisitions for environmental law
compliance. We do not presently expect environmental compliance costs to increase materially
above current levels, but we cannot predict whether future acquisitions will cause such costs to
increase. We also maintain a worker safety program that encourages safe practices in the
workplace. Operating practices at our operations emphasize minimizing the possibility of
environmental contamination and litigation. Our facilities comply in all material respects with
applicable federal and state regulations.
Insurance
We have a high deductible insurance program for automobile liability, property, general
liability, workers compensation, employers liability claims, and employee group health
insurance. Our loss exposure for insurance claims is generally limited to per incident
deductibles. Losses in excess of deductible levels are insured subject to policy limits. Under
our current insurance program, we carry per incident deductibles of $2 million for automobile
liability claims, $1.5 million for workers compensation and employers liability claims,
$1 million ($2 million aggregate) for general liability claims, primarily $25,000 for property
claims and $250,000 for employee group health insurance. Additionally, we have umbrella policies
with third-party insurance companies for automobile liability, general liability and employers
liability that will pay, during the policy term, up to $50 million per incident in excess of the
$5 million limit for automobile claims and in excess of the $1.5 million limit for employers
liability claims and will pay up to an aggregate of $50 million in excess of the $2 million
aggregate limit for general liability claims. Since workers compensation is a statutory coverage
limited by the various state jurisdictions, the umbrella coverage is not applicable. Also, our
umbrella policy does not cover property claims, as the insurance limits for these claims are in
accordance with the replacement values of the insured property. 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.
We carry environmental protection insurance with coverage of $10 million per occurrence and a
$20 million aggregate limit, after we pay the $250,000 per incident deductible. This insurance
policy covers all owned or operated landfills, certain transfer stations and other facilities.
Subject to policy terms, insurance coverage is guaranteed for acquired and newly-constructed
facilities, but each addition to the policy is underwritten on a site-specific basis and the
premium is set according to the conditions found at the site. Our policy provides insurance for
new pollution conditions that originate after the commencement of our coverage. Pollution
conditions existing prior to the commencement of our coverage, if found, could be excluded from
coverage.
Financial Surety Bonds
We use financial surety bonds for a variety of corporate guarantees. The financial surety
bonds are primarily used for guaranteeing municipal contract performance and providing financial
assurances to meet final capping, landfill closure and post-closure obligations as required under
certain environmental regulations. In addition to surety bonds, such guarantees and obligations
may also be met through alternative financial assurance instruments, including insurance, letters
of credit and restricted asset deposits. At December 31, 2008 and 2009, we had provided customers
and various regulatory authorities with surety bonds in the aggregate amount of approximately
$113.3 million and $182.5 million, respectively, to secure our landfill final capping, closure and
post-closure requirements and $48.5 million and $90.6 million, respectively, to secure performance
under collection contracts and landfill operating agreements.
We own a 9.9% interest in a company that, among other activities, issues financial surety
bonds to secure final capping, landfill closure and post-closure obligations for companies
operating in the solid waste sector, including a portion of our own.
EMPLOYEES
At December 31, 2009, we employed 5,409 full-time employees, of which 680, or approximately
12.6% of our workforce, were employed under collective bargaining agreements, primarily with the
Teamsters Union. These employees are subject to labor agreements that are renegotiated
periodically. We have 10 collective bargaining agreements covering 288 employees that are already
expired or are set to expire during 2010. We do not expect any significant disruption in our
overall business in 2010 as a result of labor negotiations, employee strikes or organizational
efforts.
11
SEASONALITY
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. 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. Historically, the fluctuation in our revenues between
our highest and lowest quarters has been approximately 9% to 11%. However, due primarily to the
economic recession currently affecting the United States, we expect the fluctuation in our revenues
between our highest and lowest quarters in 2010 to be approximately 7% to 10%. 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.
12
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning our executive officers and key
employee as of February 9, 2010:
|
|
|
|
|
NAME |
|
AGE |
|
POSITIONS |
Ronald J. Mittelstaedt (1) |
|
46 |
|
Chief Executive Officer and Chairman |
Steven F. Bouck |
|
52 |
|
President |
Darrell W. Chambliss |
|
45 |
|
Executive Vice President and Chief Operating Officer |
Worthing F. Jackman |
|
45 |
|
Executive Vice President and Chief Financial Officer |
David M. Hall |
|
52 |
|
Senior Vice President Sales and Marketing |
James M. Little |
|
48 |
|
Senior Vice President Engineering and Disposal |
Eric M. Merrill |
|
57 |
|
Senior Vice President People, Safety and Development |
David G. Eddie |
|
40 |
|
Vice President Chief Accounting Officer |
Eric O. Hansen |
|
44 |
|
Vice President Chief Information Officer |
Jerri L. Hunt (2) |
|
58 |
|
Vice President Employee Relations |
Scott I. Schreiber |
|
53 |
|
Vice President Disposal Operations |
Patrick J. Shea |
|
39 |
|
Vice President, General Counsel and Secretary |
Richard K. Wojahn |
|
52 |
|
Vice President Business Development |
|
|
|
(1) |
|
Member of the Executive Committee of the Board of Directors. |
|
(2) |
|
Key employee. |
Ronald J. Mittelstaedt has been Chief Executive Officer and a director of Waste
Connections since the company was formed, and was elected Chairman in January 1998. Mr.
Mittelstaedt also served as President from Waste Connections formation through August 2004. Mr.
Mittelstaedt has more than 21 years of experience in the solid waste industry. Mr. Mittelstaedt
holds a B.A. degree in Business Economics with a finance emphasis from the University of California
at Santa Barbara.
Steven F. Bouck has been President of Waste Connections since September 1, 2004. From
February 1998 to that date, Mr. Bouck served as Executive Vice President and Chief Financial
Officer. Mr. Bouck held various positions with First Analysis Corporation from 1986 to 1998,
focusing on financial services to the environmental industry. Mr. Bouck holds B.S. and M.S.
degrees in Mechanical Engineering from Rensselaer Polytechnic Institute, and an M.B.A. in Finance
from the Wharton School.
Darrell W. Chambliss has been Executive Vice President and Chief Operating Officer of Waste
Connections since October 2003. From October 1, 1997 to that date, Mr. Chambliss served as
Executive Vice President Operations. Mr. Chambliss has more than 20 years of experience in the
solid waste industry. Mr. Chambliss holds a B.S. degree in Business Administration from the
University of Arkansas.
Worthing F. Jackman has been Executive Vice President and Chief Financial Officer of Waste
Connections since September 1, 2004. From April 2003 to that date, Mr. Jackman served as Vice
President Finance and Investor Relations. Mr. Jackman held various investment banking positions
with Alex. Brown & Sons, now Deutsche Bank Securities, Inc., from 1991 through 2003, including most
recently as a Managing Director within the Global Industrial & Environmental Services Group. In
that capacity, he provided capital markets and strategic advisory services to companies in a
variety of sectors, including solid waste services. Mr. Jackman serves as a director for Quanta
Services, Inc. He holds a B.S. degree in Finance from Syracuse University and an M.B.A. from the
Harvard Business School.
David M. Hall has been Senior Vice President Sales and Marketing of Waste Connections since
October 2005. From August 1998 to that date, Mr. Hall served as Vice President Business
Development. Mr. Hall has more than 22 years of experience in the solid waste industry with
extensive operating and marketing experience in the Western U.S. Mr. Hall received a B.S. degree
in Management and Marketing from Missouri State University.
James M. Little has been Senior Vice President Engineering and Disposal of Waste Connections
since February 2009. From September 1999 to that date, Mr. Little served as Vice President
Engineering. Mr. Little held various management positions with Waste Management, Inc. (formerly
USA Waste Services, Inc., which acquired Waste Management, Inc. and Chambers Development Co. Inc.)
from April 1990 to September 1999, including Regional Environmental Manager and Regional Landfill
Manager, and most recently Division Manager in Ohio, where he was responsible for the operations of
ten operating companies in the Northern Ohio area. Mr. Little is a certified professional
geologist and holds a B.S. degree in Geology from Slippery Rock University.
Eric M. Merrill has been Senior Vice President People, Safety and Development of Waste
Connections since January 2009. From June 2007 to that date, Mr. Merrill served as Senior Vice
President People, Training and Development. Mr. Merrill joined us
in 1998 and since 2000 had served as Regional Vice President Pacific Northwest Region. Mr.
Merrill has over 21 years of experience in the solid waste industry. He holds a B.S. degree in
Accounting from the University of Oregon.
13
David G. Eddie has been Vice President Chief Accounting Officer of Waste Connections since
February 2010. From March 2004 to that date, Mr. Eddie served as Vice President Corporate
Controller. From April 2003 to March 2004, Mr. Eddie served as Vice President Public Reporting
and Compliance. From May 2001 to March 2003, Mr. Eddie served as Director of Finance. Mr. Eddie
served as Corporate Controller for International FiberCom, Inc. from April 2000 to May 2001. From
September 1999 to April 2000, Mr. Eddie served as Waste Connections Manager of Financial
Reporting. From September 1994 to September 1999, Mr. Eddie held various positions, including
Audit Manager, for PricewaterhouseCoopers LLP. Mr. Eddie is a Certified Public Accountant and
holds a B.S. degree in Accounting from California State University, Sacramento.
Eric O. Hansen has been Vice President Chief Information Officer of Waste Connections since
July 2004. From January 2001 to that date, Mr. Hansen served as Vice President Information
Technology. From April 1998 to December 2000, Mr. Hansen served as Director of Management
Information Systems. Mr. Hansen holds a B.S. degree from Portland State University.
Jerri L. Hunt has been Vice President Employee Relations of Waste Connections since June
2007. Ms. Hunt previously served as Vice President Human Resources from May 2002 to June 2007,
and as Vice President Human Resources and Risk Management from December 1999 to April 2002. From
1994 to 1999, Ms. Hunt held various positions with First Union National Bank (including the Money
Store, which was acquired by First Union National Bank), most recently Vice President of Human
Resources. From 1989 to 1994, Ms. Hunt served as Manager of Human Resources and Risk Management
for Browning-Ferris Industries, Inc. Ms. Hunt also served as a Human Resources Supervisor for
United Parcel Service from 1976 to 1989. She holds a B.S. degree from California State University,
Sacramento, and a Masters degree in Human Resources from Golden Gate University.
Scott I. Schreiber has been Vice President Disposal Operations of Waste Connections since
February 2009. From October 1998 to that date, Mr. Schreiber served as Director of Landfill
Operations. Mr. Schreiber has more than 30 years of experience in the solid waste industry. From
September 1993 to September 1998, Mr. Schreiber served as corporate Director of Landfill
Development and corporate Director of Environmental Compliance for Allied Waste Industries, Inc.
From August 1988 to September 1993, Mr. Schreiber served as Regional Engineer (Continental Region)
and corporate Director of Landfill Development for Laidlaw Waste Systems Inc. From June 1979 to
August 1988, Mr. Schreiber held several managerial and technical positions in the solid waste and
environmental industry. Mr. Schreiber holds a B.S. degree in Chemistry from the University of
Wisconsin at Parkside.
Patrick J. Shea has been Vice President, General Counsel and Secretary of Waste Connections
since February 2009. From February 2008 to that date, Mr. Shea served as General Counsel and
Secretary. He served as Corporate Counsel from February 2004 to February 2008. Mr. Shea practiced
corporate and securities law with Brobeck, Phleger & Harrison LLP in San Francisco from 1999 to
2003 and Winthrop, Stimson, Putnam & Roberts (now Pillsbury Winthrop Shaw Pittman LLP) in New York
and London from 1995 to 1999. Mr. Shea holds a B.S. degree in Managerial Economics from the
University of California at Davis and a J.D. degree from Cornell University.
Richard K. Wojahn has been Vice President Business Development of Waste Connections since
February 2009. From September 2005 to that date, Mr. Wojahn served as Director of Business
Development. Mr. Wojahn served as Vice President of Operations for Mountain Jack Environmental
Services, Inc. (which was acquired by Waste Connections in September 2005) from January 2004 to
September 2005. Mr. Wojahn has more than 26 years of experience in the solid waste industry having
held various management positions with Waste Management, Inc. and Allied Waste Industries, Inc.
Mr. Wojahn attended Western Illinois University.
AVAILABLE INFORMATION
Our corporate website address is http://www.wasteconnections.com. The information on
our website is not incorporated by reference in this annual report on Form 10-K. We make our
reports on Forms 10-K, 10-Q and 8-K and any amendments to such reports available on our website
free of charge as soon as reasonably practicable after we file them with or furnish them to the
Securities and Exchange Commission, or SEC. The public may read and copy any materials we file
with the SEC at the SECs Public Reference Room at 100 F Street, NE, Washington, DC, 20549. The
public may obtain information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an internet website at http://www.sec.gov that contains
reports, proxy and information statements, and other information regarding issuers that file
electronically with the SEC.
14
Certain statements contained in this Annual Report on Form 10-K are forward-looking in nature,
including statements related to our ability to provide adequate cash to fund our operating
activities, our ability to draw on our credit facility or raise additional capital, the impact of
global economic conditions on our business and results of operations, the effects of seasonality on
our business and results of operations, and our expectations with respect to the purchase of fuel
and fuel prices. 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. 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
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, customer base,
third party legal challenges or governmental actions. 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.
A portion of our growth and future financial performance depends 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.
Downturns in the worldwide economy adversely affect operating results.
Weakness in the worldwide economy has had, and may continue to have, a negative effect on our
operating results, including decreases in volume generally associated with the construction
industry, reduced personal consumption and declines in recycled commodity prices. In an economic
slowdown, we may also experience the negative effects of increased competitive pricing pressure,
customer turnover, and reductions in customer service requirements. Worsening economic conditions
or a prolonged or recurring economic recession could adversely affect our operating results and
expected seasonal fluctuations. 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 in 2010 to be approximately 7% to 10%. 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.
15
We may be subject in the normal course of business to judicial, administrative or other third
party proceedings that could interrupt or limit 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, citizens groups, trade associations or environmental activists may also bring actions
against us in connection with our operations that could interrupt or limit the scope of our
business. 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.
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, including
through the implementation of flow control ordinances or similar legislation. These operators may
have financial advantages over us because of their access to user fees and similar charges, tax
revenues and tax-exempt financing.
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
franchise agreements and municipal contracts are for a specified term and are or will be subject to
competitive bidding in the future. For example, we have approximately 339 contracts, representing
approximately 5.2% of our annual revenues, which are set for expiration or automatic renewal
through December 31, 2010. 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.
Governmental 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 and/or overlapping service. 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, 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.
16
Increases in the price of fuel may adversely affect our business and reduce our operating
margins.
The market price of fuel is volatile and rose substantially in recent years before falling
with the general economic downturn in late 2008, but again rose during 2009. We generally purchase
diesel fuel at market prices, and such prices have fluctuated significantly. A
significant increase in our fuel cost could adversely affect our business and reduce our
operating margins and reported earnings. To manage a portion of this risk, we have entered into
multiple fuel hedge agreements related to forecasted diesel fuel purchases as well as fixed-price
fuel purchase contracts. During periods of falling diesel fuel prices, our hedge payable positions
may increase and it may become more expensive to purchase fuel under our fixed-price fuel purchase
contracts than at market prices.
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 during periods of declining volumes, 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.
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. Furthermore, 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.
We could face significant withdrawal liability if we withdraw from participation in one or more
multiemployer pension plans in which we participate.
We participate in various multiemployer pension plans administered by employee and union
trustees. We make periodic contributions to these plans to allow them to meet their pension
benefit obligations to their participants. In the event that we withdraw from participation in one
of these plans, then applicable law could require us to make an additional lump-sum contribution to
the plan, and we would have to reflect that as an expense in our consolidated statement of
operations and as a liability on our consolidated balance sheet. Our withdrawal liability for any
multiemployer plan would depend on the extent of the plans funding of vested benefits. In the
ordinary course of our renegotiation of collective bargaining agreements with labor unions that
participate in these plans, we may decide to discontinue participation in a plan, and in that
event, we could face a withdrawal liability. Some multiemployer plans in which we participate may
have significant underfunded liabilities because of the general economic downturn that began in the
fourth quarter of 2008. Such underfunding could increase the size of our potential withdrawal
liability.
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, employers, environmental and
directors and officers liability as well as for employee group health insurance, property
insurance and workers compensation. We carry high deductible insurance policies for automobile
liability, property, general liability, workers compensation, employers liability and employee
group health insurance. We carry umbrella policies for certain types of claims to provide excess
coverage over the underlying policies and per incident deductibles. The 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.
17
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.
Additionally, given the turmoil in the global financial system in 2008 and 2009, our ability
to access the capital markets may be severely restricted at a time when we would like, or need, to
do so. While we expect we will be able to fund some of our acquisitions with our existing
resources, additional financing to pursue additional acquisitions may be required. However, if
current market conditions continue to persist, or deteriorate further, we may be unable to secure
additional financing or any such additional financing may be available to us on unfavorable terms,
which could have an impact on our flexibility to pursue additional acquisition opportunities and
maintain our desired level of revenue growth in the future. In addition, disruptions in the
capital and credit markets could adversely affect our ability to draw on our credit facility. Our
access to funds under the credit facility is dependent on the ability of the banks that are parties
to the facility to meet their funding commitments. Those banks may not be able to meet their
funding commitments if they experience shortages of capital and liquidity or if they experience
excessive volumes of borrowing requests within a short period of time.
Our indebtedness could adversely affect our financial condition; we may incur substantially
more debt in the future.
As of December 31, 2009, we had $870.2 million of total indebtedness outstanding. We may
incur substantial additional debt in the future. The incurrence of substantial additional
indebtedness could have important consequences to you. For example, it could:
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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 or refinancings at attractive rates; |
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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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limit our flexibility in planning for, or reacting to, changes in our business and the
industry; and |
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place us at a competitive disadvantage relative to our competitors with less debt. |
Each business that we acquire or have acquired may have liabilities or risks 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 or the sellers may not have sufficient funds to perform their obligations. 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. Additionally, there may be other risks of which we are
unaware that could have an adverse affect on businesses that we acquire or have acquired. For
example, interested parties may bring
actions against us in connection with operations that we acquire or have acquired. 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.
18
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. 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.
The financial soundness of our customers could affect our business and operating results.
As a result of the disruptions in the financial markets and other macro-economic challenges
currently affecting the economy of the United States and other parts of the world, our customers
may experience cash flow concerns. As a result, if customers operating and financial performance
deteriorates, or if they are unable to make scheduled payments or obtain credit, customers may not
be able to pay, or may delay payment of, accounts receivable owed to us. Any inability of current
and/or potential customers to pay us for services may adversely affect our financial condition,
results of operations and cash flows.
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.
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 trucking 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 landfill development projects. We expense indirect 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 and any landfill development
project that we do not expect to complete. For example, if we are unsuccessful in our attempts to
obtain or defend permits that we are seeking or have been awarded to operate landfills, we will be
required to expense in a future period the amount of capitalized expenditures, less the recoverable
value of the property and other
amounts recovered. Any such charges could have a material adverse effect on our results of
operations for that period and could decrease our stock price.
19
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, the new business combinations pronouncement, which became effective for us on January 1,
2009, changes how the purchase price is calculated and fair values are 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. Another example, the new
convertible debt pronouncement, which became effective for us on January 1, 2009, changes the
accounting for convertible debt and requires the liability and equity components to be accounted
for separately in a manner that will reflect the entitys nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. In addition, many companies accounting
policies are being subjected 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, the award of a permit or renewal
for a shorter duration than we believed was otherwise required by law, 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.
20
Future changes in laws or renewed enforcement of laws regulating the flow of solid waste in
interstate commerce could adversely affect our operating results.
Various states and local governments have enacted, or are considering enacting, laws and
regulations that restrict the disposal within the jurisdiction of solid waste generated outside the
jurisdiction. In addition, some state and local governments have
promulgated, or are considering promulgating, laws and regulations which govern the flow of
waste generated within their respective jurisdictions. Additionally, public interest and pressure
from competing industry segments has caused some trade associations and environmental activists to
seek enforcement of laws regulating the flow of solid waste that have not been recently enforced
and which, in at least one case, we believe are unconstitutional or otherwise unlawful. See
discussion regarding the Potrero Hills Landfill in Part I, Item 3, Legal Proceedings. If
successful, these groups may advocate for the enactment of similar laws in neighboring
jurisdictions through local ballot initiatives or otherwise. All such waste disposal laws and
regulations are subject to judicial interpretation and review. Court decisions, congressional
legislation, and state and local regulation in the waste disposal area could adversely affect our
operations.
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. Competing industry segments and other interested parties have sought enforcement of laws
that local jurisdictions have not recently enforced and which, in at least one case, we believe are
unconstitutional or otherwise unlawful. See discussion regarding the Potrero Hills Landfill in
Part I, Item 3, Legal Proceedings. If successful, such groups may advocate for the enactment of
similar laws in neighboring jurisdictions through local ballot initiatives or otherwise. 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, 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, the
restrictions they impose on, or the laws and regulations they enforce against, solid waste services
companies, and those changes could restrict our operations and growth.
Climate change regulations may adversely affect operating results.
Governmental authorities and various interest groups have promoted laws and regulations that
could limit greenhouse gas, or GHG, emissions due to concerns that GHG is contributing to climate
change. The State of California has already adopted a climate change law, and other states in
which we operate are considering similar actions. For example, California enacted AB32, the Global
Warming Solutions Act of 2006, which established the first statewide program in the United States
to limit GHG emissions and impose penalties for non-compliance. Since then, the California Air
Resources Board has taken and plans to take various actions to implement the program, including the
approval on December 11, 2008, of an AB32 Scoping Plan summarizing the main GHG-reduction
strategies for California. Because landfill and collection operations emit GHG, our operations in
California are subject to regulations issued under AB32. These regulations increase our costs for
those operations and adversely affect our operating results. Californias AB32 Scoping Plan
recommends a GHG cap and trade system in conjunction with the Western Climate Initiative, which
currently includes seven states, all of which we operate in, and four Canadian provinces. In
addition, the EPA made an endangerment finding in 2009 allowing carbon dioxide to be regulated
under the Clean Air Act. This finding allows the EPA to create regulations that will impact our
operations, although the materiality of the impacts will not be known until the regulations are
promulgated
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, closure and financial assurances 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.
Alternatives to landfill disposal may cause our revenues and operating results to decline.
Counties and municipalities in which we operate landfills may be required to formulate and
implement comprehensive plans to reduce the volume of solid waste deposited in landfills through
waste planning, composting, recycling or other programs. Some state and local governments prohibit
the disposal of certain types of wastes, such as yard waste, at landfills. Although such actions
are useful to protect our environment, these actions, as well as the actions of our customers to
reduce waste or seek disposal alternatives, have reduced and may in the future further reduce the
volume of waste going to landfills in certain areas, which may affect our ability to operate our
landfills at full capacity and could adversely affect our operating results.
21
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 majority of the recyclables we
process for sale are paper products that are shipped to customers in Asia. The sale prices of and
demands for recyclable commodities, particularly paper products, are frequently volatile and when
they decline, our revenues, operating results and cash flows will be affected. 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.
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.
|
|
|
ITEM 1B. |
|
UNRESOLVED STAFF COMMENTS |
None.
As of December 31, 2009, we owned 134 collection operations, 42 transfer stations,
32 municipal solid waste landfills, two construction and demolition landfills, 37 recycling
operations, and four intermodal operations and operated, but did not own, an additional 13 transfer
stations, nine municipal solid waste landfills and two intermodal operations within 26 states. We
lease certain of the sites on which these facilities are located. We lease various office
facilities, including our corporate offices in Folsom, California, where we occupy approximately
54,000 square feet of space. We also maintain regional administrative offices in each of our
regions. We own various equipment, including waste collection and transportation vehicles, related
support vehicles, double-stack rail cars, carts, containers, chassis and heavy equipment used in
landfill, collection, transfer station and intermodal operations. We believe that our existing
facilities and equipment are adequate for our current operations. However, we expect to make
additional investments in property and equipment for expansion and replacement of assets in
connection with future acquisitions.
|
|
|
ITEM 3. |
|
LEGAL PROCEEDINGS |
Our subsidiary, High Desert Solid Waste Facility, Inc. (formerly known as Rhino Solid Waste,
Inc.) (HDSWF), 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 Departments 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 was 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 communitys quality of life. The parties have agreed to postpone the
hearing until November 2010 at the earliest to allow us time to explore a possible relocation of
the landfill to the approximately 325 acres of undeveloped land HDSWF purchased from the State of
New Mexico in July 2009. HDSWF expects to file a formal landfill permit application in early 2010
with the Department in an effort to relocate the landfill to that property. At December 31, 2009,
we had $11.3 million of capitalized expenditures related to this landfill development project. If
we are not ultimately issued a permit to operate the landfill, we will be required to expense in a
future period the $11.3 million of capitalized expenditures, less the recoverable value of the
undeveloped property and other amounts recovered, which would likely have a material adverse effect
on our results of operations for that period.
22
We 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. The landfill has operated continuously since that time. On October 3, 2005,
landfill opponents filed a suit (Board of Commrs of Sumner County, Kansas, Tri-County Concerned
Citizens and Dalton Holland v. Roderick Bremby, Secy of the Kansas Dept of Health and Envt, et
al.) in the District Court of Shawnee County, Kansas, seeking a judicial review of KDHEs decision
to issue the permit, alleging that a site analysis
prepared for us 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 lacked standing to bring the
action. The plaintiffs appealed this decision to the Kansas Court of Appeals, and on October 12,
2007, the Court of Appeals issued an opinion reversing and remanding the District Courts
decision. We appealed the decision to the Kansas Supreme Court, 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. Plaintiffs filed a second amended petition on October 22, 2008,
and we filed a motion to strike various allegations contained within the second amended petition.
On July 2, 2009, the District Court granted in part and denied in part our motion to strike. The
District Court has also set a new briefing schedule, and it is anticipated that the briefing will
be completed during the first half of 2010. While we believe that we will prevail in this case,
the District Court could remand the matter back to KDHE for additional review of its decision or
could revoke the permit. An order of remand to KDHE would not necessarily affect our continued
operation of the landfill. Only in the event that a final adverse determination with respect to
the permit is received would there likely be a material adverse effect on our reported results of
operations in the future. We cannot estimate the amount of any such material adverse effect.
On January 15,
2009, a complaint captioned Heath Belcher and Denessa Arguello v. Waste
Connections, Inc., and Waste Connections of California, Inc. was filed in
the United States District Court for the Eastern District of California, naming
us and our subsidiary, Waste Connections of California, Inc., as defendants.
The complaint alleges violations under the Fair Labor Standards Act related to
overtime compensation, and alleges violations under California labor laws
related to overtime compensation, unpaid wages, meal and rest breaks, and wage
statements. The complaint also alleges violations under the California Unfair
Competition Law based on the foregoing alleged violations. The complaint seeks
class certification and various forms of relief, including declaratory
judgment, statutory penalties, unpaid back wages, liquidated damages,
restitution, interest, and attorneys’ fees and costs. We have responded
to the complaint and have contested liability. Following discovery, the named
plaintiffs elected to negotiate a settlement of their claims rather than move
the court for class certification. As a result, the two named
plaintiffs, as well as five additional individuals who had filed consents to
join the litigation, executed individual Settlement Approval and Release Forms.
On February 8, 2010, the parties’ counsel executed a
Stipulation for Settlement and Dismissal and filed a Stipulation and Proposed
Order for Dismissal with Prejudice with the court. We anticipate that the court
will enter its final judgment of dismissal by the end of the first quarter of
2010.
One of our subsidiaries, El Paso Disposal, LP (EPD), is a party to administrative
proceedings before the National Labor Relations Board (NLRB). In these proceedings, the union
has alleged various unfair labor practices relating to the failure to reach agreement on first
contracts and the resultant strike by, and the replacement of and a failure to recall, previous
employees. On April 29, 2009, following a hearing, an administrative law judge issued a
recommended Decision and Order finding violations of the National Labor Relations Act by EPD and
recommended to the NLRB that EPD take remedial actions, including such things as reinstating
certain employees and their previous terms and conditions of employment, refraining from certain
conduct, returning to the bargaining table and providing a make whole remedy. EPD filed
exceptions to the administrative law judges recommendations on June 30, 2009. Thereafter, the
parties exchanged answers and response briefs, and the matter is currently on appeal to the NLRB.
On July 27, 2009, the NLRBs regional office in Phoenix, Arizona filed a petition in federal court
seeking an interim injunction to reinstate the previous employees and order the parties to return
to bargaining while the appeal is pending. The hearing on the injunction was held on August 19,
2009, and, on October 30, 2009, the court granted the requested relief. EPD has appealed the
courts order to the Fifth Circuit Court of Appeals. Several related unfair labor practice charges
alleging failure to bargain and improper recall were subsequently filed against EPD. The charges
were heard by an administrative law judge the week of August 24, 2009, and on December 2, 2009, the
administrative law judge issued his recommended Decision and Order granting part of the requested
relief, while denying part, but the issues were effectively subsumed by the interim injunction.
Both parties filed exceptions to the judges recommendations, exchanged answers and response
briefs, and that matter is also currently on appeal to the NLRB. On January 22, 2010, the union
filed new unfair labor practice charges concerning events relating to the ongoing contract
negotiation process. EPD is currently reviewing the allegations and intends to continue to defend
these proceedings vigorously. At this point, we are unable to determine the likelihood of any
outcome in this matter, nor are we able to estimate the amount or range of loss or the impact on us
or our financial condition in the event of an unfavorable outcome.
We and Potrero Hills Landfill, Inc. (PHLF), which we purchased from Republic Services, Inc.
in April 2009, were named as real parties in interest in an amended complaint captioned
Sustainability, Parks, Recycling and Wildlife Legal Defense Fund [SPRAWLDEF] v. County of Solano,
Board of Supervisors for the County of Solano, which was filed in the Superior Court of California,
County of Solano, on July 9, 2009 (the original complaint was filed on June 12, 2009). This
lawsuit seeks to compel the County of Solano to comply with Measure E, a ballot initiative and
County ordinance passed in 1984 that the County has not enforced against PHLF for at least
18 years. Measure E directs in part that the County of Solano shall not allow the importation into
the County of any solid waste which originated or was collected outside the County in excess of
95,000 tons per year. PHLF disposes of approximately 870,000 tons of solid waste annually,
approximately 650,000 tons of which originate from sources outside of Solano County. The SPRAWLDEF
lawsuit also seeks to overturn Solano Countys approval of the use permit for the expansion of the
Potrero Hills Landfill and the related Environmental Impact Report (EIR), arguing that both
violate Measure E and that the EIR violates the California Environmental Quality Act (CEQA). Two
similar actions seeking to enforce Measure E, captioned Northern California Recycling Association
v. County of Solano and Sierra Club v. County of Solano, were filed in the same court on June 10,
2009 and August 10, 2009, respectively. The Northern California Recycling Association
(NCRA) case does not name us or any of our subsidiaries as parties and does not contain any CEQA
claims. The Sierra Club case names PHLF as a real party in interest, and seeks to overturn the
conditional use permit for the expansion of the landfill on Measure E grounds (but does not raise
CEQA claims). These complaints follow a previous lawsuit concerning Measure E that NCRA filed
against PHLF in the same court on July 22, 2008, prior to our acquisition of PHLF, but which NCRA
later dismissed.
23
In December 2009, we and PHLF filed briefs vigorously opposing enforcement of Measure E on
Constitutional and other grounds. Our position is supported by Solano County, a co-defendant, the
Attorney General of the State of California, the National Solid Wastes Management Association and
the California Refuse Recycling Council, each of which filed supporting friend of court briefs or
letters. In addition, numerous waste hauling companies in California, Oregon and Nevada have
intervened on our side in the state cases, subsequent to their participation in the federal action
discussed below. All three Measure E state cases were consolidated for a hearing on the merits,
which is scheduled to be held in mid-February. At this point, we are unable to determine the
likelihood of any outcome in this matter, nor are we able to estimate the amount or range of loss
or the impact on us or our financial condition in the event of an unfavorable outcome.
In response to the pending three state court actions to enforce Measure E described above, we,
PHLF and other waste hauling companies in California, Oregon and Nevada that are damaged by
Measure E and would be further damaged if Measure E was enforced filed a lawsuit to enjoin
Measure E and have it declared unconstitutional. On September 8, 2009, the coalition brought suit
in the United States District Court for the Eastern District of California in Sacramento
challenging Measure E under the Commerce Clause of the United States Constitution, captioned
Potrero Hills Landfill, Inc. et al. v. County of Solano. In response, SPRAWLDEF, Sierra Club and
NCRA intervened in the federal case to defend Measure E and filed motions to dismiss the federal
suit, or in the alternative, for the court to abstain from hearing the case in light of the pending
state court Measure E actions. On December 23, 2009, the federal court abstained and declined to
accept jurisdiction over our case, holding that Measure E raised unique state issues that should be
resolved by the pending state court litigation, and granted the motions to dismiss. We filed a
notice of appeal to the courts ruling on January 22, 2010.
Individual members of SPRAWLDEF are also plaintiffs in the pending lawsuit filed in the same
court on October 13, 2005, captioned Protect the Marsh, et al. v. County of Solano, et al.,
challenging the EIR that Solano County certified in connection with its approval of the expansion
of the Potrero Hills Landfill on September 13, 2005. A motion to discharge the Superior Courts
writ of mandate directing the County to vacate and set aside its certification of the EIR was heard
in August 2009. On November 3, 2009, the Superior Court upheld the Countys certification of the
EIR and the related permit approval actions. In response, the plaintiffs in Protect the Marsh
filed a notice of appeal to the courts order on December 31, 2009. At this point, we are unable
to determine the likelihood of any outcome in this matter, nor are we able to estimate the amount
or range of loss or the impact on us or our financial condition in the event of an unfavorable
outcome.
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, as of December 31, 2009, there is no current proceeding or litigation
involving us or of which any of our property is the subject that we believe will have a material
adverse impact on our business, financial condition, results of operations or cash flows.
|
|
|
ITEM 4. |
|
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
There were no matters submitted to a vote of security holders during the fourth quarter of
2009.
24
PART II
ITEM
5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Our common stock is listed on the New York Stock Exchange under the symbol WCN. The
following table sets forth, for the periods indicated, the high and low prices per share of our
common stock, as reported on the New York Stock Exchange.
|
|
|
|
|
|
|
|
|
|
|
HIGH |
|
|
LOW |
|
2008 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
31.77 |
|
|
$ |
28.05 |
|
Second Quarter |
|
|
34.93 |
|
|
|
29.99 |
|
Third Quarter |
|
|
40.74 |
|
|
|
30.31 |
|
Fourth Quarter |
|
|
36.64 |
|
|
|
26.54 |
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
31.77 |
|
|
$ |
20.52 |
|
Second Quarter |
|
|
27.79 |
|
|
|
23.99 |
|
Third Quarter |
|
|
30.27 |
|
|
|
24.43 |
|
Fourth Quarter |
|
|
34.00 |
|
|
|
28.36 |
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
First Quarter (through January 22, 2010) |
|
$ |
33.99 |
|
|
$ |
32.32 |
|
As of January 22, 2010, there were 91 record holders of our common stock.
We have never paid cash dividends on our common stock and do not currently anticipate paying
any cash dividends on our common stock. We have the ability under our senior revolving credit
facility to repurchase our common stock and pay dividends subject to us maintaining specified
financial ratios.
On October 26, 2009, we announced that our Board of Directors authorized a $300 million
increase to, and extended the term of, our previously announced common stock repurchase program.
Our Board of Directors has authorized the common stock repurchase program for the repurchase of up
to $800 million of our common stock through December 31, 2012. Under the program, stock
repurchases may be made in the open market or in privately negotiated transactions from time to
time at managements discretion. The timing and amounts of any repurchases will depend on many
factors, including our capital structure, the market price of our common stock and overall market
conditions. As of December 31, 2009, we have repurchased 19.0 million shares of our common stock
at a cost of $482.4 million. The table below reflects repurchases we have made for the three
months ended December 31, 2009 (in thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
|
Approximate Dollar |
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
|
Value of Shares that |
|
|
|
Total Number |
|
|
Average |
|
|
as Part of Publicly |
|
|
May Yet Be |
|
|
|
of Shares |
|
|
Price Paid |
|
|
Announced |
|
|
Purchased Under |
|
Period |
|
Purchased |
|
|
Per Share(1) |
|
|
Program |
|
|
the Program |
|
10/1/09 10/31/09 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
340,049 |
|
11/1/09 11/30/09 |
|
|
337,400 |
|
|
|
31.91 |
|
|
|
337,400 |
|
|
|
329,282 |
|
12/1/09 12/31/09 |
|
|
353,800 |
|
|
|
33.04 |
|
|
|
353,800 |
|
|
|
317,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
691,200 |
|
|
|
32.49 |
|
|
|
691,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This amount represents the weighted average price paid per common share. This price
includes a per share commission paid for all repurchases. |
25
Performance Graph
The following performance graph compares the total cumulative stockholder returns on our
common stock over the past five fiscal years with the total cumulative returns for the S&P 500
Index and a peer group index selected by us. The graph assumes an investment of $100 in our common
stock on December 31, 2004, and the reinvestment of all dividends (we have not paid any
dividends during the period indicated). This chart has been calculated in compliance with SEC
requirements and prepared by Capital IQ®.
This graph and the accompanying text is not soliciting material, is not deemed filed with
the SEC, and is not to be incorporated by reference in any filing by us under the Securities Act of
1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after
the date hereof and irrespective of any general incorporation language in any such filing.
Market prices and dividends have been adjusted to give retroactive effect to our three-for-two
stock split, effective as of March 13, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base |
|
|
Indexed Returns |
|
|
|
Period |
|
|
Years Ending |
|
Company Name / Index |
|
Dec 04 |
|
|
Dec 05 |
|
|
Dec 06 |
|
|
Dec 07 |
|
|
Dec 08 |
|
|
Dec 09 |
|
Waste Connections, Inc. |
|
$ |
100 |
|
|
$ |
100.61 |
|
|
$ |
121.31 |
|
|
$ |
135.33 |
|
|
$ |
138.26 |
|
|
$ |
146.01 |
|
S&P 500 Index |
|
$ |
100 |
|
|
$ |
104.91 |
|
|
$ |
121.48 |
|
|
$ |
128.16 |
|
|
$ |
80.74 |
|
|
$ |
102.11 |
|
Peer Group* |
|
$ |
100 |
|
|
$ |
106.05 |
|
|
$ |
127.73 |
|
|
$ |
123.87 |
|
|
$ |
120.94 |
|
|
$ |
133.59 |
|
|
|
|
* |
|
Peer Group Companies: Casella Waste Systems, Inc.; Republic Services, Inc.; Waste
Management, Inc. |
THE STOCK PRICE PERFORMANCE INCLUDED IN THIS GRAPH IS NOT NECESSARILY INDICATIVE OF FUTURE
STOCK PRICE PERFORMANCE.
26
ITEM 6. SELECTED FINANCIAL DATA
This table sets forth our selected financial data for the periods indicated. This data should
be read in conjunction with, and is qualified by reference to, Managements Discussion and
Analysis of Financial Condition and Results of Operations included in Item 7 of this Annual Report
on Form 10-K and our audited consolidated financial statements, including the related notes and our
independent registered public accounting firms report and the other financial information included
in Item 8 of this Annual Report on Form 10-K. The selected data in this section is not intended to
replace the consolidated financial statements included in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEARS ENDED DECEMBER 31, |
|
|
|
2005 |
|
|
2006 |
|
|
2007 (a) |
|
|
2008 (a) |
|
|
2009 (a) |
|
|
|
(in thousands, except share and per share data) |
|
STATEMENT OF OPERATIONS DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
721,899 |
|
|
$ |
824,354 |
|
|
$ |
958,541 |
|
|
$ |
1,049,603 |
|
|
$ |
1,191,393 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations |
|
|
416,883 |
|
|
|
492,766 |
|
|
|
566,089 |
|
|
|
628,075 |
|
|
|
692,415 |
|
Selling, general and administrative |
|
|
72,395 |
|
|
|
84,541 |
|
|
|
99,565 |
|
|
|
111,114 |
|
|
|
138,026 |
|
Depreciation |
|
|
61,719 |
|
|
|
70,785 |
|
|
|
81,287 |
|
|
|
91,095 |
|
|
|
117,796 |
|
Amortization of intangibles |
|
|
3,069 |
|
|
|
4,080 |
|
|
|
4,341 |
|
|
|
6,334 |
|
|
|
12,962 |
|
Loss (gain) on disposal of assets |
|
|
(216 |
) |
|
|
796 |
|
|
|
250 |
|
|
|
629 |
|
|
|
(481 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
168,049 |
|
|
|
171,386 |
|
|
|
207,009 |
|
|
|
212,356 |
|
|
|
230,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(23,966 |
) |
|
|
(33,141 |
) |
|
|
(39,206 |
) |
|
|
(43,102 |
) |
|
|
(49,161 |
) |
Interest income |
|
|
477 |
|
|
|
1,140 |
|
|
|
1,593 |
|
|
|
3,297 |
|
|
|
1,413 |
|
Other income (expense), net |
|
|
450 |
|
|
|
(3,759 |
) |
|
|
289 |
|
|
|
(633 |
) |
|
|
(7,551 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision |
|
|
145,010 |
|
|
|
135,626 |
|
|
|
169,685 |
|
|
|
171,918 |
|
|
|
175,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
(48,066 |
) |
|
|
(47,177 |
) |
|
|
(58,328 |
) |
|
|
(56,775 |
) |
|
|
(64,565 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
96,944 |
|
|
|
88,449 |
|
|
|
111,357 |
|
|
|
115,143 |
|
|
|
110,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on discontinued operations, net of tax |
|
|
(579 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
96,365 |
|
|
|
88,449 |
|
|
|
111,357 |
|
|
|
115,143 |
|
|
|
110,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to
noncontrolling interests |
|
|
(12,422 |
) |
|
|
(12,905 |
) |
|
|
(14,870 |
) |
|
|
(12,240 |
) |
|
|
(986 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Waste Connections |
|
$ |
83,943 |
|
|
$ |
75,544 |
|
|
$ |
96,487 |
|
|
$ |
102,903 |
|
|
$ |
109,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share attributable to
Waste Connections common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.20 |
|
|
$ |
1.11 |
|
|
$ |
1.41 |
|
|
$ |
1.47 |
|
|
$ |
1.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
1.16 |
|
|
$ |
1.07 |
|
|
$ |
1.38 |
|
|
$ |
1.44 |
|
|
$ |
1.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in the per share calculations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (b) |
|
|
70,050,974 |
|
|
|
68,136,126 |
|
|
|
68,238,523 |
|
|
|
70,024,874 |
|
|
|
79,413,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (b) |
|
|
72,316,952 |
|
|
|
70,408,673 |
|
|
|
69,994,713 |
|
|
|
71,419,712 |
|
|
|
80,337,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEARS ENDED DECEMBER 31, |
|
|
|
2005 |
|
|
2006 |
|
|
2007 (a) |
|
|
2008 (a) |
|
|
2009 (a) |
|
|
|
(in thousands, except share and per share data) |
|
BALANCE SHEET DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
7,514 |
|
|
$ |
34,949 |
|
|
$ |
10,298 |
|
|
$ |
265,264 |
|
|
$ |
9,639 |
|
Working capital (deficit) |
|
|
(25,625 |
) |
|
|
10,368 |
|
|
|
(24,849 |
) |
|
|
213,747 |
|
|
|
(45,059 |
) |
Property and equipment, net |
|
|
700,508 |
|
|
|
736,428 |
|
|
|
865,330 |
|
|
|
984,124 |
|
|
|
1,308,392 |
|
Total assets |
|
|
1,676,307 |
|
|
|
1,773,356 |
|
|
|
1,981,548 |
|
|
|
2,600,357 |
|
|
|
2,820,448 |
|
Long-term debt and notes payable |
|
|
586,104 |
|
|
|
617,665 |
|
|
|
704,184 |
|
|
|
819,828 |
|
|
|
867,554 |
|
Total equity |
|
|
744,557 |
|
|
|
776,321 |
|
|
|
814,618 |
|
|
|
1,261,997 |
|
|
|
1,357,036 |
|
|
|
|
(a) |
|
For more information regarding this financial data, see the Managements Discussion and
Analysis of Financial Condition and Results of Operations section included in this report.
For disclosures associated with the impact of the adoption of new accounting pronouncements
and the comparability of this information, see Note 1 of the consolidated financial
statements. |
|
(b) |
|
Shares have been adjusted to reflect our three-for-two stock split, paid as a 50% stock
dividend, effective as of March 13, 2007. |
28
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected Financial Data
included in Item 6 of this Annual Report on Form 10-K, our consolidated financial statements and
the related notes included elsewhere in this report.
Industry 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.
Executive Overview
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 and solid waste
containers in the Pacific Northwest through a network of 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.
Operating Results
We reported record revenue, net income, net cash provided by operating activities, and free
cash flow in 2009, and invested a record amount in both capital expenditures and acquisitions to
further strengthen and expand our business. Revenue in 2009 increased 13.5% to $1.19 billion from
2008. Reduced volumes from a difficult economy, declining fuel surcharges and decreased recycled
commodity prices drove revenue down 10.8% in 2009. This decline was offset by a 19.5% increase in
revenue from acquisitions and a 4.8% increase from core price, resulting in the 13.5% increase in
reported revenue.
We experienced a precipitous drop in volumes and recycled commodity prices in the fourth
quarter of 2008 due to the decline in economic activity across the United States, but believe that
our revenue began to stabilize during the second quarter of 2009. As shown in the table below,
internal growth decreased from positive 3.0% in 2008, to negative 6.0% in 2009. Internal growth
for the first three quarters of 2009 was negative 7.6%, but improved to negative 1.0% in the fourth
quarter of 2009, reflecting the stability we believe we attained relative to the declines in the
year ago period.
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2009 |
|
Price |
|
|
5.6 |
% |
|
|
2.7 |
% |
Volume |
|
|
(1.9 |
%) |
|
|
(6.2 |
%) |
Intermodal, Recycling and Other |
|
|
(0.7 |
%) |
|
|
(2.5 |
%) |
|
|
|
|
|
|
|
Internal Growth |
|
|
3.0 |
% |
|
|
(6.0 |
%) |
|
|
|
|
|
|
|
29
The core pricing component of our internal growth increased to 4.8% in 2009 as a result of
broad-based pricing initiatives primarily designed to offset the lost contribution from
year-over-year decreases in volumes and recycled commodity prices. Decreased surcharges, primarily
related to declining fuel costs, were a negative 2.1% impact to internal growth. Although volume
growth was negative 6.2% for the full year, quarterly volume losses began to improve in the
fourth quarter of 2009 to 4.5% compared to quarterly volume losses of 7.3% in the third quarter of
2009. Intermodal, recycling and other negatively impacted internal growth by approximately 2.5% in 2009 due to
a decline in recycled commodity prices during the first three quarters of the year and reduced
intermodal activity. Similar to the previously discussed improving year-over-year trends in
volumes during the fourth quarter of 2009, intermodal, recycling and other improved to a positive 1.4%
contribution to internal growth in the fourth quarter of 2009 due to increased recycled commodity
prices.
In 2009, operating income before depreciation, amortization and gain (loss) on disposal of
assets, a non-GAAP financial measure (refer to page 48 of this report for a definition and
reconciliation to Operating income), increased 16.3% to $361.0 million from 2008. As a percentage
of revenue, operating income before depreciation, amortization and gain (loss) on disposal of
assets increased from 29.6% in 2008, to 30.3% in 2009. This 0.7 percentage point increase was
primarily attributable to a decline in fuel costs and higher margin acquisitions, partially offset
by an increase in SG&A expenses. SG&A expenses increased primarily due to the expensing of
acquisition-related costs, a charge incurred to write down our prior corporate office lease in
connection with the relocation of our corporate office earlier in the year, and increased legal
expenses. The increase in operating income before depreciation, amortization and gain (loss) on
disposal of assets on a dollar and margin basis also reflects our response to the drop in economic
activity across the United States. We reduced headcount more than 10% and instituted a number of
wage and cost controls in 2009.
Free Cash Flow
Net cash provided by operating activities increased 12.3% to $303.6 million in 2009 from 2008,
and capital expenditures increased 13.0% to $128.3 million over that period. Free cash flow, a
non-GAAP financial measure (refer to page 48 of this report for a definition and reconciliation to
net cash provided by operating activities), increased 25.6% to $192.3 million in 2009, from $153.2
million in 2008. Free cash flow increased as a percentage of revenues to 16.1% in 2009, from 14.6%
in 2008. We believe this strength in our free cash flow reflects the continuing resiliency of our
strategy during this difficult economic period.
Capital Position
We target a leverage ratio, as defined in our credit facility, between 2.5x and 2.75x of total
debt to earnings before interest, taxes, depreciation and amortization, or EBITDA. We deployed
$420.0 million during 2009 for acquisitions, $128.3 million for capital expenditures, and $62.6
million for common stock repurchases. These outlays were primarily funded by a combination of
operating cash flow during the year and excess cash balances. As a result, our leverage ratio
declined from its December 31, 2008 level, and remained below our targeted range at year-end 2009.
We maintained a strong balance sheet and access to capital throughout this recent recession.
We issued a $175 million aggregate principal amount, 10-year unsecured note at a 5.25% fixed rate
and exited 2009 with almost $500 million of available capital under our credit facility to fund
additional growth opportunities.
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. Such
critical accounting estimates and assumptions are applicable to our reportable segments. Based on
this definition, we believe the following are our critical accounting estimates.
Insurance liabilities. We maintain insurance policies for automobile, general,
employers, environmental and directors and officers liability as well as for employee group
health insurance, property insurance and workers compensation. 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 third-party claims administrator. The
insurance accruals are influenced by our past claims experience factors, which have a limited
history, and by published industry development factors. If we experience insurance claims or costs
above or below our historically evaluated levels, our estimates could be materially affected. The
frequency and amount of claims or incidents could vary significantly over time, which could
materially affect our self-insurance liabilities. Additionally, the actual costs to settle the
self-insurance liabilities could materially differ from the original estimates and cause us to
incur additional costs in future periods associated with prior year claims.
30
Income taxes. We use the liability method to account for income taxes. Accordingly,
deferred tax assets and liabilities are determined based on differences between financial reporting
and income tax bases of assets and liabilities and are measured using the enacted tax rates and
laws that are expected to be in effect when the differences are expected to reverse. If our
judgment and estimates concerning assumptions made in calculating our expected future income tax
rates are incorrect, our deferred tax assets and liabilities would change. Based on our net
deferred tax liability balance at December 31, 2009, each 0.1 percentage point change to our
expected future income tax rate would change our net deferred tax liability balance and income tax
expense by approximately $0.8 million.
Accounting for landfills. We recognize landfill depletion expense as airspace of a
landfill is consumed. Our landfill depletion rates are based on the remaining disposal capacity at
our landfills, considering both permitted and expansion airspace. We calculate the net present
value of our final capping, closure and post-closure commitments by estimating the total obligation
in current dollars, inflating the obligation based upon the expected date of the expenditure and
discounting the inflated total to its present value using a credit-adjusted risk-free rate. Any
changes in expectations that result in an upward revision to the estimated undiscounted cash flows
are treated as a new liability and are inflated and discounted at rates reflecting current market
conditions. Downward revisions (or if there are no changes) to the estimated undiscounted cash
flows are inflated and discounted at rates reflecting the market conditions at the time the cash
flows were originally estimated. This policy results in our final capping, closure and
post-closure liabilities being recorded in layers. 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 landfills airspace is consumed. Interest is accreted on the recorded
liability using the corresponding discount rate. The accounting methods discussed below require us
to make certain estimates and assumptions. Changes to these estimates and assumptions could have a
material effect on our financial condition and results of operations. Any changes to our estimates
are applied prospectively.
Landfill development costs. Landfill development costs include the costs of
acquisition, construction associated with excavation, liners, site berms, groundwater monitoring
wells and leachate collection systems. We estimate the total costs associated with developing each
landfill site to its final capacity. Total landfill costs include the development costs associated
with expansion airspace. Expansion airspace is described below. Landfill development costs depend
on future events and thus actual costs could vary significantly from our estimates. Material
differences between estimated and actual development costs may affect our cash flows by increasing
our capital expenditures and thus affect our results of operations by increasing our landfill
depletion expense.
Final capping, closure and post-closure obligations. We accrue for estimated final
capping, closure and post-closure maintenance obligations at the landfills we own, and the
landfills that we operate, but do not own, under life-of-site agreements. We could have additional
material financial obligations relating to final capping, closure and post-closure costs at other
disposal facilities that we currently own or operate or that we may own or operate in the future.
At January 1, 2009, we increased our discount rate assumption for purposes of computing 2009
layers for final capping, closure and post-closure obligations from 7.5% to 9.25%, in order to
more accurately reflect our long-term cost of borrowing as of the end of 2008. Consistent with the
prior year, our inflation rate assumption is 2.5%. The resulting final capping, closure and
post-closure obligation is recorded on the balance sheet as an addition to site costs and amortized
as depletion expense as the landfills total airspace is consumed. Significant reductions in our
estimates of the remaining lives of our landfills or significant increases in our estimates of the
landfill final capping, closure and post-closure maintenance costs could have a material adverse
effect on our financial condition and results of operations. Additionally, changes in regulatory
or legislative requirements could increase our costs related to our landfills, resulting in a
material adverse effect on our financial condition and results of operations.
We own two landfills for which the prior owners are obligated to reimburse us for certain
costs we incur for final capping, closure and post-closure activities on the portion of the
landfill utilized by the prior owners. We accrue the prior owners portion of the final capping,
closure and post-closure obligation within the balance sheet classification of other long-term
liabilities, and a corresponding receivable from the prior owner in long-term other assets.
Disposal capacity. Our internal and third-party engineers perform surveys at least
annually to estimate the remaining disposal capacity at our landfills. Our landfill depletion
rates are based on the remaining disposal capacity, considering both permitted and expansion
airspace, at the landfills that we own and at the landfills that we operate, but do not own, under
life-of-site agreements. Our landfill depletion rates are based on the term of the operating
agreement at our operated landfills that have capitalized expenditures. Expansion airspace
consists of additional disposal capacity being pursued through means of expansion that is not
actually permitted. Expansion airspace that meets certain internal criteria is included in our
estimate of total landfill airspace. The internal criteria we use to determine when expansion
airspace may be included as disposal capacity are as follows:
|
1) |
|
the land where the expansion is being sought is contiguous to the current disposal
site, and we either own the expansion property or it is under an option, purchase,
operating or other similar agreement; |
|
2) |
|
total development costs, final capping costs, and closure/post-closure costs have been
determined; |
31
|
3) |
|
internal personnel have performed a financial analysis of the proposed expansion site
and have determined that it has a positive financial and operational impact; |
|
4) |
|
internal personnel or external consultants are actively working to obtain the necessary
approvals to obtain the landfill expansion permit; and |
|
5) |
|
we consider it probable that we will achieve the expansion (for a pursued expansion to
be considered probable, there must be no significant known technical, legal, community,
business or political restrictions or similar issues existing that could impair the success
of the expansion). |
We may be unsuccessful in obtaining permits for expansion disposal capacity at our landfills.
In such cases, we will charge the previously capitalized development costs to expense. This will
adversely affect our operating results and cash flows and could result in greater landfill
depletion expense being recognized on a prospective basis.
We periodically evaluate our landfill sites for potential impairment indicators. Our
judgments regarding the existence of impairment indicators are based on regulatory factors, market
conditions and operational performance of our landfills. Future events could cause us to conclude
that impairment indicators exist and that our landfill carrying costs are impaired. Any resulting
impairment loss could have a material adverse effect on our financial condition and results of
operations.
Goodwill and indefinite-lived intangible testing. Goodwill and indefinite-lived
intangibles are tested for impairment on at least an annual basis in the fourth quarter of the
year. In the first step of testing for goodwill impairment, we estimate the fair value of each
reporting unit, which we have determined to be our geographic operating segments, and compare the
fair value with the carrying value of the net assets assigned to each reporting unit. If the fair
value of a reporting unit is greater than the carrying value of the net assets assigned to the
reporting unit, then no impairment results. If the fair value is less than its carrying value,
then we would perform a second step and determine the fair value of the goodwill. In this second
step, the fair value of goodwill is determined by deducting the fair value of a reporting units
identifiable assets and liabilities from the fair value of the reporting unit as a whole, as if
that reporting unit had just been acquired and the purchase price were being initially allocated.
If the fair value of the goodwill is less than its carrying value for a reporting unit, an
impairment charge would be recorded to earnings in our Consolidated Statement of Income. In
testing indefinite-lived intangibles for impairment, we compare the estimated fair value of each
indefinite-lived intangible to its carrying value. If the fair value of the indefinite-lived
intangible is less than its carrying value, an impairment charge would be recorded to earnings in
our Consolidated Statement of Income.
To determine the fair value of each of our reporting units as a whole and each
indefinite-lived intangible asset, we use discounted cash flow analyses, which require significant
assumptions and estimates about the future operations of each reporting unit and the future
discrete cash flows related to each indefinite-lived intangible asset. Significant judgments
inherent in these analyses include the determination of appropriate discount rates, the amount and
timing of expected future cash flows and growth rates. The cash flows employed in our 2009
discounted cash flow analyses were based on ten-year financial forecasts, which in turn were based
on the 2010 annual budget developed internally by management. These forecasts reflect perpetual
revenue growth rates of 4.5% and operating profit margins that were consistent with 2009 results.
Our discount rate assumptions are based on an assessment of our weighted average cost of capital.
In assessing the reasonableness of our determined fair values of our reporting units, we evaluate
our results against our current market capitalization.
In addition, we would evaluate a reporting unit for impairment if events or circumstances
change between annual tests indicating a possible impairment. Examples of such events or
circumstances include the following:
|
|
|
A significant adverse change in legal factors or in the business climate, |
|
|
|
An adverse action or assessment by a regulator, |
|
|
|
A more likely than not expectation that a segment or a significant portion thereof will
be sold, or |
|
|
|
The testing for recoverability of a significant asset group within the segment. |
We did not record an impairment charge as a result of our goodwill and indefinite-lived
intangibles impairment test in 2009. However, there can be no assurance that goodwill and
indefinite-lived intangibles will not be impaired at any time in the future.
Business Combination Accounting. We recognize, separately from goodwill, the
identifiable assets acquired and liabilities assumed at their estimated acquisition-date fair
values. We measure and recognize goodwill as of the acquisition date as the excess of: (a) the
aggregate of the fair value of consideration transferred, the fair value of any noncontrolling
interest in the acquiree (if any) and the acquisition-date fair value of our previously held equity
interest in the acquiree (if any), over (b) the fair value of net assets acquired and liabilities
assumed.
32
From time to time, we consummate acquisitions in which we exchange operations we own for
operations owned by another solid waste company. These exchange transactions require us to
estimate the fair market value of either the operations we receive or the operations we dispose of,
whichever is more clearly evident. To the extent that the fair market value of the operations we
dispose of differs from the fair market value of the operations we obtain, cash is either paid or
received to offset the difference in fair market values. One method we use to estimate the fair
value of solid waste companies is based on a multiple of EBITDA. We determine the appropriate
EBITDA multiple to be used in the valuation of exchange transactions based on factors such as the
size of the transaction, the type and location of markets serviced, the existence of long-term
contracts and the EBITDA multiples we have paid in other similar cash-based transactions.
General
Our solid waste revenues are derived from one industry segment, which consist mainly of fees
we charge customers for collection, transfer, recycling and disposal of non-hazardous solid waste.
Our collection business also generates revenues from the sale of recyclable commodities, which have
significant variability. A large part of our collection revenues comes from providing residential,
commercial and industrial services. We frequently perform these services under service agreements,
municipal contracts or franchise agreements with governmental entities. Our existing franchise
agreements and most of our existing municipal contracts give us the exclusive right to provide
specified waste services in the specified territory during the contract term. These exclusive
arrangements are awarded, at least initially, on a competitive bid basis and subsequently on a bid
or negotiated basis. We also provide residential collection services on a subscription basis with
individual households.
We charge transfer station and landfill customers a tipping fee on a per ton and/or per yard
basis for disposing their solid waste at our transfer stations and landfill facilities. Many of
our transfer station and landfill customers have entered into one to ten year disposal contracts
with us, most of which provide for annual indexed price increases.
We typically determine the prices of our solid waste services by the collection frequency and
level of service, route density, volume, weight and type of waste collected, type of equipment and
containers furnished, the distance to the disposal or processing facility, the cost of disposal or
processing and prices charged by competitors for similar services. The terms of our contracts
sometimes limit our ability to pass on price increases. Long-term solid waste collection contracts
often contain a formula, generally based on a published price index, that automatically adjusts
fees to cover increases in some, but not all, operating costs, or that limit increases to less than
100% of the increase in the applicable price index.
Our revenues from intermodal services consist mainly of fees we charge customers for the
movement of cargo and solid waste containers between our intermodal facilities. We also generate
revenue from the storage, maintenance and repair of cargo and solid waste containers and the sale
or lease of containers and chassis.
No single contract or customer accounted for more than 10% of our total revenues at the
consolidated or reportable segment level during the periods presented. The table below shows for
the periods indicated our total reported revenues attributable to services provided (dollars in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Collection |
|
$ |
693,675 |
|
|
|
63.8 |
% |
|
$ |
787,713 |
|
|
|
66.4 |
% |
|
$ |
901,768 |
|
|
|
66.1 |
% |
Disposal and transfer |
|
|
298,954 |
|
|
|
27.5 |
|
|
|
308,811 |
|
|
|
26.0 |
|
|
|
392,497 |
|
|
|
28.8 |
|
Intermodal, recycling and other |
|
|
95,212 |
|
|
|
8.7 |
|
|
|
89,594 |
|
|
|
7.6 |
|
|
|
68,845 |
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,087,841 |
|
|
|
100.0 |
% |
|
|
1,186,118 |
|
|
|
100.0 |
% |
|
|
1,363,110 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: intercompany elimination |
|
|
(129,300 |
) |
|
|
|
|
|
|
(136,515 |
) |
|
|
|
|
|
|
(171,717 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
958,541 |
|
|
|
|
|
|
$ |
1,049,603 |
|
|
|
|
|
|
$ |
1,191,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations includes labor and benefits, tipping fees paid to third-party disposal
facilities, vehicle and equipment maintenance, workers compensation, vehicle and equipment
insurance, insurance and employee group health claims expense, third-party transportation expense,
fuel, the cost of materials we purchase for recycling, district and state taxes and host community
fees and royalties. Our significant costs of operations in 2009 were labor, third-party disposal
and transportation, vehicle and equipment maintenance, taxes and fees, insurance and fuel. We use
a number of programs to reduce overall cost of operations, including increasing the use of
automated routes to reduce labor and workers compensation exposure, utilizing comprehensive
maintenance and health and safety programs, and increasing the use of transfer stations to further
enhance internalization rates. We carry high-deductible insurance for automobile liability,
property, general liability, workers compensation, employers liability and employer group health
claims. If we experience insurance claims or costs above or below our historically evaluated
levels, our estimates could be materially affected.
33
Selling, general and administrative, or SG&A, expense includes management, sales force,
clerical and administrative employee compensation and benefits, legal, accounting and other
professional services, acquisition, bad debt expense and rent expense for our corporate
headquarters.
Depreciation expense includes depreciation of equipment and fixed assets over their estimated
useful lives using the straight-line method. Depletion expense includes depletion of landfill site
costs and total future development costs as remaining airspace of the landfill is consumed.
Remaining airspace at our landfills includes both permitted and expansion airspace. Amortization
expense includes the amortization of definite-lived intangible assets, consisting primarily of
long-term franchise agreements and contracts and non-competition agreements, over their estimated
useful lives using the straight-line method. Goodwill and indefinite-lived intangible assets,
consisting primarily of certain perpetual rights to provide solid waste collection and
transportation services in specified territories, are not amortized.
We capitalize some third-party expenditures related to development projects, such as legal,
engineering and interest expenses. We expense all third-party and indirect acquisition costs,
including third-party legal and engineering expenses, executive and corporate overhead, public
relations and other corporate services, as we incur them. We charge against net income any
unamortized capitalized expenditures and advances (net of any portion that we believe we may
recover, through sale or otherwise) that may become impaired, such as those that relate to any
operation that is permanently shut down and any landfill development project that we believe will
not be completed. We routinely evaluate all capitalized costs, and expense those related to
projects that we believe are not likely to succeed.
At December 31, 2009, we had $11.3 million in capitalized expenditures for a landfill project
in Chaparral, New Mexico, with respect to which we had obtained a permit to operate the landfill.
On July 18, 2005, the Supreme Court of New Mexico ordered the New Mexico Environment Department to
conduct an additional limited hearing to consider evidence that landfill opponents claim was
wrongfully excluded. The parties have agreed to postpone the hearing until November 2010 at the
earliest to allow us time to explore a possible relocation of the landfill to the approximately 325
acres of undeveloped land we purchased from the State of New Mexico in July 2009. If we are not
ultimately issued a permit to operate the landfill, we will be required to expense in a future
period the capitalized expenditures for this project, less the recoverable value of the applicable
property and any other amounts recovered, which would likely have a material adverse effect on our
financial position and results of operations for that period.
Segment Reporting
Our Chief Operating Decision Maker evaluates performance and determines resource allocations
based on several factors, of which the primary financial measure is operating income (loss) before
depreciation, amortization and gain (loss) on disposal of assets. Operating income (loss) before
depreciation, amortization and gain (loss) on disposal of assets is not a measure of operating
income, operating performance or liquidity under GAAP and may not be comparable to similarly titled
measures reported by other companies. Our management uses operating income (loss) before
depreciation, amortization and gain (loss) on disposal of assets in the evaluation of segment
operating performance as it is a profit measure that is generally within the control of the
operating segments.
We manage our operations through three geographic operating segments (Western, Central and
Southern), which, commencing in 2009, are also our reportable segments. Prior to 2009, we
aggregated our multiple operating segments into one reportable segment. Each segment is
responsible for managing several vertically integrated operations, which are comprised of
districts. The segment information presented herein reflects the realignment of our organizational
structure in the second quarter of 2008, which reduced the number of our geographic operating
segments from four to three.
34
Revenues, net of intercompany eliminations, for our reportable segments are shown in the
following table for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Western |
|
$ |
477,310 |
|
|
$ |
512,057 |
|
|
$ |
617,247 |
|
Central |
|
|
257,188 |
|
|
|
299,010 |
|
|
|
291,883 |
|
Southern |
|
|
224,043 |
|
|
|
238,536 |
|
|
|
282,263 |
|
Corporate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
958,541 |
|
|
$ |
1,049,603 |
|
|
$ |
1,191,393 |
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) before depreciation, amortization and gain (loss) on disposal of
assets for our reportable segments is shown in the following table for the periods indicated (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Western |
|
$ |
143,636 |
|
|
$ |
148,994 |
|
|
$ |
181,353 |
|
Central |
|
|
77,042 |
|
|
|
85,950 |
|
|
|
95,852 |
|
Southern |
|
|
71,489 |
|
|
|
71,205 |
|
|
|
88,546 |
|
Corporate |
|
|
720 |
|
|
|
4,265 |
|
|
|
(4,799 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
292,887 |
|
|
$ |
310,414 |
|
|
$ |
360,952 |
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of Operating income (loss) before depreciation, amortization and gain (loss)
on disposal of assets to Income before income tax provision is included in Note 14 to our
Consolidated Financial Statements included in this Annual Report on Form 10-K.
Significant changes in revenue and operating income (loss) before depreciation, amortization
and gain (loss) on disposal of assets for our reportable segments for the year ended December 31,
2009, compared to the year ended December 31, 2008 and for the year ended December 31, 2008,
compared to the year ended December 31, 2007, are discussed below:
Segment Revenue
Revenue in our Western segment increased $105.1 million, or 20.5%, to $617.2 million for the
year ended December 31, 2009, from $512.1 million for the year ended December 31, 2008. For the
year ended December 31, 2009, the components of the revenue increase consisted of revenue acquired
from acquisitions closed during, or subsequent to, the year ended December 31, 2008 of $134.1
million and net price increases of $13.6 million, partially offset by volume decreases of $20.4
million, recyclable commodity sales decreases of $11.7 million and other revenue decreases of $10.4
million.
Revenue in our Western segment increased $34.8 million, or 7.3%, to $512.1 million for the
year ended December 31, 2008, from $477.3 million for the year ended December 31, 2007. For the
year ended December 31, 2008, the components of the revenue increase consisted of revenue acquired
from acquisitions closed during, or subsequent to, the year ended December 31, 2007 of $28.9
million and net price increases of $16.3 million, partially offset by volume decreases of $5.3
million, recyclable commodity sales decreases of $2.5 million and other revenue decreases of $2.7
million.
Revenue in our Central segment decreased $7.1 million, or 2.4%, to $291.9 million for the year
ended December 31, 2009, from $299.0 million for the year ended December 31, 2008. For the year
ended December 31, 2009, the components of the revenue decrease consisted of volume decreases of
$27.9 million and recyclable commodity sales decreases of $3.0 million, partially offset by revenue
acquired from acquisitions closed during, or subsequent to, the year ended December 31, 2008 of
$14.6 million and net price increases of $9.2 million.
Revenue in our Central segment increased $41.8 million, or 16.3%, to $299.0 million for the
year ended December 31, 2008, from $257.2 million for the year ended December 31, 2007. For the
year ended December 31, 2008, the components of the revenue increase consisted of revenue acquired
from acquisitions closed during, or subsequent to, the year ended December 31, 2007 of $24.1
million, net price increases of $23.3 million and other revenue increases of $0.3 million,
partially offset by volume decreases of $5.3 million and recyclable commodity sales decreases of
$0.6 million.
35
Revenue in our Southern segment increased $43.8 million, or 18.3%, to $282.3 million for the
year ended December 31, 2009, from $238.5 million for the year ended December 31, 2008. For the
year ended December 31, 2009, the components of the revenue increase consisted of revenue acquired
from acquisitions closed during, or subsequent to, the year ended December 31, 2008 of $54.8
million, net price increases of $4.8 million and other revenue increases of $0.7 million, partially
offset by volume decreases of $15.8 million and recyclable commodity sales decreases of $0.8
million.
Revenue in our Southern segment increased $14.5 million, or 6.5%, to $238.5 million for the
year ended December 31, 2008, from $224.0 million for the year ended December 31, 2007. For the
year ended December 31, 2008, the components of the revenue increase consisted of revenue acquired
from acquisitions closed during, or subsequent to, the year ended December 31, 2007 of $9.0
million, net price increases of $14.0 million, and recyclable commodity sales increases of $0.1
million, partially offset by volume decreases of $7.7 million and other revenue decreases of $0.9
million.
Segment Operating Income (Loss) before Depreciation, Amortization and Gain (Loss) on Disposal
of Assets
Operating income (loss) before depreciation, amortization and gain (loss) on disposal of
assets in our Western segment increased $32.4 million, or 21.7%, to $181.4 million for the year
ended December 31, 2009, from $149.0 million for the year ended December 31, 2008. The increase
was primarily due to income generated from acquisitions closed during, or subsequent to, the year
ended December 31, 2008, and the following changes at operations owned in the comparable periods in
2008 and 2009: decreased labor expenses; decreased fuel expense; decreased third party trucking
and transportation expenses; decreased major vehicle and equipment repairs; and decreased expenses
associated with the cost of purchasing recyclable commodities; partially offset by decreased
revenues at operations owned in the comparable periods, increased legal expenses and increased
incentive compensation expenses.
Operating income (loss) before depreciation, amortization and gain (loss) on disposal of
assets in our Western segment increased $5.4 million, or 3.7%, to $149.0 million for the year ended
December 31, 2008, from $143.6 million for the year ended December 31, 2007. The increase was
primarily due to income generated from acquisitions closed during, or subsequent to, the year ended
December 31, 2007, and increased revenues and decreased auto and workers compensation insurance
expenses at operations owned in the comparable periods in 2007 and 2008, partially offset by the
following changes at operations owned in the comparable periods in 2007 and 2008: increased labor
expenses; increased disposal and third party trucking and transportation expenses; and increased
fuel expenses.
Operating income (loss) before depreciation, amortization and gain (loss) on disposal of
assets in our Central segment increased $9.9 million, or 11.5%, to $95.9 million for the year ended
December 31, 2009, from $86.0 million for the year ended December 31, 2008. The increase was
primarily due to income generated from acquisitions closed during, or subsequent to, the year ended
December 31, 2008, and the following changes at operations owned in the comparable periods in 2008
and 2009: decreased labor expenses; decreased fuel expense; decreased major vehicle and equipment
repairs; and decreased disposal and third party trucking and transportation expenses; partially
offset by decreased revenues.
Operating income (loss) before depreciation, amortization and gain (loss) on disposal of
assets in our Central segment increased $9.0 million, or 11.6%, to $86.0 million for the year ended
December 31, 2008, from $77.0 million for the year ended December 31, 2007. The increase was
primarily due to income generated from acquisitions closed during, or subsequent to, the year ended
December 31, 2007, and increased revenues and decreased auto and workers compensation insurance
expenses at operations owned in the comparable periods in 2007 and 2008, partially offset by the
following changes at operations owned in the comparable periods in 2007 and 2008: increased labor
expenses; increased disposal and third party trucking and transportation expenses; and increased
fuel expenses.
Operating income (loss) before depreciation, amortization and gain (loss) on disposal of
assets in our Southern segment increased $17.3 million, or 24.4%, to $88.5 million for the year
ended December 31, 2009, from $71.2 million for the year ended December 31, 2008. The increase was
primarily due to income generated from acquisitions closed during, or subsequent to, the year ended
December 31, 2008, and the following changes at operations owned in the comparable periods in 2008
and 2009: decreased labor expenses; decreased fuel expense; decreased disposal and third party
trucking and transportation expenses; partially offset by decreased revenues.
Operating income (loss) before depreciation, amortization and gain (loss) on disposal of
assets in our Southern segment decreased $0.3 million, or 0.4%, to $71.2 million for the year ended
December 31, 2008, from $71.5 million for the year ended December 31, 2007. The decrease was
primarily due to the following changes at operations owned in comparable periods in 2007 and 2008:
increased fuel expense; increased labor expenses; and increased third party trucking and
transportation expenses; partially offset by income generated from acquisitions closed during, or
subsequent to, the year ended December 31, 2007, and increased revenues and decreased disposal
expenses at operations owned in the comparable periods in 2007 and 2008.
36
Operating income (loss) before depreciation, amortization and gain (loss) on disposal of
assets at Corporate decreased $9.1 million, to a loss total of $4.8 million for the year ended
December 31, 2009, from an income total of $4.3 million for the year ended December 31, 2008. Our
estimated recurring corporate expenses, which can vary from the actual amount of incurred corporate
expenses, are allocated to our three geographic operating segments. The net operating losses for
the year ended December 31, 2009 were due primarily to charges recorded to establish or increase
our liability for remaining rental expenses, net of estimated sublease rentals, at our prior
corporate office facilities, direct acquisition costs that were charged to expense, increased
compensation expense resulting from increased deferred compensation plan liabilities due to
improved market performance of employee deferred contributions and increased cash and stock-based
incentive compensation expenses.
Operating income (loss) before depreciation, amortization and gain (loss) on disposal of
assets at Corporate increased $3.6 million, to $4.3 million for the year ended December 31, 2008,
from $0.7 million for the year ended December 31, 2007. Our estimated recurring corporate
expenses, which can vary from the actual amount of incurred corporate expenses, are allocated to
our three geographic operating segments. The increase was due primarily to decreased auto and
workers compensation insurance expenses and decreased employee deferred compensation expense
resulting from deferred compensation liabilities to employees being reduced as a result of declines
in the market value of investments to which employee deferred compensation balances are tracked,
partially offset by increased incentive and equity compensation expenses.
37
Results of Operations
The following table sets forth items in our consolidated statements of income in thousands and
as a percentage of revenues for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
|
|
|
|
As a % of 2007 |
|
|
|
|
|
|
As a % of 2008 |
|
|
|
|
|
|
As a % of 2009 |
|
|
|
2007 |
|
|
Revenues |
|
|
2008 |
|
|
Revenues |
|
|
2009 |
|
|
Revenues |
|
Revenues |
|
$ |
958,541 |
|
|
|
100.0 |
% |
|
$ |
1,049,603 |
|
|
|
100.0 |
% |
|
$ |
1,191,393 |
|
|
|
100.0 |
% |
Cost of operations |
|
|
566,089 |
|
|
|
59.1 |
|
|
|
628,075 |
|
|
|
59.8 |
|
|
|
692,415 |
|
|
|
58.1 |
|
Selling, general and administrative |
|
|
99,565 |
|
|
|
10.4 |
|
|
|
111,114 |
|
|
|
10.6 |
|
|
|
138,026 |
|
|
|
11.6 |
|
Depreciation |
|
|
81,287 |
|
|
|
8.5 |
|
|
|
91,095 |
|
|
|
8.7 |
|
|
|
117,796 |
|
|
|
9.9 |
|
Amortization of intangibles |
|
|
4,341 |
|
|
|
0.4 |
|
|
|
6,334 |
|
|
|
0.6 |
|
|
|
12,962 |
|
|
|
1.1 |
|
Loss (gain) on disposal of assets |
|
|
250 |
|
|
|
|
|
|
|
629 |
|
|
|
0.1 |
|
|
|
(481 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
207,009 |
|
|
|
21.6 |
|
|
|
212,356 |
|
|
|
20.2 |
|
|
|
230,675 |
|
|
|
19.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(39,206 |
) |
|
|
(4.1 |
) |
|
|
(43,102 |
) |
|
|
(4.1 |
) |
|
|
(49,161 |
) |
|
|
(4.1 |
) |
Interest income |
|
|
1,593 |
|
|
|
0.2 |
|
|
|
3,297 |
|
|
|
0.4 |
|
|
|
1,413 |
|
|
|
0.1 |
|
Other income (expense), net |
|
|
289 |
|
|
|
|
|
|
|
(633 |
) |
|
|
(0.1 |
) |
|
|
(7,551 |
) |
|
|
(0.7 |
) |
Income tax provision |
|
|
(58,328 |
) |
|
|
(6.1 |
) |
|
|
(56,775 |
) |
|
|
(5.4 |
) |
|
|
(64,565 |
) |
|
|
(5.4 |
) |
Net income attributable to
noncontrolling interests |
|
|
(14,870 |
) |
|
|
(1.5 |
) |
|
|
(12,240 |
) |
|
|
(1.2 |
) |
|
|
(986 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Waste
Connections |
|
$ |
96,487 |
|
|
|
10.1 |
% |
|
$ |
102,903 |
|
|
|
9.8 |
% |
|
$ |
109,825 |
|
|
|
9.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, 2009 and 2008
Revenues. Total revenues increased $141.8 million, or 13.5%, to $1.19 billion for the
year ended December 31, 2009, from $1.05 billion for the year ended December 31, 2008.
Acquisitions closed during, or subsequent to, the year ended December 31, 2008, increased
revenues by approximately $203.6 million.
During the year ended December 31, 2009, the net increase in prices charged to our customers
was $27.7 million, consisting of $49.6 million of core price increases, partially offset by a $21.9
million reduction in surcharges primarily related to declining fuel costs.
Volume decreases in our existing business during the year ended December 31, 2009, reduced
revenues by approximately $64.2 million. The net decrease in volume was primarily attributable to
declines in roll off activity and landfill and transfer station volumes for operations owned in the
comparable periods as a result of the economic recession currently affecting the United States.
Lower recyclable commodity prices during the initial nine months of 2009, primarily a result
of decreased overseas demand for recyclable commodities, partially offset by improved commodity
pricing during the final three months of 2009, resulted in a net decrease to revenues of $15.5
million during the year ended December 31, 2009. During the nine months ended September 30, 2009,
the decrease in recyclable revenues from price declines was $19.0 million. Commodity price
improvements during the three months ended December 31, 2009 increased revenues by $3.5 million.
Other revenues decreased by $9.8 million during the year ended December 31, 2009, primarily
due to a decline in cargo volume at our intermodal operations.
Cost of Operations. Total cost of operations increased $64.3 million, or 10.2%, to
$692.4 million for the year ended December 31, 2009, from $628.1 million for the year ended
December 31, 2008. The increase was attributable to operating costs associated with acquisitions
closed during, or subsequent to, the year ended December 31, 2008, increased landfill operating and
leachate disposal costs at certain landfills we own and an increase in auto and workers
compensation expense under our high deductible insurance program due to a larger reduction in
projected losses on open claims in 2008 compared to 2009, partially offset by decreased labor
expenses due to headcount reductions at our operations owned in the comparable periods, decreased
employee medical benefit expenses resulting from decreases in claims cost, decreased diesel fuel
expense resulting from lower volumes consumed and lower prices, decreased major vehicle and
equipment repairs, decreased disposal and third party trucking and transportation expenses due to
decreased volumes and decreased expenses associated with the cost of purchasing recyclable
commodities due to recyclable commodity pricing declines. We record adjustments to auto and
workers compensation claim development costs based on changes in estimates of actuarially
projected losses on open claims determined by our third party administrators review and a third
party actuarial review of our estimated insurance liability. During the years ended December 31,
2008 and 2009, adjustments recorded resulting from changes in estimates of actuarially projected
losses on open claims resulted in reductions to insurance expense of $3.0 million and $1.2 million,
respectively, which partially offset the overall increase in insurance expense discussed above.
38
Cost of operations as a percentage of revenues decreased 1.7 percentage points to 58.1% for
the year ended December 31, 2009, from 59.8% for the year ended December 31, 2008. The decrease as
a percentage of revenues was primarily attributable to decreased fuel prices, decreased third party
trucking and transportation expenses and decreases in the cost of recyclable commodities, partially
offset by increased auto and workers compensation expense and increased landfill leachate disposal
expenses.
SG&A. SG&A expenses increased $26.9 million, or 24.2%, to $138.0 million for the year
ended December 31, 2009, from $111.1 million for the year ended December 31, 2008. The increase in
SG&A expenses was primarily the result of additional personnel from acquisitions closed during, or
subsequent to, the year ended December 31, 2008, increased cash and stock-based incentive
compensation expense, increased compensation expense resulting from increased deferred compensation
plan liabilities due to improved market performance of employee deferred contributions, increased
legal expenses, recording a charge to increase our liability for remaining rental expenses, net of
estimated sublease rentals, at our prior corporate office facilities, and charging direct
acquisition costs to SG&A expense, partially offset by a decrease in bad debt expense.
SG&A expenses as a percentage of revenues increased 1.0 percentage point to 11.6% for the year
ended December 31, 2009, from 10.6% for the year ended December 31, 2008. The increase as a
percentage of revenues was primarily attributable to declines in revenues from operations owned in
the comparable periods, increased cash and equity-based incentive compensation expenses, increased
deferred compensation expense, increased legal expenses, the aforementioned expense charge for our
former corporate office facilities and the aforementioned charge for direct acquisition costs.
Depreciation. Depreciation expense increased $26.7 million, or 29.3%, to $117.8
million for the year ended December 31, 2009, from $91.1 million for the year ended December 31,
2008. The increase was primarily attributable to depreciation and depletion associated with
acquisitions closed during, or subsequent to, the year ended December 31, 2008, and additions to
our fleet and equipment purchased to support our existing operations, partially offset by reduced
depletion expense at landfills owned during the years ended December 31, 2008 and 2009 due to lower
landfill volumes.
Depreciation expense as a percentage of revenues increased 1.2 percentage points to 9.9% for
the year ended December 31, 2009, from 8.7% for the year ended December 31, 2008. The increase in
depreciation expense as a percentage of revenues was due to the impact of declines in revenues from
operations owned in the comparable periods, coupled with the aforementioned increased depreciation
expense at existing and acquired operations and increased depletion expense at acquired operations.
Amortization of Intangibles. Amortization of intangibles expense increased $6.7
million, or 104.6%, to $13.0 million for the year ended December 31, 2009, from $6.3 million for
the year ended December 31, 2008. Amortization of intangibles expense as a percentage of revenues
increased 0.5 percentage points to 1.1% for the year ended December 31, 2009, from 0.6% for the
year ended December 31, 2008. These increases were primarily attributable to amortization of
contracts, customer lists and other intangibles acquired during, or subsequent to, the year ended
December 31, 2008.
Operating Income. Operating income increased $18.3 million, or 8.6%, to $230.7
million for the year ended December 31, 2009, from $212.4 million for the year ended December 31,
2008. The increase was primarily attributable to increased revenues and decreased losses on
disposal of assets, partially offset by increased operating costs, increased SG&A expense, and
increased depreciation expense and amortization of intangibles expense.
Operating income as a percentage of revenues decreased 0.8 percentage points to 19.4% for the
year ended December 31, 2009, from 20.2% for the year ended December 31, 2008. The decrease as a
percentage of revenues was due to the previously described 1.0 percentage point increase in SG&A
expense, combined 1.7 percentage point increase in depreciation expense and amortization of
intangibles expense, partially offset by a 1.7 percentage point decrease in cost of operations and
a 0.2 percentage point change resulting from the recognition of a gain on the disposal of assets
during the year ended December 31, 2009.
39
Interest Expense. Interest expense increased $6.1 million, or 14.1%, to $49.2 million
for the year ended December 31, 2009, from $43.1 million for the year ended December 31, 2008. The
increase was primarily 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.
Interest Income. Interest income decreased $1.9 million to $1.4 million for the year
ended December 31, 2009, from $3.3 million for the year ended December 31, 2008. Waste Connections
maintained higher average cash balances in money market accounts during the three months ended
December 31, 2008 and the three months ended March 31, 2009 in anticipation of funding the
acquisition of certain operations from Republic. Due to a decline in rates of return on money
market accounts, interest earned on our cash balances was higher in 2008, compared to 2009.
Other Income (Expense), Net. Other income (expense), net increased $7.0 million to an
expense balance of $7.6 million for the year ended December 31, 2009, from an expense balance of
$0.6 million for the year ended December 31, 2008. The increase was primarily attributable to the
termination of two of our interest rate swap agreements in conjunction with the issuance in October
2009 of our senior notes due 2019, partially offset by earnings on our mutual fund investments. We
purchase investments in mutual funds to fund our obligations under our deferred compensation plan.
Income Tax Provision. Income taxes increased $7.8 million, or 13.7%, to $64.6 million
for the year ended December 31, 2009, from $56.8 million for the year ended December 31, 2008.
Our effective tax rates for the year ended December 31, 2008 and 2009 were 33.0% and 36.8%,
respectively. As a result of our adoption of the new guidance on noncontrolling interests
(effective January 1, 2009, as discussed in Note 13 to our Consolidated Financial Statements
included in this Annual Report on Form 10-K), the measurement of our effective tax rate has changed
from previous years. The adoption of the noncontrolling interests guidance resulted in an increase
in our Income before income tax provision due to the inclusion of Net income attributable to
noncontrolling interests in this measure. Net income attributable to noncontrolling interests, or
what was previously referred to as Minority Interests expense, was historically shown as an
expense in arriving at Income before income tax provision. Under the new noncontrolling interests
guidance, amounts reported as Net income attributable to noncontrolling interests are now reported
net of any applicable taxes. Our 2008 effective tax rate has been remeasured and reported in a
manner consistent with the current measurement approach.
During the year ended December 31, 2008, we recorded a reduction to income tax expense of $4.9
million, resulting primarily from changes to the geographical apportionment of our state income
taxes, the reversal of certain tax contingencies for which the statute of limitations expired in
2008, and the reconciliation of the income tax provision to the 2007 federal and state tax returns,
which were filed during 2008.
During the year ended December 31, 2009, we recorded a reduction to income tax expense of $1.6
million, resulting from changes to the geographical apportionment of our state income taxes due to
acquisitions closed in the current year and from current year changes to the state apportionment
formulas used in certain states and the reconciliation of the income tax provision to the 2008
federal and state tax returns, which were filed during 2009. Additionally, we recorded a net
reduction to the liability for uncertain tax positions of approximately $0.8 million due to the
expiration of certain statute of limitations, which was recorded as a reduction to income tax
expense.
Net Income Attributable to Noncontrolling Interests. Net income attributable to
noncontrolling interests decreased $11.2 million, or 91.9%, to $1.0 million for the year ended
December 31, 2009, from $12.2 million for the year ended December 31, 2008. The decrease was
primarily due to our acquisition in November 2008 of the remaining 49% interest in Pierce County
Recycling, Composting and Disposal, LLC and Pierce County Landfill Management, Inc. (PCRCD).
During the year ended December 31, 2008, net income attributable to PCRCD was $11.4 million.
Years Ended December 31, 2008 and 2007
Revenues. Total revenues increased $91.1 million, or 9.5%, to $1.05 billion for the
year ended December 31, 2008, from $958.5 million for the year ended December 31, 2007.
Acquisitions closed during, or subsequent to, the year ended December 31, 2007, increased
revenues by approximately $62.1 million.
During the year ended December 31, 2008, increased prices and surcharges charged to our
customers increased revenue by $53.6 million.
40
During the year ended December 31, 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 year ended December 31, 2008, reduced revenue by
approximately $22.2 million. The net decrease in volume was primarily attributable to declines in
roll off activity and landfill volumes for landfills owned in the comparable periods. During the
first quarter of 2008, our volume growth,
net of revenues generated from a long-term contract that commenced in March 2007, was $1.0
million. During the second, third and fourth quarters of 2008, our volume declined by $3.7
million, $5.3 million and $14.2 million, respectively, from the comparable periods in 2007. Our
volume decline increased throughout 2008 as a result of the overall economic recession currently
affecting the United States.
Recyclable commodity revenue was $40.4 million for the year ended December 31, 2008.
Reductions in recyclable commodity prices and volumes during the fourth quarter of 2008, partially
offset by increased recyclable commodity prices and volume during the first nine months of 2008,
reduced revenue by $3.3 million from 2007. During the first, second and third quarters of 2008,
our recyclable commodity revenue increased $2.2 million, $1.5 million and $0.2 million,
respectively, from the comparable periods in 2007. During the fourth quarter of 2008, our
recyclable commodity revenue declined $7.2 million from the comparable period in 2007 due to a
sharp decline in commodity pricing resulting from decreased overseas demand for recyclable
commodities.
Other revenues decreased by $3.1 million during the year ended December 31, 2008.
Cost of Operations. Total cost of operations increased $62.0 million, or 10.9%, to
$628.1 million for the year ended December 31, 2008, from $566.1 million for the year ended
December 31, 2007. The increase was attributable to operating costs associated with acquisitions
closed during, or subsequent to, the year ended December 31, 2007, operating costs incurred to
support a long-term contract that commenced in March 2007, increased diesel fuel expense resulting
from higher market prices for fuel and certain operating locations entering into short-term, fixed
price, fuel purchase agreements in the second quarter of 2008 that resulted in the purchase of
their remaining 2008 fuel volume at prices in excess of market value, 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, decreases in auto and workers compensation claims
under our high deductible insurance program and a reduction in expected development costs recorded
in prior years for open auto and workers compensation claims. This adjustment to claim
development costs was based on changes in estimates of actuarially projected losses on open claims
determined by our third party administrators review and a third party actuarial review of our
estimated insurance liability.
Cost of operations as a percentage of revenues increased 0.7 percentage points to 59.8% for
the year ended December 31, 2008, from 59.1% for the year ended December 31, 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 December 31, 2007, and decreased auto and
workers compensation insurance expense related to current and prior year claims.
SG&A. SG&A expenses increased $11.5 million, or 11.6%, to $111.1 million for the year
ended December 31, 2008, from $99.6 million for the year ended December 31, 2007. The increase was
primarily the result of additional personnel from acquisitions closed during, or subsequent to, the
year ended December 31, 2007, increased payroll expense due to increased headcount to support our
base operations, increased medical benefit expense, and increased incentive and equity compensation
expenses, partially offset by decreased employee deferred compensation expense resulting from
deferred compensation liabilities to employees being reduced as a result of declines in the market
value of investments to which employee deferred compensation balances are tracked.
SG&A expenses as a percentage of revenues increased 0.2 percentage points to 10.6% for the
year ended December 31, 2008, from 10.4% for the year ended December 31, 2007. The increase as a
percentage of revenues was primarily attributable to increased payroll expense, increased incentive
and equity compensation expense, partially offset by decreased employee deferred compensation
expense.
Depreciation. Depreciation expense increased $9.8 million, or 12.1%, to $91.1 million
for the year ended December 31, 2008, from $81.3 million for the year ended December 31, 2007. The
increase was primarily attributable to depreciation expense associated with acquisitions closed
during, or subsequent to, the year ended December 31, 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.
41
Depreciation expense as a percentage of revenues increased 0.2 percentage points to 8.7% for
the year ended December 31, 2008, from 8.5% for the year ended December 31, 2007. The increase as
a percentage of revenues was the result of fleet and equipment purchased to support our existing
operations.
Amortization of Intangibles. Amortization of intangibles expense increased $2.0
million, or 45.9%, to $6.3 million for the year ended December 31, 2008, from $4.3 million for the
year ended December 31, 2007. The increase was primarily attributable to amortization expense
associated with intangible assets acquired during, or subsequent to, the year ended December 31,
2007.
Amortization of intangibles expense as a percentage of revenues increased 0.2 percentage
points to 0.6% for the year ended December 31, 2008, from 0.4% for the year ended December 31,
2007. The increase as a percentage of revenues was the result of amortization expense associated
with intangible assets acquired during, or subsequent to, the year ended December 31, 2007.
Operating Income. Operating income increased $5.4 million, or 2.6%, to $212.4 million
for the year ended December 31, 2008, from $207.0 million for the year ended December 31, 2007.
The increase was primarily attributable to increased revenues, partially 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 1.4 percentage points to 20.2% for the
year ended December 31, 2008, from 21.6% for the year ended December 31, 2007. The decrease as a
percentage of revenues was due to the previously described percentage of revenue increases in cost
of operations, SG&A, and depreciation and amortization expense.
Interest Expense. Interest expense increased $3.9 million, or 9.9%, to $43.1 million
for the year ended December 31, 2008, from $39.2 million for the year ended December 31, 2007. The
increase 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.
Interest Income. Interest income increased $1.7 million, or 107.0%, to $3.3 million
for the year ended December 31, 2008, from $1.6 million for the year ended December 31, 2007. The
increase was attributable to higher average cash balances.
Income Tax Provision. Income taxes decreased $1.5 million, or 2.7%, to $56.8 million
for the year ended December 31, 2008, from $58.3 million for the year ended December 31, 2007.
Our effective tax rates for the years ended December 31, 2007 and 2008, were 34.4% and 33.0%,
respectively. The decrease in the effective tax rate during the year ended December 31, 2008, was
due to recording adjustments to reduce income tax expense by $4.9 million, resulting primarily from
changes to the geographical apportionment of our state income taxes, the reversal of certain tax
contingencies for which the statute of limitations expired in 2008, and the reconciliation of the
income tax provision to the 2007 federal and state tax returns, which were filed during 2008.
Net Income Attributable to Noncontrolling Interests. Net income attributable to
noncontrolling interests decreased $2.7 million, or 17.7%, to $12.2 million for the year ended
December 31, 2008, from $14.9 million for the year ended December 31, 2007. The decrease was due
to decreased earnings at PCRCD, primarily resulting from a decrease in revenues associated with
reduced disposal volumes, and our acquisition of the remaining 49% interest in PCRCD, effective
November 3, 2008. Our net income attributable to noncontrolling interests would have been $13.7
million for the year ended December 31, 2008, if we had not purchased the remaining 49% interest in
PCRCD.
Liquidity and Capital Resources
The following table sets forth certain cash flow information for the years ended December 31,
2007, 2008 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Net cash provided by operating activities |
|
$ |
219,069 |
|
|
$ |
270,409 |
|
|
$ |
303,637 |
|
Net cash used in investing activities |
|
|
(235,609 |
) |
|
|
(467,647 |
) |
|
|
(548,227 |
) |
Net cash provided by (used in) financing activities |
|
|
(8,111 |
) |
|
|
452,204 |
|
|
|
(11,035 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and equivalents |
|
|
(24,651 |
) |
|
|
254,966 |
|
|
|
(255,625 |
) |
Cash and equivalents at beginning of year |
|
|
34,949 |
|
|
|
10,298 |
|
|
|
265,264 |
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents at end of year |
|
$ |
10,298 |
|
|
$ |
265,264 |
|
|
$ |
9,639 |
|
|
|
|
|
|
|
|
|
|
|
42
Operating Activities Cash Flows
For the year ended December 31, 2009, net cash provided by operating activities was $303.6
million. For the year ended December 31, 2008, net cash provided by operating activities was
$270.4 million. The $33.2 million net increase in cash provided by operating activities was
primarily due to the following:
|
1) |
|
An increase in depreciation and amortization expense of $33.3 million; |
|
2) |
|
An increase in deferred taxes of $7.9 million primarily due to an increase in tax
deductible timing differences for depreciation and amortization expenses and to recording
basis differences for certain assets related to acquisitions; |
|
3) |
|
An increase of $2.4 million attributable to a decrease in the excess tax benefit
associated with equity-based compensation, due to a reduction in stock option exercises
resulting in reduced taxable income recognized by employees that is tax deductible to us; |
|
4) |
|
A decrease in net income of $4.3 million; and |
|
5) |
|
A decrease in cash flows from operating assets and liabilities, net of effects from
acquisitions, of $7.6 million to $10.8 million for the year ended December 31, 2009, from
$18.4 million for the year ended December 31, 2008. The significant components of the
$10.8 million in cash flows from changes in operating assets and liabilities include the
following: |
|
a) |
|
an increase from accounts payable of $13.2 million due primarily to the timing of
payments for operating activities; |
|
b) |
|
an increase from accrued liabilities of $6.5 million due primarily to increased
accruals for cash-based employee incentive compensation expense, increased accruals for
employee benefits, increased accruals for interest expense due to the timing of interest
payments under new debt instruments issued in 2009, increased accruals for property
taxes and increased accruals for auto and workers compensation claims due to the timing
of claims incurred; |
|
c) |
|
an increase from other long-term liabilities of $3.8 million due primarily to
increased deferred compensation plan liabilities resulting from employee contributions
and plan earnings; less |
|
d) |
|
a decrease from accounts receivable of $4.3 million due to increased revenues,
partially offset by an improvement in accounts receivable turnover in 2009; less |
|
e) |
|
a decrease from prepaid expenses and other current assets of $8.0 million due
primarily to an increase in prepaid income taxes and prepaid insurance premiums. |
For the year ended December 31, 2008, net cash provided by operating activities was $270.4
million. For the year ended December 31, 2007, net cash provided by operating activities was
$219.1 million. The $51.3 million net increase in cash provided by operating activities was
primarily due to the following:
|
1) |
|
An increase in the change in deferred income taxes of $19.4 million due primarily to an
increase in tax deductible timing differences for depreciation expense, amortization
expense and landfill closure and post-closure expense; |
|
|
2) |
|
An increase in depreciation and amortization expense of $11.8 million; |
|
3) |
|
An increase of $7.7 million attributable to a decrease in the excess tax benefit
associated with equity-based compensation, due to a reduction in stock option exercises
resulting in reduced taxable income recognized by employees that is tax deductible by us; |
|
|
4) |
|
An increase in net income of $3.8 million; and |
|
5) |
|
An increase in cash flows from operating assets and liabilities, net of effects from
acquisitions, of $6.2 million to $18.4 million for the year ended December 31, 2008, from
$12.2 million for the year ended December 31, 2007. The significant components of the
$18.4 million in cash flows from changes in operating assets and liabilities include the
following: |
|
a) |
|
an increase from accounts receivable of $18.8 million, due to improved accounts
receivable turnover in 2008; |
|
b) |
|
an increase from accrued liabilities of $6.4 million, due primarily to an
increase in accrued interest due to changes in the payment timing for LIBOR-based
borrowings and our issuance in 2008 of $175 million of senior unsecured notes due
October 1, 2015, which pay interest semi-annually on April 1 and October 1, less, |
|
c) |
|
a decrease from other long-term liabilities of $6.2 million due primarily to the
2008 expiration of certain accrued tax contingencies and interim capping expenditures at
one of our landfills. |
As of December 31, 2009, we had a working capital deficit of $45.1 million, including cash and
equivalents of $9.6 million. Our working capital decreased $258.8 million from a working capital
surplus of $213.7 million at December 31, 2008. Our decreased cash and working capital positions
from December 31, 2008, were primarily due to funding the acquisition of certain operations from
Republic in 2009. To date, we have experienced no loss or lack of access to our cash or cash
equivalents; however, we can provide no assurances that access to our 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.
43
Investing Activities Cash Flows
Net cash used in investing activities increased $80.6 million to $548.2 million for the year
ended December 31, 2009, from $467.6 million for the year ended December 31, 2008. The significant
components of the increase include the following:
|
1) |
|
An increase in payments for acquisitions of $64.9 million; and |
|
2) |
|
An increase in capital expenditures for property and equipment of $14.8 million due to
growth from acquisitions and the acceleration of certain planned 2010 capital expenditures
into 2009 in order to take advantage of accelerated tax deduction benefits. |
Net cash used in investing activities increased $232.0 million to $467.6 million for the year
ended December 31, 2008, from $235.6 million for the year ended December 31, 2007. The significant
components of the increase include the following:
|
1) |
|
An increase in payments for acquisitions of $245.7 million; less |
|
2) |
|
A decrease in capital expenditures for property and equipment of $10.7 million, due
primarily to non-recurring capital expenditures incurred during the year ended December 31,
2007, associated with a new long-term contract in California. |
Financing Activities Cash Flows
Net cash flows from financing activities decreased $463.2 million to a net cash used in
financing activities total of $11.0 million for the year ended December 31, 2009, from a net cash
provided by financing activities total of $452.2 million for the year ended December 31, 2008. The
significant components of the decrease include the following:
|
1) |
|
Net proceeds from the sale of stock in a public offering of $393.9 million during the
year ended December 31, 2008. There were no sales of stock in a public offering during the
year ended December 31, 2009; |
|
2) |
|
A decrease in net long-term borrowings of $53.6 million, with the net proceeds
primarily used to fund acquisition opportunities; |
|
|
3) |
|
An increase in payments to repurchase our common stock of $31.1 million; |
|
4) |
|
A decrease in proceeds from option and warrant exercises of $3.7 million due to a
decrease in the number of options and warrants exercised in 2009; less |
|
5) |
|
A change in book overdraft of $12.3 million resulting from fluctuations in our
outstanding cash balances at banks for which outstanding check balances can be offset;
less, |
|
6) |
|
A decrease in the amounts distributed to non-controlling interests of $8.2 million due
to the aforementioned purchase of the remaining 49% interest in PCRCD. |
Net cash flows from financing activities increased $460.3 million to a net cash provided by
financing activities total of $452.2 million for the year ended December 31, 2008, from a net cash
used in financing activities total of $8.1 million for the year ended December 31, 2007. The
significant components of the increase include the following:
|
1) |
|
An increase in proceeds from our common stock offering of $393.9 million, due to the
September 2008 sale of 12,650,000 shares of our common stock in a public offering; |
|
2) |
|
An increase in proceeds from long-term debt, net of principal payments, of $20.7
million; less |
|
3) |
|
A decrease in payments to repurchase common stock of $78.8 million, due to our election
not to repurchase stock after March 31, 2008, and to use our available capital to fund
acquisition opportunities; less |
|
4) |
|
A change in book overdraft of $13.3 million resulting from fluctuations in our
outstanding cash balances at banks for which outstanding check balances can be offset; less |
|
5) |
|
A decrease in proceeds from option and warrant exercises of $16.5 million due to a
decrease in the number of options and warrants exercised in 2008; and |
|
6) |
|
A decrease in the excess tax benefit associated with equity-based compensation of $7.7
million, due to the aforementioned decrease in options and warrants exercised in 2008. |
Our business is capital intensive. Our capital requirements include acquisitions and fixed
asset purchases. We will also make capital expenditures for landfill cell construction, landfill
development, landfill closure activities and intermodal facility construction in the future.
44
Our Board of Directors has authorized a common stock repurchase program for the repurchase of
up to $800 million of common stock through December 31, 2012. As of December 31, 2008 and 2009, we
had repurchased 16.8 million and 19.0 million shares, respectively, of our common stock at a cost
of $419.8 million and $482.4 million, respectively. As of December 31, 2009, the remaining maximum
dollar value of shares available for purchase under the program was approximately $317.6 million.
We made $128.3 million in capital expenditures during the year ended December 31, 2009. We
expect to make capital expenditures between $115 million and $120 million in 2010 in connection
with our existing business. We intend to fund our planned 2010 capital expenditures principally
through internally generated funds and borrowings under our credit facility. In addition, we may
make substantial additional capital expenditures in acquiring 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.
However, disruptions in the capital and credit markets could adversely affect our ability to draw
on our credit facility or raise other capital. Our access to funds under the credit facility is
dependent on the ability of the banks that are parties to the facility to meet their funding
commitments. Those banks may not be able to meet their funding commitments if they experience
shortages of capital and liquidity or if they experience excessive volumes of borrowing requests
within a short period of time.
We have an $845 million senior revolving credit facility, or the credit facility, with a
syndicate of banks for which Bank of America, N.A. acts as agent. As of December 31, 2007, $479.0
million was outstanding under our credit facility, exclusive of outstanding standby letters of
credit of $68.3 million. As of December 31, 2008, $400.0 million was outstanding under the credit
facility, exclusive of outstanding standby letters of credit of $81.4 million. As of December 31,
2009, $269.0 million was outstanding under the credit facility, exclusive of outstanding standby
letters of credit of $87.1 million.
The credit facility requires interest payments as outlined in the credit agreement and matures
in September 2012. Under the credit facility, there is no maximum amount of standby letters of
credit that can be issued; however, the issuance of standby letters of credit reduces the amount of
total borrowings available. The credit facility requires us to pay a commitment fee ranging from
0.15% to 0.20% of the unused portion of the facility. The borrowings under the credit facility
bear interest, at our option, at either the base rate plus the applicable base rate margin on base
rate loans, or the Eurodollar rate plus the applicable Eurodollar margin on Eurodollar loans. The
base rate for any day is a fluctuating rate per annum equal to the higher of: (1) the federal funds
rate plus one half of one percent (0.5%); and (2) the rate of interest in effect for such day as
publicly announced from time to time by Bank of America as its prime rate. The Eurodollar rate
is determined by the administrative agent pursuant to a formula in the credit agreement governing
the credit facility. The applicable margins under the credit facility vary depending on our
leverage ratio, as defined in the credit agreement, and range from 0.625% to 1.125% for Eurodollar
loans and 0.00% for base rate loans. The borrowings under the credit facility are not
collateralized. The credit agreement governing the credit facility contains representations and
warranties and places certain business, financial and operating restrictions on us relating to,
among other things, indebtedness, liens and other encumbrances, investments, mergers and
acquisitions, asset sales, sale and leaseback transactions, and dividends, distributions and
redemptions of capital stock. The credit facility requires that we maintain specified financial
ratios. As of December 31, 2008 and 2009, we were in compliance with all applicable covenants
under the credit facility. We use the credit facility for acquisitions, capital expenditures,
working capital, standby letters of credit and general corporate purposes.
On March 20, 2006, we completed the offering of $200 million aggregate principal amount of our
3.75% Convertible Senior Notes due 2026, or the 2026 Notes, pursuant to a private placement. The
terms and conditions of the 2026 Notes are set forth in the Indenture, dated as of March 20, 2006,
between us and U.S. Bank National Association, as trustee. The 2026 Notes rank equally in right of
payment to all of our other existing and future senior uncollateralized and unsubordinated
indebtedness. The 2026 Notes rank senior in right of payment to all of our existing and future
subordinated indebtedness and are subordinated in right of payment to our collateralized
obligations to the extent of the assets collateralizing such obligations. The 2026 Notes bear
interest at 3.75% per annum payable semi-annually in arrears on April 1 and October 1 of each year,
beginning on October 1, 2006, until the maturity date of April 1, 2026.
The 2026 Notes are convertible into cash and, if applicable, shares of common stock based on
an initial conversion rate of 29.4118 shares of common stock per $1,000 principal amount of 2026
Notes (which is equal to an initial conversion price of approximately $34.00 per share), subject to
adjustment, and only under certain circumstances. Upon a surrender of the 2026 Notes for
conversion, we will deliver cash equal to the lesser of the aggregate principal amount of notes to
be converted and our total conversion obligation. We will deliver shares of our common stock in
respect of the remainder, if any, of our conversion obligation. The holders of the 2026 Notes who
convert their notes in connection with a change in control (as defined in the Indenture) may be
entitled to a make-whole premium in the form of an increase in the conversion rate.
45
Holders may surrender the 2026 Notes for conversion into cash and, if applicable, shares of
our common stock at any time prior to the close of business on the maturity date, if the closing
sale price of our common stock for at least 20 trading days in the period of 30 consecutive trading
days ending on the last trading day of the quarter preceding the quarter in which the conversion
occurs, is more than 130% of the conversion price per share of our common stock on that
30th day.
Beginning on April 1, 2010, we may redeem in cash all or part of the 2026 Notes at a price
equal to 100% of the principal amount plus accrued and unpaid interest, including additional
interest, if any, and, if redeemed prior to April 1, 2011, an
interest make-whole payment. On February 8, 2010, we announced that
on April 1, 2010, we intend to redeem all of our 2026 Notes. Holders
may have their 2026 Notes redeemed at par plus a make-whole payment,
together with accrued and unpaid interest to the redemption date.
Alternatively, holders may convert their 2026 Notes, prior to 5 p.m.,
New York City time, on March 31, 2010. The conversion price is $34.00
per share, which is equivalent to a conversion rate of approximately
29.4118 shares of our common stock for each $1,000 principal amount
of the 2026 Notes. On February 8, 2010, the last reported sale price
of our common stock on the New York Stock Exchange was
$30.96 per share.
The holders of the 2026 Notes can require us to repurchase all or a part of the 2026 Notes in cash on
each of April 1, 2011, 2016 and 2021, and in the event of a change of control of Waste Connections,
at a purchase price of 100% of the principal amount of the 2026 Notes plus any accrued and unpaid
interest, including additional interest, if any. We are amortizing the $5.5 million debt issuance
costs over a five-year term through the first put date, or April 1, 2011.
On July 15, 2008, we entered into a Master Note Purchase Agreement with certain accredited
institutional investors pursuant to which we issued and sold to the investors at a closing on
October 1, 2008, $175 million of senior uncollateralized notes due October 1, 2015, or the 2015
Notes, in a private placement. The 2015 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 2015 Notes on October 1, 2015.
The 2015 Notes are uncollateralized obligations and rank equally with obligations under our
credit facility. The 2015 Notes are subject to representations, warranties, covenants and events
of default. Upon the occurrence of an event of default, payment of the 2015 Notes may be
accelerated by the holders of the 2015 Notes. The 2015 Notes may also be prepaid by us at any time
at par plus a make-whole amount determined in respect of the remaining scheduled interest payments
on the 2015 Notes, using a discount rate of the then current market standard for United States
treasury bills plus 0.50%. In addition, we will be required to offer to prepay the 2015 Notes upon
certain changes in control.
On October 26, 2009, we entered into a First Supplement to the Master Note Purchase Agreement
with certain accredited institutional investors pursuant to which we issued and sold to the
investors on that date $175 million of senior uncollateralized notes due November 1, 2019, or the
2019 Notes, in a private placement. The 2019 Notes bear interest at the fixed rate of 5.25% per
annum with interest payable in arrears semi-annually on May 1 and November 1 beginning on May 1,
2010, and with principal payable at the maturity of the 2019 Notes on November 1, 2019.
The 2019 Notes are uncollateralized obligations and rank equally with the 2015 Notes and
obligations under our credit facility. The 2019 Notes are subject to representations, warranties,
covenants and events of default. Upon the occurrence of an event of default, payment of the 2019
Notes may be accelerated by the holders of the 2019 Notes. The 2019 Notes may also be prepaid by
us at any time at par plus a make-whole amount determined in respect of the remaining scheduled
interest payments on the 2019 Notes, using a discount rate of the then current market standard for
United States treasury bills plus 0.50%. In addition, we will be required to offer to prepay the
2019 Notes upon certain changes in control.
We may issue additional series of senior uncollateralized notes pursuant to the terms and
conditions of the Master Note Purchase Agreement, provided that the purchasers of the 2015 Notes
and the 2019 Notes shall not have any obligation to purchase any additional notes issued pursuant
to the Master Note Purchase Agreement and the aggregate principal amount of the 2015 Notes, the
2019 Notes and any additional notes issued pursuant to the Master Note Purchase Agreement shall not
exceed $500 million.
As of December 31, 2009, we had the following contractual obligations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less Than |
|
|
1 to 3 |
|
|
|
|
|
|
Over 5 |
|
Recorded Obligations |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
3 to 5 Years |
|
|
years |
|
Long-term debt |
|
$ |
876,409 |
|
|
$ |
2,609 |
|
|
$ |
473,610 |
|
|
$ |
3,287 |
|
|
$ |
396,903 |
|
Cash interest payments |
|
|
208,150 |
|
|
|
42,315 |
|
|
|
60,608 |
|
|
|
42,322 |
|
|
|
62,905 |
|
Long-term debt payments include:
|
|
|
(1) |
|
$269.0 million in principal payments due 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 3.25% at December 31, 2009) on base rate loans, or the
Eurodollar rate plus the applicable Eurodollar margin (approximately 0.86% at December 31,
2009) on Eurodollar loans. As of December 31, 2009, our credit facility allowed us to
borrow up to $845 million. |
46
|
|
|
(2) |
|
$175.0 million in principal payments due 2019 related to our 2019 Notes. Holders
of the 2019 Notes may require us to purchase their notes in cash at a purchase price of 100%
of the principal amount of the 2019 Notes plus accrued and unpaid interest, if any, upon a
change in control, as defined in the Master Note Purchase Agreement. The 2019 Notes bear
interest at a rate of 5.25%. |
|
(3) |
|
$200.0 million in principal payments due 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.
Therefore, we have assumed the 2026 Notes will be redeemed in 2011 in the above table.
Beginning on April 1, 2010, we may redeem in cash all or part of the 2026 Notes at a price
equal to 100% of the principal amount plus accrued and unpaid interest, including additional
interest, if any, and, if redeemed prior to April 1, 2011, an interest make-whole payment.
The 2026 Notes bear interest at a rate of 3.75%. On February 8, 2010, we announced that on April 1, 2010, we intend to redeem all of our 2026 Notes.
Holders may have their 2026 Notes redeemed in cash as described above. Alternatively, holders may
convert their 2026 Notes prior to 5 p.m., New York City time, on
March 31, 2010. |
|
(4) |
|
$175.0 million in principal payments due 2015 related to our 2015 Notes. Holders
of the 2015 Notes may require us to purchase their notes in cash at a purchase price of 100%
of the principal amount of the 2015 Notes plus accrued and
unpaid interest, if any, upon a change in control, as defined in the Master Note
Purchase Agreement. The 2015 Notes bear interest at a rate of 6.22%. |
|
(5) |
|
$50.6 million in principal payments related to our tax-exempt bonds, of which $10.3
million bears interest at fixed rates (between 7.0% and 7.25%) and $40.3 million bears
interest at variable rates (between 0.29% to 0.32%) at December 31, 2009. The tax-exempt
bonds have maturity dates ranging from 2012 to 2033. In January 2010, we gave notice to
redeem the $10.3 million of bonds that bear interest at fixed rates between 7.0% and 7.25%.
We will pay the principal plus accrued interest on these bonds on March 1, 2010. |
|
(6) |
|
$4.9 million in principal payments related to our notes payable to sellers. Our
notes payable to sellers bear interest at rates between 6.05% and 10.35% at December 31,
2009, and have maturity dates ranging from 2010 to 2036. |
|
(7) |
|
$1.9 million in principal payments related to our notes payable to third parties.
Our notes payable to third parties bear interest at rates between 1.0% and 10.9% at December
31, 2009, and have maturity dates ranging from 2010 to 2019. |
The following assumptions were made in calculating cash interest payments:
|
|
|
(1) |
|
We calculated cash interest payments on the credit facility using the Eurodollar
rate plus the applicable Eurodollar margin at December 31, 2009. We assumed the credit
facility is paid off when the credit facility matures in 2012. |
|
(2) |
|
We calculated cash interest payments on our interest rate swaps using the stated
interest rate in the swap agreement less the Eurodollar rate through the term of the swaps. |
|
(3) |
|
We calculated cash interest payments on the tax-exempt bonds using the interest
rate at December 31, 2009. |
|
(4) |
|
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. Therefore, we have assumed the 2026 Notes will be redeemed in 2011
in the above table. Beginning on April 1, 2010, we may redeem in cash all or part of the 2026 Notes at a price equal to 100% of the principal amount plus accrued
and unpaid interest, including additional interest, if any, and, if redeemed
prior to April 1, 2011, an interest make-whole payment. On February 8, 2010, we
announced that on April 1, 2010, we intend to redeem all of our 2026 Notes. Holders
may have their 2026 Notes redeemed in cash as described above.
Alternatively, holders may convert their 2026 Notes prior to 5 p.m.,
New York City time, on March 31, 2010. |
The total liability for uncertain tax positions at December 31, 2009, was approximately $1
million (refer to Note 13 to the consolidated financial statements). 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 this liability within the next year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiration Per Period |
|
|
|
|
|
|
|
Less Than |
|
|
1 to 3 |
|
|
|
|
|
|
Over |
|
Unrecorded Obligations |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
3 to 5 Years |
|
|
5 years |
|
Operating leases (1) |
|
$ |
79,418 |
|
|
$ |
10,139 |
|
|
$ |
18,940 |
|
|
$ |
15,623 |
|
|
$ |
34,716 |
|
Unconditional purchase
obligations (1) |
|
|
1,624 |
|
|
|
1,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
81,042 |
|
|
$ |
11,763 |
|
|
$ |
18,940 |
|
|
$ |
15,623 |
|
|
$ |
34,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We are party to operating lease agreements and unconditional purchase
obligations as discussed in Note 10 to the consolidated financial statements. 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 December 31, 2009, our unconditional purchase
obligations consisted of multiple fixed-price fuel purchase contracts under which we have
0.8 million gallons remaining to be purchased for a total of $1.6 million, plus taxes and
transportation costs upon delivery. The current fuel purchase contracts expire on or
before June 30, 2010. These arrangements have not materially affected our financial
position, results of operations or liquidity during the year ended December 31, 2009, nor
are they expected to have a material impact on our future financial position, results of
operations or liquidity. |
47
We have obtained standby letters of credit as discussed in Note 8 to the consolidated
financial statements and financial surety bonds as discussed in Note 10 to the consolidated
financial statements. These standby letters of credit and financial surety bonds are generally
obtained to support our financial assurance needs and landfill operations. These arrangements have
not materially affected our financial position, results of operations or liquidity during the year
ended December 31, 2009, nor are they expected to have a material impact on our future financial
position, results of operations or liquidity.
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 reporting units would not be
impaired by such dispositions, we could incur losses on them.
New Accounting Pronouncements
See Note 1 to the consolidated financial statements for a description of the new accounting
standards that are applicable to us.
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
noncontrolling interests. Other companies may calculate free cash flow differently. Our free cash
flow for the years ended December 31, 2008 and 2009, is calculated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
Net cash provided by operating activities |
|
$ |
270,409 |
|
|
$ |
303,637 |
|
Change in book overdraft |
|
|
(4,520 |
) |
|
|
7,802 |
|
Plus: Proceeds from disposal of assets |
|
|
2,560 |
|
|
|
5,061 |
|
Plus: Excess tax benefit associated with
equity-based compensation |
|
|
6,441 |
|
|
|
4,054 |
|
Less: Capital expenditures for property and equipment |
|
|
(113,496 |
) |
|
|
(128,251 |
) |
Less: Distributions to noncontrolling interests |
|
|
(8,232 |
) |
|
|
|
|
|
|
|
|
|
|
|
Free cash flow |
|
$ |
153,162 |
|
|
$ |
192,303 |
|
|
|
|
|
|
|
|
OPERATING INCOME BEFORE DEPRECIATION, AMORTIZATION AND GAIN (LOSS) ON DISPOSAL OF ASSETS
Operating income before depreciation, amortization and gain (loss) on disposal of assets, a
non-GAAP financial measure, is provided supplementally because it is widely used by investors as a
valuation measure in the solid waste industry. We define operating income before depreciation,
amortization and gain (loss) on disposal of assets as operating income, plus depreciation and
amortization expense, plus or minus any gain or loss on disposal of assets. This measure is not a
substitute for, and should be used in conjunction with, GAAP financial measures. Management uses
operating income before depreciation, amortization and gain (loss) on disposal of assets as one of
the principal measures to evaluate and monitor the ongoing financial performance of the Companys
operations. Other companies may calculate operating income before depreciation, amortization and
gain (loss) on disposal of assets differently.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Operating income |
|
$ |
207,009 |
|
|
$ |
212,356 |
|
|
$ |
230,675 |
|
Plus: Depreciation |
|
|
81,287 |
|
|
|
91,095 |
|
|
|
117,796 |
|
Plus: Amortization of intangibles |
|
|
4,341 |
|
|
|
6,334 |
|
|
|
12,962 |
|
Loss (gain) on disposal of assets |
|
|
250 |
|
|
|
629 |
|
|
|
(481 |
) |
|
|
|
|
|
|
|
|
|
|
Operating income before
depreciation, amortization and gain
(loss) on disposal of assets |
|
$ |
292,887 |
|
|
$ |
310,414 |
|
|
$ |
360,952 |
|
|
|
|
|
|
|
|
|
|
|
48
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 exceed the average rate of inflation. Managements
estimates associated with inflation have an impact on our accounting for landfill liabilities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 and fuel prices. 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 over the unhedged fuel and variable rate debt
positions.
At December 31, 2009, our derivative instruments included five 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed |
|
|
Variable |
|
|
|
|
|
|
Notional |
|
|
Interest |
|
|
Interest Rate |
|
|
|
|
Date Entered |
|
Amount |
|
|
Rate Paid* |
|
|
Received |
|
Effective Date |
|
Expiration Date |
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 |
|
$ |
50,000 |
|
|
|
4.29 |
% |
|
1-month LIBOR |
|
June 2009 |
|
June 2011 |
March 2009 |
|
$ |
175,000 |
|
|
|
2.85 |
% |
|
1-month LIBOR |
|
February 2011 |
|
February 2014 |
|
|
|
* |
|
plus applicable margin. |
Under derivatives and hedging guidance, all the interest rate swap agreements are considered
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.
On October 26, 2009, we terminated two of our interest rate swap agreements in conjunction
with issuing our 2019 Notes. We terminated an interest rate swap in the amount of $75 million that
would have expired in March 2011 and an interest rate swap in the amount of $100 million that would
have expired in June 2011. As a result of terminating these interest rate swaps, we made a cash
payment of $9.2 million to the counterparty of the swap agreements. Further, because we used the
proceeds of the 2019 Notes to reduce the borrowings under our senior uncollateralized revolving
credit facility, it is no longer probable that the forecasted transactions that were being hedged
by these interest rate swap agreements will occur. Therefore, we recorded a charge of $9.2 million
to other expense in the fourth quarter of 2009.
We have performed sensitivity analyses to determine how market rate changes will affect the
fair value of our unhedged floating rate 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, 2008 and 2009, of $43.2 million and $84.3 million,
respectively, including floating rate debt under our credit facility and floating rate municipal
bond obligations. A one percent increase in interest rates on our variable-rate debt as of
December 31, 2008 and 2009, would decrease our annual pre-tax income by approximately $0.4 million
and $0.8 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, subject to counterparty default risk.
The market price of diesel fuel is unpredictable and can fluctuate significantly. We purchase
approximately 25 million gallons of diesel fuel per year; therefore, a significant increase in the
price of fuel could adversely affect our business and reduce our operating margins. To manage a
portion of this risk, in 2008, we entered into multiple fuel hedge agreements related to forecasted
diesel fuel purchases.
49
At December 31, 2009, our derivative instruments included nine fuel hedge agreements as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diesel Rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid |
|
|
|
|
|
|
|
|
|
Notional Amount |
|
|
Fixed |
|
|
|
|
|
|
|
|
|
(in gallons per |
|
|
(per |
|
|
Diesel Rate Received |
|
Effective |
|
Expiration |
Date Entered |
|
month) |
|
|
gallon) |
|
|
Variable |
|
Date |
|
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 |
December 2008 |
|
|
100,000 |
|
|
|
3.000 |
|
|
DOE Diesel Fuel Index* |
|
January 2010 |
|
December 2010 |
December 2008 |
|
|
150,000 |
|
|
|
3.000 |
|
|
DOE Diesel Fuel Index* |
|
January 2010 |
|
December 2010 |
December 2008 |
|
|
150,000 |
|
|
|
2.820 |
|
|
DOE Diesel Fuel Index* |
|
January 2010 |
|
December 2010 |
December 2008 |
|
|
150,000 |
|
|
|
2.700 |
|
|
DOE Diesel Fuel Index* |
|
January 2010 |
|
December 2010 |
December 2008 |
|
|
400,000 |
|
|
|
2.950 |
|
|
DOE Diesel Fuel Index* |
|
January 2011 |
|
December 2011 |
December 2008 |
|
|
400,000 |
|
|
|
3.030 |
|
|
DOE Diesel Fuel Index* |
|
January 2012 |
|
December 2012 |
|
|
|
* |
|
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 average price is less than the
contract price per gallon, we pay the difference to the counterparty. |
Under derivatives and hedging guidance, all the fuel hedges are considered cash flow hedges
for a portion of our forecasted diesel fuel purchases, and we apply hedge accounting to account for
these instruments.
Additionally, in 2009 we entered into multiple fixed-price fuel purchase contracts related to
fuel that we will purchase in 2010 for a total of 0.8 million gallons of diesel fuel and a total
unconditional purchase obligation of $1.6 million, plus taxes and transportation upon delivery.
These fixed-price fuel purchase contracts expire on or before June 30, 2010.
We have performed sensitivity analyses to determine how market rate changes will affect the
fair value of our unhedged diesel fuel purchases. 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.
For the year ending December 31, 2010, we expect to purchase approximately 25 million gallons of
diesel fuel, of which 10.4 million gallons will be purchased at market prices, 13.8 million gallons
will be purchased at prices that are fixed under our fuel hedges, and 0.8 million gallons will be
purchased under our fixed price fuel purchase contracts. With respect to the approximately 10.4
million gallons of unhedged diesel fuel we expect to purchase in 2010 at market prices, a $0.10 per
gallon increase in the price of fuel over the year would decrease our pre-tax income during this
period by approximately $1.0 million.
We market a variety of recyclable materials, including cardboard, office paper, plastic
containers, glass bottles and ferrous and aluminum metals. We own and operate 37 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 average prices that were in effect during the years ended
December 31, 2008 and 2009, would have had a $3.7 million and $2.7 million impact on revenues for
the years ended December 31, 2008 and 2009, respectively.
50
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
WASTE CONNECTIONS, INC.
|
|
|
|
|
|
|
Page |
|
|
|
|
|
|
|
|
|
52 |
|
|
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|
|
|
53 |
|
|
|
|
|
|
|
|
|
54 |
|
|
|
|
|
|
|
|
|
55 |
|
|
|
|
|
|
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|
|
56 |
|
|
|
|
|
|
|
|
|
58 |
|
|
|
|
|
|
|
|
|
103 |
|
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Waste Connections, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of Waste Connections, Inc. and its
subsidiaries at December 31, 2009 and December 31, 2008, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2009 in conformity
with accounting principles generally accepted in the United States of America. In addition, in our
opinion, the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in conjunction with
the related consolidated financial statements. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2009,
based on criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is
responsible for these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in Managements Report on Internal Control Over
Financial Reporting under Item 9A. Our responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the Companys internal control over
financial reporting based on our integrated audits. We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audits
also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, in 2009 the Company changed the
manner in which it accounts for noncontrolling interests in subsidiaries. As discussed in Note 8
to the consolidated financial statements, in 2009 the Company changed the manner in which it
accounts for convertible debt instruments.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Sacramento, CA
February 9, 2010
52
WASTE CONNECTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2009 |
|
|
|
(as adjusted) |
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
265,264 |
|
|
$ |
9,639 |
|
Accounts receivable, net of allowance for doubtful
accounts of $3,846 and $4,058 at December 31, 2008
and 2009, respectively |
|
|
118,456 |
|
|
|
138,972 |
|
Deferred income taxes |
|
|
22,347 |
|
|
|
17,748 |
|
Prepaid expenses and other current assets |
|
|
23,144 |
|
|
|
33,495 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
429,211 |
|
|
|
199,854 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
984,124 |
|
|
|
1,308,392 |
|
Goodwill |
|
|
836,930 |
|
|
|
906,710 |
|
Intangible assets, net |
|
|
306,444 |
|
|
|
354,303 |
|
Restricted assets |
|
|
23,009 |
|
|
|
27,377 |
|
Other assets, net |
|
|
20,639 |
|
|
|
23,812 |
|
|
|
|
|
|
|
|
|
|
$ |
2,600,357 |
|
|
$ |
2,820,448 |
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
65,537 |
|
|
$ |
86,669 |
|
Book overdraft |
|
|
4,315 |
|
|
|
12,117 |
|
Accrued liabilities |
|
|
95,220 |
|
|
|
93,380 |
|
Deferred revenue |
|
|
45,694 |
|
|
|
50,138 |
|
Current portion of long-term debt and notes payable |
|
|
4,698 |
|
|
|
2,609 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
215,464 |
|
|
|
244,913 |
|
|
|
|
|
|
|
|
|
|
Long-term debt and notes payable |
|
|
819,828 |
|
|
|
867,554 |
|
Other long-term liabilities |
|
|
47,509 |
|
|
|
45,013 |
|
Deferred income taxes |
|
|
255,559 |
|
|
|
305,932 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,338,360 |
|
|
|
1,463,412 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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; 79,842,239 and
78,599,083 shares issued and outstanding at
December 31, 2008 and 2009, respectively |
|
|
798 |
|
|
|
786 |
|
Additional paid-in capital |
|
|
661,555 |
|
|
|
625,173 |
|
Accumulated other comprehensive loss |
|
|
(23,937 |
) |
|
|
(4,892 |
) |
Retained earnings |
|
|
622,913 |
|
|
|
732,738 |
|
|
|
|
|
|
|
|
Total Waste Connections equity |
|
|
1,261,329 |
|
|
|
1,353,805 |
|
Noncontrolling interests |
|
|
668 |
|
|
|
3,231 |
|
|
|
|
|
|
|
|
Total equity |
|
|
1,261,997 |
|
|
|
1,357,036 |
|
|
|
|
|
|
|
|
|
|
$ |
2,600,357 |
|
|
$ |
2,820,448 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
53
WASTE CONNECTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
(as adjusted) |
|
|
(as adjusted) |
|
|
|
|
Revenues |
|
$ |
958,541 |
|
|
$ |
1,049,603 |
|
|
$ |
1,191,393 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations |
|
|
566,089 |
|
|
|
628,075 |
|
|
|
692,415 |
|
Selling, general and administrative |
|
|
99,565 |
|
|
|
111,114 |
|
|
|
138,026 |
|
Depreciation |
|
|
81,287 |
|
|
|
91,095 |
|
|
|
117,796 |
|
Amortization of intangibles |
|
|
4,341 |
|
|
|
6,334 |
|
|
|
12,962 |
|
Loss (gain) on disposal of assets |
|
|
250 |
|
|
|
629 |
|
|
|
(481 |
) |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
207,009 |
|
|
|
212,356 |
|
|
|
230,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(39,206 |
) |
|
|
(43,102 |
) |
|
|
(49,161 |
) |
Interest income |
|
|
1,593 |
|
|
|
3,297 |
|
|
|
1,413 |
|
Other income (expense), net |
|
|
289 |
|
|
|
(633 |
) |
|
|
(7,551 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income tax provision |
|
|
169,685 |
|
|
|
171,918 |
|
|
|
175,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
(58,328 |
) |
|
|
(56,775 |
) |
|
|
(64,565 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
111,357 |
|
|
|
115,143 |
|
|
|
110,811 |
|
Less: Net income attributable to noncontrolling interests |
|
|
(14,870 |
) |
|
|
(12,240 |
) |
|
|
(986 |
) |
|
|
|
|
|
|
|
|
|
|
Net income attributable to Waste Connections |
|
$ |
96,487 |
|
|
$ |
102,903 |
|
|
$ |
109,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share attributable to Waste Connections
common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.41 |
|
|
$ |
1.47 |
|
|
$ |
1.38 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
1.38 |
|
|
$ |
1.44 |
|
|
$ |
1.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in the per share calculations: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
68,238,523 |
|
|
|
70,024,874 |
|
|
|
79,413,067 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
69,994,713 |
|
|
|
71,419,712 |
|
|
|
80,337,441 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
54
WASTE CONNECTIONS, INC.
CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2007, 2008 AND 2009
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WASTE CONNECTIONS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCUMULATED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ADDITIONAL |
|
|
OTHER COMPRE- |
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE |
|
|
COMMON STOCK |
|
|
PAID-IN |
|
|
HENSIVE INCOME |
|
|
RETAINED |
|
|
NONCONTROLLING |
|
|
|
|
|
|
INCOME |
|
|
SHARES |
|
|
AMOUNT |
|
|
CAPITAL |
|
|
(LOSS) |
|
|
EARNINGS |
|
|
INTERESTS |
|
|
TOTAL |
|
Balances at December 31, 2006 |
|
|
|
|
|
|
68,266,041 |
|
|
$ |
455 |
|
|
$ |
310,229 |
|
|
$ |
3,067 |
|
|
$ |
422,731 |
|
|
$ |
27,992 |
|
|
$ |
764,474 |
|
Cumulative change from adoption of accounting policy convertible debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,726 |
|
|
|
|
|
|
|
(1,877 |
) |
|
|
|
|
|
|
11,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006 (as adjusted) |
|
|
|
|
|
|
68,266,041 |
|
|
$ |
455 |
|
|
$ |
323,955 |
|
|
$ |
3,067 |
|
|
$ |
420,854 |
|
|
$ |
27,992 |
|
|
$ |
776,323 |
|
Stock split |
|
|
|
|
|
|
|
|
|
|
228 |
|
|
|
|
|
|
|
|
|
|
|
(228 |
) |
|
|
|
|
|
|
|
|
Vesting of restricted stock |
|
|
|
|
|
|
168,268 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of restricted stock and warrants |
|
|
|
|
|
|
(54,498 |
) |
|
|
(1 |
) |
|
|
(1,636 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,637 |
) |
Equity-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,128 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,128 |
|
Exercise of stock options and warrants |
|
|
|
|
|
|
2,246,454 |
|
|
|
22 |
|
|
|
35,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,620 |
|
Excess tax benefit associated with equity-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,137 |
|
Repurchase of common stock |
|
|
|
|
|
|
(3,574,130 |
) |
|
|
(36 |
) |
|
|
(110,293 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(110,329 |
) |
Issuance of common stock warrants to consultants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123 |
|
Cumulative change from adoption of accounting policy income tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,897 |
|
|
|
|
|
|
|
2,897 |
|
Amounts reclassified into earnings, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,320 |
) |
|
|
|
|
|
|
|
|
|
|
(2,320 |
) |
Changes in fair value of interest rate swaps, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,037 |
) |
|
|
|
|
|
|
|
|
|
|
(5,037 |
) |
Distributions to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,642 |
) |
|
|
(12,642 |
) |
Net income |
|
$ |
111,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,487 |
|
|
|
14,870 |
|
|
|
111,357 |
|
Other comprehensive loss |
|
|
(11,981 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax effect of other comprehensive loss |
|
|
4,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
104,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to noncontrolling interests |
|
|
(14,870 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Waste Connections |
|
$ |
89,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007 (as adjusted) |
|
|
|
|
|
|
67,052,135 |
|
|
$ |
670 |
|
|
$ |
268,010 |
|
|
$ |
(4,290 |
) |
|
$ |
520,010 |
|
|
$ |
30,220 |
|
|
$ |
814,620 |
|
Vesting of restricted stock |
|
|
|
|
|
|
222,863 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of restricted stock and warrants |
|
|
|
|
|
|
(72,082 |
) |
|
|
(1 |
) |
|
|
(2,192 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,193 |
) |
Equity-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,854 |
|
Exercise of stock options and warrants |
|
|
|
|
|
|
1,030,594 |
|
|
|
10 |
|
|
|
19,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,089 |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,441 |
|
Repurchase of common stock |
|
|
|
|
|
|
(1,041,271 |
) |
|
|
(10 |
) |
|
|
(31,517 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,527 |
) |
Issuance of common stock warrants to consultants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79 |
|
Amounts reclassified into earnings, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,010 |
|
|
|
|
|
|
|
|
|
|
|
4,010 |
|
Changes in fair value of swaps, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23,657 |
) |
|
|
|
|
|
|
|
|
|
|
(23,657 |
) |
Distributions to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,232 |
) |
|
|
(8,232 |
) |
Changes in ownership interest in noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,560 |
) |
|
|
(33,560 |
) |
Net income |
|
$ |
115,143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,903 |
|
|
|
12,240 |
|
|
|
115,143 |
|
Other comprehensive loss |
|
|
(31,609 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax effect of other comprehensive loss |
|
|
11,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
95,496 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to noncontrolling interests |
|
|
(12,240 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Waste Connections |
|
$ |
83,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2008 (as adjusted) |
|
|
|
|
|
|
79,842,239 |
|
|
$ |
798 |
|
|
$ |
661,555 |
|
|
$ |
(23,937 |
) |
|
$ |
622,913 |
|
|
$ |
668 |
|
|
$ |
1,261,997 |
|
Vesting of restricted stock |
|
|
|
|
|
|
273,641 |
|
|
|
3 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of restricted stock and warrants |
|
|
|
|
|
|
(92,489 |
) |
|
|
(1 |
) |
|
|
(2,556 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,557 |
) |
Equity-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,336 |
|
Exercise of stock options and warrants |
|
|
|
|
|
|
824,520 |
|
|
|
8 |
|
|
|
15,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,397 |
|
Excess tax benefit associated with equity-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,054 |
|
Repurchase of common stock |
|
|
|
|
|
|
(2,248,828 |
) |
|
|
(22 |
) |
|
|
(62,602 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(62,624 |
) |
Amounts reclassified into earnings, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,416 |
|
|
|
|
|
|
|
|
|
|
|
14,416 |
|
Changes in fair value of swaps, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,629 |
|
|
|
|
|
|
|
|
|
|
|
4,629 |
|
Fair value of noncontrolling interest associated with business acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,577 |
|
|
|
1,577 |
|
Net income |
|
$ |
110,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,825 |
|
|
|
986 |
|
|
|
110,811 |
|
Other comprehensive income |
|
|
30,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax effect of other comprehensive income |
|
|
(11,698 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
129,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to noncontrolling interests |
|
|
(986 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Waste Connections |
|
$ |
128,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2009 |
|
|
|
|
|
|
78,599,083 |
|
|
$ |
786 |
|
|
$ |
625,173 |
|
|
$ |
(4,892 |
) |
|
$ |
732,738 |
|
|
$ |
3,231 |
|
|
$ |
1,357,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
55
WASTE CONNECTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
(as adjusted) |
|
|
(as adjusted) |
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
111,357 |
|
|
$ |
115,143 |
|
|
$ |
110,811 |
|
Adjustments to reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on disposal of assets |
|
|
250 |
|
|
|
629 |
|
|
|
(481 |
) |
Depreciation |
|
|
81,287 |
|
|
|
91,095 |
|
|
|
117,796 |
|
Amortization of intangibles |
|
|
4,341 |
|
|
|
6,334 |
|
|
|
12,962 |
|
Deferred income taxes, net of acquisitions |
|
|
10,851 |
|
|
|
30,277 |
|
|
|
38,224 |
|
Amortization of debt issuance costs |
|
|
2,056 |
|
|
|
1,840 |
|
|
|
1,942 |
|
Amortization of debt discount |
|
|
4,309 |
|
|
|
4,404 |
|
|
|
4,684 |
|
Equity-based compensation |
|
|
6,128 |
|
|
|
7,854 |
|
|
|
9,336 |
|
Interest income on restricted assets |
|
|
(684 |
) |
|
|
(543 |
) |
|
|
(488 |
) |
Closure and post-closure accretion |
|
|
1,155 |
|
|
|
1,400 |
|
|
|
2,055 |
|
Excess tax benefit associated with equity-based compensation |
|
|
(14,137 |
) |
|
|
(6,441 |
) |
|
|
(4,054 |
) |
Changes in operating assets and liabilities, net of effects from acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
(17,514 |
) |
|
|
18,768 |
|
|
|
(4,328 |
) |
Prepaid expenses and other current assets |
|
|
(8,077 |
) |
|
|
335 |
|
|
|
(8,032 |
) |
Accounts payable |
|
|
2,888 |
|
|
|
(54 |
) |
|
|
13,218 |
|
Deferred revenue |
|
|
7,870 |
|
|
|
(829 |
) |
|
|
(309 |
) |
Accrued liabilities |
|
|
27,162 |
|
|
|
6,426 |
|
|
|
6,513 |
|
Other long-term liabilities |
|
|
(173 |
) |
|
|
(6,229 |
) |
|
|
3,788 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
219,069 |
|
|
|
270,409 |
|
|
|
303,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Payments for acquisitions, net of cash acquired |
|
|
(109,429 |
) |
|
|
(355,150 |
) |
|
|
(420,011 |
) |
Capital expenditures for property and equipment |
|
|
(124,234 |
) |
|
|
(113,496 |
) |
|
|
(128,251 |
) |
Proceeds from disposal of assets |
|
|
1,016 |
|
|
|
2,560 |
|
|
|
5,061 |
|
Increase in restricted assets, net of interest income |
|
|
(2,698 |
) |
|
|
(2,653 |
) |
|
|
(3,880 |
) |
Decrease (increase) in other assets |
|
|
(264 |
) |
|
|
1,092 |
|
|
|
(1,146 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(235,609 |
) |
|
|
(467,647 |
) |
|
|
(548,227 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt |
|
|
626,000 |
|
|
|
302,000 |
|
|
|
426,500 |
|
Principal payments on notes payable and long-term debt |
|
|
(568,607 |
) |
|
|
(223,854 |
) |
|
|
(401,970 |
) |
Change in book overdraft |
|
|
8,835 |
|
|
|
(4,520 |
) |
|
|
7,802 |
|
Proceeds from option and warrant exercises |
|
|
35,620 |
|
|
|
19,089 |
|
|
|
15,397 |
|
Excess tax benefit associated with equity-based compensation |
|
|
14,137 |
|
|
|
6,441 |
|
|
|
4,054 |
|
Distributions to noncontrolling interests |
|
|
(12,642 |
) |
|
|
(8,232 |
) |
|
|
|
|
Payments for repurchase of common stock |
|
|
(110,329 |
) |
|
|
(31,527 |
) |
|
|
(62,624 |
) |
Proceeds from secondary stock offering, net |
|
|
|
|
|
|
393,930 |
|
|
|
|
|
Debt issuance costs |
|
|
(1,125 |
) |
|
|
(1,123 |
) |
|
|
(194 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(8,111 |
) |
|
|
452,204 |
|
|
|
(11,035 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and equivalents |
|
|
(24,651 |
) |
|
|
254,966 |
|
|
|
(255,625 |
) |
Cash and equivalents at beginning of year |
|
|
34,949 |
|
|
|
10,298 |
|
|
|
265,264 |
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents at end of year |
|
$ |
10,298 |
|
|
$ |
265,264 |
|
|
$ |
9,639 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
56
WASTE CONNECTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH TRANSACTIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Cash paid for income taxes |
|
$ |
35,260 |
|
|
$ |
24,635 |
|
|
$ |
26,848 |
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
33,418 |
|
|
$ |
32,626 |
|
|
$ |
41,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with its acquisitions, the Company assumed liabilities as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired |
|
$ |
162,425 |
|
|
$ |
359,114 |
|
|
$ |
461,120 |
|
Cash paid and warrants issued for current year acquisitions |
|
|
(107,772 |
) |
|
|
(320,620 |
) |
|
|
(416,853 |
) |
|
|
|
|
|
|
|
|
|
|
Liabilities assumed and notes payable issued to sellers of businesses acquired |
|
$ |
54,653 |
|
|
$ |
38,494 |
|
|
$ |
44,267 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
57
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Waste Connections, Inc. (WCI or the Company) was incorporated in Delaware on September 9,
1997, and commenced its operations on October 1, 1997, through the purchase of certain solid waste
operations in the state of Washington. The Company is an integrated, non-hazardous solid waste
services company that provides collection, transfer, disposal and recycling services to commercial,
industrial and residential customers in the states of Alabama, Arizona, California, Colorado,
Idaho, Illinois, Iowa, Kansas, Kentucky, Michigan, Minnesota, Mississippi, Montana, Nebraska,
Nevada, New Mexico, North Carolina, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee,
Texas, Utah, Washington and Wyoming. The Company also provides intermodal services for the
movement of containers in the Pacific Northwest.
Basis of Presentation
These consolidated financial statements include the accounts of WCI and its wholly-owned and
majority-owned subsidiaries. The consolidated entity is referred to herein as the Company. All
significant intercompany accounts and transactions have been eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less at
purchase to be cash equivalents. The Company did not have any cash equivalents at December 31,
2009. As of December 31, 2008, cash equivalents consisted of demand money market accounts.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk
consist primarily of cash and accounts receivable. The Company maintains cash and cash equivalents
with banks that at times exceed applicable insurance limits. The Company reduces its exposure to
credit risk by maintaining such deposits with high quality financial institutions. The Company has
not experienced any losses in such accounts. The Company generally does not require collateral on
its trade receivables. Credit risk on accounts receivable is minimized as a result of the large
and diverse nature of the Companys customer base. The Company maintains allowances for losses
based on the expected collectability of accounts receivable.
Revenue Recognition and Accounts Receivable
Revenues are recognized when persuasive evidence of an arrangement exists, the service has
been provided, the price is fixed or determinable and collection is reasonably assured. Certain
customers are billed in advance and, accordingly, recognition of the related revenues is deferred
until the services are provided. In accordance with revenue recognition guidance, any tax assessed
by a governmental authority that is directly imposed on a revenue-producing transaction between a
seller and a customer is presented in the statements of income on a net basis (excluded from
revenues).
The Companys receivables are recorded when billed or accrued and represent claims against
third parties that will be settled in cash. The carrying value of the Companys receivables, net
of the allowance for doubtful accounts, represents their estimated net realizable value. The
Company estimates its allowance for doubtful accounts based on historical collection trends, type
of customer such as municipal or non-municipal, the age of outstanding receivables and existing
economic conditions. If events or changes in circumstances indicate that specific receivable
balances may be impaired, further consideration is given to the collectability of those balances
and the allowance is adjusted accordingly. Past-due receivable balances are written off when the
Companys internal collection efforts have been unsuccessful in collecting the amount due.
Property and Equipment
Property and equipment are stated at cost. Improvements or betterments, not considered to be
maintenance and repair, which add new functionality or significantly extend the life of an asset
are capitalized. Third-party expenditures related to pending development projects, such as legal,
engineering and interest expenses, are capitalized. Expenditures for maintenance and repair costs,
including planned major maintenance activities, are charged to expense as incurred. The cost of
assets retired or otherwise disposed of and the related accumulated depreciation are eliminated
from the accounts in the year of disposal. Gains and losses resulting from disposals of property
and equipment are recognized in the period in which the property and equipment is disposed.
Depreciation is computed using the straight-line method over the estimated useful lives of the
assets or the lease term, whichever is shorter.
58
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The estimated useful lives are as follows:
|
|
|
|
|
Buildings |
|
10 20 years |
Land and leasehold improvements |
|
3 20 years |
Machinery and equipment |
|
3 12 years |
Rolling stock |
|
3 10 years |
Containers |
|
5 12 years |
Rail cars |
|
20 years |
Landfill Accounting
The Company utilizes the life cycle method of accounting for landfill costs. This method
applies the costs to be capitalized associated with acquiring, developing, closing and monitoring
the landfills over the associated consumption of landfill capacity. The Company utilizes the units
of consumption method to amortize landfill development costs over the estimated remaining capacity
of a landfill. Under this method, the Company includes future estimated construction costs using
current dollars, as well as costs incurred to date, in the amortization base. When certain
criteria are met, the Company includes expansion airspace, which has not been permitted, in the
calculation of the total remaining capacity of the landfill.
|
|
|
Landfill development costs. Landfill development costs include the costs of
acquisition, construction associated with excavation, liners, site berms, groundwater
monitoring wells and leachate collection systems. The Company estimates the total costs
associated with developing each landfill site to its final capacity. This includes certain
projected landfill site costs that are uncertain because they are dependent on future
events and thus actual costs could vary significantly from estimates. The total cost to
develop a site to its final capacity includes amounts previously expended and capitalized,
net of accumulated depletion, and projections of future purchase and development costs,
liner construction costs, operating construction costs and capitalized interest costs.
Total landfill costs include the development costs associated with expansion airspace.
Expansion airspace is addressed below. |
|
|
|
Final capping, closure and post-closure obligations. The Company accrues for
estimated final capping, closure and post-closure maintenance obligations at the landfills
it owns and the landfills that it operates, but does not own under life-of-site agreements.
Accrued final capping, closure and post-closure costs represent an estimate of the current
value of the future obligation associated with final capping, closure and post-closure
monitoring of non-hazardous solid waste landfills currently owned or operated under
life-of-site agreements by the Company. Final capping costs represent the costs related to
installation of clay liners, drainage and compacted soil layers and topsoil constructed
over areas of the landfill where total airspace capacity has been consumed. Closure and
post-closure monitoring and maintenance costs represent the costs related to cash
expenditures yet to be incurred when a landfill facility ceases to accept waste and closes.
Accruals for final capping, closure and post-closure monitoring and maintenance
requirements in the U.S. consider site inspection, groundwater monitoring, leachate
management, methane gas control and recovery, and operating and maintenance costs to be
incurred during the period after the facility closes. Certain of these environmental
costs, principally capping and methane gas control costs, are also incurred during the
operating life of the site in accordance with the landfill operation requirements of
Subtitle D and the air emissions standards. Daily maintenance activities, which include
many of these costs, are expensed as incurred during the operating life of the landfill.
Daily maintenance activities include leachate disposal; surface water, groundwater, and
methane gas monitoring and maintenance; other pollution control activities; mowing and
fertilizing the landfill final cap; fence and road maintenance; and third party inspection
and reporting costs. Site specific final capping, closure and post-closure engineering
cost estimates are prepared annually for landfills owned or operated under life-of-site
agreements by the Company for which it is responsible for final capping, closure and
post-closure. |
59
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The net present value of landfill final capping, closure and post-closure liabilities are
calculated by estimating the total obligation in current dollars, inflating the obligation based
upon the expected date of the expenditure and discounting the inflated total to its present value
using a credit-adjusted risk-free rate. Any changes in expectations that result in an upward
revision to the estimated undiscounted cash flows are treated as a new liability and are inflated
and discounted at rates reflecting current market conditions. Downward revisions (or if there are
no changes) to the estimated undiscounted cash flows are inflated and discounted at rates
reflecting the market conditions at the time the cash flows were originally estimated. This policy
results in the Companys capping, closure and post-closure liabilities being recorded in layers.
At January 1, 2009, the Company increased its discount rate assumption for purposes of computing
2009 layers for final capping, closure and post-closure obligations from 7.5% to 9.25%, in order
to more accurately reflect the Companys long-term cost of borrowing as of the end of 2008.
Consistent with the prior year, the Companys inflation rate assumption is 2.5%. At December 31,
2008 and 2009, accruals for landfill final capping, closure and post-closure costs (including costs
assumed through acquisitions) were $22,002 and $32,235, respectively.
In accordance with the accounting guidance on asset retirement obligations, the final capping,
closure and post-closure liability is recorded as an addition to site costs and amortized to
depletion expense on a units-of-consumption basis as remaining landfill airspace is consumed. The
impact of changes determined to be changes in estimates, based on an annual update, is accounted
for on a prospective basis. Depletion expense resulting from final capping, closure and
post-closure obligations recorded as a component of landfill site costs will generally be less
during the early portion of a landfills operating life and increase thereafter. The final
capping, closure and post-closure liabilities reflect owned landfills and landfills operated under
life-of-site agreements with estimated remaining lives, based on remaining permitted capacity,
probable expansion capacity and projected annual disposal volumes, that range from approximately 3
to 185 years, with an average remaining life of approximately 52 years. The costs for final
capping, closure and post-closure obligations at landfills the Company owns or operates under
life-of-site agreements are generally estimated based on interpretations of current requirements
and proposed or anticipated regulatory changes.
The estimates for landfill final capping, closure and post-closure costs consider when the
costs would actually be paid and factor in inflation and discount rates. Interest is accreted on
the recorded liability using the corresponding discount rate. When using discounted cash flow
techniques, reliable estimates of market premiums may not be obtainable. In the waste industry,
there is no market for selling the responsibility for final capping, closure and post-closure
obligations independent of selling the landfill in its entirety. Accordingly, the Company does not
believe that it is possible to develop a methodology to reliably estimate a market risk premium and
has therefore excluded any such market risk premium from its determination of expected cash flows
for landfill asset retirement obligations. The possibility of changing legal and regulatory
requirements and the forward-looking nature of these types of costs make any estimation or
assumption less certain.
The following is a reconciliation of the Companys final capping, closure and post-closure
liability balance from December 31, 2007 to December 31, 2009:
|
|
|
|
|
Final capping, closure and post-closure liability at December 31,
2007 |
|
$ |
17,853 |
|
Adjustments to final capping, closure and post-closure liabilities |
|
|
1,812 |
|
Liabilities incurred |
|
|
1,598 |
|
Accretion expense |
|
|
1,400 |
|
Closure payments |
|
|
(1,361 |
) |
Assumption of closure liabilities from acquisitions |
|
|
700 |
|
|
|
|
|
Final capping, closure and post-closure liability at December 31,
2008 |
|
|
22,002 |
|
Adjustments to final capping, closure and post-closure liabilities |
|
|
(1,285 |
) |
Liabilities incurred |
|
|
1,944 |
|
Accretion expense |
|
|
2,055 |
|
Closure payments |
|
|
(969 |
) |
Assumption of closure liabilities from acquisitions |
|
|
8,488 |
|
|
|
|
|
Final capping, closure and post-closure liability at December 31,
2009 |
|
$ |
32,235 |
|
|
|
|
|
The adjustments to final capping, closure and post-closure liabilities for the year ended
December 31, 2008, primarily consisted of 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 adjustments to final capping, closure and post-closure
liabilities for the year ended December 31, 2009, primarily consisted of revisions in cost
estimates and decreases in estimates of annual tonnage consumption across the majority of the
Companys landfills, as well as an increase in estimated airspace at one of the Companys landfills
at which an expansion is being pursued. The Company performs its annual review of its cost and
capacity estimates in the first quarter of each year.
60
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
At December 31, 2009, $25,074 of the Companys restricted assets balance was for purposes of
settling future final capping, closure and post-closure liabilities.
|
|
|
Disposal capacity. The Companys internal and third-party engineers perform
surveys at least annually to estimate the disposal capacity at its landfills. This is done
by using surveys and other methods to calculate, based on the terms of the permit, height
restrictions and other factors, how much airspace is left to fill and how much waste can be
disposed of at a landfill before it has reached its final capacity. The Companys landfill
depletion rates are based on the remaining disposal capacity, considering both permitted
and expansion airspace, at the landfills it owns, and certain landfills it operates, but
does not own, under life-of-site agreements. The Companys landfill depletion rates are
based on the term of the operating agreement at its operated landfills that have
capitalized expenditures. Expansion airspace consists of additional disposal capacity
being pursued through means of an expansion that is not actually permitted. Expansion
airspace that meets certain internal criteria is included in the estimate of total landfill
airspace. The Companys internal criteria to determine when expansion airspace may be
included as disposal capacity is as follows: |
|
1) |
|
The land where the expansion is being sought is contiguous to the current
disposal site, and the Company either owns the expansion property or is under an option,
purchase, operating or other similar agreement; |
|
2) |
|
Total development costs, final capping costs, and closure/post-closure costs have
been determined; |
|
3) |
|
Internal personnel have performed a financial analysis of the proposed expansion
site and have determined that it has a positive financial and operational impact; |
|
4) |
|
Internal personnel or external consultants are actively working to obtain the
necessary approvals to obtain the landfill expansion permit; and |
|
5) |
|
Obtaining the expansion is considered probable (for a pursued expansion to be
considered probable, there must be no significant known technical, legal, community,
business, or political restrictions or similar issues existing that could impair the
success of the expansion). |
It is possible that the Companys estimates or assumptions could ultimately be significantly
different from actual results. In some cases the Company may be unsuccessful in obtaining an
expansion permit or the Company may determine that an expansion permit that the Company previously
thought was probable has become unlikely. To the extent that such estimates, or the assumptions
used to make those estimates, prove to be significantly different than actual results, or the
belief that the Company will receive an expansion permit changes adversely in a significant manner,
the costs of the landfill, including the costs incurred in the pursuit of the expansion, may be
subject to impairment testing, as described below, and lower profitability may be experienced due
to higher amortization rates, higher capping, closure and post-closure rates, and higher expenses
or asset impairments related to the removal of previously included expansion airspace.
The Company periodically evaluates its landfill sites for potential impairment indicators.
The Companys judgments regarding the existence of impairment indicators are based on regulatory
factors, market conditions and operational performance of its landfills. Future events could cause
the Company to conclude that impairment indicators exist and that its landfill carrying costs are
impaired.
Business Combination Accounting
A summary of the Companys policies for 2009 for accounting for business combinations is as
follows:
|
|
|
The Company recognizes, separately from goodwill, the identifiable assets acquired and
liabilities assumed at their estimated acquisition-date fair values. The Company measures
and recognizes goodwill as of the acquisition date as the excess of: (a) the aggregate of
the fair value of consideration transferred, the fair value of any noncontrolling interest
in the acquiree (if any) and the acquisition-date fair value of the Companys previously
held equity interest in the acquiree (if any), over (b) the fair value of net assets
acquired and liabilities assumed. |
|
|
|
At the acquisition date, the Company measures at their acquisition-date fair values all
assets acquired and liabilities assumed that arise from contractual contingencies. The
Company measures at their acquisition-date fair values all noncontractual contingencies if,
as of the acquisition date, it is more likely than not that the contingency will give rise
to an asset or liability. |
61
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Goodwill and Indefinite-Lived Intangible Assets
The Company acquired indefinite-lived intangible assets in connection with certain of its
acquisitions. The amounts assigned to indefinite-lived intangible assets consist of the value of
certain perpetual rights to provide solid waste collection and transportation services in specified
territories. The Company measures and recognizes acquired indefinite-lived intangible assets at
their estimated acquisition-date fair values. Indefinite-lived intangible assets are not
amortized. Goodwill represents the excess of: (a) the aggregate of the fair value of consideration
transferred, the fair value of any noncontrolling interest in the acquiree (if any) and the
acquisition-date fair value of the Companys previously held equity interest in the acquiree (if
any), over (b) the fair value of assets acquired and liabilities assumed. Goodwill and intangible
assets, deemed to have indefinite lives, are subject to annual impairment tests as described below.
Goodwill and indefinite-lived intangibles are tested for impairment on at least an annual
basis in the fourth quarter of the year. In the first step of testing for goodwill impairment, the
Company estimates the fair value of each reporting unit, which it has determined to be its
geographic operating segments, and compares the fair value with the carrying value of the net
assets assigned to each unit. If the fair value of a reporting unit is greater than the carrying
value of the net assets assigned to the reporting unit, then no impairment results. If the fair
value is less than its carrying value, then the Company would perform a second step and determine
the fair value of the goodwill. In this second step, the fair value of goodwill is determined by
deducting the fair value of a reporting units identifiable assets and liabilities from the fair
value of the reporting unit as a whole, as if that reporting unit had just been acquired and the
purchase price were being initially allocated. If the fair value of the goodwill is less than its
carrying value for a reporting unit, an impairment charge would be recorded to earnings in the
Companys Consolidated Statement of Income. In testing indefinite-lived
intangibles for impairment, the Company compares the estimated fair value of each
indefinite-lived intangible to its carrying value. If the fair value of the indefinite-lived
intangible is less than its carrying value, an impairment charge would be recorded to earnings in
the Companys Consolidated Statement of Income.
To determine the fair value of each of the Companys reporting units as a whole and each
indefinite-lived intangible asset, the Company uses discounted cash flow analyses, which require
significant assumptions and estimates about the future operations of each reporting unit and the
future discrete cash flows related to each indefinite-lived intangible asset. Significant
judgments inherent in these analyses include the determination of appropriate discount rates, the
amount and timing of expected future cash flows and growth rates. The cash flows employed in the
Companys 2009 discounted cash flow analyses were based on ten-year financial forecasts, which in
turn were based on the 2010 annual budget developed internally by management. These forecasts
reflect perpetual revenue growth rates of 4.5% and operating profit margins that were consistent
with 2009 results. The Companys discount rate assumptions are based on a determination of the
Companys weighted average cost of capital. In assessing the reasonableness of the Companys
determined fair values of its reporting units, the Company evaluates its results against its
current market capitalization.
In addition, the Company would evaluate a reporting unit for impairment if events or
circumstances change between annual tests indicating a possible impairment. Examples of such
events or circumstances include the following:
|
|
|
A significant adverse change in legal factors or in the business climate, |
|
|
|
An adverse action or assessment by a regulator, |
|
|
|
A more likely than not expectation that a segment or a significant portion thereof will
be sold, or |
|
|
|
The testing for recoverability of a significant asset group within the segment. |
As a result of performing the tests for potential impairment, the Company determined that no
impairment existed as of December 31, 2008 or 2009, and, therefore, there were no write-downs to
any of its goodwill or indefinite-lived intangible assets.
Impairments of Property, Plant and Equipment and Other Intangible Assets
Other intangible assets consist of long-term franchise agreements, contracts and
non-competition agreements. Property, plant, equipment and other intangible assets are carried on
the Companys consolidated financial statements based on their cost less accumulated depreciation
or amortization. The recoverability of these assets is tested whenever events or changes in
circumstances indicate that their carrying amount may not be recoverable.
62
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Typical indicators that an asset may be impaired include:
|
|
|
A significant adverse change in legal factors or in the business climate; |
|
|
|
An adverse action or assessment by a regulator; |
|
|
|
A more likely than not expectation that a segment or a significant portion thereof will
be sold; or |
|
|
|
The testing for recoverability of a significant asset group within a segment. |
If any of these or other indicators occur, a test of recoverability is performed by comparing
the carrying value of the asset or asset group to its undiscounted expected future cash flows. If
the carrying values are in excess of undiscounted expected future cash flows, impairment is
measured by comparing the fair value of the asset to its carrying value. Fair value is determined
by an internally developed discounted projected cash flow analysis of the asset. Cash flow
projections are sometimes based on a group of assets, rather than a single asset. If cash flows
cannot be separately and independently identified for a single asset, the Company will determine
whether an impairment has occurred for the group of assets for which the projected cash flows can
be identified. If the fair value of an asset is determined to be less than the carrying amount of
the asset or asset group, an impairment in the amount of the difference is recorded in the period
that the impairment indicator occurs. Several impairment indicators are beyond the Companys
control, and whether or not they will occur cannot be predicted with any certainty. Estimating
future cash flows requires significant judgment and projections may vary from cash flows eventually
realized. There are other considerations for impairments of landfills, as described below.
The estimated fair value of the acquired long-term franchise agreements and contracts was
determined by management based on the discounted net cash flows associated with the rights,
agreements and contracts. The estimated fair value of the non-competition agreements reflects
managements estimates based on the amount of revenue protected under such agreements. The amounts
assigned to the franchise agreements, contracts, and non-competition agreements are being amortized
on a straight-line basis over the expected term of the related agreements (ranging from 2 to 56
years).
Landfills There are certain indicators listed above that require significant judgment and
understanding of the waste industry when applied to landfill development or expansion projects.
For example, a regulator may initially deny a landfill expansion permit application though the
expansion permit is ultimately granted. In addition, management may periodically divert waste from
one landfill to another to conserve remaining permitted landfill airspace. Therefore, certain
events could occur in the ordinary course of business and not necessarily be considered indicators
of impairment due to the unique nature of the waste industry.
Restricted Assets
Restricted assets held by trustees consist principally of funds deposited in connection with
landfill final capping, closure and post-closure obligations and other financial assurance
requirements. Proceeds from these financing arrangements are directly deposited into trust funds,
and the Company does not have the ability to utilize the funds in regular operating activities.
See Note 9 for further information on restricted assets.
Fair Value of Financial Instruments
The Companys financial instruments consist primarily of cash, trade receivables, restricted
assets, trade payables, debt instruments, interest rate swaps and fuel hedges. As of December 31,
2008 and 2009, the carrying values of cash, trade receivables, restricted assets, and trade
payables are considered to be representative of their respective fair values. The carrying values
of the Companys debt instruments, excluding the 3.75% Convertible Senior Notes due 2026 (the 2026
Notes), the 6.22% Senior Notes due 2015 (the 2015 Notes) and the 5.25% Senior Notes due 2019
(the 2019 Notes), approximate their fair values as of December 31, 2008 and 2009, based on
current borrowing rates for similar types of borrowing arrangements. The Companys 2026 Notes had
a carrying value of $189,070 and $193,754 and a fair value of approximately $217,200 and $218,234
at December 31, 2008 and 2009, respectively, based on the publicly quoted trading price of these
notes. The Companys 2015 Notes had a carrying value of $175,000 and a fair value of approximately
$160,213 and $188,895 at December 31, 2008 and 2009, respectively, based on quotes of bonds with
similar ratings in similar industries. The Companys 2019 Notes had a carrying value of $175,000
and a fair value of approximately $170,538 at December 31, 2009, based on quotes of bonds with
similar ratings in similar industries. For details on the fair value of the Companys interest
rate swaps and fuel hedges, refer to Note 9.
63
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Derivative Financial Instruments
The Company recognizes all derivatives on the balance sheet at fair value. All of the
Companys derivatives have been designated as cash flow hedges; therefore, the effective portion of
the changes in the fair value of derivatives will be recognized in accumulated other comprehensive
income (loss) until the hedged item is recognized in earnings. The ineffective portion of the
changes in the fair value of derivatives will be immediately recognized in earnings. The Company
classifies cash inflows and outflows from derivatives within net income on the statement of cash
flows.
One of the Companys objectives for utilizing derivative instruments is to reduce its exposure
to fluctuations in cash flows due to changes in the variable interest rates of certain borrowings
issued under its credit facility. The Companys strategy to achieve that objective involves
entering into interest rate swaps that are specifically designated to the Companys credit facility
and accounted for as cash flow hedges.
At December 31, 2009, the Companys derivative instruments included five interest rate swap
agreements as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed |
|
|
Variable |
|
|
|
|
|
|
Notional |
|
|
Interest |
|
|
Interest Rate |
|
|
|
|
Date Entered |
|
Amount |
|
|
Rate Paid* |
|
|
Received |
|
Effective Date |
|
Expiration Date |
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 |
|
$ |
50,000 |
|
|
|
4.29 |
% |
|
1-month LIBOR |
|
June 2009 |
|
June 2011 |
March 2009 |
|
$ |
175,000 |
|
|
|
2.85 |
% |
|
1-month LIBOR |
|
February 2011 |
|
February 2014 |
|
|
|
* |
|
plus applicable margin. |
On October 26, 2009, the Company terminated two of its interest rate swap agreements in
conjunction with issuing its 2019 Notes. The Company terminated an interest rate swap in the
amount of $75,000 that would have expired in March 2011 and an interest rate swap in the amount of
$100,000 that would have expired in June 2011. As a result of terminating these interest rate
swaps, the Company made a cash payment of $9,250 to the counterparty of the swap agreements.
Further, because the Company used
the proceeds of the 2019 Notes to reduce the borrowings under its senior uncollateralized
revolving credit facility, it is no longer probable that the forecasted transactions that were
being hedged by these interest rate swap agreements will occur. Therefore, the Company recorded a
charge of $9,250 to other expense in 2009.
Another of the Companys objectives for utilizing derivative instruments is to reduce its
exposure to fluctuations in cash flows due to changes in the price of diesel fuel. The Companys
strategy to achieve that objective involves entering into fuel hedges that are specifically
designated to certain forecasted diesel fuel purchases and accounted for as cash flow hedges.
64
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
At December 31, 2009, the Companys derivative instruments included nine fuel hedge agreements
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
Diesel |
|
|
|
|
|
|
|
|
|
Amount |
|
|
Rate Paid |
|
|
|
|
|
|
|
|
|
(in gallons per |
|
|
Fixed (per |
|
|
Diesel Rate Received |
|
Effective |
|
Expiration |
Date Entered |
|
month) |
|
|
gallon) |
|
|
Variable |
|
Date |
|
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 |
December 2008 |
|
|
100,000 |
|
|
|
3.000 |
|
|
DOE Diesel Fuel Index* |
|
January 2010 |
|
December 2010 |
December 2008 |
|
|
150,000 |
|
|
|
3.000 |
|
|
DOE Diesel Fuel Index* |
|
January 2010 |
|
December 2010 |
December 2008 |
|
|
150,000 |
|
|
|
2.820 |
|
|
DOE Diesel Fuel Index* |
|
January 2010 |
|
December 2010 |
December 2008 |
|
|
150,000 |
|
|
|
2.700 |
|
|
DOE Diesel Fuel Index* |
|
January 2010 |
|
December 2010 |
December 2008 |
|
|
400,000 |
|
|
|
2.950 |
|
|
DOE Diesel Fuel Index* |
|
January 2011 |
|
December 2011 |
December 2008 |
|
|
400,000 |
|
|
|
3.030 |
|
|
DOE Diesel Fuel Index* |
|
January 2012 |
|
December 2012 |
|
|
|
* |
|
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 average price is less
than the contract price per gallon, the Company pays the difference to the counterparty. |
The fair values of derivative instruments designated as cash flow hedges as of December 31,
2009, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
|
|
|
|
|
Designated as Cash |
|
Asset Derivatives |
|
|
Liability Derivatives |
|
Flow Hedges |
|
Balance Sheet Location |
|
Fair Value |
|
|
Balance Sheet Location |
|
Fair Value |
|
Interest rate swaps |
|
Other assets, net |
|
$ |
1,647 |
|
|
Accrued liabilities(a) |
|
$ |
(8,235 |
) |
|
|
|
|
|
|
|
|
Other assets, net |
|
|
(1,173 |
) |
Fuel hedges |
|
Accrued liabilities(b) |
|
|
1,406 |
|
|
Accrued liabilities(b) |
|
|
(3,884 |
) |
|
|
Other assets, net |
|
|
2,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
designated as cash
flow hedges |
|
|
|
$ |
5,427 |
|
|
|
|
$ |
(13,292 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents the estimated amount of the existing unrealized losses on interest rate
swaps as of December 31, 2009 (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. The actual amounts reclassified into earnings are dependent on future
movements in interest rates. |
|
(b) |
|
The net balance of $2,478 represents the estimated amount of the existing unrealized
losses on fuel hedges as of December 31, 2009 (based on the forward DOE diesel fuel index curve
at that date), included in accumulated other comprehensive loss expected to be reclassified into
pre-tax earnings within the next 12 months. The actual amounts reclassified into earnings are
dependent on future movements in diesel fuel prices. |
65
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following table summarizes the impact of the Companys cash flow hedges on the results of
operations, comprehensive income and accumulated other comprehensive loss (AOCL) as of and for
the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain
Recognized in
AOCL on
Derivatives,
Net of Tax
|
|
|
Statement of Income |
|
Amount of Gain
Reclassified
from AOCL
into Earnings,
Net of Tax |
|
Derivatives Designated as Cash Flow Hedges |
|
(Effective Portion)(a) |
|
|
Classification |
|
(Effective Portion)(b), (c) |
|
Interest rate swaps |
|
$ |
3,283 |
|
|
Interest expense |
|
$ |
9,124 |
|
|
|
|
|
Fuel hedges |
|
|
1,346 |
|
|
Cost of operations |
|
|
5,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,629 |
|
|
|
|
$ |
14,416 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In accordance with the derivatives and hedging guidance, the effective portions of the
changes in fair values of interest rate swaps and fuel hedges have been recorded in equity as a
component of AOCL. As the critical terms of the interest rate swaps match the underlying debt
being hedged, no ineffectiveness is recognized on these swaps and, therefore, all unrealized
changes in fair value are recorded in AOCL. Because changes in the actual price of diesel fuel
and changes in the DOE index price do not offset exactly each reporting period, the Company
assesses whether the fuel hedges are highly effective using the cumulative dollar offset
approach. |
|
(b) |
|
Amounts reclassified from AOCL into earnings related to realized gains and losses on
interest rate swaps are recognized when interest payments or receipts occur related to the swap
contracts, which correspond to when interest payments are made on the Companys hedged debt. |
|
(c) |
|
Amounts reclassified from AOCL into earnings related to realized gains and losses on
fuel hedges are recognized when settlement payments or receipts occur related to the hedge
contracts, which correspond to when the underlying fuel is consumed. |
The Company measures and records ineffectiveness on the fuel hedges in Cost of operations in
the Consolidated Statements of Income on a monthly basis based on the difference between the DOE
index price and the actual price of diesel fuel purchased, multiplied by the notional gallons on
the contracts. There was no significant ineffectiveness recognized on the fuel hedges during the
year ended December 31, 2009.
See Note 12 for further discussion on the impact of the Companys hedge accounting to its
consolidated Comprehensive income and AOCL.
Income Taxes
The Company uses the liability method to account for income taxes. Under this method,
deferred tax assets and liabilities are determined based on differences between the financial
reporting and income tax bases of assets and liabilities and are measured using the enacted tax
rates and laws that are expected to be in effect when the differences are expected to reverse. The
Company assumes the deductibility of certain costs in its income tax filings and estimates the
future recovery of deferred tax assets.
The Company is required to evaluate whether the tax positions taken will more likely than not
be sustained upon examination by the appropriate taxing authority. The Company classifies a
liability for unrecognized tax benefits as current only to the extent it anticipates making a
payment within one year.
Stock-Based Compensation
The fair value of restricted stock and restricted stock units for the years ended December 31,
2007, 2008 and 2009, were determined based on the number of shares granted and the quoted price of
the Companys common stock.
All share-based compensation cost is measured at the grant date, based on the estimated fair
value of the award, and is recognized on a straight-line basis as expense over the employees
requisite service period. The Company calculates potential windfalls and shortfalls under the
treasury stock method by including the impact of pro forma deferred tax assets in the calculation
of diluted earnings per common share. Under the stock-based compensation guidance, the Company
elected to use the short-cut method to calculate the historical pool of windfall tax benefits. The
Company elected to use the tax law ordering approach for purposes of determining whether an excess
of tax benefit has been realized.
66
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Stock-based compensation expense recognized during the years ended December 31, 2007, 2008 and
2009, were approximately $6,128 ($3,825 net of taxes), $7,854 ($4,937 net of taxes) and $9,314
($5,860 net of taxes), respectively, and consisted of stock option, restricted stock unit and
restricted stock expense. The Company records stock-based compensation expense in Selling, general
and administrative expenses in the Consolidated Statements of Income. The total unrecognized
compensation cost at December 31, 2009, related to unvested stock option and restricted stock unit
awards was $18,527 and that future expense will be recognized over the remaining vesting period of
the stock option and restricted stock unit awards, which currently extends to 2014. The weighted
average remaining vesting period of those awards is 1.3 years.
Per Share Information
Basic net income per share attributable to Waste Connections common stockholders is computed
using the weighted average number of common shares outstanding. Diluted net income per share
attributable to Waste Connections common stockholders is computed using the weighted average
number of common and potential common shares outstanding. Potential common shares are excluded
from the computation if their effect is anti-dilutive.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for the years ended December
31, 2007, 2008 and 2009, was $2,252, $2,596 and $3,408, respectively, which is included in selling,
general and administrative expense in the Consolidated Statements of Income.
Insurance Liabilities
The Company is effectively self-insured for automobile liability, property, general liability,
workers compensation, employers liability and employee group health claims. The Companys
insurance accruals are based on claims filed and estimates of claims incurred but not reported and
are developed by the Companys management with assistance from its third-party actuary and its
third-party claims administrator. The insurance accruals are influenced by the Companys past
claims experience factors, which have a limited history, and by published industry development
factors. At December 31, 2008 and 2009, the Companys total accrual for self-insured liabilities
was $33,841 and $35,834, respectively, which is included in accrued liabilities in the Consolidated
Balance Sheets.
Reclassifications
Certain amounts reported in the Companys prior years financial statements have been
reclassified to conform with the 2009 presentation.
New Accounting Pronouncements
Business
Combinations. In December 2007, the Financial Accounting Standards Board
(FASB) issued new guidance on business combinations. This guidance establishes principles and
requirements for how the Company: (1) recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree; (2) recognizes and measures the goodwill acquired in the business combination or a gain
from a bargain purchase; and (3) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the business combination. The
business combinations guidance also requires acquisition-related transaction and restructuring
costs to be expensed rather than treated as part of the cost of the acquisition. This guidance
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. The
Company adopted the business combination guidance on January 1, 2009 (see Note 3).
67
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
In April 2009, the FASB issued guidance relating to accounting for assets acquired and
liabilities assumed in a business combination that arise from contingencies. This pronouncement
amends the guidance on business combinations to clarify the initial and subsequent recognition,
subsequent accounting, and disclosure of assets and liabilities arising from contingencies in a
business combination. This pronouncement requires that assets acquired and liabilities assumed in
a business combination that arise from contingencies be recognized at fair value, as determined in
accordance with the fair value measurements guidance, if the acquisition-date fair value can be
reasonably estimated. If the acquisition-date fair value of an asset or liability cannot be
reasonably estimated, the asset or liability would be measured at the amount that would be
recognized in accordance with the accounting guidance for contingencies. This pronouncement became
effective for the Company as of January 1, 2009, and the provisions of the pronouncement are
applied prospectively to business combinations with an acquisition date on or after the date the
guidance became
effective. The adoption of this pronouncement did not have a material impact on the Companys
financial position or results of operations.
Fair Value Measurements and Disclosures. The Companys nonfinancial assets and
liabilities measured at fair value on a nonrecurring basis include assets and liabilities acquired
in connection with a business combination, goodwill and intangible assets. The Company adopted the
fair value measurement guidance as it relates to these assets and liabilities on January 1, 2009.
See Note 9 for disclosures related to fair value measurement of these assets and liabilities in
periods subsequent to their initial measurement.
In April 2009, the FASB issued additional guidance on fair value measurements and disclosures.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants under current market conditions.
The new guidance requires an evaluation of whether there has been a significant decrease in the
volume and level of activity for the asset or liability in relation to normal market activity for
the asset or liability. If there has been a significant decrease in activity, transactions or
quoted prices may not be indicative of fair value and a significant adjustment may need to be made
to those prices to estimate fair value. Additionally, an entity must consider whether the observed
transaction was orderly (that is, not distressed or forced). If the transaction was orderly, the
obtained price can be considered a relevant, observable input for determining fair value. If the
transaction is not orderly, other valuation techniques must be used when estimating fair value.
This guidance, which was applied by the Company prospectively as of June 30, 2009, did not impact
the Companys results of operations, cash flows or financial position for the year ended December
31, 2009 (see Note 9).
In August 2009, the FASB issued additional guidance on the fair value measurement of
liabilities. The new guidance provides clarification on the measurement and reporting of a
liability in circumstances in which a quoted price in an active market for the identical liability
is not available. This guidance is effective for the first reporting period beginning after August
2009. This guidance, which was applied by the Company as of October 1, 2009, did not impact the
Companys results of operations, cash flows or financial position for the year ended December 31,
2009.
Consolidation Noncontrolling Interests. In December 2007, the FASB issued guidance
on noncontrolling interests which establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary (formerly known as minority interest) and for the
deconsolidation of a subsidiary. This guidance 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. This guidance also requires presentation 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, resulting in an increase to consolidated Net income.
Historically, Net income attributable to noncontrolling interests was presented as minority
interest expense. Under this new guidance, amounts reported as Net income attributable to
noncontrolling interests are now reported net of any applicable taxes. The Companys 2007 and 2008
effective tax rates have been remeasured and reported in a manner consistent with the current
measurement approach. This guidance requires expanded disclosures in the consolidated financial
statements that clearly identify and distinguish between the interests of the parents owners and
the interests of the noncontrolling owners of a subsidiary. This guidance is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The
Company applied this guidance prospectively as of January 1, 2009, except for the presentation and
disclosure requirements, which were applied retrospectively for all periods presented.
Derivatives and Hedging. In March 2008, the FASB issued new disclosure requirements
for derivative instruments and hedging activities. The new disclosure requirements will provide
users of financial statements with an enhanced understanding of: (1) how and why an entity uses
derivative instruments; (2) how derivative instruments and related hedged items are accounted for;
and (3) how derivative instruments and related hedged items affect an entitys financial position,
financial performance and cash flows. This guidance 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. This guidance is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. The Company adopted this guidance on
January 1, 2009 (see Derivative Financial Instruments within this Note and Note 12).
68
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Convertible Debt. In May 2008, the FASB issued guidance that 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. This guidance specifies that issuers of convertible
debt instruments should separately account for the liability and equity components in a manner that
will reflect the entitys non-convertible debt borrowing rate when interest cost is recognized in
subsequent periods. This guidance is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal years. The Company
adopted this guidance on January 1, 2009, and the guidance has been applied retrospectively to all
periods presented.
The adoption of the convertible debt guidance did not affect the Companys total cash flows;
however, it did impact the Companys results of operations by increasing interest expense
associated with the Companys 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. As a result, the Companys Consolidated Balance
Sheets, Consolidated Statements of Income, Consolidated Statements of Equity and Comprehensive
Income and certain line items comprising the subtotal for Net cash provided by operating activities
in the Companys Consolidated Statements of Cash Flows have been affected by the adoption of this
pronouncement. For additional disclosures regarding the terms of the 2026 Notes and how this
instrument has been reflected in the Companys Consolidated Financial Statements for the year ended
December 31, 2009, see Note 8. The Company has elected not to apply the provisions of the
convertible debt guidance to its 2022 Floating Rate Convertible Subordinated Notes, which were
issued in 2002. In April 2006, these notes became convertible and were called for redemption;
therefore, these notes were not outstanding during any of the periods presented in this Annual
Report on Form 10-K for the year ended December 31, 2009.
Intangible Assets. In April 2008, the FASB issued guidance on determining the useful
life of intangible assets. The intent of the guidance is to improve the consistency between the
useful life of a recognized intangible asset and the period of expected cash flows used to measure
the fair value of the asset. This guidance 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 entitys intent
and/or ability to renew or extend the arrangement. This guidance is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. The Company adopted this guidance on January 1, 2009. The adoption of this
guidance did not have a material impact on the Companys financial position or results of
operations.
Subsequent Events. In May 2009, the FASB issued guidance on subsequent events which
establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available to be issued. This
guidance is based on the same principles as currently exist in auditing standards and was issued by
the FASB to include accounting guidance that originated as auditing standards into the body of
authoritative literature issued by the FASB. The standard addresses the period after the balance
sheet date during which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions occurring after the
balance sheet date in its financial statements and the disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. The Company adopted this
guidance during the quarterly period ended June 30, 2009. For the year ended December 31, 2009,
the Company evaluated subsequent events through February 9, 2010, which was the date the
accompanying financial statements were issued.
2. USE OF ESTIMATES AND ASSUMPTIONS
In preparing the Companys consolidated financial statements, 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 of the
information that is used in the preparation of the Companys consolidated financial statements is
dependent on future events, cannot be calculated with a high degree of precision from data
available or is simply not capable of being readily calculated based on generally accepted
methodologies. In some cases, these estimates are particularly difficult to determine and the
Company must exercise significant judgment. The most difficult, subjective and complex estimates
and the assumptions that deal with the greatest amount of uncertainty are related to the Companys
accounting for landfills, self-insurance, income taxes, allocation of acquisition purchase price
and asset impairments, which are discussed in Note 1. 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 the accounting guidance on contingencies.
Actual results for all estimates could differ materially from the estimates and assumptions that
the Company uses in the preparation of its consolidated financial statements.
69
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. ACQUISITIONS
As disclosed in Note 1, the Company has adopted the new pronouncement on business combinations
for all business combinations for which the acquisition date is on or after January 1, 2009.
Assets and liabilities that arose from business combinations whose acquisition date preceded the
application of the new pronouncement were not adjusted upon application of the new standard.
For all acquisitions completed prior to the Companys adoption of the new business combination
pronouncement, the acquisition purchase prices were allocated to the identified assets acquired and
liabilities assumed based on their estimated fair values at the dates of acquisition, with any
residual amounts allocated to goodwill. Purchase price allocations were considered preliminary
until the Company was no longer waiting for information that it arranged to obtain and that was
known to be available or obtainable. Although the time required to obtain the necessary
information varied with circumstances specific to an individual acquisition, the allocation
period for finalizing purchase price allocations did not exceed one year from the consummation of
a business combination. Any adjustments made during the allocation period were recorded
prospectively in the consolidated financial statements. The Company recognized third-party
acquisition-related costs as part of the cost of the acquisition.
For all acquisitions completed under the new business combinations pronouncement, as of the
respective acquisition dates, the Company recognizes, separately from goodwill, the identifiable
assets acquired and liabilities assumed at their estimated acquisition-date fair values. The
Company measures and recognizes goodwill as of the acquisition date as the excess of: (a) the
aggregate of the fair value of consideration transferred, the fair value of any noncontrolling
interest in the acquiree (if any) and the acquisition-date fair value of the Companys previously
held equity interest in the acquiree (if any), over (b) the fair value of assets acquired and
liabilities assumed. If information about facts and circumstances existing as of the acquisition
date is incomplete by the end of the reporting period in which a business combination occurs, the
Company will report provisional amounts for the items for which the accounting is incomplete. The
measurement period ends once the Company receives the information it was seeking; however, this
period will not exceed one year from the acquisition date. Any material adjustments recognized
during the measurement period will be reflected retrospectively in the consolidated financial
statements of the subsequent period. The Company recognizes third-party acquisition-related costs
as expense.
During each of 2007 and 2008, the Company acquired 15 non-hazardous solid waste collection,
transfer, disposal and recycling businesses. In addition, during 2008, the Company acquired the
remaining 49% interest in Pierce County Recycling, Composting and Disposal, LLC and Pierce County
Landfill Management, Inc. (PCRCD). Prior to the acquisition, the Company was consolidating PCRCD
as a majority-owned subsidiary with a related noncontrolling interest obligation and noncontrolling
interest expense.
During the second quarter of 2009, the Company completed the acquisition of 100% interests in
certain operations from Republic Services, Inc. and some of its subsidiaries and affiliates
(Republic). The operations were divested as a result of Republics merger with Allied Waste
Industries, Inc. The operations acquired include seven municipal solid waste landfills, six
collection operations and three transfer stations across eight markets: Southern California;
Northern California; Denver, CO; Houston, TX; Greenville/Spartanburg, SC; Charlotte, NC; Lubbock,
TX; and Flint, MI. The Company paid $377,129 in existing cash for the purchased operations plus
amounts paid for the purchase of accounts receivable and other prepaid assets. Total revenues for
the year ended December 31, 2009, generated from the Republic operations and included within
consolidated revenues were $102,925. Total pre-tax earnings for the year ended December 31, 2009,
generated from the Republic operations and included within consolidated income before income tax
provision were $4,822. Pursuant to the asset purchase agreement, the Company is required to remit
additional consideration to Republic if certain acquired operations exceed earnings targets
specified in the agreement. The Company has not recorded a liability because the fair value of the
contingent consideration is not material. Any changes in fair value of the contingent
consideration subsequent to the acquisition date will be charged to expense until the contingency
is settled.
During the year ended December 31, 2009, the Company also completed the acquisition of a 100%
interest in Sanipac, Inc. (Sanipac), a provider of collection services in Oregon, in exchange for
total consideration of $45,082. As part of this acquisition, the Company acquired a 75% interest
in EcoSort, LLC, a provider of recycling services, resulting in a 25% noncontrolling interest that
was recognized at fair value on the purchase date. Pursuant to the stock purchase agreement, the
Company is required to remit up to $4,500 of additional consideration to the former shareholders of
Sanipac if the acquired operations exceed earnings targets specified in the stock purchase
agreement over a three-year period ending July 31, 2012. The Company computed the fair value of
the contingent consideration using a probability-weighted discounted cash flow methodology, which
resulted in an obligation recognized at the purchase date totaling $4,274. Any changes in the fair value of the contingent consideration
subsequent to the acquisition date will be charged to expense until the contingency is settled.
70
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
In addition to the acquisitions from Republic and the acquisition of Sanipac, the Company
acquired five individually immaterial non-hazardous solid waste collection and recycling businesses
during the year ended December 31, 2009. The results of operations of the acquired businesses have
been included in the Companys consolidated financial statements from their respective acquisition
dates. The acquisitions completed during the years ended December 31, 2007, 2008 and 2009, were
not material to the Companys results of operations, either individually or in the aggregate. As a
result, pro forma financial information has not been provided. The Company expects these acquired
businesses to contribute towards the achievement of the Companys growth strategy of expansion
through acquisitions.
The following table summarizes the consideration transferred to acquire these businesses and
the amounts of identified assets acquired, liabilities assumed and noncontrolling interests
associated with businesses acquired at the acquisition date for acquisitions consummated in the
years ended December 31, 2007, 2008 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
Acquisitions |
|
|
Acquisitions |
|
|
Acquisitions |
|
Fair value of consideration transferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
107,649 |
|
|
$ |
320,541 |
|
|
$ |
416,853 |
|
Debt assumed |
|
|
31,249 |
|
|
|
22,688 |
|
|
|
16,423 |
|
Notes issued to sellers |
|
|
|
|
|
|
1,788 |
|
|
|
|
|
Contingent consideration |
|
|
|
|
|
|
|
|
|
|
4,274 |
|
Common stock warrants |
|
|
123 |
|
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
139,021 |
|
|
|
345,096 |
|
|
|
437,550 |
|
|
|
|
|
|
|
|
|
|
|
Recognized amounts of identifiable assets
acquired, liabilities assumed and
noncontrolling interests associated with
businesses acquired: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
6,099 |
|
|
|
13,781 |
|
|
|
16,187 |
|
Other current assets |
|
|
724 |
|
|
|
1,527 |
|
|
|
2,319 |
|
Property and equipment |
|
|
82,749 |
|
|
|
98,448 |
|
|
|
308,454 |
|
Long-term franchise agreements and contracts |
|
|
3,667 |
|
|
|
117,416 |
|
|
|
9,325 |
|
Indefinite-lived intangibles |
|
|
|
|
|
|
92,312 |
|
|
|
|
|
Customer lists |
|
|
3,592 |
|
|
|
9,044 |
|
|
|
33,730 |
|
Other intangibles |
|
|
|
|
|
|
|
|
|
|
19,132 |
|
Non-competition agreements |
|
|
4,941 |
|
|
|
48 |
|
|
|
|
|
Other assets |
|
|
|
|
|
|
514 |
|
|
|
667 |
|
Deferred revenue |
|
|
(4,043 |
) |
|
|
(2,449 |
) |
|
|
(4,754 |
) |
Accounts payable |
|
|
(2,283 |
) |
|
|
(6,692 |
) |
|
|
(1,264 |
) |
Accrued liabilities |
|
|
(4,812 |
) |
|
|
(3,526 |
) |
|
|
(2,436 |
) |
Noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
(1,577 |
) |
Other long-term liabilities |
|
|
(4,193 |
) |
|
|
(700 |
) |
|
|
(8,489 |
) |
Deferred income taxes |
|
|
(8,073 |
) |
|
|
(651 |
) |
|
|
(5,050 |
) |
|
|
|
|
|
|
|
|
|
|
Total identifiable net assets |
|
|
78,368 |
|
|
|
319,072 |
|
|
|
366,244 |
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
60,653 |
|
|
$ |
26,024 |
|
|
$ |
71,306 |
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired in 2007 totaling $58,886 and long-term franchise agreements, contracts, and
other intangibles acquired in 2007 totaling $11,269 are expected to be deductible for tax purposes.
Goodwill acquired in 2008 totaling $22,586 and long-term franchise agreements, contracts, and
other intangibles acquired in 2008 totaling $217,933 are expected to be deductible for tax
purposes. Goodwill acquired in 2009 totaling $40,535 and long-term franchise agreements,
contracts, and other intangibles acquired in 2009 totaling $54,923 are expected to be deductible
for tax purposes. The goodwill is attributable to the synergies and ancillary growth opportunities
expected to arise after the Companys acquisition of these businesses.
The fair value of acquired working capital related to two acquisitions completed during the
year ended December 31, 2009, is provisional pending receipt of information from the acquiree to
support the fair value of the assets acquired and liabilities assumed.
71
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The gross amount of trade receivables due under contracts acquired during the year ended
December 31, 2008, is $14,550, of which $770 is expected to be uncollectible. The gross amount of
trade receivables due under contracts acquired during the year ended December 31, 2009, is $17,190,
of which $1,002 is expected to be uncollectible. The Company did not acquire any other class of
receivable as a result of the acquisition of these businesses.
A reconciliation of the Fair value of consideration transferred, as disclosed in the table
above, to Payments for acquisitions, net of cash acquired, as reported in the Consolidated
Statements of Cash Flows for the years ended December 31, 2007, 2008 and 2009, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
|
Acquisitions |
|
|
Acquisitions |
|
|
Acquisitions |
|
Cash consideration transferred |
|
$ |
107,649 |
|
|
$ |
320,541 |
|
|
$ |
416,853 |
|
Elimination of noncontrolling interests |
|
|
|
|
|
|
33,560 |
|
|
|
|
|
Payment of contingent consideration |
|
|
|
|
|
|
|
|
|
|
2,000 |
|
Payment of acquisition-related liabilities |
|
|
1,780 |
|
|
|
1,049 |
|
|
|
1,158 |
|
|
|
|
|
|
|
|
|
|
|
Payments for acquisitions, net of cash acquired |
|
$ |
109,429 |
|
|
$ |
355,150 |
|
|
$ |
420,011 |
|
|
|
|
|
|
|
|
|
|
|
The $2,000 of contingent consideration paid during the year ended December 31, 2009
represented additional purchase price for an acquisition closed in 2007. Acquisition-related
liabilities are liabilities paid in the year shown above that were accrued for in a previous year.
Elimination of noncontrolling interests in 2008 consists of the noncontrolling interest liability
in PCRCD that was eliminated as a result of the Companys acquisition of the remaining 49% interest
in PCRCD.
During the year ended December 31, 2009, the Company incurred $3,987 of third-party
acquisition-related costs. These expenses are included in Selling, general and administrative
expenses in the Companys Consolidated Statements of Income for the year ended December 31, 2009.
4. INTANGIBLE ASSETS
Intangible assets, exclusive of goodwill, consisted of the following at December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term franchise agreements and contracts |
|
$ |
187,105 |
|
|
$ |
(18,751 |
) |
|
$ |
168,354 |
|
Customer lists |
|
|
57,572 |
|
|
|
(11,265 |
) |
|
|
46,307 |
|
Non-competition agreements |
|
|
9,732 |
|
|
|
(5,740 |
) |
|
|
3,992 |
|
Other |
|
|
21,236 |
|
|
|
(1,746 |
) |
|
|
19,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275,645 |
|
|
|
(37,502 |
) |
|
|
238,143 |
|
Nonamortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets |
|
|
116,160 |
|
|
|
|
|
|
|
116,160 |
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, exclusive of goodwill |
|
$ |
391,805 |
|
|
$ |
(37,502 |
) |
|
$ |
354,303 |
|
|
|
|
|
|
|
|
|
|
|
The weighted-average amortization periods of long-term franchise agreements and contracts,
customer lists and other intangibles acquired during the year ended December 31, 2009, are 33.0
years, 9.7 years and 38.1 years, respectively.
72
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Intangible assets, exclusive of goodwill, consisted of the following at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term franchise agreements and contracts |
|
$ |
179,674 |
|
|
$ |
(12,751 |
) |
|
$ |
166,923 |
|
Customer lists |
|
|
22,083 |
|
|
|
(4,951 |
) |
|
|
17,132 |
|
Non-competition agreements |
|
|
9,751 |
|
|
|
(5,157 |
) |
|
|
4,594 |
|
Other |
|
|
4,024 |
|
|
|
(2,389 |
) |
|
|
1,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
215,532 |
|
|
|
(25,248 |
) |
|
|
190,284 |
|
Nonamortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets |
|
|
116,160 |
|
|
|
|
|
|
|
116,160 |
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, exclusive of goodwill |
|
$ |
331,692 |
|
|
$ |
(25,248 |
) |
|
$ |
306,444 |
|
|
|
|
|
|
|
|
|
|
|
The weighted-average amortization periods of long-term franchise agreements and contracts,
customer lists and non-competition agreements acquired during the year ended December 31, 2008, are
30.9 years, 9.6 years and 6.9 years, respectively.
The amounts assigned to indefinite-lived intangible assets consist of the value of certain
perpetual rights to provide solid waste collection and transportation services in specified
territories.
Estimated future amortization expense for the next five years of amortizable intangible assets
is as follows:
|
|
|
|
|
For the year ending December 31, 2010 |
|
$ |
14,299 |
|
For the year ending December 31, 2011 |
|
$ |
14,126 |
|
For the year ending December 31, 2012 |
|
$ |
13,807 |
|
For the year ending December 31, 2013 |
|
$ |
12,385 |
|
For the year ending December 31, 2014 |
|
$ |
11,806 |
|
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
Landfill site costs |
|
$ |
655,773 |
|
|
$ |
923,670 |
|
Rolling stock |
|
|
343,692 |
|
|
|
406,010 |
|
Land, buildings and improvements |
|
|
155,712 |
|
|
|
197,214 |
|
Containers |
|
|
155,646 |
|
|
|
175,542 |
|
Machinery and equipment |
|
|
138,094 |
|
|
|
180,801 |
|
Construction in progress |
|
|
8,594 |
|
|
|
5,831 |
|
|
|
|
|
|
|
|
|
|
|
1,457,511 |
|
|
|
1,889,068 |
|
Less accumulated depreciation and depletion |
|
|
(473,387 |
) |
|
|
(580,676 |
) |
|
|
|
|
|
|
|
|
|
$ |
984,124 |
|
|
$ |
1,308,392 |
|
|
|
|
|
|
|
|
The Companys landfill depletion expense for the years ended December 31, 2007, 2008 and 2009,
was $22,282, $23,422 and $33,627, respectively.
73
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. OTHER ASSETS, NET
Other assets, net, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
Deferred financing costs |
|
$ |
6,845 |
|
|
$ |
5,096 |
|
Investment in unconsolidated entity |
|
|
5,300 |
|
|
|
5,300 |
|
Landfill closure receivable |
|
|
4,358 |
|
|
|
4,619 |
|
Deposits |
|
|
916 |
|
|
|
1,597 |
|
Unrealized interest rate and fuel hedge gains |
|
|
|
|
|
|
2,849 |
|
Other |
|
|
3,220 |
|
|
|
4,351 |
|
|
|
|
|
|
|
|
|
|
$ |
20,639 |
|
|
$ |
23,812 |
|
|
|
|
|
|
|
|
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
Insurance claims |
|
$ |
33,841 |
|
|
$ |
35,834 |
|
Payroll and payroll-related |
|
|
20,198 |
|
|
|
23,692 |
|
Interest payable |
|
|
6,934 |
|
|
|
7,806 |
|
Acquisition-related |
|
|
4,227 |
|
|
|
4,913 |
|
Unrealized interest rate and fuel hedge losses |
|
|
21,120 |
|
|
|
10,714 |
|
Other |
|
|
8,900 |
|
|
|
10,421 |
|
|
|
|
|
|
|
|
|
|
$ |
95,220 |
|
|
$ |
93,380 |
|
|
|
|
|
|
|
|
8. LONG-TERM DEBT
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2009 |
|
Revolver under Credit Facility |
|
$ |
400,000 |
|
|
$ |
269,000 |
|
2026 Notes, net of discount of $10,930 and
$6,246 as of December 31, 2008 and 2009,
respectively |
|
|
189,070 |
|
|
|
193,754 |
|
2015 Notes |
|
|
175,000 |
|
|
|
175,000 |
|
2019 Notes |
|
|
|
|
|
|
175,000 |
|
Tax-exempt bonds |
|
|
53,960 |
|
|
|
50,615 |
|
Notes payable to sellers in connection with
acquisitions, uncollateralized, bearing
interest at 6.05% to 10.35%, principal and
interest payments due periodically with due
dates ranging from 2010 to 2036 |
|
|
4,888 |
|
|
|
4,872 |
|
Notes payable to third parties,
collateralized by substantially all assets
of certain subsidiaries of the Company,
bearing interest at 1.0% to 10.9%,
principal and interest payments due
periodically with due dates ranging from
2010 to 2019 |
|
|
1,608 |
|
|
|
1,922 |
|
|
|
|
|
|
|
|
|
|
|
824,526 |
|
|
|
870,163 |
|
Less current portion |
|
|
(4,698 |
) |
|
|
(2,609 |
) |
|
|
|
|
|
|
|
|
|
$ |
819,828 |
|
|
$ |
867,554 |
|
|
|
|
|
|
|
|
74
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Credit Facility
The Company has a senior revolving credit facility with a syndicate of banks for which Bank of
America, N.A. acts as agent. The maximum borrowings available under the Companys credit facility
was $845,000 as of December 31, 2008 and 2009. There is no maximum amount of standby letters of
credit that can be issued; however, the issuance of standby letters of credit reduces the amount of
total borrowings available. As of December 31, 2008, $400,000 was outstanding under the credit
facility, exclusive of outstanding standby letters of credit of $81,401. As of December 31, 2009,
$269,000 was outstanding under the credit facility, exclusive of outstanding standby letters of
credit of $87,116. The credit facility matures in September 2012.
The borrowings under the credit facility bear interest, at the Companys option, at either the
base rate plus the applicable base rate margin (approximately 3.25% at each of December 31, 2008
and 2009) on base rate loans, or the Eurodollar rate plus the applicable Eurodollar margin
(approximately 2.5% and 0.86% at December 31, 2008 and 2009, respectively) on Eurodollar loans.
The applicable margins under the credit facility vary depending on the Companys leverage ratio, as
defined in the credit agreement. As of December 31, 2008 and 2009, the margins were 0.625% for
Eurodollar loans and 0.00% for base rate loans.
The credit facility requires the Company to pay an annual commitment fee on the unused portion
of the facility. The commitment fee was 0.15% as of December 31, 2008 and 2009.
The borrowings under the credit facility are not collateralized. The credit facility contains
representations and warranties and places certain business, financial and operating restrictions on
the Company relating to, among other things, indebtedness, liens and other encumbrances,
investments, mergers and acquisitions, asset sales, sale and leaseback transactions, and dividends,
distributions and redemptions of capital stock. The credit agreement requires that the Company
maintain specified financial ratios. As of December 31, 2008 and 2009, the Company was in
compliance with all applicable covenants in the credit facility.
Convertible Senior Notes due 2026
As discussed in Note 1, effective January 1, 2009, the Company adopted a new pronouncement on
convertible debt which affected the Companys accounting and disclosure for its 2026 Notes.
Consistent with the transition guidance in this convertible debt pronouncement, the Companys
adoption of this pronouncement is being treated as a change in accounting principle that is being
applied retrospectively to all periods presented. The cumulative effect of the change in
accounting principle on periods prior to those presented in the Companys Consolidated Financial
Statements for the period ended December 31, 2009, has been reflected as an offsetting adjustment
to the December 31, 2006 balances of Additional paid-in capital and Retained earnings in the
Companys Consolidated Statements of Equity. A description of the prior-period information that
has been retrospectively adjusted is provided below.
On March 20, 2006, the Company completed its offering of $200,000 aggregate principal amount
of its 3.75% Convertible Senior Notes due 2026 in an offering pursuant to Rule 144A of the
Securities Act of 1933, as amended. The terms and conditions of the 2026 Notes are set forth in
the Indenture, dated as of March 20, 2006, between the Company and U.S. Bank National Association,
as trustee. The 2026 Notes rank equally in right of payment to all of the Companys other existing
and future senior uncollateralized and unsubordinated indebtedness. The 2026 Notes rank senior in
right of payment to all of the Companys existing and future subordinated indebtedness and are
subordinated in right of payment to the Companys collateralized obligations to the extent of the
assets collateralizing such obligations. The 2026 Notes bear interest at 3.75% per annum payable
semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2006, until
the maturity date of April 1, 2026. The Companys obligations under the 2026 Notes are not
guaranteed by any third party.
The 2026 Notes are convertible into cash and, if applicable, shares of common stock based on
an initial conversion rate of 29.4118 shares of common stock per $1 principal amount of 2026 Notes
(which is equal to an initial conversion price of approximately $34.00 per share), subject to
adjustment, and only under certain circumstances. Upon surrender of the 2026 Notes for conversion,
the Company will deliver cash equal to the lesser of the aggregate principal amount of notes to be
converted and its total conversion obligation. The Company will deliver shares of its common stock
in respect of the excess amount, if any, of its conversion obligation over the amount paid in cash.
The holders of the 2026 Notes who convert their notes in connection with a change in control (as
defined in the Indenture) may be entitled to a make-whole premium in the form of an increase in the
conversion rate.
75
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Holders may surrender notes for conversion into cash and, if applicable, shares of the
Companys common stock at an initial conversion price of $34.00 per share (equivalent to an initial
conversion rate of 29.4118 shares per $1 principal amount of notes) at any time prior to the close
of business on the maturity date, if the closing sale price of the Companys common stock for at
least 20 trading days in the period of 30 consecutive trading days ending on the last trading day
of the quarter preceding the quarter in which the conversion occurs, is more than 130% of the
conversion price per share of the Companys common stock on that 30th day. Based on the
Companys share price through December 31, 2009, the 2026 Notes have not met the requirements for
conversion by the holders.
Beginning on April 1, 2010, the Company may redeem in cash all or part of the 2026 Notes at a
price equal to 100% of the principal amount plus accrued and unpaid interest, including additional
interest, if any, and, if redeemed prior to April 1, 2011, an interest make-whole payment. On February 8, 2010, the Company announced that on April 1, 2010, it intends to redeem all of its
2026 Notes. Holders may have their 2026 Notes redeemed at par plus a make-whole payment, together
with accrued and unpaid interest to the redemption date. Alternatively, holders may convert their
2026 Notes, prior to 5 p.m., New York City time, on March 31, 2010. The conversion price is $34.00
per share, which is equivalent to a conversion rate of approximately 29.4118 shares of the Company's
common stock for each $1,000 principal amount of the 2026 Notes. On February 8, 2010, the last reported
sale price of the Company's common stock on the New York Stock
Exchange was $30.96 per share. The Company
intends to pay the principal plus related interest of the redeemed notes with funds from its credit facility.
The holders of the 2026 Notes can require the Company to repurchase
all or a part of the 2026 Notes in cash on each of April 1,
2011, 2016 and 2021, and in the event of a change of control of the
Company, at a purchase price of 100% of the principal amount of the
2026 Notes plus any accrued and unpaid interest, including additional
interest, if any.
Upon adoption of the convertible debt pronouncement, the Company first determined the carrying
amount of the liability component of the 2026 Notes at their issuance date by measuring the fair
value of a similar liability excluding the embedded conversion option. At the date of issuance of
the 2026 Notes, the Companys borrowing rate for similar debt instruments with no conversion rights
was estimated at 6.5% per annum. This borrowing rate was estimated to be representative of
non-convertible debt with a maturity date of five years, which was considered appropriate given the
April 1, 2011 put feature of the 2026 Notes, as previously discussed. Using a present value
formula that incorporated a 6.5% annual discount rate over a five-year period with semi-annual
interest coupon payment dates, the Company estimated the fair value of the hypothetical
non-convertible debt to be $177,232. The Company then determined the carrying amount of the equity
component of the 2026 Notes, represented by the embedded conversion option, by deducting the fair
value of the liability component from the initial proceeds ascribed to the convertible debt
instrument as a whole, which were equal to the $200,000 principal amount of the Notes. The
resulting carrying amount of the equity component at the issuance date of the 2026 Notes was
$22,768. This amount, net of the tax effect of $8,652, is reflected in the adjustment to the
opening balance of Additional paid-in capital in the Companys Consolidated Statements of Equity.
In addition to computing the initial liability and equity components of the 2026 Notes upon
adoption of the convertible debt pronouncement, the Company also computed the amount of direct
transaction costs to be allocated between the liability and equity components of the 2026 Notes at
the date of issuance. The Company allocated direct transaction costs, totaling $5,534, between the
liability and equity components in an amount proportionate to the allocation of the proceeds of the
2026 Notes. This computation resulted in $4,904 and $630 being allocated to the liability and
equity components of the 2026 Notes, respectively. The amount allocated to the equity component,
net of the tax effect of $240, is reflected in the adjustment to the opening balance of Additional
paid-in capital in the Companys Consolidated Statements of Equity.
Subsequent to the initial measurement of the liability and equity components, and the related
allocation of direct transaction costs, as of the issuance date of the 2026 Notes, the Company
calculated an amortization schedule for the excess of the principal amount of the liability
component over its carrying amount (the debt discount), using the interest method. The debt
discount is being amortized over a five-year period 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. In addition, the Company calculated the adjusted debt issuance cost amortization on
the portion of direct transaction costs allocated to the liability component, which is recognized
as Interest expense in the Companys Consolidated Statements of Income. The adjustment to the debt
issuance cost amortization subsequent to adoption of the convertible debt pronouncement relates to
the portion of direct transaction costs allocated to the equity component. These costs were
recognized as a reduction to the carrying value of the equity component, which is not amortized.
Amortization of the debt discount on the 2026 Notes, which is recognized as interest expense,
from March 2006 to December 31, 2006, was calculated as $3,124. This amount, net of the tax effect
of $1,187, is reflected in the adjustment to the opening balance of Retained earnings in the
Companys Consolidated Statements of Equity. The reduction to previously reported debt issuance
cost amortization, as a result of the direct transaction costs allocated to the equity component,
from March 2006 to December 31, 2006, was calculated as $95. This amount, net of the tax effect of
$35, is reflected in the adjustment to the opening balance of Retained earnings in the Companys
Consolidated Statements of Equity.
76
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
A summary of the financial statement line items that have been retrospectively adjusted as a
result of the Companys adoption of the new convertible debt pronouncement is presented in the
table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
Balance as Reported |
|
|
|
|
|
|
December 31, 2008 |
|
|
|
in the 2008 Annual |
|
|
Cumulative |
|
|
Balance as Presented in |
|
|
|
Report on Form |
|
|
Retrospective |
|
|
the 2009 Annual Report |
|
Consolidated Balance Sheet |
|
10-K |
|
|
Adjustment |
|
|
on Form 10-K |
|
Other assets, net |
|
$ |
20,922 |
|
|
$ |
(283 |
) |
|
$ |
20,639 |
|
Long-term debt and notes payable |
|
$ |
830,758 |
|
|
$ |
(10,930 |
) |
|
$ |
819,828 |
|
Deferred income taxes |
|
$ |
251,514 |
|
|
$ |
4,045 |
|
|
$ |
255,559 |
|
Additional paid-in capital |
|
$ |
647,829 |
|
|
$ |
13,726 |
|
|
$ |
661,555 |
|
Retained earnings |
|
$ |
630,037 |
|
|
$ |
(7,124 |
) |
|
$ |
622,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance for the Year |
|
|
|
|
|
|
|
|
|
|
Ended December 31, |
|
|
|
|
|
|
Balance for the Year |
|
|
|
2007, as Reported |
|
|
|
|
|
|
Ended December 31, |
|
|
|
in the 2008 |
|
|
|
|
|
|
2007, as Presented in |
|
Consolidated Statement of |
|
Annual Report on |
|
|
Retrospective |
|
|
the 2009 Annual Report |
|
Income |
|
Form 10-K |
|
|
Adjustment |
|
|
on Form 10-K |
|
Interest expense |
|
$ |
35,023 |
|
|
$ |
4,183 |
|
|
$ |
39,206 |
|
Income tax provision |
|
$ |
59,917 |
|
|
$ |
(1,589 |
) |
|
$ |
58,328 |
|
Basic earnings per share |
|
$ |
1.45 |
|
|
$ |
(0.04 |
) |
|
$ |
1.41 |
|
Diluted earnings per share |
|
$ |
1.42 |
|
|
$ |
(0.04 |
) |
|
$ |
1.38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance for the Year |
|
|
|
|
|
|
|
|
|
|
Ended December 31, |
|
|
|
|
|
|
Balance for the Year |
|
|
|
2008, as Reported |
|
|
|
|
|
|
Ended December 31, |
|
|
|
in the 2008 |
|
|
|
|
|
|
2008, as Presented in |
|
Consolidated Statement of |
|
Annual Report on |
|
|
Retrospective |
|
|
the 2009 Annual Report |
|
Income |
|
Form 10-K |
|
|
Adjustment |
|
|
on Form 10-K |
|
Interest expense |
|
$ |
38,824 |
|
|
$ |
4,278 |
|
|
$ |
43,102 |
|
Income tax provision |
|
$ |
58,400 |
|
|
$ |
(1,625 |
) |
|
$ |
56,775 |
|
Basic earnings per share |
|
$ |
1.51 |
|
|
$ |
(0.04 |
) |
|
$ |
1.47 |
|
Diluted earnings per share |
|
$ |
1.48 |
|
|
$ |
(0.04 |
) |
|
$ |
1.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance for the Year |
|
|
|
|
|
|
|
|
|
|
Ended December 31, |
|
|
|
|
|
|
Balance for the Year |
|
|
|
2007, as Reported |
|
|
|
|
|
|
Ended December 31, |
|
|
|
in the 2008 |
|
|
|
|
|
|
2007, as Presented in |
|
Consolidated Statement of |
|
Annual Report on |
|
|
Retrospective |
|
|
the 2009 Annual Report |
|
Cash Flows |
|
Form 10-K |
|
|
Adjustment |
|
|
on Form 10-K |
|
Deferred income taxes,
net of acquisitions |
|
$ |
12,440 |
|
|
$ |
(1,589 |
) |
|
$ |
10,851 |
|
Amortization of debt
issuance costs |
|
$ |
2,182 |
|
|
$ |
(126 |
) |
|
$ |
2,056 |
|
Amortization of debt discount |
|
$ |
|
|
|
$ |
4,309 |
|
|
$ |
4,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance for the Year |
|
|
|
|
|
|
|
|
|
|
Ended December 31, |
|
|
|
|
|
|
Balance for the Year |
|
|
|
2008, as Reported |
|
|
|
|
|
|
Ended December 31, |
|
|
|
in the 2008 |
|
|
|
|
|
|
2008, as Presented in |
|
Consolidated Statement of |
|
Annual Report on |
|
|
Retrospective |
|
|
the 2009 Annual Report |
|
Cash Flows |
|
Form 10-K |
|
|
Adjustment |
|
|
on Form 10-K |
|
Deferred income taxes,
net of acquisitions |
|
$ |
31,902 |
|
|
$ |
(1,625 |
) |
|
$ |
30,277 |
|
Amortization of debt
issuance costs |
|
$ |
1,966 |
|
|
$ |
(126 |
) |
|
$ |
1,840 |
|
Amortization of debt discount |
|
$ |
|
|
|
$ |
4,404 |
|
|
$ |
4,404 |
|
77
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
For the financial statement line items adjusted as a result of the Companys adoption of the
new convertible debt pronouncement, the balances as of, or for the year ended, December 31, 2009,
that would have been reported prior to the Companys adoption of the new convertible debt
pronouncement, are presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Balance as Reported in |
|
|
|
|
|
|
Balance Prior to |
|
|
|
the 2009 Annual |
|
|
|
|
|
|
Adoption of New |
|
|
|
Report on |
|
|
|
|
|
|
Convertible Debt |
|
Consolidated Balance Sheet |
|
Form 10-K |
|
|
Adjustment |
|
|
Pronouncement |
|
Other assets, net |
|
$ |
23,812 |
|
|
$ |
157 |
|
|
$ |
23,969 |
|
Long-term debt and notes payable |
|
$ |
867,554 |
|
|
$ |
6,246 |
|
|
$ |
873,800 |
|
Deferred income tax liabilities |
|
$ |
305,932 |
|
|
$ |
(2,314 |
) |
|
$ |
303,618 |
|
Additional paid-in capital |
|
$ |
625,173 |
|
|
$ |
(13,726 |
) |
|
$ |
611,447 |
|
Retained earnings |
|
$ |
732,738 |
|
|
$ |
9,951 |
|
|
$ |
742,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance for the Year |
|
|
|
|
|
|
Balance for the Year |
|
|
|
Ended December 31, |
|
|
|
|
|
|
Ended December 31, |
|
|
|
2009, as Reported in |
|
|
|
|
|
|
2009 Prior to Adoption |
|
Consolidated Statement of |
|
the 2009 Annual |
|
|
|
|
|
|
of New Convertible |
|
Income |
|
Report on Form 10-K |
|
|
Adjustment |
|
|
Debt Pronouncement |
|
Interest expense |
|
$ |
49,161 |
|
|
$ |
(4,558 |
) |
|
$ |
44,603 |
|
Income tax provision |
|
$ |
64,565 |
|
|
$ |
1,732 |
|
|
$ |
66,297 |
|
Basic earnings per share |
|
$ |
1.38 |
|
|
$ |
0.04 |
|
|
$ |
1.42 |
|
Diluted earnings per share |
|
$ |
1.37 |
|
|
$ |
0.04 |
|
|
$ |
1.41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance for the Year |
|
|
|
|
|
|
Balance for the Year |
|
|
|
Ended December 31, |
|
|
|
|
|
|
Ended December 31, |
|
|
|
2009, as Reported in |
|
|
|
|
|
|
2009 Prior to Adoption |
|
Consolidated Statement of |
|
the 2009 Annual |
|
|
|
|
|
|
of New Convertible |
|
Cash Flows |
|
Report on Form 10-K |
|
|
Adjustment |
|
|
Debt Pronouncement |
|
Deferred income taxes,
net of acquisitions |
|
$ |
38,224 |
|
|
$ |
1,732 |
|
|
$ |
39,956 |
|
Amortization of debt
issuance costs |
|
$ |
1,942 |
|
|
$ |
126 |
|
|
$ |
2,068 |
|
Amortization of debt discount |
|
$ |
4,684 |
|
|
$ |
(4,684 |
) |
|
$ |
|
|
For the years ended December 31, 2007, 2008 and 2009, the total interest expense recognized by
the Company relating to both the contractual interest coupon and amortization of the non-cash debt
discount on the 2026 Notes was $11,809 ($7,322, net of taxes), $11,904 ($7,381, net of taxes) and
$12,184 ($7,554, net of taxes), respectively. The portion of total interest expense related to the
contractual interest coupon on the 2026 Notes during each of the years ended December 31, 2007,
2008 and 2009 was $7,500 ($4,650, net of taxes). The portion of total interest expense related to
amortizing the non-cash debt discount during the years ended December 31, 2007, 2008 and 2009 was
$4,309 ($2,672, net of taxes), $4,404 ($2,731, net of taxes) and $4,684 ($2,904, net of taxes),
respectively. The effective interest rate on the liability component for the years ended December
31, 2007, 2008 and 2009 was 6.4%. As of December 31, 2009, the Company has five quarterly periods
remaining over which the debt discount will be amortized.
The following table presents information regarding the values at which the following items are
carried in the Companys December 31, 2008 and 2009 Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008 |
|
|
December 31, 2009 |
|
Carrying amount of equity component |
|
$ |
13,726 |
|
|
$ |
13,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal amount of liability component |
|
$ |
200,000 |
|
|
$ |
200,000 |
|
Unamortized
discount on liability component |
|
|
(10,930 |
) |
|
|
(6,246 |
) |
|
|
|
|
|
|
|
Net carrying amount of liability component |
|
$ |
189,070 |
|
|
$ |
193,754 |
|
|
|
|
|
|
|
|
78
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
At December 31, 2009, the 2026 Notes did not meet any of the conditions for conversion. Under
the new convertible debt pronouncement, upon conversion of the 2026 Notes, the Company will be
required to allocate the fair value of the consideration transferred and any transaction costs
incurred between the equity and liability components. This will be 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, will be recorded in earnings.
Master Note Purchase Agreement
Senior Notes due 2015
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 in a private placement. The 2015 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 2015 Notes on October 1, 2015.
The 2015 Notes are uncollateralized obligations and rank equally with obligations under the
Companys senior uncollateralized revolving credit facility. The 2015 Notes are subject to
representations, warranties, covenants and events of default. Upon the occurrence of an event
of default, payment of the 2015 Notes may be accelerated by the holders of the 2015 Notes. The
2015 Notes may also be prepaid at any time in whole or from time to time in any part (not less
than 5% of the then-outstanding principal amount) by the Company at par plus a make-whole amount
determined in respect of the remaining scheduled interest payments on the 2015 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 2015 Notes upon certain changes
in control. The Company is amortizing the $1,026 debt issuance costs over a seven-year term
through the maturity date, or October 1, 2015.
Senior Notes due 2019
On October 26, 2009, the Company entered into a First Supplement to the Master Note
Purchase Agreement with certain accredited institutional investors pursuant to which the Company
issued and sold to the investors on that date $175,000 of senior uncollateralized notes due
November 1, 2019 in a private placement. The 2019 Notes bear interest at the fixed rate of
5.25% per annum with interest payable in arrears semi-annually on May 1 and November 1 beginning
on May 1, 2010, and with principal payable at the maturity of the 2019 Notes on November 1,
2019.
The 2019 Notes are uncollateralized obligations and rank equally with the 2015 Notes and
obligations under the Companys senior uncollateralized revolving credit facility. The 2019
Notes are subject to representations, warranties, covenants and events of default. Upon the
occurrence of an event of default, payment of the 2019 Notes may be accelerated by the holders
of the 2019 Notes. The 2019 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 2019
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 2019 Notes
upon certain changes in control. The Company is amortizing the $152 debt issuance costs over a
10-year term through the maturity date, or November 1, 2019.
The Company may issue additional series of senior uncollateralized notes pursuant to the terms
and conditions of the Master Note Purchase Agreement, provided that the purchasers of the 2015
Notes and the 2019 Notes shall not have any obligation to purchase any additional notes issued
pursuant to the Master Note Purchase Agreement and the aggregate principal amount of the 2015
Notes, the 2019 Notes and any additional notes issued pursuant to the Master Note Purchase
Agreement shall not exceed $500,000.
79
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Tax-Exempt Bonds
The Companys tax-exempt bond financings are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate |
|
|
|
|
|
|
|
|
|
|
|
|
Backed |
|
|
|
Type of |
|
on Bond at |
|
|
|
|
Outstanding Balance at |
|
|
by Letter |
|
|
|
Interest |
|
December 31, |
|
|
Maturity Date of |
|
December 31, |
|
|
of Credit |
|
Name of Bond |
|
Rate |
|
2009 |
|
|
Bond |
|
2008 |
|
|
2009 |
|
|
(Amount) |
|
Wasco Bond 2012 |
|
Fixed |
|
|
7.00 |
% |
|
March 1, 2012 |
|
$ |
2,325 |
|
|
$ |
1,800 |
|
|
$ |
|
|
Wasco Bond 2021 |
|
Fixed |
|
|
7.25 |
|
|
March 1, 2021 |
|
|
8,475 |
|
|
|
8,475 |
|
|
|
|
|
Madera Bond |
|
Variable |
|
|
0.32 |
|
|
May 1, 2016 |
|
|
1,800 |
|
|
|
1,800 |
|
|
|
1,829 |
|
Tehama Bond |
|
Variable |
|
|
0.32 |
|
|
June 1, 2014 |
|
|
580 |
|
|
|
515 |
|
|
|
523 |
|
San Jose Bonds |
|
Variable |
|
|
0.32 |
|
|
September 1, 2016 |
|
|
7,020 |
|
|
|
4,475 |
|
|
|
4,750 |
|
West Valley Bond |
|
Variable |
|
|
0.30 |
|
|
August 1, 2018 |
|
|
15,500 |
|
|
|
15,500 |
|
|
|
15,678 |
|
LeMay Washington Bond |
|
Variable |
|
|
0.29 |
|
|
April 1, 2033 |
|
|
15,930 |
|
|
|
15,930 |
|
|
|
16,126 |
|
LeMay Olympia Bond |
|
Variable |
|
|
0.29 |
|
|
April 1, 2019 |
|
|
2,330 |
|
|
|
2,120 |
|
|
|
2,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
53,960 |
|
|
$ |
50,615 |
|
|
$ |
41,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In January 2010, the Company gave notice to redeem the Wasco Bond 2012 and the Wasco Bond
2021. The Company will pay the principal plus accrued interest on these bonds on March 1, 2010.
The variable-rate bonds are all remarketed weekly by a remarketing agent to effectively
maintain a variable yield. If the remarketing agent is unable to remarket the bonds, then the
remarketing agent can put the bonds to the Company. The Company has obtained standby letters of
credit, issued under its senior revolving credit facility, to guarantee repayment of the bonds in
this event. The Company classified these borrowings as long-term at December 31, 2009, because the
borrowings are supported by standby letters of credit issued under the Companys senior revolving
credit facility which is long-term.
As of December 31, 2009, aggregate contractual future principal payments by calendar year on
long-term debt are due as follows:
|
|
|
|
|
2010 |
|
$ |
2,609 |
|
2011 |
|
|
202,200 |
|
2012 |
|
|
271,410 |
|
2013 |
|
|
1,555 |
|
2014 |
|
|
1,732 |
|
Thereafter |
|
|
396,903 |
|
|
|
|
|
|
|
$ |
876,409 |
|
|
|
|
|
The above table does not reflect the aforementioned notice to
redeem in 2010 the 2026 Notes, the Wasco Bond 2012 or the Wasco Bond 2021.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and
liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured
at fair value on a non-recurring basis, in periods subsequent to their initial measurement. 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.
80
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The Companys financial assets and liabilities recorded at fair value on a recurring basis
include derivative instruments and certain investments included in cash equivalent money market
funds and restricted assets. The Companys derivative instruments are pay-fixed, receive-variable
interest rate swaps and pay-fixed, receive-variable diesel fuel hedges. The Companys interest
rate swaps are recorded at their estimated fair values based on quotes received from financial
institutions that trade these contracts. The Company verifies the reasonableness of these quotes
using similar quotes from another financial institution as of each date for which
financial statements are prepared. The Company uses a discounted cash flow (DCF) model to
determine the estimated fair values of the diesel fuel hedges. The assumptions used in preparing
the DCF model include: (i) estimates for the forward DOE index curve; and (ii) the discount rate
based on risk-free interest rates over the term of the agreements. The DOE index curve used in the
DCF model was obtained from financial institutions that trade these contracts. For the Companys
interest rate and fuel hedges, the Company also considers the Companys creditworthiness in its
determination of the fair value measurement of these instruments in a net liability position and
the banks creditworthiness in its determination of the fair value measurements of these
instruments in a net asset position. The Companys cash equivalent money market funds and
restricted assets are valued at quoted market prices in active markets for identical assets, which
the Company receives from the financial institutions that hold such investments on its behalf. The
Companys restricted assets measured at fair value are invested primarily in U.S. government and
agency securities.
The Companys assets and liabilities measured at fair value on a recurring basis at December
31, 2008 and 2009, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at December 31, 2008 Using |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
for Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Interest rate swap
derivative
instruments -
liability position |
|
$ |
(27,796 |
) |
|
$ |
|
|
|
$ |
(27,796 |
) |
|
$ |
|
|
Fuel hedge
derivative
instruments -net
liability position |
|
$ |
(10,812 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(10,812 |
) |
Cash equivalent
money market funds |
|
$ |
256,060 |
|
|
$ |
256,060 |
|
|
$ |
|
|
|
$ |
|
|
Restricted assets |
|
$ |
21,429 |
|
|
$ |
21,429 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at December 31, 2009 Using |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
for Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Interest rate swap
derivative
instruments net
liability position |
|
$ |
(7,761 |
) |
|
$ |
|
|
|
$ |
(7,761 |
) |
|
$ |
|
|
Fuel hedge
derivative
instruments net
liability position |
|
$ |
(104 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
(104 |
) |
Restricted assets |
|
$ |
27,617 |
|
|
$ |
27,617 |
|
|
$ |
|
|
|
$ |
|
|
81
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following table summarizes the change in the fair value for Level 3 derivatives for the
years ended December 31, 2008 and 2009:
|
|
|
|
|
|
|
Level 3 |
|
|
|
Derivatives |
|
Balance as of December 31, 2007 |
|
$ |
|
|
Realized losses included in earnings |
|
|
|
|
Unrealized losses included in AOCL |
|
|
(10,812 |
) |
|
|
|
|
Balance as of December 31, 2008 |
|
|
(10,812 |
) |
Realized losses included in earnings |
|
|
8,509 |
|
Unrealized gains included in AOCL |
|
|
2,199 |
|
|
|
|
|
Balance as of December 31, 2009 |
|
$ |
(104 |
) |
|
|
|
|
During the year ended December 31, 2009, there were no fair value measurements of assets or
liabilities measured at fair value on a nonrecurring basis subsequent to their initial recognition.
10. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Leases
The Company leases its facilities and certain equipment under non-cancelable operating leases
for periods ranging from one to 20 years, with renewal options for certain leases. The Companys
total rent expense under operating leases during the years ended December 31, 2007, 2008 and 2009,
was $8,790, $9,008 and $11,017, respectively.
As of December 31, 2009, future minimum lease payments, by calendar year, are as follows:
|
|
|
|
|
2010 |
|
$ |
10,139 |
|
2011 |
|
|
9,272 |
|
2012 |
|
|
9,668 |
|
2013 |
|
|
8,504 |
|
2014 |
|
|
7,119 |
|
Thereafter |
|
|
34,716 |
|
|
|
|
|
|
|
$ |
79,418 |
|
|
|
|
|
Financial Surety Bonds
The Company uses financial surety bonds for a variety of corporate guarantees. The two
largest uses of financial surety bonds are for municipal contract performance guarantees and
landfill final capping, closure and post-closure financial assurance required under certain
environmental regulations. Environmental regulations require demonstrated financial assurance to
meet final capping, closure and post-closure requirements for landfills. In addition to surety
bonds, these requirements may also be met through alternative financial assurance instruments,
including insurance, letters of credit and restricted asset deposits.
At December 31, 2008 and 2009, the Company had provided customers and various regulatory
authorities with surety bonds in the aggregate amount of approximately $113,273 and $182,468,
respectively, to secure its landfill final capping, closure and post-closure requirements and
$48,502 and $90,593, respectively, to secure performance under collection contracts and landfill
operating agreements.
The Company owns a 9.9% interest in a company that, among other activities, issues financial
surety bonds to secure final capping, landfill closure and post-closure obligations for companies
operating in the solid waste industry. The Company accounts for this investment under the cost
method of accounting. There have been no identified events or changes in circumstances that may
have a significant adverse effect on the fair value of the investment. This investee company and
the parent company of the investee had written final capping, landfill closure and post-closure financial surety bonds for the
Company, of which $85,802 and $122,318 were outstanding as of December 31, 2008 and 2009,
respectively. The Companys reimbursement obligations under these bonds are secured by a pledge of
its stock in the investee company.
82
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Unconditional Purchase Obligations
At December 31, 2009, the Companys unconditional purchase obligations consist of multiple
fixed-price fuel purchase contracts under which it has 0.8 million gallons remaining to be
purchased for a total of $1,624, plus taxes and transportation upon delivery. These fuel purchase
contracts expire on or before June 30, 2010.
CONTINGENCIES
Environmental Risks
The Company may be subject to liability for any environmental damage that its solid waste
facilities cause to neighboring landowners or residents, particularly as a result of the
contamination of soil, groundwater or surface water, and especially drinking water, including
damage resulting from conditions existing prior to the acquisition of such facilities by the
Company. The Company may also be subject to liability for any off-site environmental contamination
caused by pollutants or hazardous substances whose transportation, treatment or disposal was
arranged by the Company or its predecessors. Any substantial liability for environmental damage
incurred by the Company could have a material adverse effect on the Companys financial condition,
results of operations or cash flows. As of December 31, 2009, the Company is not aware of any
material environmental liabilities.
Legal Proceedings
The Companys subsidiary, High Desert Solid Waste Facility, Inc. (formerly known as Rhino
Solid Waste, Inc.) (HDSWF), 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 Departments 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 was 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 communitys quality of
life. The parties have agreed to postpone the hearing until November 2010 at the earliest to allow
the Company time to explore a possible relocation of the landfill to the approximately 325 acres of
undeveloped land HDSWF purchased from the State of New Mexico in July 2009. HDSWF expects to file
a formal landfill permit application in early 2010 with the Department in an effort to relocate the
landfill to that property. At December 31, 2009, the Company had $11,337 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
$11,337 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 Companys results
of operations 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. The landfill has operated continuously since that time. On
October 3, 2005, landfill opponents filed a suit (Board of Commrs of Sumner County, Kansas,
Tri-County Concerned Citizens and Dalton Holland v. Roderick Bremby, Secy of the Kansas Dept of
Health and Envt, et al.) in the District Court of Shawnee County, Kansas, seeking a judicial
review of KDHEs decision to issue the permit, 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 lacked standing to bring the action. The plaintiffs
appealed this decision to the Kansas Court of Appeals, and on October 12, 2007, the Court of
Appeals issued an opinion reversing and remanding the District Courts decision. The Company
appealed the decision to the Kansas Supreme Court, 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. Plaintiffs filed a second amended petition on October 22, 2008, and the
Company filed a motion to strike various allegations contained within the second amended petition. On July 2, 2009, the
District Court granted in part and denied in part the Companys motion to strike. The District
Court has also set a new briefing schedule, and it is anticipated that the briefing will be
completed during the first half of 2010. While the Company believes that it will prevail in this
case, the District Court could remand the matter back to KDHE for additional review of its decision
or could revoke the permit. An order of remand to KDHE would not necessarily affect the Companys
continued operation of the landfill. Only in the event that a final adverse determination with
respect to the permit is received would there likely be a material adverse effect on the Companys
reported results of operations in the future. The Company cannot estimate the amount of any such
material adverse effect.
83
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
On January 15,
2009, a complaint captioned Heath Belcher and Denessa Arguello v. Waste
Connections, Inc., and Waste Connections of California, Inc. was filed in
the United States District Court for the Eastern District of California, naming
the Company and its subsidiary, Waste Connections of California, Inc., as
defendants. The complaint alleges violations under the Fair Labor Standards Act
related to overtime compensation, and alleges violations under California labor
laws related to overtime compensation, unpaid wages, meal and rest breaks, and
wage statements. The complaint also alleges violations under the California
Unfair Competition Law based on the foregoing alleged violations. The complaint
seeks class certification and various forms of relief, including declaratory
judgment, statutory penalties, unpaid back wages, liquidated damages,
restitution, interest, and attorneys’ fees and costs. The Company has
responded to the complaint and has contested liability. Following discovery,
the named plaintiffs elected to negotiate a settlement of their claims rather
than move the court for class certification. As a result, the two
named plaintiffs, as well as five additional individuals who had filed consents
to join the litigation, executed individual Settlement Approval and Release
Forms. On February 8, 2010, the parties’ counsel executed a
Stipulation for Settlement and Dismissal and filed a Stipulation and Proposed
Order for Dismissal with Prejudice with the court. The Company anticipates that
the court will enter its final judgment of dismissal by the end of the first
quarter of 2010.
One of the Companys subsidiaries, El Paso Disposal, LP (EPD), is a party to administrative
proceedings before the National Labor Relations Board (NLRB). In these proceedings, the union
has alleged various unfair labor practices relating to the failure to reach agreement on first
contracts and the resultant strike by, and the replacement of and a failure to recall, previous
employees. On April 29, 2009, following a hearing, an administrative law judge issued a
recommended Decision and Order finding violations of the National Labor Relations Act by EPD and
recommended to the NLRB that EPD take remedial actions, including such things as reinstating
certain employees and their previous terms and conditions of employment, refraining from certain
conduct, returning to the bargaining table and providing a make whole remedy. EPD filed
exceptions to the administrative law judges recommendations on June 30, 2009. Thereafter, the
parties exchanged answers and response briefs, and the matter is currently on appeal to the NLRB.
On July 27, 2009, the NLRBs regional office in Phoenix, Arizona filed a petition in federal court
seeking an injunction to reinstate the previous employees and order the parties to return to
bargaining while the appeal is pending. The hearing on the injunction was held on August 19, 2009,
and on October 30, 2009, the court granted the requested relief. EPD has appealed the courts
order to the Fifth Circuit Court of Appeals. Several related unfair labor practice charges
alleging failure to bargain and improper recall were subsequently filed against EPD. The charges
were heard by an administrative law judge the week of August 24, 2009, and on December 2, 2009, the
administrative law judge issued his recommended Decision and Order granting part of the requested
relief, while denying part, but the issues were effectively subsumed by the interim injunction.
Both parties filed exceptions to the judges recommendations, exchanged answers and response
briefs, and that matter is also currently on appeal to the NLRB. On January 22, 2010, the union
filed new unfair labor practice charges concerning events relating to the ongoing contract
negotiations process. EPD is currently reviewing the allegations and intends to continue to defend
these proceedings vigorously. At this point, the Company is unable to determine the likelihood of
any outcome in this matter, nor is it able to estimate the amount or range of loss or the impact on
the Company or its financial condition in the event of an unfavorable outcome.
The Company and Potrero Hills Landfill, Inc. (PHLF), which the Company purchased from
Republic Services, Inc. in April 2009, were named as real parties in interest in an amended
complaint captioned Sustainability, Parks, Recycling and Wildlife Legal Defense Fund [SPRAWLDEF] v.
County of Solano, Board of Supervisors for the County of Solano, which was filed in the Superior
Court of California, County of Solano, on July 9, 2009 (the original complaint was filed on June
12, 2009). This lawsuit seeks to compel the County of Solano to comply with Measure E, a ballot
initiative and County ordinance passed in 1984 that the County has not enforced against PHLF for at
least 18 years. Measure E directs in part that the County of Solano shall not allow the
importation into the County of any solid waste which originated or was collected outside the County
in excess of 95,000 tons per year. PHLF disposes of approximately 870,000 tons of solid waste
annually, approximately 650,000 tons of which originate from sources outside of Solano County. The
SPRAWLDEF lawsuit also seeks to overturn Solano Countys approval of the use permit for the
expansion of the Potrero Hills Landfill and the related Environmental Impact Report (EIR),
arguing that both violate Measure E and that the EIR violates the California Environmental Quality
Act (CEQA). Two similar actions seeking to enforce Measure E, captioned Northern California
Recycling Association v. County of Solano and Sierra Club v. County of Solano, were filed in the
same court on June 10, 2009 and August 10, 2009, respectively. The Northern California Recycling
Association (NCRA) case does not name the Company or any of its subsidiaries as parties and does
not contain any CEQA claims. The Sierra Club case names PHLF as a real party in interest, and
seeks to overturn the conditional use permit for the expansion of the landfill on Measure E grounds
(but does not raise CEQA claims). These complaints follow a previous lawsuit concerning Measure E that NCRA filed
against PHLF in the same court on July 22, 2008, prior to the Companys acquisition of PHLF, but
which NCRA later dismissed.
84
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
In December 2009, the Company and PHLF filed briefs vigorously opposing enforcement of Measure
E on Constitutional and other grounds. The Companys position is supported by Solano County, a
co-defendant, the Attorney General of the State of California, the National Solid Wastes Management
Association and the California Refuse Recycling Council, each of which filed supporting friend of
court briefs or letters. In addition, numerous waste hauling companies in California, Oregon and
Nevada have intervened on the Companys side in the state cases, subsequent to their participation
in the federal action discussed below. All three Measure E state cases were consolidated for a
hearing on the merits, which is scheduled to be held in mid-February. At this point, the Company
is unable to determine the likelihood of any outcome in this matter, nor is it able to estimate the
amount or range of loss or the impact on the Company or its financial condition in the event of an
unfavorable outcome.
In response to the pending three state court actions to enforce Measure E described above, the
Company, PHLF and other waste hauling companies in California, Oregon and Nevada that are damaged
by Measure E and would be further damaged if Measure E was enforced filed a lawsuit to enjoin
Measure E and have it declared unconstitutional. On September 8, 2009, the coalition brought suit
in the United States District Court for the Eastern District of California in Sacramento
challenging Measure E under the Commerce Clause of the United States Constitution, captioned
Potrero Hills Landfill, Inc. et al. v. County of Solano. In response, SPRAWLDEF, Sierra Club and
NCRA intervened in the federal case to defend Measure E and filed motions to dismiss the federal
suit, or in the alternative, for the court to abstain from hearing the case in light of the pending
state court Measure E actions. On December 23, 2009, the federal court abstained and declined to
accept jurisdiction over the Companys case, holding that Measure E raised unique state issues that
should be resolved by the pending state court litigation, and granted the motions to dismiss. The
Company filed a notice of appeal to the courts ruling on January 22, 2010.
Individual members of SPRAWLDEF are also plaintiffs in the pending lawsuit filed in the same
court on October 13, 2005, captioned Protect the Marsh, et al. v. County of Solano, et al.,
challenging the EIR that Solano County certified in connection with its approval of the expansion
of the Potrero Hills Landfill on September 13, 2005. A motion to discharge the Superior Courts
writ of mandate directing the County to vacate and set aside its certification of the EIR was heard
in August 2009. On November 3, 2009, the Superior Court upheld the Countys certification of the
EIR and the related permit approval actions. In response, the plaintiffs in Protect the Marsh
filed a notice of appeal to the courts order on December 31, 2009. At this point, the Company is
unable to determine the likelihood of any outcome in this matter, nor is it able to estimate the
amount or range of loss or the impact on the Company or its financial condition in the event of an
unfavorable outcome.
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 December 31, 2009, there is no current proceeding or
litigation involving the Company or of which any of its property is the subject that the Company
believes will have a material adverse impact on its business, financial condition, results of
operations or cash flows.
Collective Bargaining Agreements
The Company has 10 collective bargaining agreements that have expired or are set to expire in
2010. The Company does not expect any significant disruption in its overall business in 2010 as a
result of labor negotiations, employee strikes or organizational efforts.
85
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
11. STOCKHOLDERS EQUITY
Stock Split
On February 12, 2007, the Company announced that its Board of Directors had authorized a
three-for-two stock split of its common stock, in the form of a 50% stock dividend, payable to
stockholders of record as of February 27, 2007. Shares resulting from the split were issued on
March 13, 2007. In connection therewith, the Company transferred $228 from retained earnings to
common stock, representing the par value of additional shares issued. As a result of the stock
split, fractional shares equal to 3,040 whole shares were repurchased for $132. All share and per
share amounts for all periods presented have been adjusted to reflect the stock split.
Share Repurchase Program
The Companys Board of Directors has authorized a common stock repurchase program for the
repurchase of up to $800,000 of common stock through December 31, 2012. Under the program, stock
repurchases may be made in the open market or in privately negotiated transactions from time to
time at managements discretion. The timing and amounts of any repurchases will depend on many
factors, including the Companys capital structure, the market price of the common stock and
overall market conditions. As of December 31, 2008 and 2009, the Company had repurchased
16,785,544 and 19,034,372 shares, respectively, of its common stock at a cost of $419,783 and
$482,407, respectively. As of December 31, 2009, the remaining maximum dollar value of shares
available for purchase under the program was approximately $317,593. Subsequent to December 31,
2009 and through the date the accompanying financial statements were issued, the Company
repurchased 1,500,000 shares of its common stock under this program at a cost of $49,432. The
Companys policy related to repurchases of its common stock is to charge any excess of cost over
par value entirely to additional paid-in capital.
Common Stock
Of the 71,400,917 shares of common stock authorized but unissued as of December 31, 2009, the
following shares were reserved for issuance:
|
|
|
|
|
Stock option and restricted stock unit plans |
|
|
5,621,219 |
|
2026 Notes |
|
|
5,882,354 |
|
Consultant Incentive Plan |
|
|
269,822 |
|
2002 Restricted Stock Plan |
|
|
10,531 |
|
|
|
|
|
|
|
|
11,783,926 |
|
|
|
|
|
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.
Restricted Stock and Stock Options
During 2002, the Companys Board of Directors adopted the 2002 Restricted Stock Plan in which
selected employees, other than officers and directors, may participate. Restricted stock awards
under the 2002 Restricted Stock Plan may or may not require a cash payment from a participant to
whom an award is made. The awards become free of the stated restrictions over periods determined
at the date of the grant, subject to continuing employment, the achievement of particular
performance goals and/or the satisfaction of certain vesting provisions applicable to each award of
shares. The Board of Directors authorizes the grant of any stock awards and determines the
employees to whom shares are awarded, number of shares to be awarded, award period and other terms
and conditions of the awards. Unvested shares of restricted stock may be forfeited and revert to
the Company if a plan participant resigns from the Company and its subsidiaries, is terminated for
cause or violates the terms of any noncompetition or nonsolicitation agreements to which that plan
participant is bound (if such plan participant has been terminated without cause). A total of
213,750 shares of the Companys common stock were reserved for issuance under the 2002 Restricted Stock Plan. As of
December 31, 2009, 10,531 shares of common stock were available for future grants of restricted
stock under the 2002 Restricted Stock Plan. The fair value of restricted stock for the years ended
December 31, 2007, 2008 and 2009, was determined based on the number of shares granted and the
quoted price of the Companys common stock on the date of grant.
86
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following table summarizes activity for the 2002 Restricted Stock Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Restricted shares granted |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average grant-date fair value of
shares granted |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Total fair value of restricted shares granted |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Restricted shares becoming free of restrictions |
|
|
41,263 |
|
|
|
4,872 |
|
|
|
|
|
Weighted average restriction period (in years) |
|
|
|
|
|
|
|
|
|
|
|
|
In 1997, the Companys Board of Directors adopted the 1997 Stock Option Plan in which all
officers, employees, directors and consultants may participate. Options granted under the 1997
Stock Option Plan may either be incentive stock options or nonqualified stock options, generally
have a term of 10 years from the date of grant, and will vest over periods determined at the date
of grant. The exercise prices of the options are determined by the Companys Board of Directors
and, in the case of incentive stock options, will be at least 100% or 110% of the fair market value
of the Companys common stock on the date of grant as provided for in the 1997 Stock Option Plan.
The 1997 Stock Option Plan provides for the reservation of common stock for issuance thereunder
equal to 7,794,400 shares. As of December 31, 2009, no options for shares of common stock were
available for future grants under the 1997 Stock Option Plan.
In 2002, the Companys Board of Directors authorized two additional equity-based compensation
plans: the 2002 Stock Option Plan and 2002 Senior Management Equity Incentive Plan. A total of
5,496,364 shares of the Companys common stock were reserved for future issuance under the 2002
Stock Option Plan. Participation in the 2002 Stock Option Plan is limited to consultants and
employees, other than officers and directors. Options granted under the 2002 Stock Option Plan are
nonqualified stock options and have a term of no longer than 10 years from the date they are
granted. Options generally become exercisable in installments pursuant to a vesting schedule set
forth in each option agreement. The Board of Directors authorizes the granting of options and
determines the employees and consultants to whom options are to be granted, the number of shares
subject to each option, the exercise price, option term, vesting schedule and other terms and
conditions of the options. A total of 6,144,473 shares of the Companys common stock were reserved
for future issuance under the 2002 Senior Management Equity Incentive Plan. The Companys
stockholders approved the 2002 Senior Management Equity Incentive Plan on May 16, 2002.
Participation in the 2002 Senior Management Equity Incentive Plan is limited to officers and
directors of the Company and its subsidiaries. Options granted under the 2002 Senior Management
Equity Incentive Plan may be either incentive stock options or nonqualified stock options and have
a term of no longer than 10 years from the date they are granted. Options generally become
exercisable in installments pursuant to a vesting schedule set forth in each option agreement. The
Board of Directors authorizes the granting of options and determines the officers and directors to
whom options are to be granted, the number of shares subject to each option, the exercise price,
option term, vesting schedule and other terms and conditions of the options. In the case of
incentive stock options, the exercise price will be at least 100% or 110% of the fair market value
of the Companys common stock on the date of grant as provided for in the 2002 Senior Management
Equity Incentive Plan. As of December 31, 2009, options for 0 and 1,000,000 shares of common stock
were available for future grants under the 2002 Stock Option Plan and 2002 Senior Management Equity
Incentive Plan, respectively.
In 2004, the Companys Board of Directors authorized the 2004 Equity Incentive Plan. On May
25, 2006, the stockholders of the Company approved the Second Amended and Restated 2004 Equity
Incentive Plan, and on May 15, 2008, they approved further amendments to the Second Amended and
Restated 2004 Equity Incentive Plan. A total of 3,775,000 shares of the Companys common stock
were reserved for future issuance under the 2004 Equity Incentive Plan, all of which may be used
for grants of stock options, restricted stock, and/or restricted stock units. Participation in the
2004 Equity Incentive Plan is limited to consultants and employees, including officers and
directors. Options granted under the 2004 Equity Incentive Plan are nonqualified stock options and
have a term of no longer than five years from the date they are granted. Restricted stock,
restricted stock units, and options generally vest in installments pursuant to a vesting schedule
set forth in each option or restricted stock or unit agreement. The Board of Directors authorizes
the granting of options, restricted stock and restricted stock units, and determines the employees
and consultants to whom options, restricted stock, and restricted stock units are to be
87
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
granted,
the number of shares subject to each option, restricted stock, or restricted stock unit, the exercise price, term, vesting schedule and other terms
and conditions of the options, restricted stock, or restricted stock units. The exercise prices of
the options shall not be less than the fair market value of the Companys common stock on the date
of grant. Restricted stock awards under the plan may or may not require a cash payment from a
participant to whom an award is made; restricted stock unit awards under the plan do not require
any cash payment from the participant to whom an award is made. The fair value of restricted stock
units granted during the years ended December 31, 2007, 2008 and 2009, was determined based on the
number of restricted stock units granted and the quoted price of the Companys common stock on the
date of grant. As of December 31, 2009, 1,098,722 shares of common stock were available to be
issued pursuant to future awards granted under the 2004 Equity Incentive Plan.
The following table summarizes restricted stock units activity for the 2004 Equity Incentive
Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
Restricted stock units granted |
|
|
426,802 |
|
|
|
379,949 |
|
|
|
391,684 |
|
Weighted average grant-date fair value of
restricted stock units granted |
|
$ |
29.08 |
|
|
$ |
28.99 |
|
|
$ |
26.26 |
|
Total fair value of restricted stock units granted |
|
$ |
12,413 |
|
|
$ |
11,013 |
|
|
$ |
10,265 |
|
Restricted stock units becoming free of
restrictions |
|
|
127,005 |
|
|
|
217,991 |
|
|
|
272,757 |
|
Weighted average restriction period (in years) |
|
|
4.5 |
|
|
|
4.4 |
|
|
|
4.4 |
|
As of December 31, 2007, 2008 and 2009, a total of 4,031,781, 3,127,840 and 2,419,028 options
to purchase common stock were exercisable under all stock option plans, respectively.
A summary of the Companys stock option activity and related information for the years ended
December 31, 2007, 2008 and 2009, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Number of |
|
|
Average |
|
|
|
Shares (Options) |
|
|
Exercise Price |
|
Outstanding as of December 31, 2006 |
|
|
6,649,513 |
|
|
$ |
17.99 |
|
Granted |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(8,186 |
) |
|
|
22.73 |
|
Exercised |
|
|
(2,237,618 |
) |
|
|
15.92 |
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2007 |
|
|
4,403,709 |
|
|
|
19.04 |
|
Granted |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(26,814 |
) |
|
|
22.53 |
|
Exercised |
|
|
(1,022,481 |
) |
|
|
18.67 |
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2008 |
|
|
3,354,414 |
|
|
|
19.12 |
|
Granted |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(2,063 |
) |
|
|
22.85 |
|
Exercised |
|
|
(823,782 |
) |
|
|
18.37 |
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2009 |
|
|
2,528,569 |
|
|
|
19.35 |
|
|
|
|
|
|
|
|
|
88
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following table summarizes information about stock options outstanding as of December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Weighted |
|
|
Remaining |
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
|
Average |
|
|
Contractual |
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
|
|
|
|
|
Exercise |
|
|
Life |
|
|
|
|
|
|
Exercise |
|
|
Contractual |
|
Exercise Price |
|
Shares |
|
|
Price |
|
|
(in years) |
|
|
Shares |
|
|
Price |
|
|
Life (in years) |
|
$5.00 to $14.00 |
|
|
56,735 |
|
|
$ |
10.82 |
|
|
|
1.9 |
|
|
|
56,735 |
|
|
$ |
10.82 |
|
|
|
1.9 |
|
$14.01 to $16.00 |
|
|
297,941 |
|
|
|
14.67 |
|
|
|
3.0 |
|
|
|
297,941 |
|
|
|
14.67 |
|
|
|
3.0 |
|
$16.01 to $20.00 |
|
|
814,226 |
|
|
|
16.63 |
|
|
|
4.1 |
|
|
|
814,226 |
|
|
|
16.63 |
|
|
|
4.1 |
|
$20.01 to $30.00 |
|
|
1,359,667 |
|
|
|
22.36 |
|
|
|
5.4 |
|
|
|
1,250,126 |
|
|
|
22.29 |
|
|
|
5.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,528,569 |
|
|
|
19.35 |
|
|
|
4.6 |
|
|
|
2,419,028 |
|
|
|
19.18 |
|
|
|
4.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of options outstanding and options exercisable at December 31,
2009, was $35,373 and $34,263, respectively.
A summary of option activity under the foregoing stock option plans as of December 31, 2008,
and changes during the year ended December 31, 2009, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
Unvested |
|
|
|
|
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
Vested Shares |
|
|
Total Shares |
|
|
Price |
|
Outstanding at
December 31, 2008 |
|
|
223,199 |
|
|
|
3,131,215 |
|
|
|
3,354,414 |
|
|
$ |
19.12 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(1,500 |
) |
|
|
(563 |
) |
|
|
(2,063 |
) |
|
|
22.85 |
|
Vested |
|
|
(112,158 |
) |
|
|
112,158 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
(823,782 |
) |
|
|
(823,782 |
) |
|
|
18.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at
December 31, 2009 |
|
|
109,541 |
|
|
|
2,419,028 |
|
|
|
2,528,569 |
|
|
|
19.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of stock options exercised during the years ended December 31, 2007,
2008 and 2009, was $34,951, $15,711 and $10,427, respectively. The total fair value of stock
options vested during the years ended December 31, 2007, 2008 and 2009, was $643, $643 and $575,
respectively.
A summary of activity related to restricted stock and restricted stock units under the 2002
Restricted Stock Plan and the 2004 Equity Incentive Plan as of December 31, 2008, and changes
during the year ended December 31, 2009, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
Grant Date Fair |
|
|
|
Unvested Shares |
|
|
Value Per Share |
|
Outstanding at December 31, 2008 |
|
|
906,572 |
|
|
$ |
27.45 |
|
Granted |
|
|
391,684 |
|
|
|
26.26 |
|
Forfeited |
|
|
(30,821 |
) |
|
|
27.82 |
|
Vested |
|
|
(272,757 |
) |
|
|
26.91 |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
994,678 |
|
|
|
27.12 |
|
|
|
|
|
|
|
|
|
89
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Stock Purchase Warrants
In 2002, the Companys Board of Directors authorized the 2002 Consultant Incentive Plan, under
which warrants to purchase the Companys common stock may be issued to certain consultants to the
Company. Warrants awarded under the Consultant Incentive Plan are subject to a vesting schedule
set forth in each warrant agreement. Historically, warrants issued have been fully vested and
exercisable at the date of grant. The Board of Directors authorizes the issuance of warrants and
determines the consultants to whom warrants are to be issued, the number of shares subject to each
warrant, the purchase price, exercise date and period, warrant term and other terms and conditions
of the warrants. The Board reserved 450,000 shares of the Companys common stock for future
issuance under the Consultant Incentive Plan. As of December 31, 2009, 227,223 shares of common
stock were available for future grants of warrants under the 2002 Consultant Incentive Plan.
A summary of warrant activity as of December 31, 2008, and changes during the year ended
December 31, 2009, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
Warrants |
|
|
Exercise Price |
|
Outstanding at December 31, 2008 |
|
|
44,123 |
|
|
$ |
28.28 |
|
Granted |
|
|
3,726 |
|
|
|
27.06 |
|
Forfeited |
|
|
|
|
|
|
|
|
Exercised |
|
|
(5,250 |
) |
|
|
21.96 |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009 |
|
|
42,599 |
|
|
|
28.96 |
|
|
|
|
|
|
|
|
|
The following table summarizes information about warrants outstanding as of December 31, 2008
and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
of |
|
|
|
|
|
|
Warrants |
|
|
|
|
Warrants |
|
|
Outstanding at December 31, |
|
Grant Date |
|
Issued |
|
|
Exercise Price |
|
Issued |
|
|
2008 |
|
|
2009 |
|
Throughout 2005 |