Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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þ |
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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, 2011
OR
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o |
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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
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94-3283464 |
(State or other jurisdiction
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(I.R.S. Employer Identification No.) |
of incorporation or organization) |
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Waterway Plaza Two |
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10001 Woodloch Forest Drive, Suite 400 |
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The Woodlands, Texas
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77380 |
(Address of principal executive offices)
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(Zip Code) |
(832) 442-2200
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, par value $0.01 per share
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New York Stock Exchange |
(Title of each class)
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(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 þ 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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þ Large accelerated filer
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o Accelerated filer
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o Non-accelerated filer
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o Smaller reporting company |
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, 2011, 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 $3,569,021,781.
Number of shares of common stock outstanding as of January 20, 2012: 110,922,595
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive Proxy Statement for the 2012 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 exclusive and secondary
markets in the U.S. We provide intermodal services for the rail haul movement of cargo and solid
waste containers in the Pacific Northwest through a network of seven intermodal facilities. We
also treat and dispose of non-hazardous waste that is generated in the exploration and production
of oil and natural gas primarily at a facility in Southwest Louisiana. As of December 31, 2011, we
served more than two million residential, commercial and industrial customers from a network of
operations in 29 states: Alabama, Arizona, California, Colorado, Idaho, Illinois, Iowa, Kansas,
Kentucky, Louisiana, Massachusetts, Michigan, Minnesota, Mississippi, Montana, Nebraska, Nevada,
New Mexico, New York, North Carolina, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee,
Texas, Utah, Washington and Wyoming. As of December 31, 2011, we owned or operated a network of
140 solid waste collection operations, 58 transfer stations, seven intermodal facilities, 39
recycling operations, 46 active landfills, and one exploration and production waste treatment and
disposal facility.
We are a leading provider of solid waste services in most of our markets. We have focused on
exclusive and secondary markets 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 in which we operate 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
many of the markets in which we operate, and makes us an attractive buyer to many potential
acquisition candidates.
1
As of December 31, 2011, we delivered our services from approximately 180 operating locations
grouped into three regions: our Western Region is comprised of operating locations in California,
Idaho, Montana, Nevada, Oregon, Washington and western Wyoming; our Central Region is comprised of
operating locations in Arizona, Colorado, Kansas, Louisiana, Minnesota, Nebraska, New Mexico,
Oklahoma, South Dakota, Texas, Utah and eastern Wyoming; and our Eastern Region is comprised of
operating locations in Alabama, Illinois, Iowa, Kentucky, Massachusetts, Michigan, Mississippi, New
York, North Carolina, South Carolina and Tennessee. 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 15 to the consolidated financial statements for further information
on our segment reporting of our operations.
Each operating location has a district or site manager who has a high degree of
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 executive 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 winning 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.
2
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 our ongoing operations and those of the acquired business.
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 and the merger between IESI-BFC Ltd. and Waste
Services, Inc. in 2010. In addition, Veolia Environnement S.A. recently announced its intention to
divest its U.S. solid waste business. 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.
During the year ended December 31, 2011, we completed 13 acquisitions, none of which
individually accounted for greater than 10% of our total assets. The
total fair value of consideration transferred for the 13 acquisitions completed during the year ended December 31,
2011 was $375.7 million. During
the year ended December 31, 2010, we completed 19 acquisitions, 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 more than two million residential, commercial and industrial customers from
operations in 29 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 2012 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, 2011, 2010 or 2009.
3
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.
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 stationary
compactors that compact waste prior to collection on the premises of large volume customers.
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. Solid waste
landfills over time generate a greenhouse gas, methane, which can be converted into a valuable
source of clean energy. We deploy gas recovery systems to collect methane, which can then be used
to generate electricity for local households, fuel local industrial power plants, power alternative
fueled vehicles, or qualify for carbon emission credits.
Our landfill facilities consisted of the following at December 31, 2011:
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Owned and operated landfills |
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35 |
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Operated landfills under life-of-site agreements |
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5 |
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Operated landfills under limited-term operating agreements |
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6 |
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46 |
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We own landfills in California, Colorado, Illinois, Kansas, Kentucky, Louisiana, 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, New Mexico and New York. With the exception of three landfills, two of
which are located in Mississippi and one in Colorado, which only accept construction and demolition
and other non-putrescible 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 four of our five 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, and
we intend to seek renewal of these contracts prior to, or upon, their expiration. The remaining
operating contract for which the contracted term is less than the life of the landfill is operated
on a month-to-month basis.
4
Based on remaining permitted capacity as of December 31, 2011, 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 38 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 we either own the expansion property or have rights to it 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 we believe are
more likely than not to impair the success of the expansion). |
We are currently seeking to expand permitted capacity at nine 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 48 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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2011 |
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2010 |
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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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531,905 |
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133,324 |
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665,229 |
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526,088 |
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119,227 |
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645,315 |
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Acquired landfills |
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1,846 |
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4,000 |
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5,846 |
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21,710 |
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21,710 |
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Permits granted |
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12,047 |
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(12,047 |
) |
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5,426 |
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(5,426 |
) |
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Airspace consumed |
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(14,387 |
) |
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(14,387 |
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(13,255 |
) |
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(13,255 |
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Pursued expansions |
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16,537 |
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16,537 |
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Changes in engineering
estimates |
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1,239 |
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1,239 |
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(8,064 |
) |
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19,523 |
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11,459 |
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Balance, end of year |
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532,650 |
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141,814 |
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674,464 |
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531,905 |
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133,324 |
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665,229 |
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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, 2011, and December 31, 2010, are
shown in the tables below. The estimated remaining operating lives include assumptions that the
operating permits are renewed.
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2011 |
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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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2 |
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4 |
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8 |
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4 |
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16 |
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35 |
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Operated landfills under
life-of-site agreements |
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2 |
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2 |
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1 |
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5 |
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1 |
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|
2 |
|
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6 |
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|
10 |
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|
4 |
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|
17 |
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40 |
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2010 |
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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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|
2 |
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|
1 |
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|
4 |
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7 |
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|
3 |
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|
18 |
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|
35 |
|
Operated landfills under
life-of-site agreements |
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3 |
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1 |
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4 |
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2 |
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1 |
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4 |
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10 |
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3 |
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19 |
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39 |
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5
The disposal tonnage that we received in 2011 and 2010 at all of our landfills is shown in the
tables below (tons in thousands):
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Three months ended |
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March 31, |
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June 30, |
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September 30, |
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December 31, |
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Twelve months |
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2011 |
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2011 |
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2011 |
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2011 |
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ended |
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Number |
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Total |
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Number |
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Total |
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Number |
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Total |
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Number |
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Total |
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December 31, |
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of Sites |
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Tons |
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of Sites |
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Tons |
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of Sites |
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Tons |
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of Sites |
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Tons |
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2011 |
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Owned landfills and
landfills operated
under life-of-site
agreements |
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39 |
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3,059 |
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39 |
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3,592 |
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40 |
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4,134 |
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40 |
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3,602 |
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14,387 |
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Operated landfills |
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5 |
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120 |
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5 |
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136 |
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5 |
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150 |
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6 |
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140 |
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546 |
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44 |
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3,179 |
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44 |
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3,728 |
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45 |
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4,284 |
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46 |
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3,742 |
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14,933 |
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Three months ended |
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March 31, |
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June 30, |
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September 30, |
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December 31, |
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Twelve months |
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2010 |
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2010 |
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2010 |
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2010 |
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ended |
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Number |
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Total |
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Number |
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Total |
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Number |
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Total |
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Number |
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Total |
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December 31, |
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of Sites |
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Tons |
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of Sites |
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Tons |
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of Sites |
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Tons |
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of Sites |
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Tons |
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2010 |
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Owned landfills and
landfills operated
under life-of-site
agreements |
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38 |
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2,853 |
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38 |
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3,324 |
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39 |
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3,775 |
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39 |
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3,303 |
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13,255 |
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Operated landfills |
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5 |
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122 |
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5 |
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137 |
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5 |
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136 |
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5 |
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128 |
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523 |
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43 |
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2,975 |
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43 |
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3,461 |
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44 |
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3,911 |
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44 |
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3,431 |
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13,778 |
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In 2010, we renewed an operating agreement at one of our landfills which resulted in a term
equal to the remaining life of the site. As a result, this landfill previously classified as
operated is currently operated under a life-of-site agreement. We have restated all information
above to reflect this change.
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 58
transfer stations at December 31, 2011. Currently, we own transfer stations in California,
Colorado, Kansas, Kentucky, Montana, Nebraska, North Carolina, New York, 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:
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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; |
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improving utilization of collection personnel and equipment; and |
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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. In addition, we have partnered with RecycleBank to
introduce a customer loyalty and rewards program in certain markets to encourage customers to
either recycle for the first time or increase their current recycling efforts. We own or operate
39 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
EXPLORATION AND PRODUCTION WASTE TREATMENT AND DISPOSAL SERVICES
We treat and dispose of non-hazardous waste that is generated in the exploration and
production, or E&P, of oil and natural gas primarily at a facility in Southwest Louisiana. E&P
waste streams accepted at this permitted location include: saltwater, which is injected into
on-site disposal wells; recovered hydrocarbons, which are sold for re-use; and soil, which is
treated to remove hydrocarbons, salts, dissolved solids and heavy metals and then tested to ensure
regulatory compliance. In addition, this facility accepts non-hazardous industrial wastes from
local refineries and petrochemical plants. We also accept E&P waste soils and other
hydrocarbon-contaminated soils and liquids at our solid waste landfills.
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 we do not own. As of December 31, 2011, we owned or operated seven 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 seven
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 U.S. 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.
7
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.
Major federal, state and local statutes and regulations that apply to our operations are
described generally 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.
8
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.
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, or CAA, 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 CAA
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. The EPA recently modified, or is in the process of modifying, standards
promulgated under the CAA in a manner which could increase our compliance costs. For example, the
EPA has recently modified or discussed modifying boiler emission standards, national ambient air
quality standards applicable to particulate matter, carbon monoxide, and oxides of sulfur and
nitrogen, and other standards to make them more stringent.
Climate Change Laws and Regulations
On September 27, 2006, California enacted AB 32, 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. Because landfill and collection operations emit
GHGs, our operations in California are subject to regulations issued under AB 32. The California
Air Resources Board, or CARB, has taken, and plans to take, various actions to implement AB 32,
including the approval in December 2008 of an AB 32 Scoping Plan summarizing the main GHG-reduction
strategies for California. CARB approved a landfill methane control measure, which became
effective in June 2010, and this measure requires that certain uncontrolled landfills install gas
collection and control systems and also sets operating standards for gas collection and control
systems. In addition, CARB approved
in December 2010 and revised in October 2011 regulations implementing a GHG cap-and-trade
program, which is scheduled to begin imposing compliance obligations in 2013.
State climate change laws could also affect our non-California operations. For example, the
Western Climate Initiative, which once included seven states and four Canadian provinces, has
developed GHG reduction strategies, among them a GHG cap-and-trade program.
9
The EPAs regulation of GHG emissions under its CAA authority may also impact our operations.
In 2009, the EPA made an endangerment finding allowing GHGs to be regulated under the CAA. The CAA
requires stationary sources of air pollution to obtain New Source Review, or NSR, permits prior to
construction and, in some cases, Title V operating permits. Pursuant to the EPAs rulemakings and
interpretations, certain Title V and NSR Prevention of Significant Deterioration, or PSD, permits
issued on or after January 2, 2011, must address GHG emissions. As a result, new or modified
landfills may be required to install Best Available Control Technology to limit GHG emissions. The
EPA may in the future promulgate CAA New Source Performance Standards applicable to landfills. The
EPAs Mandatory Greenhouse Gas Reporting Rule sets monitoring, recordkeeping, and reporting
requirements applicable to certain landfills and other entities.
These statutes and regulations increase the costs of our operations, and future climate change
statutes and regulations may have an impact as well. If we are unable to pass such higher costs
through to our customers, our business, financial condition and operating results could be
adversely affected.
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.
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.
10
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.
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, employee group health insurance and
employment practices liability. 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, $250,000 for employee group health
insurance and employment practices liability, and primarily $100,000 for property claims.
Additionally, we have umbrella policies with third-party insurance companies for automobile
liability, general liability and employers liability. 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 which has a $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.
11
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, 2011 and 2010, we had provided customers
and various regulatory authorities with surety bonds in the aggregate amount of approximately
$243.3 million and $221.7 million, respectively, to secure our landfill final capping, closure and
post-closure requirements and $68.7 million and $63.9 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, 2011, we employed 5,909 full-time employees, of which 750, or approximately
12.7% 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 seven collective bargaining agreements covering 331 employees that are set
to expire during 2012. We do not expect any significant disruption in our overall business in 2012
as a result of labor negotiations, employee strikes or organizational efforts.
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. We expect the fluctuation in our revenues between our
highest and lowest quarters 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 8, 2012:
|
|
|
|
|
|
|
NAME |
|
AGE |
|
POSITIONS |
Ronald J. Mittelstaedt (1)
|
|
|
48 |
|
|
Chief Executive Officer and Chairman |
Steven F. Bouck
|
|
|
54 |
|
|
President |
Darrell W. Chambliss
|
|
|
47 |
|
|
Executive Vice President and Chief Operating Officer |
Worthing F. Jackman
|
|
|
47 |
|
|
Executive Vice President and Chief Financial Officer |
David G. Eddie
|
|
|
42 |
|
|
Senior Vice President and Chief Accounting Officer |
David M. Hall
|
|
|
54 |
|
|
Senior Vice President Sales and Marketing |
James M. Little
|
|
|
50 |
|
|
Senior Vice President Engineering and Disposal |
Eric M. Merrill
|
|
|
59 |
|
|
Senior Vice President People, Safety and Development |
Eric O. Hansen
|
|
|
46 |
|
|
Vice President Chief Information Officer |
Jerri L. Hunt (2)
|
|
|
60 |
|
|
Vice President Employee Relations |
Scott I. Schreiber
|
|
|
55 |
|
|
Vice President Disposal Operations |
Patrick J. Shea
|
|
|
41 |
|
|
Vice President, General Counsel and Secretary |
Gregory Thibodeaux
|
|
|
45 |
|
|
Vice President Maintenance and Fleet Management |
Richard K. Wojahn
|
|
|
54 |
|
|
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 23 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 22 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 G. Eddie has been Senior Vice President and Chief Accounting Officer of Waste
Connections since January 2011. From February 2010 to that date, Mr. Eddie served as Vice
President Chief Accounting Officer. From March 2004 to February 2010, Mr. Eddie served as Vice
President Corporate Controller. From April 2003 to February 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.
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 24 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.
13
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 24 years of
experience in the solid waste industry. He holds a B.S. degree in Accounting from the University
of Oregon.
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 32 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.
Gregory Thibodeaux has been Vice President Maintenance and Fleet Management of Waste
Connections since January 2011. From January 2000 to that date, Mr. Thibodeaux served as Director
of Maintenance. Mr. Thibodeaux has more than 26 years of experience in the solid waste industry
having held various management positions with Browning Ferris Industries, Sanifill, and USA Waste
Services, Inc. Before coming to Waste Connections, Mr. Thibodeaux served as corporate Director of
Maintenance for Texas Disposal Systems.
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 30 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 volume, business and results of operations, the effects of
landfill special waste projects on volume results, the effects of seasonality on our business and
results of operations, demand for recyclable commodities and recyclable commodity pricing,
completion of the Alaska Waste acquisition and the expected timing thereof, the impact of the
relocation of our corporate headquarters to The Woodlands, Texas, our expectations with respect to
capital expenditures, 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. See discussion regarding the Solano County,
California Measure E/Landfill Expansion Litigation under the Legal Proceedings section of Note 11
of our consolidated financial statements included in Item 8 of this report. 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. Similar risks may affect contracts that we are awarded to operate
municipally-owned assets, such as landfills. See discussion regarding the Colonie, New York
Landfill Privatization Litigation under the Legal Proceedings section of Note 11 of our
consolidated financial statements included in Item 8 of this report.
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. Similar risks may
affect contracts that we are awarded to operate municipally-owned assets, such as landfills. 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.
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, we may have
fewer acquisition opportunities and those opportunities may be on less attractive terms than in
the past, which could cause a reduction in our rate of growth from acquisitions.
15
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 market conditions deteriorate, 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.
We may be unable to compete effectively with larger and better capitalized companies, companies
with lower return expectations, 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 255 contracts, representing
approximately 3.4% of our annual revenues, which are set for expiration or automatic renewal on or
before December 31, 2012. 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,
including municipalities, may terminate their contracts with us before the end of the terms of
those contracts. Similar risks may affect contracts that we are awarded to operate
municipally-owned assets, such as landfills. See discussion regarding the Colonie, New York
Landfill Privatization Litigation under the Legal Proceedings section of Note 11 of our
consolidated financial statements included in Item 8 of this report.
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 we provide services on a competitive basis may elect to franchise those 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.
Economic downturns adversely affect operating results.
Negative effects of a weak economy include decreases in volume generally associated with the
construction industry, reduced personal consumption and declines in recycled commodity prices. In
an economic slowdown, we 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 after such a downturn will result in an immediate, if at all positive,
improvement in our operating results or cash flows.
16
Our results are vulnerable to economic conditions and seasonal factors affecting the regions in
which we operate.
Our business and financial results would be harmed by downturns in the general economy of the
regions in which we operate and other factors affecting those regions, such as state regulations
affecting the solid waste services industry and severe weather conditions. Based on historic
trends, we expect our operating results to vary seasonally, with revenues typically lowest in the
first quarter, higher in the second and third quarters, and lower in the fourth quarter than in the
second and third quarters. We expect the fluctuation in our revenues between our highest and
lowest quarters to be 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 the U.S. In addition, some of our operating
costs may be higher in the winter months. Adverse winter weather conditions slow waste collection
activities, resulting in higher labor and operational costs. Greater precipitation in the winter
increases the weight of collected waste, resulting in higher disposal costs, which are calculated
on a per ton basis. Because of these factors, we expect operating income to be generally lower in
the winter months, and our stock price may be negatively affected by these variations.
We may 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 or as a result
of third party challenges, 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.
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, 2010 and 2011. 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 fuel hedge
agreements related to forecasted diesel fuel purchases and may also enter into 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 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.
The relocation of our corporate headquarters from California to Texas, discussed in greater detail
in Note 10 of our consolidated financial statements included in Item 8 of this report, may
temporarily exacerbate this risk. 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.
17
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. As a result of these activities, we may be subjected to unfair
labor practice charges, complaints and other legal and administrative proceedings initiated against
us by unions or the National Labor Relations Board, which could negatively impact our operating
results. Negotiating collective bargaining agreements with these groups could divert management
attention, which could also 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
underfunded 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 pursuant to our various contractual
obligations to do so. In the event that we withdraw from participation in or otherwise cease our
contributions to one of these plans, then applicable law regarding withdrawal liability could
require us to make additional contributions to the plan if it is underfunded, 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 from time to time have significant
underfunded liabilities. 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 high deductible 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 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,
injuries and adverse judgments. 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.
Our indebtedness could adversely affect our financial condition; we may incur substantially
more debt in the future.
As of December 31, 2011, we had $1.18 billion 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, dividends, share repurchases 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. |
18
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 or risks 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 have existed 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.
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 and operate. We are also required to pay capping, closure and post-closure
maintenance costs for four of our five operated landfills for which we have life-of-site
agreements. 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.
19
We may incur charges related to capitalized expenditures of landfill development projects,
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 or expand a landfill,
we will no longer generate anticipated income from the landfill and we will be required to expense
in a future period the amount of capitalized expenditures related to the landfill or expansion
project, less the recoverable value of the property and other amounts recovered. Additionally, we
may incur increased operating expenses to dispose of the previously internalized waste that would
need to be transported to another disposal location. Any such charges could have a material
adverse effect on our results of operations for that period and could decrease our stock price.
See discussion regarding the Chaparral, New Mexico Landfill Permit Litigation, the Harper County,
Kansas Permit Litigation and the Solano County, California Measure E/Landfill Expansion Litigation
under the Legal Proceedings section of Note 11 of our consolidated financial statements included
in Item 8 of this report.
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.
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 proposed derivatives guidance would change the overall accounting for hedges by
requiring only a qualitative assessment of hedge effectiveness at inception and reassessments only
under certain circumstances. However, the proposed guidance requires all ineffectiveness to be
recorded in the income statement and eliminates the short cut and critical terms match methods to
attain hedge effectiveness. Additionally, the proposed lease accounting pronouncement would change
the accounting for operating leases by requiring a right-of-use-asset to be recorded on the
balance sheet as well as a corresponding liability for the obligation to pay lease rentals. The
proposed guidance also changes how lease expense is recognized in the income statement requiring
more expense to be recorded in the initial years of the lease.
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.
20
Pending or future litigation or governmental proceedings could result in material adverse
consequences, including judgments or settlements.
We are, and from time to time become, involved in lawsuits, regulatory inquiries, and
governmental and other legal proceedings arising out of the ordinary course of our business. Many
of these matters raise difficult and complicated factual and legal issues and are subject to
uncertainties and complexities. The timing of the final resolutions to lawsuits, regulatory
inquiries, and governmental and other legal proceedings is uncertain. Additionally, the possible
outcomes or resolutions to these matters could include adverse judgments or settlements, either of
which could require substantial payments, adversely affecting our consolidated financial condition,
results of operations and cash flows. See discussion under the Legal Proceedings section of Note
11 of our consolidated financial statements included in Item 8 of this report.
If we are not able to develop and protect intellectual property, or if a competitor develops or
obtains exclusive rights to a breakthrough technology, our financial results may suffer.
Our existing and proposed service offerings to customers may require that we develop or
license, and protect, new technologies. We may experience difficulties or delays in the research,
development, production and/or marketing of new products and services which may negatively impact
our operating results and prevent us from recouping or realizing a return on the investments
required to bring new products and services to market. Further, protecting our intellectual
property rights and combating unlicensed copying and use of intellectual property is difficult, and
any inability to obtain or protect new technologies could impact our services to customers and
development of new revenue sources. Additionally, a competitor may develop or obtain exclusive
rights to a breakthrough technology that provides a revolutionary change in traditional waste
management. If we have inferior intellectual property to our competitors, our financial results may
suffer.
Risks Related to Our Industry
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 customers 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.
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 46 landfills. Our ability to meet our financial and operating
objectives may depend in part on our ability to acquire, lease, or renew landfill operating
permits, 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 special 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.
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 state 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. These flow control laws and regulations typically require that waste generated
within the jurisdiction be directed to specified facilities for disposal or processing, which could
limit or prohibit the disposal or processing of waste in our transfer stations and landfills. Such
flow control laws and regulations could also require us to deliver waste collected by us within a
particular jurisdiction to facilities not owned or controlled by us, which could increase our costs
and reduce our revenues. In addition, such laws and regulations could require us to obtain
additional costly licenses or authorizations to be deemed an authorized hauler or disposal
facility.
21
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 and otherwise unlawful. See discussion regarding the Solano County, California
Measure E/Landfill Expansion Litigation under the Legal Proceedings section of Note 11 of our
consolidated financial statements included in Item 8 of this report. 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, health, safety and employment laws and regulations may
restrict our operations and growth and increase our costs.
Existing environmental and employment 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 and otherwise unlawful. See discussion regarding the Solano
County, California Measure E/Landfill Expansion Litigation under the Legal Proceedings section of
Note 11 of our consolidated financial statements included in Item 8 of this report. 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 GHGs are 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 AB 32, 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. The California Air
Resources Board has taken and plans to take various actions to implement the program, including the
approval in December 2008 of an AB 32 Scoping Plan summarizing the main GHG-reduction strategies
for California; a landfill methane control measure, which became effective in June 2010; and, in
December 2010, a GHG cap-and-trade program which is scheduled to begin imposing compliance
obligations in 2013. Because landfill and collection operations emit GHGs, our operations in
California are subject to regulations issued under AB 32. These regulations increase our costs for
those operations and adversely affect our operating results. The Western Climate Initiative, which
once included seven states, all of which we operate in, and four Canadian provinces, has also
developed GHG reduction strategies, among them a GHG cap-and-trade program. In addition, the EPA
made an endangerment finding in 2009 allowing certain GHGs to be regulated under the Clean Air Act.
This finding allows the EPA to create regulations that will impact our operations including
imposing emission reporting, permitting, control technology installation, and monitoring
requirements, although the materiality of the impacts will not be known until all regulations are
finalized. The EPA has already finalized its GHG reporting rule, which requires that municipal
solid waste landfills monitor and report GHG emissions. The EPA has also finalized its tailoring
rule, which imposes certain permitting and control technology requirements upon newly-constructed
or modified facilities which emit GHGs over a certain threshold under the Clean Air Act New Source
Review Prevention of Significant Deterioration, or NSR PSD, and Title V permitting programs. As a
result, NSR PSD or Title V permits issued after January 2, 2011, for new or modified landfills may
need to address GHG emissions, including by requiring the installation of Best Available Control
Technology. Notably, landfills may become subject to such permitting requirements under the
tailoring rule based on their GHG emissions even if their emission of other regulated pollutants
would not otherwise trigger permitting requirements. In addition, NEPA and the National Highway
Transportation Safety
Administration promulgated in August 2011 standards to reduce GHG emissions from, and increase
the fuel efficiency of, medium- and heavy-duty vehicles.
22
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.
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.
23
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ITEM 1B. |
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UNRESOLVED STAFF COMMENTS |
None.
As of December 31, 2011, we owned 140 collection operations, 45 transfer stations, 32
municipal solid waste landfills, three construction and demolition landfills, 39 recycling
operations, five intermodal operations and one exploration and production waste treatment and
disposal facility, and operated, but did not own, an additional 13 transfer stations, 11 municipal
solid waste landfills and two intermodal operations in 29 states. We lease certain of the sites on
which these facilities are located. We lease various office facilities, including our corporate
offices in The Woodlands, Texas, where we occupy approximately 19,000 square feet of space. We
also lease approximately 64,000 square feet of space in our former corporate offices in Folsom,
California. We may incur a loss on lease in 2012 on the cessation of use of our former corporate
offices, which we estimate could range between $4 million and $6 million. 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.
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ITEM 3. |
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LEGAL PROCEEDINGS |
Information regarding our legal proceedings can be found under the Legal Proceedings section
of Note 11 of our consolidated financial statements included in Item 8 of this report and is
incorporated herein by reference.
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ITEM 4. |
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MINE SAFETY DISCLOSURE |
None.
24
PART II
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ITEM 5. |
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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. Prices have been retroactively adjusted
to reflect our three-for-two stock split, in the form of a 50% stock dividend, effective as of
November 12, 2010.
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DIVIDENDS |
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HIGH |
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LOW |
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DECLARED |
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2012 |
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First Quarter (through January 20, 2012) |
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$ |
33.94 |
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$ |
31.81 |
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|
$ |
0.090 |
(1) |
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2011 |
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Fourth Quarter |
|
$ |
35.95 |
|
|
$ |
31.26 |
|
|
$ |
0.090 |
|
Third Quarter |
|
|
35.35 |
|
|
|
29.06 |
|
|
|
0.075 |
|
Second Quarter |
|
|
32.69 |
|
|
|
28.77 |
|
|
|
0.075 |
|
First Quarter |
|
|
29.86 |
|
|
|
26.99 |
|
|
|
0.075 |
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2010 |
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|
|
|
|
|
|
Fourth Quarter |
|
$ |
27.79 |
|
|
$ |
25.60 |
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|
$ |
0.075 |
|
Third Quarter |
|
|
26.96 |
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|
|
22.97 |
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|
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Second Quarter |
|
|
24.71 |
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|
|
22.01 |
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First Quarter |
|
|
23.58 |
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20.46 |
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(1) |
|
On February 7, 2012, we announced that our Board of Directors approved a regular quarterly
cash dividend of $0.09 per share on our common stock. The dividend will be paid on March 6, 2012,
to stockholders of record on the close of business on February 21, 2012. The Board will review the
cash dividend periodically, with a long-term objective of increasing the amount of the dividend.
We cannot assure you as to the amounts or timing of future dividends. We have the ability under
our senior revolving credit facility to repurchase our common stock and pay dividends provided we
maintain specified financial ratios. |
As of January 20, 2012, there were 80 record holders of our common stock.
On December 5, 2011, we announced that our Board of Directors authorized a $400 million
increase to, and extended the term of, our previously announced common stock repurchase program.
As amended, our common stock repurchase program authorizes the repurchase of up to $1.2 billion of
our common stock through December 31, 2014. 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, 2011, we have repurchased approximately 39.2 million shares of our common stock at a
cost of $765.4 million. The table below reflects repurchases we made during the three months ended
December 31, 2011 (in thousands, except share and per share amounts):
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Maximum |
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Total Number of |
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Approximate Dollar |
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Shares Purchased |
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Value of Shares that |
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Total Number |
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Average |
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as Part of Publicly |
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May Yet Be |
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of Shares |
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Price Paid |
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Announced |
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Purchased Under |
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Period |
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Purchased |
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Per Share(1) |
|
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Program |
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|
the Program |
|
10/1/11 10/31/11 |
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$ |
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|
|
$ |
466,306 |
|
11/1/11 11/30/11 |
|
|
633,862 |
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|
|
32.31 |
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|
|
633,862 |
|
|
|
445,828 |
|
12/1/11 12/31/11 |
|
|
350,626 |
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|
32.15 |
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|
350,626 |
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434,557 |
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|
984,488 |
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32.25 |
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984,488 |
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(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 we selected. The graph assumes an investment of $100 in our common
stock on December 31, 2006, and the reinvestment of all dividends. 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.
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|
|
|
|
Base |
|
|
Indexed Returns |
|
|
|
Period |
|
|
Years Ending |
|
Company Name / Index |
|
Dec 06 |
|
|
Dec 07 |
|
|
Dec 08 |
|
|
Dec 09 |
|
|
Dec 10 |
|
|
Dec 11 |
|
Waste Connections, Inc. |
|
$ |
100 |
|
|
$ |
111.55 |
|
|
$ |
113.97 |
|
|
$ |
120.36 |
|
|
$ |
149.35 |
|
|
$ |
181.55 |
|
S&P 500 Index |
|
$ |
100 |
|
|
$ |
105.49 |
|
|
$ |
66.46 |
|
|
$ |
84.05 |
|
|
$ |
96.71 |
|
|
$ |
98.76 |
|
Peer Group (a) |
|
$ |
100 |
|
|
$ |
96.97 |
|
|
$ |
94.68 |
|
|
$ |
106.51 |
|
|
$ |
120.84 |
|
|
$ |
111.64 |
|
|
|
|
(a) |
|
Peer Group Companies: Casella Waste Systems, Inc.; Republic Services, Inc.; Waste
Management, Inc.; IESI-BFC Ltd. (included from June 5, 2009, when it began trading on a U.S. stock
exchange) |
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, |
|
|
|
2011 (a) |
|
|
2010 (a) |
|
|
2009 (a) |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands, except share and per share data) |
|
STATEMENT OF OPERATIONS DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
1,505,366 |
|
|
$ |
1,319,757 |
|
|
$ |
1,191,393 |
|
|
$ |
1,049,603 |
|
|
$ |
958,541 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations |
|
|
857,580 |
|
|
|
749,487 |
|
|
|
692,415 |
|
|
|
628,075 |
|
|
|
566,089 |
|
Selling, general and administrative |
|
|
161,967 |
|
|
|
149,860 |
|
|
|
138,026 |
|
|
|
111,114 |
|
|
|
99,565 |
|
Depreciation |
|
|
147,036 |
|
|
|
132,874 |
|
|
|
117,796 |
|
|
|
91,095 |
|
|
|
81,287 |
|
Amortization of intangibles |
|
|
20,064 |
|
|
|
14,582 |
|
|
|
12,962 |
|
|
|
6,334 |
|
|
|
4,341 |
|
Loss (gain) on disposal of assets |
|
|
1,657 |
|
|
|
571 |
|
|
|
(481 |
) |
|
|
629 |
|
|
|
250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
317,062 |
|
|
|
272,383 |
|
|
|
230,675 |
|
|
|
212,356 |
|
|
|
207,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(44,520 |
) |
|
|
(40,134 |
) |
|
|
(49,161 |
) |
|
|
(43,102 |
) |
|
|
(39,206 |
) |
Interest income |
|
|
530 |
|
|
|
590 |
|
|
|
1,413 |
|
|
|
3,297 |
|
|
|
1,593 |
|
Loss on extinguishment of debt |
|
|
|
|
|
|
(10,193 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net |
|
|
57 |
|
|
|
2,830 |
|
|
|
(7,551 |
) |
|
|
(633 |
) |
|
|
289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision |
|
|
273,129 |
|
|
|
225,476 |
|
|
|
175,376 |
|
|
|
171,918 |
|
|
|
169,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
(106,958 |
) |
|
|
(89,334 |
) |
|
|
(64,565 |
) |
|
|
(56,775 |
) |
|
|
(58,328 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
166,171 |
|
|
|
136,142 |
|
|
|
110,811 |
|
|
|
115,143 |
|
|
|
111,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to
noncontrolling interests |
|
|
(932 |
) |
|
|
(1,038 |
) |
|
|
(986 |
) |
|
|
(12,240 |
) |
|
|
(14,870 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Waste Connections |
|
$ |
165,239 |
|
|
$ |
135,104 |
|
|
$ |
109,825 |
|
|
$ |
102,903 |
|
|
$ |
96,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share attributable to
Waste Connections common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.47 |
|
|
$ |
1.17 |
|
|
$ |
0.92 |
|
|
$ |
0.98 |
|
|
$ |
0.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
1.45 |
|
|
$ |
1.16 |
|
|
$ |
0.91 |
|
|
$ |
0.96 |
|
|
$ |
0.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in the per share calculations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (b) |
|
|
112,720,444 |
|
|
|
115,646,173 |
|
|
|
119,119,601 |
|
|
|
105,037,311 |
|
|
|
102,357,785 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (b) |
|
|
113,583,486 |
|
|
|
116,894,204 |
|
|
|
120,506,162 |
|
|
|
107,129,568 |
|
|
|
104,992,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share |
|
$ |
0.315 |
|
|
$ |
0.075 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid |
|
$ |
35,566 |
|
|
$ |
8,561 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEARS ENDED DECEMBER 31, |
|
|
|
2011 (a) |
|
|
2010 (a) |
|
|
2009 (a) |
|
|
2008 |
|
|
2007 |
|
|
|
(in thousands, except share and per share data) |
|
BALANCE SHEET DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
12,643 |
|
|
$ |
9,873 |
|
|
$ |
9,639 |
|
|
$ |
265,264 |
|
|
$ |
10,298 |
|
Working capital (deficit) |
|
|
(34,844 |
) |
|
|
(37,976 |
) |
|
|
(45,059 |
) |
|
|
213,747 |
|
|
|
(24,849 |
) |
Property and equipment, net |
|
|
1,450,469 |
|
|
|
1,337,476 |
|
|
|
1,308,392 |
|
|
|
984,124 |
|
|
|
865,330 |
|
Total assets |
|
|
3,328,005 |
|
|
|
2,915,984 |
|
|
|
2,820,448 |
|
|
|
2,600,357 |
|
|
|
1,981,548 |
|
Long-term debt and notes payable |
|
|
1,172,758 |
|
|
|
909,978 |
|
|
|
867,554 |
|
|
|
819,828 |
|
|
|
704,184 |
|
Total equity |
|
|
1,399,687 |
|
|
|
1,370,418 |
|
|
|
1,357,036 |
|
|
|
1,261,997 |
|
|
|
814,618 |
|
|
|
|
(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) |
|
Share amounts have been retroactively adjusted to reflect our three-for-two stock split, in
the form of a 50% stock dividend, effective as of March 13, 2007 and our three-for-two stock
split, in the form of a 50% stock dividend, effective as of November 12, 2010. |
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 exclusive and secondary markets in the U.S. We
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 also treat and dispose of
non-hazardous waste that is generated in the exploration and production of oil and natural gas
primarily at a facility in Southwest Louisiana. 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
Revenues in 2011 increased 14.1% to $1.51 billion from $1.32 billion in 2010, with
approximately two-thirds of this growth attributable to acquisitions. Operating margins, net
income, capital expenditures, and free cash flow also increased, further strengthening our business
and financial profile.
As shown in the table below, internal growth decreased to 4.7% in 2011, from 5.5% in 2010.
Pricing increased 0.7%, due to higher surcharges primarily related to increased fuel prices.
Increased landfill revenue primarily associated with higher special waste, or one-time projects,
offset most of the continuing weakness in collection revenue, which resulted in total volume growth
decreasing from flat in 2010 to negative 0.3% in 2011. Intermodal, recycling and other contributed
1.4% to internal growth in 2011, a slower rate of growth than the 2.6% realized in 2010, due
primarily to a more moderate rate of increase in recycled commodity prices compared to the
unprecedented rate of increases in such commodity prices throughout 2010. Decreases in recycled
commodity values experienced during the fourth quarter of 2011 are expected to result in negative
internal growth from such revenue in 2012.
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
Price |
|
|
3.6 |
% |
|
|
2.9 |
% |
Volume |
|
|
(0.3 |
%) |
|
|
0.0 |
% |
Intermodal, Recycling and Other |
|
|
1.4 |
% |
|
|
2.6 |
% |
|
|
|
|
|
|
|
Internal Growth |
|
|
4.7 |
% |
|
|
5.5 |
% |
|
|
|
|
|
|
|
29
In 2011, adjusted operating income before depreciation and amortization, a non-GAAP financial
measure (refer to page 49 of this report for a definition and reconciliation to Operating income),
increased 15.4% to $489.5 million, from $424.3 million in 2010. As a
percentage of revenue, adjusted operating income before depreciation and amortization
increased from 32.1% in 2010, to 32.5% in 2011. This 0.4 percentage point increase was primarily
attributable to growth in higher margin revenue components: price increases to our customers,
higher recycling commodity values and increased disposal volumes, offset by a 0.8% increase in fuel
expense as a percent of revenue due to increased market prices for diesel. Net income attributable
to Waste Connections in 2011 increased 22.3% to $165.2 million from $135.1 million in 2010.
Free Cash Flow
Net cash provided by operating activities increased 16.9% to $388.2 million in 2011, from
$332.2 million in 2010, and capital expenditures increased 5.3% to $141.9 million over that period.
Free cash flow, a non-GAAP financial measure (refer to page 49 of this report for a definition and
reconciliation to Net cash provided by operating activities), increased 17.7% to $254.5 million in
2011, from $216.3 million in 2010. Free cash flow as a percentage of revenues was 16.9% in 2011,
compared to 16.4% in 2010. This increase as a percentage of revenues was primarily due to
increased deferred taxes associated with an Internal Revenue Service approved change in our tax
method for deducting depreciation expense for certain landfills as well as other tax deductible
timing differences associated with depreciation.
Return of Capital to Stockholders
In 2011, we returned $152.4 million to stockholders through a combination of stock repurchases
and cash dividends. We repurchased approximately 3.8 million shares of common stock at a cost of
$116.8 million during 2011. Our Board of Directors also declared dividends totaling $35.6 million
throughout 2011, and increased the quarterly cash dividend by 20% from $0.075 to $0.09 per share of
common stock in October 2011. Our Board of Directors intends to review the quarterly dividend
during the fourth quarter of each year, with a long-term objective of increasing the amount of the
dividend. We expect the amount of capital we return to stockholders through stock repurchases to
vary depending on our financial condition and results of operations, capital structure, the amount
of cash we deploy on acquisitions, the market price of our common stock, and overall market
conditions. We cannot assure you as to the amounts or timing of future stock repurchases or
dividends. We have the ability under our senior revolving credit facility to repurchase our common
stock and pay dividends provided we maintain specified financial ratios.
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
$495.4 million during 2011 for acquisitions, repurchases of common stock, and dividends. These
cash outlays were primarily funded by borrowings during the year and operating cash flow. As a
result of our strong free cash flow and improved financial performance, our leverage ratio remained
below our targeted range at year-end 2011 despite the large outlay of capital.
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 high deductible 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 umbrella policies
for certain types of claims to provide excess coverage over the underlying policies and per
incident deductibles. 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, 2011, 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 $1.0 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 probable 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. Any changes in expectations that result in a downward
revision (or no revision) to the estimated undiscounted cash flows result in a liability that is
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 along with an offsetting addition to site costs, which
is amortized to depletion expense as the remaining landfill 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, gas recovery systems 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 four of the
five 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, 2011, we decreased our discount rate assumption for purposes of computing
2011 layers for final capping, closure and post-closure obligations from 6.5% to 5.75%, in order
to more accurately reflect our long-term cost of borrowing as of the end of 2010. Our inflation
rate assumption was 2.5% for the years ending December 31, 2011 and 2010. 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 probable
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 rate is based on the term of the
operating agreement at our operated landfill that has capitalized expenditures. Expansion airspace
consists of additional disposal capacity being pursued through means of expansion that is not
actually permitted. Expansion airspace that meets the following criteria is included in our
estimate of total landfill airspace.
|
1) |
|
whether the land where the expansion is being sought is contiguous to the current
disposal site, and we either own the expansion property or have rights to it under an
option, purchase, operating or other similar agreement; |
|
|
2) |
|
whether total development costs, final capping costs, and closure/post-closure costs
have been determined; |
31
|
3) |
|
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; |
|
|
4) |
|
whether internal personnel or external consultants are actively working to obtain the
necessary approvals to obtain the landfill expansion permit; and |
|
|
5) |
|
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 we believe
are more likely than not to 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 fourth quarter of 2011, we elected to early adopt the new guidance issued by the
Financial Accounting Standards Board related to testing goodwill for impairment. This new guidance
provides us the option to perform a qualitative assessment to determine whether it is more likely
than not that the fair value of a reporting unit is less than its carrying value. In performing
the qualitative assessment, we assess relevant events and circumstances that may impact the fair
value of our reporting units, including the following:
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macroeconomic conditions; |
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|
industry and market considerations; |
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|
cost factors; |
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|
overall financial performance; |
|
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|
Company-specific events; |
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|
events affecting a reporting unit; |
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|
sustained decreases in share price; and |
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recent fair value calculation for our reporting units, if available. |
If, after assessing the above described events and circumstances, we determine that it is more
likely than not that the fair value of a reporting unit, which we have determined to be our
geographic operating segments, is greater than its carrying value, then no further testing is
required. If we determine that it is more likely than not that the fair value is less than the
carrying value, then we would perform the first step of quantitative testing for goodwill
impairment, as described below.
In the first step of quantitative testing for goodwill impairment, we estimate the fair value
of each reporting unit 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 Statements 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 Statements 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 2011
discounted cash flow analyses were based on ten-year financial forecasts, which in turn were based
on the 2012 annual budget developed internally by management. These forecasts reflect operating
profit margins that were consistent with 2011 results and perpetual revenue growth rates of 3.5%.
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.
32
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 are the same as those described above for the qualitative assessment of goodwill
impairment.
We did not record an impairment charge as a result of our qualitative impairment test of
goodwill or quantitative impairment test of indefinite-lived intangibles in 2011. Additionally, we
do not expect any impairment on our goodwill or indefinite-lived intangibles in the foreseeable
future. However, we cannot assure you 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.
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, and 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 recycling services consist of selling recyclable materials (including
cardboard, office paper, plastic containers, glass bottles and ferrous and aluminum metals)
collected from our residential customers and at our recycling processing operations to third
parties for processing before resale.
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.
33
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, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Collection |
|
$ |
1,069,065 |
|
|
|
62.0 |
% |
|
$ |
951,327 |
|
|
|
62.8 |
% |
|
$ |
901,768 |
|
|
|
66.1 |
% |
Disposal and transfer |
|
|
510,330 |
|
|
|
29.6 |
|
|
|
458,241 |
|
|
|
30.3 |
|
|
|
392,497 |
|
|
|
28.8 |
|
Intermodal, recycling and other |
|
|
144,583 |
|
|
|
8.4 |
|
|
|
103,974 |
|
|
|
6.9 |
|
|
|
68,845 |
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,723,978 |
|
|
|
100.0 |
% |
|
|
1,513,542 |
|
|
|
100.0 |
% |
|
|
1,363,110 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: intercompany
elimination |
|
|
(218,612 |
) |
|
|
|
|
|
|
(193,785 |
) |
|
|
|
|
|
|
(171,717 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
1,505,366 |
|
|
|
|
|
|
$ |
1,319,757 |
|
|
|
|
|
|
$ |
1,191,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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 2011 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.
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 probable expansion airspace.
Amortization expense includes the amortization of finite-lived intangible assets, consisting
primarily of long-term franchise agreements and contracts, customer lists 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. For example, if we are unsuccessful in our
attempts to obtain or defend permits that we are seeking or have been awarded to operate or expand
a landfill, we will no longer generate anticipated income from the landfill and we will be required
to expense in a future period the amount of capitalized expenditures related to the landfill or
expansion project, less the recoverable value of the property and other amounts recovered. See
discussions regarding the Chaparral, New Mexico Landfill Permit Litigation, the Harper County,
Kansas Landfill Permit Litigation and the Solano County, California Measure E/Landfill Expansion
Litigation under the Legal Proceedings section of Note 11 of our consolidated financial
statements included in Item 8 of this report.
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 before
depreciation, amortization and gain (loss) on disposal of assets. Operating income 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 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.
34
We manage our operations through three geographic operating segments, which are also our
reportable segments. Each operating segment is responsible for managing several vertically
integrated operations, which are comprised of districts. In April 2011, as a result of the County
Waste acquisition described in Note 3 to the consolidated financial statements, we realigned our
reporting structure and changed our three geographic operating segments from Western, Central and
Southern to Western, Central and Eastern. As part of this realignment, the states of Arizona,
Louisiana, New Mexico and Texas, which were previously part of the Southern region, are now
included in the Central region. Also as part of this realignment, the state of Michigan, which was
previously part of the Central region, is now included in the Eastern region (previously referred
to as the Southern region). Additionally, the states of New York and Massachusetts, which we now
operate in as a result of the County Waste acquisition, are included in the Eastern region. The
segment information presented herein reflects the realignment of these districts. Under the
current orientation, our Western Region is comprised of operating locations in California, Idaho,
Montana, Nevada, Oregon, Washington and western Wyoming; our Central Region is comprised of
operating locations in Arizona, Colorado, Kansas, Louisiana, Minnesota, Nebraska, New Mexico,
Oklahoma, South Dakota, Texas, Utah and eastern Wyoming; and our Eastern Region is comprised of
operating locations in Alabama, Illinois, Iowa, Kentucky, Massachusetts, Michigan, Mississippi, New
York, North Carolina, South Carolina and Tennessee.
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, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Western |
|
$ |
742,588 |
|
|
$ |
709,821 |
|
|
$ |
634,368 |
|
Central |
|
|
430,177 |
|
|
|
386,697 |
|
|
|
356,964 |
|
Eastern |
|
|
332,601 |
|
|
|
223,239 |
|
|
|
200,061 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,505,366 |
|
|
$ |
1,319,757 |
|
|
$ |
1,191,393 |
|
|
|
|
|
|
|
|
|
|
|
Operating income 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, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Western |
|
$ |
232,940 |
|
|
$ |
218,254 |
|
|
$ |
184,421 |
|
Central |
|
|
152,059 |
|
|
|
127,861 |
|
|
|
115,129 |
|
Eastern |
|
|
95,301 |
|
|
|
69,013 |
|
|
|
57,701 |
|
Corporate(a) |
|
|
5,519 |
|
|
|
5,282 |
|
|
|
3,701 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
485,819 |
|
|
$ |
420,410 |
|
|
$ |
360,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Corporate functions include accounting, legal, tax, treasury, information
technology, risk management, human resources, training and other administrative
functions. |
A reconciliation of Operating income before depreciation, amortization and gain (loss) on
disposal of assets to Income before income tax provision is included in Note 15 to our Consolidated
Financial Statements included in this Annual Report on Form 10-K.
Significant changes in revenue and operating income before depreciation, amortization and gain
(loss) on disposal of assets for our reportable segments for the year ended December 31, 2011,
compared to the year ended December 31, 2010 and for the year ended December 31, 2010, compared to
the year ended December 31, 2009, are discussed below:
Segment Revenue
Revenue in our Western segment increased $32.8 million, or 4.6%, to $742.6 million for the
year ended December 31, 2011, from $709.8 million for the year ended December 31, 2010. For the
year ended December 31, 2011, the components of the increase consisted of revenue acquired from
acquisitions closed during, or subsequent to, the year ended December 31, 2010, of $0.7 million,
net price increases of $17.4 million, recyclable commodity sales increases of $11.9 million,
intermodal revenue increases of $3.8 million and other revenue increases of $0.4 million, partially
offset by decreases of $1.3 million from divested operations and volume decreases of $0.1 million.
Revenue in our Western segment increased $75.4 million, or 11.9%, to $709.8 million for the
year ended December 31, 2010, from $634.4 million for the year ended December 31, 2009. For the
year ended December 31, 2010, the components of the increase consisted of revenue acquired from
acquisitions closed during, or subsequent to, the year ended December 31, 2009 of $31.1 million,
net price increases of $13.1 million, volume increases of $5.6 million, recyclable commodity
sales increases of $20.4 million, intermodal increases of $9.1 million, partially offset by
decreases of $1.1 million from divested operations and other revenue decreases of $2.8 million.
35
Revenue in our Central segment increased $43.5 million, or 11.2%, to $430.2 million for the
year ended December 31, 2011, from $386.7 million for the year ended December 31, 2010. For the
year ended December 31, 2011, the components of the increase consisted of revenue acquired from
acquisitions closed during, or subsequent to, the year ended December 31, 2010, of $29.4 million,
net price increases of $20.0 million and recyclable commodity sales increases of $1.4 million,
partially offset by decreases of $1.5 million from divested operations and volume decreases of $5.8
million.
Revenue in our Central segment increased $29.7 million, or 8.3%, to $386.7 million for the
year ended December 31, 2010, from $357.0 million for the year ended December 31, 2009. For the
year ended December 31, 2010, the components of the increase consisted of revenue acquired from
acquisitions closed during, or subsequent to, the year ended December 31, 2009 of $17.4 million,
net price increases of $14.6 million, recyclable commodity sales increases of $3.0 million and
other revenue increases of $0.2 million, partially offset by decreases of $4.7 million from
divested operations and volume decreases of $0.8 million.
Revenue in our Eastern segment increased $109.4 million, or 49.0%, to $332.6 million for the
year ended December 31, 2011, from $223.2 million for the year ended December 31, 2010. For the
year ended December 31, 2011, the components of the increase consisted of revenue acquired from
acquisitions closed during, or subsequent to, the year ended December 31, 2010, of $98.0 million,
net price increases of $9.6 million, volume increases of $2.0 million and recyclable commodity
sales increases of $0.7 million, partially offset by decreases of $0.6 million from divested
operations and other revenue decreases of $0.3 million.
Revenue in our Eastern segment increased $23.1 million, or 11.6%, to $223.2 million for the
year ended December 31, 2010, from $200.1 million for the year ended December 31, 2009. For the
year ended December 31, 2010, the components of the increase consisted of revenue acquired from
acquisitions closed during, or subsequent to, the year ended December 31, 2009 of $20.2 million,
net price increases of $6.6 million and recyclable commodity sales increases of $1.1 million,
partially offset by volume decreases of $4.3 million and other revenue decreases of $0.5 million.
Segment Operating Income before Depreciation, Amortization and Gain (Loss) on Disposal of
Assets
Operating income before depreciation, amortization and gain (loss) on disposal of assets in
our Western segment increased $14.6 million, or 6.7%, to $232.9 million for the year ended December
31, 2011, from $218.3 million for the year ended December 31, 2010. The increase was primarily due
to increased revenues, decreased disposal expenses and decreased third party trucking and
transportation expenses at our collection and disposal operations, partially offset by increased
rail transportation expenses at our intermodal operations, increased franchise fees and taxes on
revenues, increased expenses associated with the cost of purchasing recyclable commodities,
increased direct and administrative labor expenses, increased diesel fuel expense and increased
truck, equipment and container repair expenses.
Operating income before depreciation, amortization and gain (loss) on disposal of assets in
our Western segment increased $33.9 million, or 18.3%, to $218.3 million for the year ended
December 31, 2010, from $184.4 million for the year ended December 31, 2009. The increase was
primarily due to income generated from acquisitions closed during, or subsequent to, the year ended
December 31, 2009, and the following changes at operations owned in the comparable periods in 2009
and 2010: increased revenues, decreased legal expenses and decreased fuel expenses due to lower
realized losses on diesel fuel hedges allocated to the Western segment, partially offset by
increased disposal expenses, increased third party trucking and transportation expenses, increased
expenses associated with the cost of purchasing recyclable commodities, increased taxes on
revenues, increased direct and administrative labor expenses, and increased truck, equipment and
container repair expenses.
Operating income before depreciation, amortization and gain (loss) on disposal of assets in
our Central segment increased $24.2 million, or 18.9%, to $152.1 million for the year ended
December 31, 2011, from $127.9 million for the year ended December 31, 2010. The increase was
primarily due to income generated from acquisitions closed during, or subsequent to, the year ended
December 31, 2011 and the following changes at operations owned in comparable periods in 2010 and
2011: increased revenues, decreased auto and workers compensation insurance expenses and decreased
advertising expenses, partially offset by increased disposal expenses, increased third party
trucking and transportation expenses, increased taxes on revenues, increased diesel fuel expense
and increased truck, equipment and container repair expenses.
36
Operating income before depreciation, amortization and gain (loss) on disposal of assets in
our Central segment increased $12.8 million, or 11.1%, to $127.9 million for the year ended
December 31, 2010, from $115.1 million for the year ended December 31, 2009. The increase was
primarily due to income generated from acquisitions closed during, or subsequent to, the year ended
December 31, 2009, and the following changes at operations owned in the comparable periods in
2009 and 2010: increased revenues, partially offset by increased disposal expenses, increased
third party trucking and transportation expenses, increased taxes on revenues, increased direct and
administrative labor expenses, increased container repair expenses and increased advertising
expenses.
Operating income before depreciation, amortization and gain (loss) on disposal of assets in
our Eastern segment increased $26.3 million, or 38.1%, to $95.3 million for the year ended December
31, 2011, from $69.0 million for the year ended December 31, 2010. The increase was primarily due
to income generated from acquisitions closed during, or subsequent to, the year ended December 31,
2010 and the following changes at operations owned in comparable periods in 2010 and 2011:
increased revenues, partially offset by increased third party trucking and transportation expenses,
increased taxes on revenues, increased direct labor expenses, increased diesel fuel expense,
increased truck, equipment and container repair expenses and increased expenses for uncollectible
accounts receivable.
Operating income before depreciation, amortization and gain (loss) on disposal of assets in
our Eastern segment increased $11.3 million, or 19.6%, to $69.0 million for the year ended December
31, 2010, from $57.7 million for the year ended December 31, 2009. The increase was primarily due
to income generated from acquisitions closed during, or subsequent to, the year ended December 31,
2009, and the following changes at operations owned in the comparable periods in 2009 and 2010:
increased revenues and decreased auto and workers compensation insurance expenses, partially
offset by increased disposal expenses, increased third party trucking and transportation expenses,
increased taxes on revenues, and increased container repair expenses.
Operating income before depreciation, amortization and gain (loss) on disposal of assets at
Corporate increased $0.2 million, or 4.5%, to $5.5 million for the year ended December 31, 2011,
from $5.3 million for the year ended December 31, 2010. Our estimated recurring corporate
expenses, which can vary from the actual amount of incurred corporate expenses, are allocated to
our three geographic operating segments.
Operating income before depreciation, amortization and gain (loss) on disposal of assets at
Corporate increased $1.6 million, or 42.7%, to $5.3 million for the year ended December 31, 2010,
from $3.7 million for the year ended December 31, 2009. 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 primarily due to decreased legal
expenses, decreased direct acquisition costs that were charged to expense and recording charges
during the year ended December 31, 2009 to establish our liability for remaining rental expenses,
net of estimated sublease rentals, at our prior corporate office facilities, partially offset by
increased cash and stock-based incentive compensation expense.
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 2011 |
|
|
|
|
|
|
As a % of 2010 |
|
|
|
|
|
|
As a % of 2009 |
|
|
|
2011 |
|
|
Revenues |
|
|
2010 |
|
|
Revenues |
|
|
2009 |
|
|
Revenues |
|
Revenues |
|
$ |
1,505,366 |
|
|
|
100.0 |
% |
|
$ |
1,319,757 |
|
|
|
100.0 |
% |
|
$ |
1,191,393 |
|
|
|
100.0 |
% |
Cost of operations |
|
|
857,580 |
|
|
|
57.0 |
|
|
|
749,487 |
|
|
|
56.8 |
|
|
|
692,415 |
|
|
|
58.1 |
|
Selling, general and administrative |
|
|
161,967 |
|
|
|
10.8 |
|
|
|
149,860 |
|
|
|
11.3 |
|
|
|
138,026 |
|
|
|
11.6 |
|
Depreciation |
|
|
147,036 |
|
|
|
9.8 |
|
|
|
132,874 |
|
|
|
10.1 |
|
|
|
117,796 |
|
|
|
9.9 |
|
Amortization of intangibles |
|
|
20,064 |
|
|
|
1.3 |
|
|
|
14,582 |
|
|
|
1.1 |
|
|
|
12,962 |
|
|
|
1.1 |
|
Loss (gain) on disposal of assets |
|
|
1,657 |
|
|
|
0.0 |
|
|
|
571 |
|
|
|
0.1 |
|
|
|
(481 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
317,062 |
|
|
|
21.1 |
|
|
|
272,383 |
|
|
|
20.6 |
|
|
|
230,675 |
|
|
|
19.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(44,520 |
) |
|
|
(3.0 |
) |
|
|
(40,134 |
) |
|
|
(3.0 |
) |
|
|
(49,161 |
) |
|
|
(4.1 |
) |
Interest income |
|
|
530 |
|
|
|
0.0 |
|
|
|
590 |
|
|
|
0.1 |
|
|
|
1,413 |
|
|
|
0.1 |
|
Loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
(10,193 |
) |
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
Other income (expense), net |
|
|
57 |
|
|
|
0.0 |
|
|
|
2,830 |
|
|
|
0.2 |
|
|
|
(7,551 |
) |
|
|
(0.7 |
) |
Income tax provision |
|
|
(106,958 |
) |
|
|
(7.1 |
) |
|
|
(89,334 |
) |
|
|
(6.8 |
) |
|
|
(64,565 |
) |
|
|
(5.4 |
) |
Net income attributable to
noncontrolling interests |
|
|
(932 |
) |
|
|
(0.0 |
) |
|
|
(1,038 |
) |
|
|
(0.1 |
) |
|
|
(986 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Waste
Connections |
|
$ |
165,239 |
|
|
|
11.0 |
% |
|
$ |
135,104 |
|
|
|
10.2 |
% |
|
$ |
109,825 |
|
|
|
9.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, 2011 and 2010
Revenues. Total revenues increased $185.6 million, or 14.1%, to $1.51 billion for the
year ended December 31, 2011, from $1.32 billion for the year ended December 31, 2010.
Acquisitions closed during, or subsequent to, the year ended December 31, 2010, increased
revenues by approximately $128.1 million. Operations divested during, or subsequent to, the year
ended December 31, 2010, decreased revenues by approximately $3.4 million.
During the year ended December 31, 2011, the net increase in prices charged to our customers
was $47.0 million, consisting of $36.7 million of core price increases and $10.3 million of fuel,
materials and environmental surcharges.
Volume decreases in our existing business during the year ended December 31, 2011, decreased
revenues by approximately $3.9 million. The net decrease in volume was primarily attributable to
decreases in commercial hauling activity, partially offset by increases in landfill special waste
volumes and roll off hauling activity.
Recyclable commodity price increases, which occurred during the nine months ended September
30, 2011, and increased recyclable commodity volumes collected, increased revenues by $14.0
million. The increase in recyclable commodity prices during the nine months ended September 30,
2011 was primarily due to increased overseas demand for recyclable commodities. Recyclable
commodity prices during the three months ended December 31, 2011 and 2010 were consistent as the
increased demand occurring during the nine months ended September 30, 2011 did not continue during
the final three months of 2011. If average recyclable commodity prices during the year ended
December 31, 2012 are consistent with the average recyclable commodity prices realized during the
three months ended December 31, 2011, we expect recyclable commodity revenue to decline by
approximately $8 million to $10 million during the year ended December 31, 2012, compared to the
year ended December 31, 2011.
Other revenues increased by $3.8 million during the year ended December 31, 2011, primarily
due to an increase in cargo volume at our intermodal operations.
Cost of Operations. Total cost of operations increased $108.1 million, or 14.4%, to
$857.6 million for the year ended December 31, 2011, from $749.5 million for the year ended
December 31, 2010. The increase was primarily attributable to operating costs associated with
acquisitions closed during, or subsequent to, the year ended December 31, 2010, increased rail
transportation expenses at our intermodal operations, increased third party trucking and
transportation expenses due to increased waste disposal
internalization, increased franchise fees and taxes on revenues due to increased tax rates and
increased landfill volumes, increased expenses associated with the cost of purchasing recyclable
commodities due to recyclable commodity pricing increases, increased labor expenses, increased
employee medical benefit expenses resulting from increased claims cost and severity, increased
diesel fuel expense resulting from higher market prices for fuel and increased truck, equipment and
container repair expenses.
38
Cost of operations as a percentage of revenues increased 0.2 percentage points to 57.0% for
the year ended December 31, 2011, from 56.8% for the year ended December 31, 2010. The increase as
a percentage of revenues was due primarily to increased diesel fuel expense and acquisitions closed
during, or subsequent to, the year ended December 31, 2010 having higher disposal costs as a
percentage of revenue relative to our company average, partially offset by higher gross margins on
landfill special waste volumes and leveraging existing personnel to support increases in landfill
volumes, recyclable commodity revenue and intermodal revenue.
SG&A. SG&A expenses increased $12.1 million, or 8.1%, to $162.0 million for the year
ended December 31, 2011, from $149.9 million for the year ended December 31, 2010. The increase
was primarily the result of additional personnel expenses from acquisitions closed during, or
subsequent to, the year ended December 31, 2010, increased payroll and payroll-related expenses,
increased equity compensation expense, increased cash incentive compensation expense, increased
contributions to community organizations and public programs in our operating markets, increased
expenses for uncollectible accounts receivable and increased employee travel 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, decreased advertising expenses and a
decrease in direct acquisition expenses.
SG&A expenses as a percentage of revenues decreased 0.5 percentage points to 10.8% for the
year ended December 31, 2011, from 11.3% for the year ended December 31, 2010. The decrease as a
percentage of revenues was primarily attributable to leveraging our administrative activities to
support increases in landfill volumes, recyclable commodity revenue and intermodal revenue,
decreased employee deferred compensation expense, decreased advertising expenses and acquisitions
closed during, or subsequent to, the year ended December 31, 2010 having lower SG&A expenses as a
percentage of revenue than our company average.
In December 2011, we commenced a relocation of our corporate headquarters from Folsom,
California to The Woodlands, Texas. The relocation is expected to be completed in 2012. In
connection with the relocation, we expect to incur an estimated $15 million of increased SG&A costs
during 2012 related to personnel and office relocation expenses. In addition, we may incur a loss
on lease in 2012 on the cessation of use of our former corporate headquarters in Folsom,
California, which we estimate could range between $4 million and $6 million.
Depreciation. Depreciation expense increased $14.1 million, or 10.7%, to $147.0
million for the year ended December 31, 2011, from $132.9 million for the year ended December 31,
2010. The increase was primarily attributable to depreciation and depletion associated with
acquisitions closed during, or subsequent to, the year ended December 31, 2010, increased
depreciation expense associated with additions to our fleet and equipment purchased to support our
existing operations, and increased depletion expense associated with increases in landfill volumes.
Depreciation expense as a percentage of revenues decreased 0.3 percentage points to 9.8% for
the year ended December 31, 2011, from 10.1% for the year ended December 31, 2010, due primarily to
acquisitions closed during, or subsequent to, the year ended December 31, 2010 having depreciation
expense as a percentage of revenues below our company average and leveraging existing equipment to
service increases in landfill volumes, recyclable commodity revenue and intermodal revenue.
Amortization of Intangibles. Amortization of intangibles expense increased $5.5
million, or 37.6%, to $20.1 million for the year ended December 31, 2011, from $14.6 million for
the year ended December 31, 2010, due primarily to the amortization of contracts and customer lists
acquired during, or subsequent to, the year ended December 31, 2010.
Operating Income. Operating income increased $44.7 million, or 16.4%, to $317.1
million for the year ended December 31, 2011, from $272.4 million for the year ended December 31,
2010. The increase was primarily attributable to increased revenues, 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 increased 0.5 percentage points to 21.1% for the
year ended December 31, 2011, from 20.6% for the year ended December 31, 2010. The increase as a
percentage of revenues was primarily due to the previously described 0.5 percentage point decrease
in SG&A expense and 0.3 percentage point decrease in depreciation expense, partially offset by the
0.2 percentage point increase in cost of operations and 0.2 percentage point increase in
amortization expense.
39
Interest Expense. Interest expense increased $4.4 million, or 10.9%, to $44.5 million
for the year ended December 31, 2011, from $40.1 million for the year ended December 31, 2010. The
increase was due to increased borrowings on our senior revolving credit facility, an increase in
the applicable margin above the base rate or Eurodollar rate under our new senior revolving credit
facility that we entered into in July 2011, interest expense associated with the April 2011
issuance of our 2016 Notes, 2018 Notes and 2021 Notes and interest accretion expense recorded on
long-term liabilities recorded at fair value associated with acquisitions closed during the year
ended December 31, 2011, partially offset by funding the redemption of our 2026 Notes with
borrowings under our credit facility at lower interest rates, a reduction in the amortization of
our debt discount and debt issuance costs on the redeemed 2026 Notes, the expiration of a $50
million interest rate swap in June 2011 with a fixed rate of 4.29% and a reduction in the fixed
interest rate paid on $175 million of interest rate swaps. In February 2011, three interest rate
swaps with a combined notional amount of $175 million and fixed interest rate of 4.37% expired and
we commenced a new $175 million interest rate swap with a fixed interest rate of 2.85%.
Loss on Extinguishment of Debt. Loss on extinguishment of debt for the year ended
December 31, 2010, consisted of an expense charge of $9.7 million associated with the redemption of
our 2026 Notes and an expense charge of $0.5 million associated with the redemption of our Wasco
Bonds.
Income Tax Provision. Income taxes increased $17.7 million, or 19.7%, to $107.0
million for the year ended December 31, 2011, from $89.3 million for the year ended December 31,
2010.
Our effective tax rates for the years ended December 31, 2011 and 2010, were 39.2% and 39.6%,
respectively.
During the year ended December 31, 2010, we recorded a $1.5 million increase in the income tax
provision associated with an adjustment in deferred tax liabilities resulting from a voter-approved
increase in Oregon state income tax rates and changes to the geographic apportionment of our state
income taxes.
Years Ended December 31, 2010 and 2009
Revenues. Total revenues increased $128.4 million, or 10.8%, to $1.32 billion for the
year ended December 31, 2010, from $1.19 billion for the year ended December 31, 2009.
Acquisitions closed during, or subsequent to, the year ended December 31, 2009, increased
revenues by approximately $68.8 million. Operations divested during, or subsequent to, the year
ended December 31, 2009, decreased revenues by approximately $5.9 million.
During the year ended December 31, 2010, the net increase in prices charged to our customers
was $34.4 million, consisting of $31.8 million of core price increases and $2.6 million of fuel,
materials and environmental surcharges.
Volume increases in our existing business during the year ended December 31, 2010, increased
revenues by approximately $0.5 million. The net increase in volume was primarily attributable to
increases in landfill volumes and roll off hauling activity for operations owned in the comparable
periods, partially offset by declines in residential and commercial hauling activity. Our volume
improved from a negative $10.4 million and negative $1.9 million during the three months ended
March 31, 2010 and June 30, 2010, respectively, to a positive $10.1 million and positive $2.7
million during the three months ended September 30, 2010 and December 31, 2010, respectively, as a
result of increased stability in our operating markets and revenues generated from landfill special
waste projects.
Increased recyclable commodity volumes collected and increased recyclable commodity prices
during the year ended December 31, 2010, increased revenues by $24.6 million. The increase in
recyclable commodity prices was primarily a result of the recovery of overseas demand for
recyclable commodities, which had experienced significant year-over-year declines beginning near
the end of 2008 and continuing through most of 2009.
Other revenues increased by $6.0 million during the year ended December 31, 2010, primarily
due to an increase in cargo volume at our intermodal operations.
Cost of Operations. Total cost of operations increased $57.1 million, or 8.2%, to
$749.5 million for the year ended December 31, 2010, from $692.4 million for the year ended
December 31, 2009. The increase was primarily attributable to operating costs associated with
acquisitions closed during, or subsequent to, the year ended December 31, 2009, and the following
changes at operations owned in the comparable periods in 2009 and 2010: increased rail
transportation expenses at our intermodal operations; increased third party trucking and
transportation expenses due to increased waste disposal internalization and outsourcing these
services; increased disposal expenses due to increased disposal rates and volumes; increased
franchise fees and taxes on revenues due
to increased tax rates and increased landfill volumes; increased expenses associated with the
cost of purchasing recyclable commodities due to recyclable commodity pricing increases; increased
labor expenses; increased truck, equipment and container repair expenses; increased property taxes
and increased facility repairs; partially offset by decreased diesel fuel expense due primarily to
the expiration at the end of 2009 of diesel fuel purchase contracts in which the diesel fuel
contract price per gallon exceeded the diesel fuel retail price; decreased auto and workers
compensation expense under our high deductible insurance program due to a reduction in projected
losses on open claims and a decrease in general liability insurance expenses due to reduced claims
severity.
40
Cost of operations as a percentage of revenues decreased 1.3 percentage points to 56.8% for
the year ended December 31, 2010, from 58.1% for the year ended December 31, 2009. The decrease as
a percentage of revenues was primarily attributable to decreased fuel expense, decreased auto and
workers compensation expense, decreased general liability insurance expenses and price increases
charged to our customers being higher, on a percentage basis, than certain expense increases
recognized during the year ended December 31, 2010, partially offset by increased third party
trucking and transportation expenses and increased rail transportation expenses.
SG&A. SG&A expenses increased $11.9 million, or 8.6%, to $149.9 million for the year
ended December 31, 2010, from $138.0 million for the year ended December 31, 2009. The increase
was primarily the result of additional personnel from acquisitions closed during, or subsequent to,
the year ended December 31, 2009, increased payroll and payroll-related expenses, increased cash
and stock-based incentive compensation expense and increased advertising expenses, partially offset
by a decrease in legal expenses, decreased direct acquisition expenses and decreased expenses
associated with our prior corporate office facilities. During the year ended December 31, 2009, we
incurred higher direct acquisition expenses due primarily to our acquisition of certain operations
from Republic Services, Inc.
SG&A expenses as a percentage of revenues decreased 0.3 percentage points to 11.3% for the
year ended December 31, 2010, from 11.6% for the year ended December 31, 2009. The decrease as a
percentage of revenues was primarily attributable to declines in the aforementioned charges for our
prior corporate office facilities and direct acquisition expenses.
Depreciation. Depreciation expense increased $15.1 million, or 12.8%, to $132.9
million for the year ended December 31, 2010, from $117.8 million for the year ended December 31,
2009. The increase was primarily attributable to depreciation and depletion associated with
acquisitions closed during, or subsequent to, the year ended December 31, 2009, increased depletion
expense at existing operations and increased depreciation expense associated with additions to our
fleet and equipment purchased to support our existing operations.
Depreciation expense as a percentage of revenues increased 0.2 percentage points to 10.1% for
the year ended December 31, 2010, from 9.9% for the year ended December 31, 2009, due primarily to
increased depletion expense at acquired operations.
Amortization of Intangibles. Amortization of intangibles expense increased $1.6
million, or 12.5%, to $14.6 million for the year ended December 31, 2010, from $13.0 million for
the year ended December 31, 2009, due primarily to amortization on contracts, customer lists and
other intangibles acquired during, or subsequent to, the year ended December 31, 2009.
Loss (Gain) on Disposal of Assets. Loss (gain) on disposal of assets increased $1.1
million, to a loss of $0.6 million for the year ended December 31, 2010, from a gain of $0.5
million for the year ended December 31, 2009. On an aggregate basis, assets disposed in 2010 had a
higher book carrying value relative to sales proceeds compared to assets disposed in 2009.
Operating Income. Operating income increased $41.7 million, or 18.1%, to $272.4
million for the year ended December 31, 2010, from $230.7 million for the year ended December 31,
2009. The increase was primarily attributable to increased revenues, 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 increased 1.2 percentage points to 20.6% for the
year ended December 31, 2010, from 19.4% for the year ended December 31, 2009. The increase as a
percentage of revenues was due to the previously described 1.3 percentage point decrease in cost of
operations and 0.3 percentage point decrease in SG&A expense, partially offset by the 0.2
percentage point increase in depreciation expense and 0.2 percentage point increase in loss (gain)
on disposal of assets.
Interest Expense. Interest expense decreased $9.1 million, or 18.4%, to $40.1 million
for the year ended December 31, 2010, from $49.2 million for the year ended December 31, 2009. The
decrease was primarily attributable to funding the redemption of our 2026 Notes with borrowings
under our credit facility at lower interest rates, a reduction in the amortization of our debt
discount on the redeemed 2026 Notes and reduced average borrowing rates on the portion of our
credit facility borrowings not fixed under interest rate swap agreements.
41
Interest Income. Interest income decreased $0.8 million to $0.6 million for the year
ended December 31, 2010, from $1.4 million for the year ended December 31, 2009, due to lower
average cash balances. We maintained higher cash balances, primarily between January 2009 and
April 2009, in order to fund acquisitions that closed during the second quarter of 2009.
Loss on Extinguishment of Debt. Loss on extinguishment of debt for the year ended
December 31, 2010, consisted of an expense charge of $9.7 million associated with the redemption of
our 2026 Notes and an expense charge of $0.5 million associated with the redemption of our Wasco
Bonds.
Other Income (Expense), Net. Other income (expense), net increased $10.4 million to
an income balance of $2.8 million for the year ended December 31, 2010, from an expense balance of
$7.6 million for the year ended December 31, 2009. During the year ended December 31, 2009, we
recorded a $9.2 million charge to other expense resulting from the termination of two interest rate
swap agreements prior to their expiration.
Income Tax Provision. Income taxes increased $24.7 million, or 38.4%, to $89.3
million for the year ended December 31, 2010, from $64.6 million for the year ended December 31,
2009.
Our effective tax rates for the year ended December 31, 2009 and 2010, were 36.8% and 39.6%,
respectively.
During the year ended December 31, 2010, we recorded a $1.2 million increase in the income tax
provision associated with the reconciliation of the income tax provision to the 2009 federal and
state tax returns, which were filed during 2010. We also recorded a reduction to the liability for
uncertain tax positions of approximately $0.6 million due to the expiration of certain statutes of
limitations, which was recorded as a reduction to income tax expense. Additionally, during the
year ended December 31, 2010, we recorded a $1.5 million increase in the income tax provision
associated with an adjustment in deferred tax liabilities resulting from a voter-approved increase
in Oregon state income tax rates and changes to the geographic apportionment of our state income
taxes and a $0.4 million increase in the income tax provision associated with the disposal of
certain assets that had no tax basis.
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, during the year ended
December 31, 2009, we recorded a net reduction to the liability for uncertain tax positions of
approximately $0.8 million due to the expiration of certain statutes of limitations, which was
recorded as a reduction to income tax expense.
Liquidity and Capital Resources
The following table sets forth certain cash flow information for the years ended December 31,
2011, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Net cash provided by operating activities |
|
$ |
388,170 |
|
|
$ |
332,179 |
|
|
$ |
306,194 |
|
Net cash used in investing activities |
|
|
(400,505 |
) |
|
|
(214,224 |
) |
|
|
(548,227 |
) |
Net cash provided by (used in) financing activities |
|
|
15,105 |
|
|
|
(117,721 |
) |
|
|
(13,592 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and equivalents |
|
|
2,770 |
|
|
|
234 |
|
|
|
(255,625 |
) |
Cash and equivalents at beginning of year |
|
|
9,873 |
|
|
|
9,639 |
|
|
|
265,264 |
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents at end of year |
|
$ |
12,643 |
|
|
$ |
9,873 |
|
|
$ |
9,639 |
|
|
|
|
|
|
|
|
|
|
|
42
Operating Activities Cash Flows
For the year ended December 31, 2011, net cash provided by operating activities was $388.2
million. For the year ended December 31, 2010, net cash provided by operating activities was
$332.2 million. The $56.0 million net increase in cash provided by operating activities was due
primarily to the following:
|
1) |
|
An increase in net income of $30.0 million; |
|
|
2) |
|
An increase in deferred taxes of $24.6 million due primarily to the recognition during
the year ended December 31, 2011, of tax benefits totaling $16.4 million associated with an
Internal Revenue Service approved change in our tax method for deducting depreciation
expense for certain landfills as well as other tax deductible timing differences associated
with depreciation; |
|
|
3) |
|
An increase in depreciation
and amortization expense of $19.6 million; |
|
|
4) |
|
An increase of $7.2 million attributable to a decrease in the excess tax benefit
associated with equity-based compensation, due to a decrease in stock option exercises
resulting in decreased taxable income recognized by employees that is tax deductible to us;
less |
|
|
5) |
|
A decrease in cash flows from operating assets and liabilities, net of effects from
acquisitions, of $23.7 million to cash used by operating assets and liabilities of $7.8
million for the year ended December 31, 2011, from cash provided by operating assets and
liabilities of $15.9 million for the year ended December 31, 2010. The significant
components of the $7.8 million in cash outflows from changes in operating assets and
liabilities for the year ended December 31, 2011, include the following: |
|
a) |
|
a decrease in cash resulting from a $14.5 million increase in accounts receivable
due to an increase in revenues; |
|
|
b) |
|
a decrease in cash resulting from a $4.2 million increase in prepaid expenses and
other current assets due primarily to increases in prepaid insurance expenses, income
taxes receivable, other prepaid expenses and parts inventory; |
|
|
c) |
|
a decrease in cash resulting from a $2.9 million decrease in accounts payable due
primarily to the timing of payments; less |
|
|
d) |
|
an increase in cash resulting from an increase in accrued liabilities of $10.4
million due primarily to increased accrued interest expense due to increased debt
balances and the timing of interest payments, increased liabilities for auto and
workers compensation claims, and increased liabilities for employee medical benefit
expenses, increased liabilities for property taxes and increased liability for cash
incentive compensation; less |
|
|
e) |
|
an increase in cash resulting from an increase in deferred revenue of $4.2
million due primarily to increased revenues and timing of billing for services. |
For the year ended December 31, 2010, net cash provided by operating activities was $332.2
million. For the year ended December 31, 2009, net cash provided by operating activities was
$306.2 million. The $26.0 million net increase in cash provided by operating activities was due
primarily to the following:
|
1) |
|
An increase in net income of $25.3 million; |
|
|
2) |
|
An increase in depreciation and amortization expense of $16.7 million; |
|
|
3) |
|
A decrease in deferred taxes of $11.8 million due primarily to the recognition during
the year ended December 31, 2009, of tax benefits associated with a change in our tax
method for deducting depreciation expense for certain landfills; |
|
|
4) |
|
An increase in equity-based compensation expense of $2.0 million; |
|
|
5) |
|
A decrease of $7.9 million attributable to an increase in the excess tax benefit
associated with equity-based compensation, due to an increase in stock option exercises
resulting in increased taxable income recognized by employees that is tax deductible to us;
and |
|
|
6) |
|
An increase in cash flows from operating assets and liabilities, net of effects from
acquisitions, of $2.5 million to cash provided by operating assets and liabilities of $15.9
million for the year ended December 31, 2010, from cash provided by operating assets and
liabilities of $13.4 million for the year ended December 31, 2009. The significant
components of the $15.9 million in cash inflows from changes in operating assets and
liabilities for the year ended December 31, 2010, include the following: |
|
a) |
|
an increase in cash resulting from a $3.3 million decrease in prepaid expenses
and other current assets due primarily to decreases in prepaid income taxes and prepaid
insurance expenses; |
|
|
b) |
|
an increase in cash due to a $19.1 million increase in accrued liabilities due
primarily to increased accruals for auto and workers compensation insurance claims,
cash-based employee incentive compensation expense, payroll and payroll-related
liabilities, partially offset by a decrease in accrued interest due to the redemption of
the 2026 Notes in April 2010; less |
|
|
c) |
|
a decrease in cash resulting from a $0.9 million decrease in accounts payable due
primarily to the timing of payments for capital expenditures and operating expenses;
less |
|
|
d) |
|
a decrease in cash due to a $9.3 million increase in accounts receivable due to
increased revenues. |
43
As of December 31, 2011, we had a working capital deficit of $34.8 million, including cash and
equivalents of $12.6 million. Our working capital deficit decreased $3.2 million from $38.0
million at December 31, 2010. 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, along with stock
repurchase and dividend programs, to reduce our indebtedness under our credit facility and to
minimize our cash balances.
Investing Activities Cash Flows
Net cash used in investing activities increased $186.3 million to $400.5 million for the year
ended December 31, 2011, from $214.2 million for the year ended December 31, 2010. The significant
components of the increase include the following:
|
1) |
|
An increase in payments for acquisitions of $177.3 million primarily due to the recent
acquisition of County Waste and for the Colonie Landfill transaction; |
|
|
2) |
|
An increase in capital expenditures for property and equipment of $7.1 million due to
increases in expenditures for site costs at various landfills, equipment, computers and
buildings, partially offset by a decrease in expenditures for land and trucks, and |
|
|
3) |
|
A decrease in proceeds from the sale of property, plant and equipment of $2.2 million. |
Net cash used in investing activities decreased $334.0 million to $214.2 million for the year
ended December 31, 2010, from $548.2 million for the year ended December 31, 2009. The significant
components of the decrease include the following:
|
1) |
|
A decrease in payments for acquisitions of $339.0 million; less |
|
|
2) |
|
An increase in capital expenditures for property and equipment of $6.6 million due to
increases in site costs for various landfills, construction of buildings for operational
facilities and purchase of containers, land and land improvements, partially offset by a
decrease in truck and equipment purchases. |
Financing Activities Cash Flows
Net cash flows from financing activities increased $132.8 million to a net cash provided by
financing activities total of $15.1 million for the year ended December 31, 2011, from a net cash
used in financing activities total of $117.7 million for the year ended December 31, 2010. The
significant components of the increase include the following:
|
1) |
|
An increase in net long-term borrowings of $155.0 million due primarily to the issuance
of new debt to fund the acquisition of County Waste and for the Colonie Landfill
transaction; |
|
|
2) |
|
A decrease in payments to repurchase our common stock of $49.5 million; less |
|
|
3) |
|
A decrease in proceeds from option and warrant exercises of $27.9 million due to a
decrease in the number of options and warrants exercised in the year ended December 31,
2011; less |
|
|
4) |
|
An increase in cash dividends paid of $27.0 million with the initiation of a quarterly
cash dividend in November 2010; less |
|
|
5) |
|
A decrease in the excess tax benefit associated with equity-based compensation of $7.2
million; less |
|
|
6) |
|
An increase in debt issuance costs of $6.6 million in conjunction with our new senior
revolving credit facility entered into during the year ended December 31, 2011. |
Net cash used in financing activities increased $104.1 million to $117.7 million for the year
ended December 31, 2010, from $13.6 million for the year ended December 31, 2009. The significant
components of the increase include the following:
|
1) |
|
An increase in payments to repurchase our common stock of $103.7 million; |
|
|
2) |
|
A decrease in net long-term borrowings of $8.9 million due to increased availability of
operating cash flow after funding operations, acquisitions, capital expenditures, stock
repurchases and dividend payments; |
|
|
3) |
|
An increase in stock dividends paid of $8.6 million with the initiation of a quarterly
stock dividend in 2010; less |
|
|
4) |
|
A change in book overdraft of $7.5 million resulting from fluctuations in our
outstanding cash balances at banks for which outstanding check balances can be offset; less |
|
|
5) |
|
An increase in proceeds from option and warrant exercises of $17.7 million due to an
increase in the number of options and warrants exercised in the year ended December 31,
2010; less, |
|
|
6) |
|
An increase in the excess tax benefit associated with equity-based compensation of $7.9
million, due to the aforementioned increase in options and warrants exercised in the year
ended December 31, 2010, which resulted in increased taxable income, recognized by
employees, that is tax deductible by us. |
44
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.
On December 5, 2011, we announced that our Board of Directors authorized a $400 million
increase to, and extended the term of, our previously announced common stock repurchase program.
As amended, our common stock repurchase program authorizes the repurchase of up to $1.2 billion of
our common stock through December 31, 2014. 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 the common stock and overall market conditions. As of
December 31, 2011 and 2010, we had repurchased in aggregate 39.2 million and 35.4 million shares,
respectively, of our common stock at an aggregate cost of $765.4 million and $648.6 million,
respectively. As of December 31, 2011, the remaining maximum dollar value of shares available for
purchase under the program was approximately $434.6 million.
On October 19, 2010, our Board of Directors authorized a three-for-two split of our common
stock, in the form of a 50% stock dividend, payable to stockholders of record as of October 29,
2010. Shares resulting from the split were issued on November 12, 2010. All share and per share
amounts for all periods presented have been retroactively adjusted to reflect the stock split.
In addition, in October 2010, our Board of Directors authorized the initiation of a quarterly
cash dividend of $0.075 per share, as adjusted for the three-for-two stock split described above.
In October 2011, our Board of Directors authorized an increase to our regular quarterly cash
dividend by $0.015, from $0.075 to $0.09 per share. Cash dividends of $35.6 million and $8.6
million were paid during the years ended December 31, 2011 and 2010, respectively. The Board will
review the cash dividend periodically, with a long-term objective of increasing the amount of the
dividend. We cannot assure you as to the amounts or timing of future dividends.
We made $141.9 million in capital expenditures during the year ended December 31, 2011. We
expect to make capital expenditures of approximately $145 million in 2012 in connection with our
existing business. We intend to fund our planned 2012 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 a $1.2 billion senior revolving credit facility, or the credit facility, with a
syndicate of banks for which Bank of America, N.A. acts as administrative agent and J.P. Morgan
Chase Bank, N.A. and Wells Fargo Bank, National Association act as co-syndication agents. As of
December 31, 2011, $519.0 million was outstanding under the credit facility, exclusive of
outstanding standby letters of credit of $80.4 million. As of December 31, 2010, $511.0 million
was outstanding under the credit facility, exclusive of outstanding standby letters of credit of
$82.9 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.
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 0.200% per annum
to 0.350% per annum 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 highest of: (1) the
federal funds rate plus one half of one percent (0.500%); (2) the LIBOR rate plus one percent
(1.000%), and (3) 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 LIBOR rate is determined by the administrative
agent pursuant to a formula in the credit agreement. The applicable margins under the credit
agreement vary depending on our leverage ratio, as defined in the credit agreement, and range from
1.150% per annum to 2.000% per annum for LIBOR loans and 0.150% per annum to 1.000% per annum for
base rate loans. The credit facility matures in July 2016. The borrowings under the credit
facility are not collateralized. The credit agreement 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 agreement requires that we maintain specified financial ratios. As of December
31, 2011 and
2010, we were in compliance with all applicable covenants under the credit facility. We
expect to be in compliance with all applicable covenants under the credit facility for the next 12
months. We use the credit facility for acquisitions, capital expenditures, working capital,
standby letters of credit and general corporate purposes.
45
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
2026 Notes were convertible into cash and, if applicable, shares of our common stock based on an
initial conversion rate of 44.1177 shares of common stock per $1,000 principal amount of 2026 Notes
(which was equal to an initial conversion price of approximately $22.67 per share), subject to
adjustment, and only under certain circumstances. Upon a surrender of the 2026 Notes for
conversion, we were required to deliver cash equal to the lesser of the aggregate principal amount
of notes to be converted or our total conversion obligation.
On April 1, 2010, we redeemed the $200 million aggregate principal amount of the 2026 Notes.
Holders of the notes chose to convert a total of $22.7 million principal amount of the notes. In
addition to paying the principal amount of these notes with proceeds from our credit facility, we
issued 32,859 shares of our common stock in connection with the conversion and redemption. We
redeemed the balance of $177.3 million principal amount of the notes with proceeds from our credit
facility. All holders of the notes also received accrued interest and an interest make-whole
payment. As a result of the redemption, we recognized $9.7 million of pre-tax expense ($6.0
million net of taxes) in April 2010.
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.
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.
On April 1, 2011, we entered into a Second Supplement to Master Note Purchase Agreement with
certain accredited institutional investors (the Second Supplement), pursuant to which we issued
and sold to the investors on that date $250 million of senior uncollateralized notes at fixed
interest rates with interest payable in arrears semi-annually on October 1 and April 1 beginning on
October 1, 2011 in a private placement. Of these notes, $100 million will mature on April 1, 2016
with an annual interest rate of 3.30% (the 2016 Notes), $50 million will mature on April 1, 2018
with an annual interest rate of 4.00% (the 2018 Notes), and $100 million will mature on April 1,
2021 with an annual interest rate of 4.64% (the 2021 Notes).
The 2015 Notes, 2016 Notes, 2018 Notes, 2019 Notes, and 2021 Notes (collectively, the Senior
Notes) are uncollateralized obligations and rank equally in right of payment with each of the
Senior Notes and obligations under our senior uncollateralized revolving credit facility. The
Senior Notes are subject to representations, warranties, covenants and events of default. Upon the
occurrence of an event of default, payment of the Senior Notes may be accelerated by the holders of
the respective notes. The Senior 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 us at par plus a
make-whole amount determined in respect of the remaining scheduled interest payments on the Senior
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 Senior 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 Agreement, provided that the purchasers of the Senior Notes shall not
have any obligation to purchase any additional notes issued pursuant to the Master Note Agreement
and the aggregate principal amount of the outstanding notes and any additional notes issued
pursuant to the Master Note Agreement shall not exceed $750 million. We currently have $600
million of Notes outstanding under the Master Note Agreement.
46
As of December 31, 2011, we had the following contractual obligations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less Than |
|
|
1 to 3 |
|
|
3 to 5 |
|
|
Over |
|
Recorded Obligations |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 years |
|
Long-term debt |
|
$ |
1,178,657 |
|
|
$ |
5,899 |
|
|
$ |
9,348 |
|
|
$ |
801,911 |
|
|
$ |
361,499 |
|
Cash interest payments |
|
|
265,826 |
|
|
|
48,022 |
|
|
|
93,693 |
|
|
|
69,940 |
|
|
|
54,171 |
|
|
|
|
|
|
Long-term debt payments include: |
|
1) |
|
$519.0 million in principal payments due July 2016 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 3.65% at December 31, 2011) on base
rate loans, or the Eurodollar rate plus the applicable Eurodollar margin (approximately
1.70% at December 31, 2011) on Eurodollar loans. As of December 31, 2011, our credit
facility allowed us to borrow up to $1.2 billion. |
|
|
2) |
|
$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%. |
|
|
3) |
|
$100.0 million in principal payments due 2016 related to our 2016 Notes. Holders
of the 2016 Notes may require us to purchase their notes in cash at a purchase price of
100% of the principal amount of the 2016 Notes plus accrued and unpaid interest, if any,
upon a change in control, as defined in the Master Note Purchase Agreement. The 2016
Notes bear interest at a rate of 3.30%. |
|
|
4) |
|
$50.0 million in principal payments due 2018 related to our 2018 Notes. Holders
of the 2018 Notes may require us to purchase their notes in cash at a purchase price of
100% of the principal amount of the 2018 Notes plus accrued and unpaid interest, if any,
upon a change in control, as defined in the Master Note Purchase Agreement. The 2018
Notes bear interest at a rate of 4.00%. |
|
|
5) |
|
$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%. |
|
|
6) |
|
$100.0 million in principal payments due 2021 related to our 2021 Notes. Holders
of the 2021 Notes may require us to purchase their notes in cash at a purchase price of
100% of the principal amount of the 2021 Notes plus accrued and unpaid interest, if any,
upon a change in control, as defined in the Master Note Purchase Agreement. The 2021
Notes bear interest at a rate of 4.64%. |
|
|
7) |
|
$38.5 million in principal payments related to our tax-exempt bonds, which bear
interest at variable rates (between 0.18% and 0.19%) at December 31, 2011. The
tax-exempt bonds have maturity dates ranging from 2012 to 2033. |
|
|
8) |
|
$18.4 million in principal payments related to our notes payable to sellers. Our
notes payable to sellers bear interest at rates between 2.50% and 10.35% at December 31,
2011, and have maturity dates ranging from 2012 to 2036. |
|
|
9) |
|
$2.8 million in principal payments related to our notes payable to third parties.
Our notes payable to third parties bear interest at rates between 6.7% and 10.9% at
December 31, 2011, and have maturity dates ranging from 2012 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, 2011. We assumed the credit
facility is paid off when it matures in July 2016. |
|
|
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 earlier
expiration of the term of the swaps or the term of the credit facility. |
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Commitment Expiration Per Period |
|
|
|
(amounts in thousands) |
|
|
|
|
|
|
|
Less Than |
|
|
1 to 3 |
|
|
3 to 5 |
|
|
Over |
|
Unrecorded Obligations(1) |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
5 Years |
|
Operating leases |
|
$ |
72,104 |
|
|
$ |
12,049 |
|
|
$ |
18,251 |
|
|
$ |
12,842 |
|
|
$ |
28,962 |
|
|
|
|
(1) |
|
We are party to operating lease agreements as discussed in Note 11 to the
consolidated financial statements. These lease agreements are established in the
ordinary course of our business and are designed to provide us with access to facilities
at competitive, market-driven prices. These arrangements have not materially affected
our financial position, results of operations or liquidity during the year ended
December 31, 2011, nor are they expected to have a material impact on our future
financial position, results of operations or liquidity. |
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 11 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, 2011, 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.
Non-GAAP Financial Measures
Free Cash Flow
We present free cash flow, a non-GAAP financial measure, supplementally because it is widely
used by investors as a valuation and liquidity measure in the solid waste industry. We define free
cash flow as net cash provided by operating activities, plus proceeds from disposal of assets, plus
or minus change in book overdraft, plus excess tax benefit associated with equity-based
compensation, less capital expenditures for property and equipment and distributions to
noncontrolling interests. This measure is not a substitute for, and should be used in conjunction
with, GAAP liquidity or financial measures. Management uses free cash flow as one of the principal
measures to evaluate and monitor the ongoing financial performance of our operations. Other
companies may calculate free cash flow differently. Our free cash flow for the years ended
December 31, 2011 and 2010, is calculated as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Net cash provided by operating activities |
|
$ |
388,170 |
|
|
$ |
332,179 |
|
|
$ |
306,194 |
|
Plus/less: Change in book overdraft |
|
|
(227 |
) |
|
|
279 |
|
|
|
7,802 |
|
Plus: Proceeds from disposal of assets |
|
|
4,434 |
|
|
|
6,659 |
|
|
|
5,061 |
|
Plus: Excess tax benefit associated with equity-based compensation |
|
|
4,763 |
|
|
|
11,997 |
|
|
|
4,054 |
|
Less: Capital expenditures for property and equipment |
|
|
(141,924 |
) |
|
|
(134,829 |
) |
|
|
(128,251 |
) |
Less: Distributions to noncontrolling interests |
|
|
(675 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Free cash flow |
|
$ |
254,541 |
|
|
$ |
216,285 |
|
|
$ |
194,860 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted Operating Income Before Depreciation and Amortization
We present adjusted operating income before depreciation and amortization, a non-GAAP
financial measure, supplementally because it is widely used by investors as a performance and
valuation measure in the solid waste industry. We define adjusted operating income before
depreciation and amortization as operating income, plus depreciation and amortization expense, plus
closure and post-closure accretion expense, plus or minus any gain or loss on disposal of assets.
We further adjust this calculation to exclude the effects of items management believes impact the
ability to assess the operating performance of our business. This measure is not a substitute for,
and should be used in conjunction with, GAAP financial measures. Management uses adjusted
operating income before depreciation and amortization as one of the principal measures to evaluate
and monitor the ongoing financial performance of our operations. Other companies may calculate
adjusted operating income before depreciation and amortization differently. Our adjusted
operating income before depreciation and amortization for the years ended December 31, 2011,
2010 and 2009, is calculated as follows (amounts in thousands):
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Operating income |
|
$ |
317,062 |
|
|
$ |
272,383 |
|
|
$ |
230,675 |
|
Plus: Depreciation and amortization |
|
|
167,100 |
|
|
|
147,456 |
|
|
|
130,758 |
|
Plus: Closure and post-closure accretion |
|
|
1,967 |
|
|
|
1,766 |
|
|
|
2,055 |
|
Plus/less: Loss (gain) on disposal of assets |
|
|
1,657 |
|
|
|
571 |
|
|
|
(481 |
) |
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Plus: Acquisition-related transaction costs (a) |
|
|
1,744 |
|
|
|
2,081 |
|
|
|
3,987 |
|
Plus: Loss on prior corporate office lease (b) |
|
|
|
|
|
|
|
|
|
|
1,839 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted operating income before depreciation and
amortization |
|
$ |
489,530 |
|
|
$ |
424,257 |
|
|
$ |
368,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects the addback of acquisition-related costs. |
|
(b) |
|
Reflects the addback of a loss on our prior corporate office lease due to the
relocation of our corporate offices. |
Reconciliation of Net Income to Adjusted Net Income and Adjusted Net Income per diluted
share
Adjusted net income and adjusted net income per diluted share, both non-GAAP financial
measures, are provided supplementally because they are widely used by investors as a valuation
measure in the solid waste industry. We provide adjusted net income to exclude the effects of
items management believes impact the comparability of operating results between periods. Adjusted
net income has limitations due to the fact that it may exclude items that have an impact on our
financial condition and results of operations. Adjusted net income and adjusted net income per
diluted share are not a substitute for, and should be used in conjunction with, GAAP financial
measures. Management uses adjusted net income and adjusted net income per diluted share as one of
the principal measures to evaluate and monitor the ongoing financial performance of our operations.
Other companies may calculate adjusted net income and adjusted net income per diluted share
differently.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Reported net income attributable to Waste Connections |
|
$ |
165,239 |
|
|
$ |
135,104 |
|
|
$ |
109,825 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Swap termination costs, net of taxes (a) |
|
|
|
|
|
|
|
|
|
|
5,753 |
|
Loss on extinguishment of debt, net of taxes (b) |
|
|
|
|
|
|
6,320 |
|
|
|
|
|
Acquisition-related transaction costs, net of taxes (c) |
|
|
1,327 |
|
|
|
1,290 |
|
|
|
2,630 |
|
Loss on prior corporate office lease, net of taxes (d) |
|
|
|
|
|
|
|
|
|
|
1,144 |
|
Loss (gain) on disposal of assets, net of taxes (e) |
|
|
1,027 |
|
|
|
776 |
|
|
|
(299 |
) |
Impact of deferred tax adjustment (f) |
|
|
|
|
|
|
1,547 |
|
|
|
(1,142 |
) |
|
|
|
|
|
|
|
|
|
|
Adjusted net income attributable to Waste Connections |
|
$ |
167,593 |
|
|
$ |
145,037 |
|
|
$ |
117,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share attributable to Waste Connections
common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
Reported net income |
|
$ |
1.45 |
|
|
$ |
1.16 |
|
|
$ |
0.91 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income |
|
$ |
1.48 |
|
|
$ |
1.24 |
|
|
$ |
0.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects the elimination of costs associated with the termination of a notional
$175 million of interest rate swaps. |
|
(b) |
|
Reflects the elimination of costs associated with early redemption of outstanding
debt. |
|
(c) |
|
Reflects the elimination of acquisition-related costs. |
|
(d) |
|
Reflects the elimination of a loss on our prior corporate office lease due to the
relocation of our corporate offices. |
|
(e) |
|
Reflects the elimination of a loss (gain) on disposal of assets. |
|
(f) |
|
Reflects (1) the elimination in 2009 of a benefit to the income tax provision
primarily from a reduction in our deferred tax liabilities and (2) the elimination in 2010 of
an increase to the income tax provision associated with an adjustment in our deferred tax
liabilities primarily resulting from a voter-approved increase in Oregon state income tax
rates. |
49
Inflation
Other than volatility in fuel prices, inflation has not materially affected our operations in
recent years. 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, 2011, our derivative instruments included three 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 |
|
March 2009 |
|
$ |
175,000 |
|
|
|
2.85 |
% |
|
1-month LIBOR |
|
|
February 2011 |
|
|
February 2014 |
|
August 2011 |
|
$ |
150,000 |
|
|
|
0.80 |
% |
|
1-month LIBOR |
|
|
April 2012 |
|
|
January 2015 |
|
December 2011 |
|
$ |
175,000 |
|
|
|
1.60 |
% |
|
1-month LIBOR |
|
|
February 2014 |
|
|
February 2017 |
|
|
|
|
* |
|
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, 2011 and 2010, of $382.5 million and $325.4 million,
respectively, including floating rate debt under our credit facility and floating rate municipal
bond obligations. A one percentage point increase in interest rates on our variable-rate debt as
of December 31, 2011 and 2010, would decrease our annual pre-tax income by approximately $3.8
million and $3.3 million, respectively. All of our remaining debt instruments are at fixed rates,
or effectively fixed under the interest rate swap agreements described above; therefore, changes in
market interest rates under these instruments would not significantly impact our cash flows or
results of operations, subject to counterparty default risk.
50
The market price of diesel fuel is unpredictable and can fluctuate significantly. We purchase
approximately 28 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 fuel hedge agreements related to forecasted diesel
fuel purchases.
At December 31, 2011, our derivative instruments included one fuel hedge agreement as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diesel |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate |
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
Paid |
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
Fixed |
|
|
|
|
|
|
|
|
|
|
|
|
(in gallons per |
|
|
(per |
|
|
Diesel Rate Received |
|
|
Effective |
|
|
Expiration |
|
Date Entered |
|
month) |
|
|
gallon) |
|
|
Variable |
|
|
Date |
|
|
Date |
|
December 2008 |
|
|
400,000 |
|
|
$ |
3.03 |
|
|
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 number of 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, the fuel hedge is considered a cash flow hedge
for a portion of our forecasted diesel fuel purchases, and we apply hedge accounting to account for
this instrument.
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, 2012, we expect to purchase approximately 28 million gallons of
diesel fuel, of which 23.2 million gallons will be purchased at market prices and 4.8 million
gallons will be purchased at prices that are fixed under our fuel hedges. With respect to the
approximately 23.2 million gallons of unhedged diesel fuel we expect to purchase in 2012 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 $2.3 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 39 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 year ended
December 31, 2011 and 2010, would have had a $7.8 million and $4.6 million impact on revenues for
the year ended December 31, 2011 and 2010, respectively.
51
|
|
|
ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
WASTE CONNECTIONS, INC.
|
|
|
|
|
|
|
Page |
|
|
|
|
53 |
|
|
|
|
|
|
|
|
|
54 |
|
|
|
|
|
|
|
|
|
55 |
|
|
|
|
|
|
|
|
|
56 |
|
|
|
|
|
|
|
|
|
57 |
|
|
|
|
|
|
|
|
|
59 |
|
|
|
|
|
|
|
|
|
102 |
|
52
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, 2011 and December 31, 2010, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2011 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, 2011,
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.
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 7, 2012
53
WASTE CONNECTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
12,643 |
|
|
$ |
9,873 |
|
Accounts receivable, net of allowance for doubtful
accounts of $6,617 and $5,084 at December 31, 2011
and 2010, respectively |
|
|
176,277 |
|
|
|
152,156 |
|
Deferred income taxes |
|
|
20,630 |
|
|
|
20,130 |
|
Prepaid expenses and other current assets |
|
|
39,708 |
|
|
|
33,402 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
249,258 |
|
|
|
215,561 |
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
1,450,469 |
|
|
|
1,337,476 |
|
Goodwill |
|
|
1,116,888 |
|
|
|
927,852 |
|
Intangible assets, net |
|
|
449,581 |
|
|
|
381,475 |
|
Restricted assets |
|
|
30,544 |
|
|
|
30,441 |
|
Other assets, net |
|
|
31,265 |
|
|
|
23,179 |
|
|
|
|
|
|
|
|
|
|
$ |
3,328,005 |
|
|
$ |
2,915,984 |
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
95,097 |
|
|
$ |
85,252 |
|
Book overdraft |
|
|
12,169 |
|
|
|
12,396 |
|
Accrued liabilities |
|
|
106,243 |
|
|
|
99,075 |
|
Deferred revenue |
|
|
64,694 |
|
|
|
54,157 |
|
Current portion of long-term debt and notes payable |
|
|
5,899 |
|
|
|
2,657 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
284,102 |
|
|
|
253,537 |
|
|
|
|
|
|
|
|
|
|
Long-term debt and notes payable |
|
|
1,172,758 |
|
|
|
909,978 |
|
Other long-term liabilities |
|
|
74,324 |
|
|
|
47,637 |
|
Deferred income taxes |
|
|
397,134 |
|
|
|
334,414 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,928,318 |
|
|
|
1,545,566 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 11) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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;
250,000,000 and 150,000,000 shares authorized;
110,907,782 and 113,950,081 shares issued and
outstanding at December 31, 2011 and 2010,
respectively |
|
|
1,109 |
|
|
|
1,139 |
|
Additional paid-in capital |
|
|
408,721 |
|
|
|
509,218 |
|
Accumulated other comprehensive loss |
|
|
(3,480 |
) |
|
|
(3,095 |
) |
Retained earnings |
|
|
988,560 |
|
|
|
858,887 |
|
|
|
|
|
|
|
|
Total Waste Connections equity |
|
|
1,394,910 |
|
|
|
1,366,149 |
|
Noncontrolling interest in subsidiaries |
|
|
4,777 |
|
|
|
4,269 |
|
|
|
|
|
|
|
|
Total equity |
|
|
1,399,687 |
|
|
|
1,370,418 |
|
|
|
|
|
|
|
|
|
|
$ |
3,328,005 |
|
|
$ |
2,915,984 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
54
WASTE CONNECTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Revenues |
|
$ |
1,505,366 |
|
|
$ |
1,319,757 |
|
|
$ |
1,191,393 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of operations |
|
|
857,580 |
|
|
|
749,487 |
|
|
|
692,415 |
|
Selling, general and administrative |
|
|
161,967 |
|
|
|
149,860 |
|
|
|
138,026 |
|
Depreciation |
|
|
147,036 |
|
|
|
132,874 |
|
|
|
117,796 |
|
Amortization of intangibles |
|
|
20,064 |
|
|
|
14,582 |
|
|
|
12,962 |
|
Loss (gain) on disposal of assets |
|
|
1,657 |
|
|
|
571 |
|
|
|
(481 |
) |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
317,062 |
|
|
|
272,383 |
|
|
|
230,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(44,520 |
) |
|
|
(40,134 |
) |
|
|
(49,161 |
) |
Interest income |
|
|
530 |
|
|
|
590 |
|
|
|
1,413 |
|
Loss on extinguishment of debt |
|
|
|
|
|
|
(10,193 |
) |
|
|
|
|
Other income (expense), net |
|
|
57 |
|
|
|
2,830 |
|
|
|
(7,551 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income tax provision |
|
|
273,129 |
|
|
|
225,476 |
|
|
|
175,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
|
(106,958 |
) |
|
|
(89,334 |
) |
|
|
(64,565 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
166,171 |
|
|
|
136,142 |
|
|
|
110,811 |
|
Less: Net income attributable to noncontrolling interests |
|
|
(932 |
) |
|
|
(1,038 |
) |
|
|
(986 |
) |
|
|
|
|
|
|
|
|
|
|
Net income attributable to Waste Connections |
|
$ |
165,239 |
|
|
$ |
135,104 |
|
|
$ |
109,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share attributable to Waste Connections
common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.47 |
|
|
$ |
1.17 |
|
|
$ |
0.92 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
1.45 |
|
|
$ |
1.16 |
|
|
$ |
0.91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in the per share calculations: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
112,720,444 |
|
|
|
115,646,173 |
|
|
|
119,119,601 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
113,583,486 |
|
|
|
116,894,204 |
|
|
|
120,506,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends per common share |
|
$ |
0.315 |
|
|
$ |
0.075 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
55
WASTE CONNECTIONS, INC.
CONSOLIDATED STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2009, 2010 AND 2011
(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, 2008 |
|
|
|
|
|
|
119,763,358 |
|
|
$ |
798 |
|
|
$ |
661,555 |
|
|
$ |
(23,937 |
) |
|
$ |
622,913 |
|
|
$ |
668 |
|
|
$ |
1,261,997 |
|
Vesting of restricted stock units |
|
|
|
|
|
|
410,461 |
|
|
|
3 |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax withholdings related to net share settlements of restricted stock units |
|
|
|
|
|
|
(138,733 |
) |
|
|
(1 |
) |
|
|
(2,556 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,557 |
) |
Equity-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,336 |
|
Exercise of stock options and warrants |
|
|
|
|
|
|
1,236,780 |
|
|
|
8 |
|
|
|
15,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,397 |
|
Excess tax benefit associated with equity-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,054 |
|
Repurchase of common stock |
|
|
|
|
|
|
(3,373,242 |
) |
|
|
(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 |
|
|
|
|
|
|
117,898,624 |
|
|
$ |
786 |
|
|
$ |
625,173 |
|
|
$ |
(4,892 |
) |
|
$ |
732,738 |
|
|
$ |
3,231 |
|
|
$ |
1,357,036 |
|
Stock split |
|
|
|
|
|
|
|
|
|
|
394 |
|
|
|
|
|
|
|
|
|
|
|
(394 |
) |
|
|
|
|
|
|
|
|
Vesting of restricted stock units |
|
|
|
|
|
|
511,196 |
|
|
|
5 |
|
|
|
(5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax withholdings related to net share settlements of restricted stock units |
|
|
|
|
|
|
(175,776 |
) |
|
|
(2 |
) |
|
|
(3,781 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,783 |
) |
Equity-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,331 |
|
Exercise of stock options and warrants |
|
|
|
|
|
|
2,572,195 |
|
|
|
25 |
|
|
|
33,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,074 |
|
Excess tax benefit associated with equity-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,997 |
|
Repurchase of common stock |
|
|
|
|
|
|
(6,889,017 |
) |
|
|
(69 |
) |
|
|
(166,251 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(166,320 |
) |
Cash dividends on common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,561 |
) |
|
|
|
|
|
|
(8,561 |
) |
Reacquisition of equity component resulting from conversion of 2026 Convertible Senior Notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,295 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,295 |
) |
Issuance of shares in connection with conversion of 2026 Convertible Senior Notes |
|
|
|
|
|
|
32,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts reclassified into earnings, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,050 |
|
|
|
|
|
|
|
|
|
|
|
8,050 |
|
Changes in fair value of swaps, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,253 |
) |
|
|
|
|
|
|
|
|
|
|
(6,253 |
) |
Net income |
|
$ |
136,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135,104 |
|
|
|
1,038 |
|
|
|
136,142 |
|
Other comprehensive income |
|
|
2,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax effect of other comprehensive income |
|
|
(1,076 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
137,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to noncontrolling interests |
|
|
(1,038 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Waste Connections |
|
$ |
136,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2010 |
|
|
|
|
|
|
113,950,081 |
|
|
$ |
1,139 |
|
|
$ |
509,218 |
|
|
$ |
(3,095 |
) |
|
$ |
858,887 |
|
|
$ |
4,269 |
|
|
$ |
1,370,418 |
|
Vesting of restricted stock units |
|
|
|
|
|
|
545,223 |
|
|
|
6 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax withholdings related to net share settlements of restricted stock units |
|
|
|
|
|
|
(186,811 |
) |
|
|
(2 |
) |
|
|
(5,509 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,511 |
) |
Equity-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,879 |
|
Exercise of stock options and warrants |
|
|
|
|
|
|
407,012 |
|
|
|
4 |
|
|
|
5,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,159 |
|
Excess tax benefit associated with equity-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,763 |
|
Repurchase of common stock |
|
|
|
|
|
|
(3,807,723 |
) |
|
|
(38 |
) |
|
|
(116,779 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(116,817 |
) |
Cash dividends on common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,566 |
) |
|
|
|
|
|
|
(35,566 |
) |
Amounts reclassified into earnings, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
934 |
|
|
|
|
|
|
|
|
|
|
|
934 |
|
Changes in fair value of swaps, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,319 |
) |
|
|
|
|
|
|
|
|
|
|
(1,319 |
) |
Distributions to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(675 |
) |
|
|
(675 |
) |
Fair value of noncontrolling interest associated with business acquired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
251 |
|
|
|
251 |
|
Net income |
|
$ |
166,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165,239 |
|
|
|
932 |
|
|
|
166,171 |
|
Other comprehensive loss |
|
|
(621 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax effect of other comprehensive loss |
|
|
236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
165,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to noncontrolling interests |
|
|
(932 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to Waste Connections |
|
$ |
164,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2011 |
|
|
|
|
|
|
110,907,782 |
|
|
$ |
1,109 |
|
|
$ |
408,721 |
|
|
$ |
(3,480 |
) |
|
$ |
988,560 |
|
|
$ |
4,777 |
|
|
$ |
1,399,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
56
WASTE CONNECTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
166,171 |
|
|
$ |
136,142 |
|
|
$ |
110,811 |
|
Adjustments to reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on disposal of assets |
|
|
1,657 |
|
|
|
571 |
|
|
|
(481 |
) |
Depreciation |
|
|
147,036 |
|
|
|
132,874 |
|
|
|
117,796 |
|
Amortization of intangibles |
|
|
20,064 |
|
|
|
14,582 |
|
|
|
12,962 |
|
Deferred income taxes, net of acquisitions |
|
|
50,989 |
|
|
|
26,431 |
|
|
|
38,224 |
|
Loss on redemption of 2026 Convertible Senior Notes, net of make-whole payment |
|
|
|
|
|
|
2,255 |
|
|
|
|
|
Amortization of debt issuance costs |
|
|
1,420 |
|
|
|
1,574 |
|
|
|
1,942 |
|
Amortization of debt discount |
|
|
|
|
|
|
1,245 |
|
|
|
4,684 |
|
Equity-based compensation |
|
|
11,879 |
|
|
|
11,331 |
|
|
|
9,336 |
|
Interest income on restricted assets |
|
|
(454 |
) |
|
|
(511 |
) |
|
|
(488 |
) |
Closure and post-closure accretion |
|
|
1,967 |
|
|
|
1,766 |
|
|
|
2,055 |
|
Excess tax benefit associated with equity-based compensation |
|
|
(4,763 |
) |
|
|
(11,997 |
) |
|
|
(4,054 |
) |
Changes in operating assets and liabilities, net of effects from acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
(14,507 |
) |
|
|
(9,321 |
) |
|
|
(4,328 |
) |
Prepaid expenses and other current assets |
|
|
(4,236 |
) |
|
|
3,304 |
|
|
|
(8,032 |
) |
Accounts payable |
|
|
(2,912 |
) |
|
|
(853 |
) |
|
|
13,218 |
|
Deferred revenue |
|
|
4,161 |
|
|
|
3,244 |
|
|
|
(309 |
) |
Accrued liabilities |
|
|
10,355 |
|
|
|
19,086 |
|
|
|
9,070 |
|
Other long-term liabilities |
|
|
(657 |
) |
|
|
456 |
|
|
|
3,788 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
388,170 |
|
|
|
332,179 |
|
|
|
306,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Payments for acquisitions, net of cash acquired |
|
|
(258,352 |
) |
|
|
(81,010 |
) |
|
|
(420,011 |
) |
Capital expenditures for property and equipment |
|
|
(141,924 |
) |
|
|
(134,829 |
) |
|
|
(128,251 |
) |
Proceeds from disposal of assets |
|
|
4,434 |
|
|
|
6,659 |
|
|
|
5,061 |
|
Decrease (increase) in restricted assets, net of interest income |
|
|
351 |
|
|
|
(2,552 |
) |
|
|
(3,880 |
) |
Increase in other assets |
|
|
(5,014 |
) |
|
|
(2,492 |
) |
|
|
(1,146 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(400,505 |
) |
|
|
(214,224 |
) |
|
|
(548,227 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt |
|
|
592,500 |
|
|
|
483,253 |
|
|
|
426,500 |
|
Principal payments on notes payable and long-term debt |
|
|
(421,872 |
) |
|
|
(467,660 |
) |
|
|
(401,970 |
) |
Change in book overdraft |
|
|
(227 |
) |
|
|
279 |
|
|
|
7,802 |
|
Proceeds from option and warrant exercises |
|
|
5,159 |
|
|
|
33,074 |
|
|
|
15,397 |
|
Excess tax benefit associated with equity-based compensation |
|
|
4,763 |
|
|
|
11,997 |
|
|
|
4,054 |
|
Payments for repurchase of common stock |
|
|
(116,817 |
) |
|
|
(166,320 |
) |
|
|
(62,624 |
) |
Payments for cash dividends |
|
|
(35,566 |
) |
|
|
(8,561 |
) |
|
|
|
|
Tax withholdings related to net share settlements of restricted stock units |
|
|
(5,511 |
) |
|
|
(3,783 |
) |
|
|
(2,557 |
) |
Distributions to noncontrolling interests |
|
|
(675 |
) |
|
|
|
|
|
|
|
|
Debt issuance costs |
|
|
(6,649 |
) |
|
|
|
|
|
|
(194 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
15,105 |
|
|
|
(117,721 |
) |
|
|
(13,592 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and equivalents |
|
|
2,770 |
|
|
|
234 |
|
|
|
(255,625 |
) |
Cash and equivalents at beginning of year |
|
|
9,873 |
|
|
|
9,639 |
|
|
|
265,264 |
|
|
|
|
|
|
|
|
|
|
|
Cash and equivalents at end of year |
|
$ |
12,643 |
|
|
$ |
9,873 |
|
|
$ |
9,639 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
57
WASTE CONNECTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH TRANSACTIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Cash paid for income taxes |
|
$ |
52,729 |
|
|
$ |
50,111 |
|
|
$ |
26,848 |
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
39,499 |
|
|
$ |
39,913 |
|
|
$ |
41,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In connection with its acquisitions, the Company assumed liabilities as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired |
|
$ |
404,550 |
|
|
$ |
107,144 |
|
|
$ |
461,120 |
|
Cash paid for current year acquisitions |
|
|
(257,852 |
) |
|
|
(81,010 |
) |
|
|
(416,853 |
) |
|
|
|
|
|
|
|
|
|
|
Liabilities assumed and notes payable issued to sellers of businesses acquired |
|
$ |
146,698 |
|
|
$ |
26,134 |
|
|
$ |
44,267 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
58
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. 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,
2011 or 2010.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk
consist primarily of cash, restricted assets 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 Companys restricted assets are invested primarily in U.S. government and agency
securities. The Company has not experienced any losses related to its cash and cash equivalent or
restricted asset 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.
59
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 and engineering 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.
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, gas recovery
systems 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, and operating
construction 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 four of the
five 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. |
60
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. Any changes in expectations that
result in a downward revision (or no revision) to the estimated undiscounted cash flows result in a
liability that is 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, 2011, the Company decreased its
discount rate assumption for purposes of computing 2011 layers for final capping, closure and
post-closure obligations from 6.5% to 5.75%, in order to more accurately reflect the Companys
long-term cost of borrowing as of the end of 2010. The Companys inflation rate assumption was
2.5% for the years ending December 31, 2011 and 2010.
In accordance with the accounting guidance on asset retirement obligations, the final capping,
closure and post-closure liability is recorded on the balance sheet along with an offsetting
addition to site costs which is 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. Owned landfills and landfills operated under life-of-site agreements have
estimated remaining lives, based on remaining permitted capacity, probable expansion capacity and
projected annual disposal volumes, that range from approximately 1 to 188 years, with an average
remaining life of approximately 48 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, 2009 to December 31, 2011:
|
|
|
|
|
Final capping, closure and post-closure liability at December 31, 2009 |
|
$ |
32,235 |
|
Adjustments to final capping, closure and post-closure liabilities |
|
|
(6,990 |
) |
Liabilities incurred |
|
|
2,513 |
|
Accretion expense |
|
|
1,766 |
|
Closure payments |
|
|
(1,133 |
) |
Assumption of closure liabilities from acquisitions |
|
|
146 |
|
|
|
|
|
Final capping, closure and post-closure liability at December 31, 2010 |
|
|
28,537 |
|
Adjustments to final capping, closure and post-closure liabilities |
|
|
(1,038 |
) |
Liabilities incurred |
|
|
2,088 |
|
Accretion expense |
|
|
1,967 |
|
Closure payments |
|
|
(2,100 |
) |
Assumption of closure liabilities from acquisitions |
|
|
1,429 |
|
|
|
|
|
Final capping, closure and post-closure liability at December 31, 2011 |
|
$ |
30,883 |
|
|
|
|
|
The adjustments to final capping, closure and post-closure liabilities for the year ended
December 31, 2011, primarily consisted of an increase in estimated airspace at one of the Companys
landfills at which an expansion is being pursued. The adjustments to final capping, closure and
post-closure liabilities for the year ended December 31, 2010, primarily consisted of revisions in
capping, closure and post-closure cost estimates related to a landfill acquired from Republic
Services, Inc., as well as decreases in estimates of annual tonnage consumption. The final
capping, closure and post-closure liability is included in Other long-term liabilities in the
Consolidated Balance Sheets. The Company performs its annual review of its cost and capacity
estimates in the first quarter of each year.
61
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
At December 31, 2011, $28,190 of the Companys restricted assets balance was for purposes of
securing its performance of future final capping, closure and post-closure obligations.
|
|
|
Disposal capacity. The Companys internal and third-party engineers perform
surveys at least annually to estimate the remaining 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 probable expansion airspace, at the landfills it owns, and
landfills it operates, but does not own, under life-of-site agreements. The Companys
landfill depletion rate is based on the term of the operating agreement at its operated
landfill that has capitalized expenditures. Expansion airspace consists of additional
disposal capacity being pursued through means of an expansion that has not yet been
permitted. Expansion airspace that meets the following criteria is included in the
estimate of total landfill airspace: |
|
1) |
|
whether the land where the expansion is being sought is contiguous to the current
disposal site, and the Company either owns the expansion property or has rights to it
under an option, purchase, operating or other similar agreement; |
|
2) |
|
whether total development costs, final capping costs, and closure/post-closure
costs have been determined; |
|
3) |
|
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; |
|
4) |
|
whether internal personnel or external consultants are actively working to obtain
the necessary approvals to obtain the landfill expansion permit; and |
|
5) |
|
whether the Company considers it probable that the Company 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 the Company believes are more likely than not to 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
The Company accounts for business combinations 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 the fair values of all assets acquired and
liabilities assumed that arise from contractual contingencies. The Company measures the
fair values of 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. |
62
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Finite-Lived Intangible Assets
The amounts assigned to the franchise agreements, contracts, customer lists and
non-competition agreements are being amortized on a straight-line basis over the expected term of
the related agreements (ranging from 1 to 56 years).
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 fourth quarter of 2011, the Company elected to early adopt the new guidance issued by
the Financial Accounting Standards Board (FASB) related to testing goodwill for impairment. This
new guidance provides the Company the option to perform a qualitative assessment to determine
whether it is more likely than not that the fair value of a reporting unit is less than its
carrying value. In performing the qualitative assessment, the Company assesses relevant events and
circumstances that may impact the fair value of its reporting units, including the following:
|
|
|
macroeconomic conditions; |
|
|
|
industry and market considerations; |
|
|
|
overall financial performance; |
|
|
|
Company-specific events; |
|
|
|
events affecting a reporting unit; |
|
|
|
sustained decreases in share price; and |
|
|
|
recent fair value calculation for the Companys reporting units, if available. |
If, after assessing the above described events and circumstances, the Company determines that
it is more likely than not that the fair value of a reporting unit, which it has determined to be
its geographic operating segments, is greater than its carrying value, then no further testing is
required. If the Company determines that it is more likely than not that the fair value is less
than the carrying value, then the Company would perform the first step of quantitative testing for
goodwill impairment, as described below.
In the first step of quantitative testing for goodwill impairment, the Company estimates the
fair value of each reporting unit 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 the 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 Statements 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 Statements
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 2011 discounted cash flow analyses were based on ten-year financial forecasts, which in
turn were based on the 2012 annual budget developed internally by management. These forecasts
reflect operating profit margins that were consistent with 2011 results and perpetual revenue
growth rates of 3.5%. The Companys discount rate assumptions are based on an assessment 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.
63
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 are the same as those described above for the qualitative assessment of
goodwill impairment.
As a result of performing the tests for potential impairment of goodwill and indefinite-lived
intangible assets, the Company determined that no impairment existed as of December 31, 2011 or
2010, 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
Property, plant, equipment and other intangible assets are carried on the Companys
consolidated financial statements based on their cost less accumulated depreciation or
amortization. Other intangible assets consist of long-term franchise agreements, contracts,
customer lists and non-competition agreements. The recoverability of these assets is tested
whenever events or changes in circumstances indicate that their carrying amount may not be
recoverable.
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 value is in excess of the 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.
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.
A regulator or court may deny or overturn a landfill development or landfill expansion permit
application before the development or expansion permit is ultimately granted. See Note 11 for
discussion of the Chaparral, New Mexico Landfill Permit Litigation, the Harper County, Kansas
Landfill Permit Litigation and the Solano County, California Measure E/Landfill Expansion
Litigation.
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.
64
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Fair Value of Financial Instruments
The Companys financial instruments consist primarily of cash and equivalents, trade
receivables, restricted assets, trade payables, debt instruments, interest rate swaps and fuel
hedges. As of December 31, 2011 and 2010, the carrying values of cash and equivalents, 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 certain
notes as listed in the table below, approximate their fair values as of December 31, 2011 and 2010,
based on current borrowing rates for similar types of borrowing arrangements. The carrying values
and fair values of the Companys debt instruments where the carrying values do not approximate
their fair values as of December 31, 2011 and 2010, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value at |
|
|
Fair Value* at |
|
|
|
December 31, |
|
|
December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2011 |
|
|
2010 |
|
6.22% Senior Notes due 2015 |
|
$ |
175,000 |
|
|
$ |
175,000 |
|
|
$ |
186,305 |
|
|
$ |
198,300 |
|
3.30% Senior Notes due 2016 |
|
$ |
100,000 |
|
|
$ |
|
|
|
$ |
98,980 |
|
|
$ |
|
|
4.00% Senior Notes due 2018 |
|
$ |
50,000 |
|
|
$ |
|
|
|
$ |
51,220 |
|
|
$ |
|
|
5.25% Senior Notes due 2019 |
|
$ |
175,000 |
|
|
$ |
175,000 |
|
|
$ |
174,125 |
|
|
$ |
191,316 |
|
4.64% Senior Notes due 2021 |
|
$ |
100,000 |
|
|
$ |
|
|
|
$ |
104,250 |
|
|
$ |
|
|
|
|
|
* |
|
Fair value 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.
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 operating activities 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, 2011, the Companys derivative instruments included three interest rate swap
agreements as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed |
|
|
Variable |
|
|
|
|
|
|
|
|
|
Notional |
|
|
Interest |
|
|
Interest Rate |
|
|
|
|
|
|
|
Date Entered |
|
Amount |
|
|
Rate Paid* |
|
|
Received |
|
|
Effective Date |
|
|
Expiration Date |
|
March 2009 |
|
$ |
175,000 |
|
|
|
2.85 |
% |
|
1-month LIBOR |
|
|
February 2011 |
|
|
February 2014 |
|
August 2011 |
|
$ |
150,000 |
|
|
|
0.80 |
% |
|
1-month LIBOR |
|
|
April 2012 |
|
|
January 2015 |
|
December 2011 |
|
$ |
175,000 |
|
|
|
1.60 |
% |
|
1-month LIBOR |
|
|
February 2014 |
|
|
February 2017 |
|
|
|
|
* |
|
plus applicable margin. |
On October 26, 2009, the Company terminated two of its interest rate swap agreements in
conjunction with issuing the 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.
65
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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.
At December 31, 2011, the Companys derivative instruments included one fuel hedge agreement
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional |
|
|
Diesel |
|
|
|
|
|
|
|
|
|
|
|
|
Amount |
|
|
Rate Paid |
|
|
|
|
|
|
|
|
|
|
|
|
(in gallons per |
|
|
Fixed (per |
|
|
Diesel Rate Received |
|
|
Effective |
|
|
Expiration |
|
Date Entered |
|
month) |
|
|
gallon) |
|
|
Variable |
|
|
Date |
|
|
Date |
|
December 2008 |
|
|
400,000 |
|
|
$ |
3.03 |
|
|
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 number of 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, 2011, 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 |
|
|
|
|
|
|
|
|
|
Accrued liabilities(a) |
|
|
$ |
(4,476 |
) |
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
|
|
(4,642 |
) |
Fuel hedges |
|
Prepaid expenses and other current assets(b) |
|
|
$ |
3,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
designated as cash
flow hedges |
|
|
|
|
|
$ |
3,506 |
|
|
|
|
|
|
$ |
(9,118 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents the estimated amount of the existing unrealized losses on interest rate
swaps as of December 31, 2011 (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) |
|
Represents the estimated amount of the existing unrealized gains on fuel hedges as of
December 31, 2011 (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. |
The fair values of derivative instruments designated as cash flow hedges as of December
31, 2010, 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 |
|
|
|
|
|
|
|
|
|
Accrued liabilities |
|
|
$ |
(4,988 |
) |
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
|
|
(4,734 |
) |
Fuel hedges |
|
Prepaid expenses and other current assets |
|
|
$ |
2,469 |
|
|
|
|
|
|
|
|
|
|
|
Other assets, net |
|
|
|
2,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives
designated as cash
flow hedges |
|
|
|
|
|
$ |
4,730 |
|
|
|
|
|
|
$ |
(9,722 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
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 years ended December 31, 2011, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain or (Loss) Recognized |
|
|
|
|
|
|
Amount of (Gain) or Loss Reclassified |
|
|
|
as AOCL on Derivatives, Net of Tax |
|
|
|
|
|
|
from AOCL into Earnings, |
|
Derivatives |
|
(Effective Portion)(a) |
|
|
Statement of |
|
|
Net of Tax (Effective Portion)(b), (c) |
|
Designated as Cash |
|
Years Ended December 31, |
|
|
Income |
|
|
Years Ended December 31, |
|
Flow Hedges |
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
Classification |
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Interest rate swaps |
|
$ |
(3,224 |
) |
|
$ |
(6,812 |
) |
|
$ |
3,283 |
|
|
Interest expense |
|
|
$ |
3,598 |
|
|
$ |
5,612 |
|
|
$ |
9,124 |
|
Fuel hedges |
|
|
1,905 |
|
|
|
559 |
|
|
|
1,346 |
|
|
Cost of operations |
|
|
|
(2,664 |
) |
|
|
2,438 |
|
|
|
5,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(1,319 |
) |
|
$ |
(6,253 |
) |
|
$ |
4,629 |
|
|
|
|
|
|
$ |
934 |
|
|
$ |
8,050 |
|
|
$ |
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.
Amounts exclude the charge of $9,250 related to the termination of two interest rate swap
agreements in October 2009. |
|
(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 number of
gallons on the contracts. There was no significant ineffectiveness recognized on the fuel hedges
during the years ended December 31, 2011, 2010 and 2009.
See Note 13 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 on its federal and state
income tax returns will more likely than not be sustained upon examination by the appropriate
taxing authority. If the Company determines that such tax positions will not be sustained, it
records a liability for the related unrecognized tax benefits. The Company classifies its
liability for unrecognized tax benefits as a current liability to the extent it anticipates making
a payment within one year.
Stock-Based Compensation
The fair value of restricted stock and restricted stock units is determined based on the
number of shares granted and the closing 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 income tax 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.
Stock-based compensation expense recognized during the years ended December 31, 2011, 2010 and
2009, was approximately $11,800 ($7,316 net of taxes), $10,980 ($6,816 net of taxes) and $9,314
($5,860 net of taxes), respectively, and consisted of stock option and restricted stock unit
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, 2011, related to unvested restricted stock unit awards was
$20,560 and that future expense will be recognized over the remaining vesting period of the
restricted stock unit awards, which extends to 2015. The weighted average remaining vesting period
of those awards is 1.1 years.
67
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 and vested and unissued restricted
stock units deferred for issuance into the deferred compensation plan. 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, 2011, 2010 and 2009, was $3,679, $4,171 and $3,408, respectively, which is included in Selling,
general and administrative expense in the Consolidated Statements of Income.
Insurance Liabilities
As a result of its high deductible insurance policies, 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, 2011 and 2010, the
Companys total accrual for self-insured liabilities was $40,137 and $37,623, respectively, which
is included in Accrued liabilities in the Consolidated Balance Sheets.
Reclassification
Certain amounts reported in the Companys prior years financial statements have been
reclassified to conform with the 2011 presentation.
New Accounting Pronouncements
Fair Value Measurement. In May 2011, the FASB issued additional guidance on fair
value disclosures. This guidance contains certain updates to the measurement guidance as well as
enhanced disclosure requirements. The most significant change in disclosures is an expansion of
the information required for Level 3 measurements including enhanced disclosure for: (1) the
valuation processes used by the reporting entity; and (2) the sensitivity of the fair value
measurement to changes in unobservable inputs and the interrelationships between those unobservable
inputs, if any. This guidance is effective for interim and annual periods beginning on or after
December 15, 2011, with early adoption prohibited. As of December 31, 2011, the only asset or
liability which requires Level 3 measurements is the Companys diesel fuel hedge.
Presentation of Comprehensive Income. In September 2011, the FASB issued guidance on
the presentation of comprehensive income. This guidance eliminates the current option to report
other comprehensive income and its components in the statement of changes in equity. The guidance
allows two presentation alternatives: (1) present items of net income and other comprehensive
income in one continuous statement, referred to as the statement of comprehensive income; or (2) in
two separate, but consecutive, statements of net income and other comprehensive income. This
guidance is effective as of the beginning of a fiscal year that begins after December 15, 2011.
Early adoption is permitted, but full retrospective application is required under both sets of
accounting standards. The guidance also previously required the presentation of adjustments for
items that are reclassified from other comprehensive income to net income in the statement where
the components of net income and the components of other comprehensive income are presented;
however, this portion of the guidance has been deferred. Upon adoption, the Company will elect to
present items of net income and other comprehensive income in one continuous statement, the
statement of comprehensive income.
Multiemployer Pension Plans. In September 2011, the FASB issued guidance requiring
companies to provide additional disclosures related to multiemployer pension plans. The
disclosures are required to be made on an annual basis for all individually material plans.
Retrospective application of the disclosures is required. This guidance is effective for fiscal
years ending after December 15, 2011, with early adoption permitted. The Company adopted this
guidance as of December 31, 2011. See Note 17 for further details.
68
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Goodwill Impairment. In September 2011, the FASB issued guidance on testing goodwill
for impairment. The guidance provides entities an option to perform a qualitative assessment to
determine whether further impairment testing is necessary. This guidance is effective for annual
and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. However, an entity can choose to early adopt, provided that the entity has not yet performed
its 2011 annual impairment test or issued its financial statements. The Company has elected to
early adopt the guidance and performed a qualitative assessment of goodwill impairment in the
fourth quarter of 2011. See Goodwill and Indefinite-Lived Intangible Assets within this Note 1
for further details.
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 accruals, 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.
3. ACQUISITIONS
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 acquisition-related costs as expense.
On April 1, 2011, the Company completed the acquisition of a 100% interest in Hudson Valley
Waste Holding, Inc., and its wholly-owned subsidiary, County Waste and Recycling Service, Inc.
(collectively, County Waste). As part of this acquisition, the Company acquired a 50% interest
in Russell Sweepers, LLC, a provider of sweeper services, resulting in a 50% noncontrolling
interest that was recognized at fair value on the purchase date. The operations include six
collection operations, three transfer stations and one recycling facility across six markets in New
York and Massachusetts. The Company paid $299,000 for the purchased operations plus amounts paid
for the purchase of accounts receivable and other prepaid assets and estimated working capital,
which amounts were subject to post-closing adjustments. No other consideration, including
contingent consideration, was transferred by the Company to acquire these operations. Total
revenues during the year ended December 31, 2011, generated from the County Waste operations and
included within consolidated revenues were $93,713. Total pre-tax earnings during the year ended
December 31, 2011, generated from the County Waste operations and included within consolidated
income before income taxes were $7,276.
In August 2011, the Companys subsidiary, Capital Region Landfills, Inc. (CRL), entered into
an agreement with the Town of Colonie, a municipal corporation of the state of New York, to operate
a municipal solid waste disposal facility (the Colonie Landfill) for an initial term of 25 years.
The agreement became effective on September 19, 2011. As consideration for operating equipment
and the right to operate the Colonie Landfill, CRL remitted an initial payment of $23,860. CRL is
also required to remit up to $55,470 of additional consideration over the term of the agreement,
comprised of $11,500 payable over a five-year period ending September 2016 and up to $43,970
payable over the term of the agreement if certain expansion criteria are met and certain annual
tonnage targets are exceeded as specified in the operating agreement. CRL computed the present
value of the additional consideration using a probability-weighted discounted cash flow
methodology, resulting in a total obligation recognized at the effective date of $32,928, which
consisted of $10,656 recorded as Notes issued to sellers and $22,272 recorded as contingent
consideration in Other long-term liabilities. CRL is also responsible for all final capping,
closure and post-closure liabilities and estimates the total obligation in current dollars to be
$21,287, the net present value of which is $1,429. This obligation was recorded in Other long-term
liabilities. Any changes in the fair value of the contingent consideration subsequent to the
acquisition date will be charged or credited to income until the contingency is settled.
69
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
In addition to the County Waste acquisition and Colonie Landfill transaction, the Company
acquired 11 individually immaterial non-hazardous solid waste collection and transfer businesses
during the year ended December 31, 2011.
In August 2011, the Company announced that it has entered into agreements to acquire the
operations of Alaska Pacific Environmental Services Anchorage, LLC and Alaska Green Waste
Solutions, LLC (together, Alaska Waste). Alaska Waste provides solid waste collection, recycling
and composting services in Anchorage, the Mat-Su Valley, Fairbanks, the Kenai Peninsula and Kodiak
Island. The Company expects the total purchase price to be between $115,000 and $125,000. The
transaction remains subject to closing conditions, including receipt of certain consents. The
acquisition is expected to close in the first quarter of 2012.
During the year ended December 31, 2010, the Company acquired 18 non-hazardous solid waste
collection, disposal and recycling businesses and one exploration and production waste treatment
and disposal business.
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
during the year ended December 31, 2009, generated from the Republic operations and included within
consolidated revenues were $102,925. Total pre-tax earnings during 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 was required to
remit additional consideration to Republic if certain acquired operations exceeded earnings targets
specified in the agreement; alternatively, if these earnings targets were not met, Republic was
required to refund consideration to the Company. The earnings targets were not met and the
contingency was settled by Republic in 2010 for an immaterial amount.
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. As of December 31,
2011, the obligation recognized at the purchase date has not materially changed. Any changes in
the fair value of the contingent consideration subsequent to the acquisition date will be charged
or credited to expense until the contingency is settled.
In addition to the acquisitions from Republic and the acquisition of Sanipac, the Company
acquired five 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, 2011, 2010 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 strategy to expand through acquisitions.
70
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following table summarizes the consideration transferred to acquire these businesses and
the amounts of identifiable assets acquired, liabilities assumed and noncontrolling interests
associated with businesses acquired at the acquisition date for acquisitions consummated in the
years ended December 31, 2011, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
Acquisitions |
|
|
Acquisitions |
|
|
Acquisitions |
|
Fair value of consideration transferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
$ |
257,852 |
|
|
$ |
81,010 |
|
|
$ |
416,853 |
|
Debt assumed* |
|
|
84,737 |
|
|
|
20,633 |
|
|
|
16,423 |
|
Notes issued to sellers |
|
|
10,656 |
|
|
|
|
|
|
|
|
|
Contingent consideration |
|
|
22,486 |
|
|
|
3,928 |
|
|
|
4,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
375,731 |
|
|
|
105,571 |
|
|
|
437,550 |
|
|
|
|
|
|
|
|
|
|
|
Recognized amounts of identifiable assets
acquired, liabilities assumed and
noncontrolling interests associated with
businesses acquired: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
9,613 |
|
|
|
3,864 |
|
|
|
16,187 |
|
Other current assets |
|
|
1,056 |
|
|
|
742 |
|
|
|
2,319 |
|
Property and equipment |
|
|
114,463 |
|
|
|
37,881 |
|
|
|
308,454 |
|
Long-term franchise agreements and contracts |
|
|
3,269 |
|
|
|
4,208 |
|
|
|
9,325 |
|
Indefinite-lived intangibles |
|
|
42,283 |
|
|
|
32,759 |
|
|
|
|
|
Customer lists |
|
|
34,463 |
|
|
|
5,373 |
|
|
|
33,730 |
|
Other intangibles |
|
|
10,367 |
|
|
|
|
|
|
|
19,132 |
|
Other long-term assets |
|
|
|
|
|
|
|
|
|
|
667 |
|
Deferred revenue |
|
|
(6,376 |
) |
|
|
(775 |
) |
|
|
(4,754 |
) |
Accounts payable |
|
|
(6,183 |
) |
|
|
(248 |
) |
|
|
(1,264 |
) |
Accrued liabilities |
|
|
(2,398 |
) |
|
|
(404 |
) |
|
|
(2,436 |
) |
Noncontrolling interests |
|
|
(251 |
) |
|
|
|
|
|
|
(1,577 |
) |
Other long-term liabilities |
|
|
(2,145 |
) |
|
|
(146 |
) |
|
|
(8,489 |
) |
Deferred income taxes |
|
|
(11,466 |
) |
|
|
|
|
|
|
(5,050 |
) |
|
|
|
|
|
|
|
|
|
|
Total identifiable net assets |
|
|
186,695 |
|
|
|
83,254 |
|
|
|
366,244 |
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
189,036 |
|
|
$ |
22,317 |
|
|
$ |
71,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Debt assumed as part of 2011 acquisition was paid at close of acquisition. |
Goodwill acquired in 2011 totaling $24,242 and long-term franchise agreements, contracts,
indefinite-lived intangibles, customer lists and other intangibles acquired in 2011 totaling
$54,392 are expected to be deductible for tax purposes. Goodwill acquired in 2010 totaling $21,948
and long-term franchise agreements, contracts, indefinite-lived intangibles and customer lists
acquired in 2010 totaling $42,340 are expected to be deductible for tax purposes. Goodwill
acquired in 2009 totaling $40,535 and long-term franchise agreements, contracts, customer lists 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 five acquisitions completed during the
year ended December 31, 2011, is provisional pending receipt of information from the acquiree to
support the fair value of the assets acquired and liabilities assumed. Any adjustments recorded
relating to finalizing the working capital for these five acquisitions are not expected to be
material to the Companys financial position.
The gross amount of trade receivables due under contracts acquired during the year ended
December 31, 2011, is $10,232, of which $619 is expected to be uncollectible. The gross amount of
trade receivables due under contracts acquired during the year ended December 31, 2010, is $4,317,
of which $453 is expected to be uncollectible. The Company did not acquire any other class of
receivable as a result of the acquisition of these businesses.
71
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
A reconciliation of the Fair value of cash consideration transferred to Payments for
acquisitions, net of cash acquired, as reported in the Consolidated Statements of Cash Flows for
the years ended December 31, 2011, 2010 and 2009, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
Acquisitions |
|
|
Acquisitions |
|
|
Acquisitions |
|
Cash consideration transferred |
|
$ |
257,852 |
|
|
$ |
81,010 |
|
|
$ |
416,853 |
|
Payment of contingent consideration |
|
|
500 |
|
|
|
|
|
|
|
2,000 |
|
Payment of acquisition-related liabilities |
|
|
|
|
|
|
|
|
|
|
1,158 |
|
|
|
|
|
|
|
|
|
|
|
Payments for acquisitions, net of cash acquired |
|
$ |
258,352 |
|
|
$ |
81,010 |
|
|
$ |
420,011 |
|
|
|
|
|
|
|
|
|
|
|
The $500 of contingent consideration paid during the year ended December 31, 2011 primarily
represented the completion of earnings targets for an acquisition closed in 2010. 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. In January 2012, the
Company paid $3,600 of contingent consideration which represented the remaining payout related to
the completion of earnings targets for an acquisition closed in 2010.
During the years ended December 31, 2011, 2010 and 2009, the Company incurred $1,744, $2,081
and $3,987, respectively, of acquisition-related costs. These expenses are included in Selling,
general and administrative expenses in the Companys Consolidated Statements of Income.
4. INTANGIBLE ASSETS
Intangible assets, exclusive of goodwill, consisted of the following at December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term franchise agreements and contracts |
|
$ |
190,532 |
|
|
$ |
(31,592 |
) |
|
$ |
158,940 |
|
Customer lists |
|
|
96,501 |
|
|
|
(28,475 |
) |
|
|
68,026 |
|
Non-competition agreements |
|
|
9,374 |
|
|
|
(6,389 |
) |
|
|
2,985 |
|
Other |
|
|
31,603 |
|
|
|
(3,175 |
) |
|
|
28,428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
328,010 |
|
|
|
(69,631 |
) |
|
|
258,379 |
|
Nonamortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets |
|
|
191,202 |
|
|
|
|
|
|
|
191,202 |
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, exclusive of goodwill |
|
$ |
519,212 |
|
|
$ |
(69,631 |
) |
|
$ |
449,581 |
|
|
|
|
|
|
|
|
|
|
|
The weighted-average amortization period of long-term franchise agreements and contracts
acquired during the year ended December 31, 2011 was 22.3 years. The weighted-average amortization
period of customer lists acquired during the year ended December 31, 2011 was 6.8 years. The
weighted-average amortization period of other intangibles acquired during the year ended December
31, 2011 was 40.0 years.
Intangible assets, exclusive of goodwill, consisted of the following at December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Net Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term franchise agreements and contracts |
|
$ |
190,489 |
|
|
$ |
(25,255 |
) |
|
$ |
165,234 |
|
Customer lists |
|
|
62,885 |
|
|
|
(17,867 |
) |
|
|
45,018 |
|
Non-competition agreements |
|
|
9,414 |
|
|
|
(5,982 |
) |
|
|
3,432 |
|
Other |
|
|
21,236 |
|
|
|
(2,364 |
) |
|
|
18,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
284,024 |
|
|
|
(51,468 |
) |
|
|
232,556 |
|
Nonamortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets |
|
|
148,919 |
|
|
|
|
|
|
|
148,919 |
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, exclusive of goodwill |
|
$ |
432,943 |
|
|
$ |
(51,468 |
) |
|
$ |
381,475 |
|
|
|
|
|
|
|
|
|
|
|
72
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The weighted-average amortization period of long-term franchise agreements and contracts
acquired during the year ended December 31, 2010 was 9.1 years. The weighted-average amortization
period of customer lists acquired during the year ended December 31, 2010 was 6.4 years.
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 and to operate an exploration and production waste treatment and disposal facility.
Estimated future amortization expense for the next five years relating to amortizable
intangible assets is as follows:
|
|
|
|
|
For the year ending December 31, 2012 |
|
$ |
20,986 |
|
For the year ending December 31, 2013 |
|
$ |
20,012 |
|
For the year ending December 31, 2014 |
|
$ |
18,917 |
|
For the year ending December 31, 2015 |
|
$ |
18,234 |
|
For the year ending December 31, 2016 |
|
$ |
14,295 |
|
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
Landfill site costs |
|
$ |
1,066,282 |
|
|
$ |
967,950 |
|
Rolling stock |
|
|
497,984 |
|
|
|
441,476 |
|
Land, buildings and improvements |
|
|
247,907 |
|
|
|
219,453 |
|
Containers |
|
|
217,401 |
|
|
|
189,802 |
|
Machinery and equipment |
|
|
216,749 |
|
|
|
192,565 |
|
Construction in progress |
|
|
19,617 |
|
|
|
16,245 |
|
|
|
|
|
|
|
|
|
|
|
2,265,940 |
|
|
|
2,027,491 |
|
Less accumulated depreciation and depletion |
|
|
(815,471 |
) |
|
|
(690,015 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,450,469 |
|
|
$ |
1,337,476 |
|
|
|
|
|
|
|
|
The Companys landfill depletion expense, recorded in Depreciation in the Consolidated
Statements of Income, for the years ended December 31, 2011, 2010 and 2009, was $43,217, $40,884
and $33,627, respectively.
6. OTHER ASSETS, NET
Other assets, net, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
Deferred financing costs |
|
$ |
7,795 |
|
|
$ |
2,566 |
|
Investment in unconsolidated entity |
|
|
5,300 |
|
|
|
5,300 |
|
Landfill closure receivable |
|
|
4,852 |
|
|
|
4,749 |
|
Deposits |
|
|
1,635 |
|
|
|
1,659 |
|
Unrealized fuel hedge gains |
|
|
|
|
|
|
2,261 |
|
Other |
|
|
11,683 |
|
|
|
6,644 |
|
|
|
|
|
|
|
|
|
|
$ |
31,265 |
|
|
$ |
23,179 |
|
|
|
|
|
|
|
|
73
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
Insurance claims |
|
$ |
40,137 |
|
|
$ |
37,623 |
|
Payroll and payroll-related |
|
|
30,180 |
|
|
|
28,910 |
|
Interest payable |
|
|
9,211 |
|
|
|
5,569 |
|
Acquisition-related |
|
|
8,917 |
|
|
|
8,558 |
|
Unrealized interest rate losses |
|
|
4,476 |
|
|
|
4,988 |
|
Other |
|
|
13,322 |
|
|
|
13,427 |
|
|
|
|
|
|
|
|
|
|
$ |
106,243 |
|
|
$ |
99,075 |
|
|
|
|
|
|
|
|
8. LONG-TERM DEBT
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
Revolver under Credit Facility |
|
$ |
519,000 |
|
|
$ |
511,000 |
|
2015 Notes |
|
|
175,000 |
|
|
|
175,000 |
|
2016 Notes |
|
|
100,000 |
|
|
|
|
|
2018 Notes |
|
|
50,000 |
|
|
|
|
|
2019 Notes |
|
|
175,000 |
|
|
|
175,000 |
|
2021 Notes |
|
|
100,000 |
|
|
|
|
|
Tax-exempt bonds |
|
|
38,460 |
|
|
|
39,420 |
|
Notes payable to sellers in connection with
acquisitions, uncollateralized, bearing
interest at 2.50% to 10.35%, principal and
interest payments due periodically with due
dates ranging from 2012 to 2036 |
|
|
18,356 |
|
|
|
9,159 |
|
Notes payable to third parties,
collateralized by substantially all assets
of certain subsidiaries of the Company,
bearing interest at 6.7% to 10.9%,
principal and interest payments due
periodically with due dates ranging from
2012 to 2019 |
|
|
2,841 |
|
|
|
3,056 |
|
|
|
|
|
|
|
|
|
|
|
1,178,657 |
|
|
|
912,635 |
|
Less current portion |
|
|
(5,899 |
) |
|
|
(2,657 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,172,758 |
|
|
$ |
909,978 |
|
|
|
|
|
|
|
|
Credit Facility
The Company has a senior revolving credit facility with a syndicate of banks for which Bank of
America, N.A. acts as administrative agent and J.P. Morgan Chase Bank, N.A. and Wells Fargo Bank,
National Association act as co-syndication agents. The maximum borrowings available under the
Companys credit facility were $1,200,000 and $845,000 as of December 31, 2011 and 2010. The
Company has the ability to increase commitments under the revolving credit facility from $1,200,000
to $1,500,000, subject to conditions including that no default, as defined in the credit agreement,
has occurred, although no existing lender has any obligation to increase its commitment. There is
no maximum amount of standby letters of credit that can be issued under the credit facility;
however, the issuance of standby letters of credit reduces the amount of total borrowings
available. As of December 31, 2011, $519,000 was outstanding under the credit facility, exclusive
of outstanding standby letters of credit of $80,395. As of December 31, 2010, $511,000 was
outstanding under the credit facility, exclusive of outstanding standby letters of credit of
$82,939. The credit facility matures in July 2016. The Company is amortizing the $5,160 debt
issuance costs through the maturity date, or July 2016.
74
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The borrowings under the credit facility bear interest, at the Companys option, at either the
base rate plus the applicable base rate margin (approximately 3.65% and 3.25% at December 31, 2011
and 2010, respectively) on base rate loans, or the Eurodollar rate plus the applicable Eurodollar
margin (approximately 1.70% and 0.89% at December 31, 2011 and 2010, 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, 2011 and 2010, the margins were
1.400% and 0.625%, respectively, for Eurodollar loans and 0.40% and 0.00%, respectively, 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 0.25% and 0.15% as of December 31, 2011 and 2010,
respectively.
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 facility requires that the Company
maintain specified financial ratios. As of December 31, 2011 and 2010, the Company was in
compliance with all applicable covenants in the credit facility.
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
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 Company is amortizing the $152 debt issuance costs over a 10-year term through the
maturity date, or November 1, 2019.
Senior Notes due 2016, 2018 and 2021
On April 1, 2011, the Company entered into a Second 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 $250,000 of senior uncollateralized notes at fixed
interest rates with interest payable in arrears semi-annually on October 1 and April 1 beginning
on October 1, 2011 in a private placement. Of these notes, $100,000 will mature on April 1,
2016 with an annual interest rate of 3.30% (the 2016 Notes), $50,000 will mature on April 1,
2018 with an annual interest rate of 4.00% (the 2018 Notes), and $100,000 will mature on April
1, 2021 with an annual interest rate of 4.64% (the 2021 Notes). The Company is amortizing the
$1,489 debt issuance costs through the maturity dates of the respective notes.
The 2015 Notes, 2016 Notes, 2018 Notes, 2019 Notes, and 2021 Notes (collectively, the Senior
Notes) are uncollateralized obligations and rank equally in right of payment with each of the
Senior Notes and obligations under the Companys senior uncollateralized revolving credit facility.
The Senior Notes are subject to representations, warranties, covenants and events of default.
Upon the occurrence of an event of default, payment of the Senior Notes may be accelerated by the
holders of the respective notes. The Senior 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 Senior 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 Senior
Notes upon certain changes in control.
75
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The Company may issue additional series of senior uncollateralized notes pursuant to the terms
and conditions of the Master Note Purchase Agreement, as amended, provided that the purchasers of
the Senior 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 outstanding notes and any additional notes issued pursuant to the Master
Note Purchase Agreement shall not exceed $750,000.
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 |
|
|
2011 |
|
|
Bond |
|
2011 |
|
|
2010 |
|
|
(Amount) |
|
Madera Bond |
|
Variable |
|
|
0.18 |
% |
|
May 1, 2016 |
|
$ |
1,800 |
|
|
$ |
1,800 |
|
|
$ |
1,829 |
|
Tehama Bond |
|
Variable |
|
|
0.18 |
|
|
June 1, 2014 |
|
|
370 |
|
|
|
445 |
|
|
|
375 |
|
San Jose Bond
Series 1997A |
|
Variable |
|
|
0.18 |
|
|
August 1, 2012 |
|
|
160 |
|
|
|
320 |
|
|
|
188 |
|
San Jose Bond
Series 2001A |
|
Variable |
|
|
0.18 |
|
|
September 1, 2016 |
|
|
2,580 |
|
|
|
3,305 |
|
|
|
2,827 |
|
West Valley Bond |
|
Variable |
|
|
0.18 |
|
|
August 1, 2018 |
|
|
15,500 |
|
|
|
15,500 |
|
|
|
15,678 |
|
LeMay Washington Bond |
|
Variable |
|
|
0.19 |
|
|
April 1, 2033 |
|
|
15,930 |
|
|
|
15,930 |
|
|
|
16,126 |
|
LeMay Olympia Bond |
|
Variable |
|
|
0.19 |
|
|
April 1, 2019 |
|
|
2,120 |
|
|
|
2,120 |
|
|
|
2,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
38,460 |
|
|
$ |
39,420 |
|
|
$ |
39,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In January 2010, the Company gave notice to redeem two of its tax-exempt bonds (the Wasco Bond
2012 and the Wasco Bond 2021) with a remaining principal balance of $10,275. The Company paid the
principal, accrued interest and call premium on these bonds on March 1, 2010, recording $459 to
Loss on extinguishment of debt in the Consolidated Statements of Income.
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, 2011, because the
borrowings are supported by standby letters of credit issued under the Companys senior revolving
credit facility which matures in July 2016.
As of December 31, 2011, aggregate contractual future principal payments by calendar year on
long-term debt are due as follows:
|
|
|
|
|
2012 |
|
$ |
5,899 |
|
2013 |
|
|
3,990 |
|
2014 |
|
|
5,358 |
|
2015 |
|
|
179,084 |
|
2016 |
|
|
622,827 |
|
Thereafter |
|
|
361,499 |
|
|
|
|
|
|
|
$ |
1,178,657 |
|
|
|
|
|
Convertible Senior Notes due 2026
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 were convertible into cash and, if applicable, shares of common stock
based on an initial conversion rate of 44.1177 shares of common stock per $1 principal amount of
2026 Notes (which was equal to an initial conversion price of approximately $22.67 per share),
subject to adjustment, and only under certain circumstances. Upon surrender of the 2026 Notes for
conversion, the Company was required to deliver cash equal to the lesser of the aggregate principal
amount of notes to be converted and its total conversion obligation.
76
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
On April 1, 2010, the Company redeemed the $200,000 aggregate principal amount of its 2026
Notes. Holders of the notes chose to convert a total of $22,700 principal amount of the notes. In
addition to paying the principal amount of these notes with proceeds from its credit facility, the
Company issued 32,859 shares of its common stock in connection with the conversion and redemption.
The Company redeemed the balance of $177,300 principal amount of the notes with proceeds from its
credit facility. All holders of the notes that were redeemed also received accrued interest of $0.01875 per $1 principal
amount of the notes and an interest make-whole payment of $0.037396 per $1 principal amount of the
notes. As a result of the redemption, the Company recognized $9,734 of pre-tax expense ($6,035 net
of taxes) in April 2010, which was included in Loss on extinguishment of debt in the Consolidated
Statements of Income.
For the years ended December 31, 2010 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 $3,120 ($1,935, 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, 2010 and 2009 was $1,875 ($1,163, net of
taxes) and $7,500 ($4,650, net of taxes), respectively. The portion of total interest expense
related to amortizing the non-cash debt discount during the years ended December 31, 2010 and 2009
was $1,245 ($772, 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, 2010 and 2009 was 6.4%.
Under the convertible debt pronouncement, upon conversion of the 2026 Notes, the Company was
required to allocate the fair value of the consideration transferred and any transaction costs
incurred between the equity and liability components. This was 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. A 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, was
recorded in Loss on extinguishment of debt in the Consolidated Statements of Income.
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.
The Companys financial assets and liabilities recorded at fair value on a recurring basis
include derivative instruments 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 its 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 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.
77
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The Companys assets and liabilities measured at fair value on a recurring basis at December
31, 2011 and 2010, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at December 31, 2011 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 |
|
$ |
(9,118 |
) |
|
$ |
|
|
|
$ |
(9,118 |
) |
|
$ |
|
|
Fuel hedge
derivative instruments net asset position |
|
$ |
3,506 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,506 |
|
Restricted assets |
|
$ |
30,728 |
|
|
$ |
30,728 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at December 31, 2010 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 |
|
$ |
(9,722 |
) |
|
$ |
|
|
|
$ |
(9,722 |
) |
|
$ |
|
|
Fuel hedge derivative instruments net asset position |
|
$ |
4,730 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4,730 |
|
Restricted assets |
|
$ |
30,791 |
|
|
$ |
30,791 |
|
|
$ |
|
|
|
$ |
|
|
During the years ended December 31, 2011 and 2010, there were no fair value measurements of
assets or liabilities measured at fair value on a nonrecurring basis subsequent to their initial
recognition.
The following table summarizes the change in the fair value for Level 3 derivatives for the
years ended December 31, 2011 and 2010:
|
|
|
|
|
|
|
Level 3 |
|
|
|
Derivatives |
|
Balance as of December 31, 2009 |
|
$ |
(104 |
) |
Realized losses included in earnings |
|
|
3,932 |
|
Unrealized gains included in AOCL |
|
|
902 |
|
|
|
|
|
Balance as of December 31, 2010 |
|
|
4,730 |
|
Realized gains included in earnings |
|
|
(4,297 |
) |
Unrealized gains included in AOCL |
|
|
3,073 |
|
|
|
|
|
Balance as of December 31, 2011 |
|
$ |
3,506 |
|
|
|
|
|
10. CORPORATE OFFICE RELOCATION
In December 2011, the Company commenced a relocation of its corporate headquarters from
Folsom, California to The Woodlands, Texas. The relocation is expected to be completed in 2012.
In connection with the relocation, the Company has incurred $83 related to personnel and office
relocation expenses as of December 31, 2011, and expects to incur an estimated $15,000 of related
costs during 2012. These costs are recorded in Selling, general and administrative expenses in the
Consolidated Statements of Income. In addition, the Company may incur a loss on lease in 2012 on
the cessation of use of its former corporate headquarters in Folsom, California, which the Company
estimates could range between $4,000 and $6,000.
78
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
11. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Leases
The Company leases its facilities and certain equipment under non-cancelable operating
leases for periods ranging from one to 30 years, with renewal options for certain leases. The
Companys total rent expense under operating leases during the years ended December 31, 2011, 2010
and 2009, was $13,519, $12,222 and $11,017, respectively.
As of December 31, 2011, future minimum lease payments, by calendar year, are as follows:
|
|
|
|
|
2012 |
|
$ |
12,049 |
|
2013 |
|
|
10,378 |
|
2014 |
|
|
7,873 |
|
2015 |
|
|
6,780 |
|
2016 |
|
|
6,062 |
|
Thereafter |
|
|
28,962 |
|
|
|
|
|
|
|
$ |
72,104 |
|
|
|
|
|
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, 2011 and 2010, the Company had provided customers and various regulatory
authorities with surety bonds in the aggregate amount of
approximately $243,323 and $221,738,
respectively, to secure its landfill final capping, closure and post-closure requirements and
$68,698 and $63,931, 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 has written financial surety bonds for the Company, of which
$141,272 and $130,287 were outstanding as of December 31, 2011 and 2010, respectively. The
Companys reimbursement obligations under these bonds are secured by a pledge of its stock in the
investee company.
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, 2011, the Company is not aware of any
material environmental liabilities.
79
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Legal Proceedings
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 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 special interest
or other groups, 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 below, as of December 31, 2011, there is no current proceeding or
litigation involving the Company or its property that the Company believes could have a material
adverse impact on its business, financial condition, results of operations or cash flows.
Chaparral, New Mexico Landfill Permit Litigation
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 claimed 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. In July 2007, the Department, CDC, the Company and Otero County signed a stipulation
requesting a postponement of the limited public hearing to allow the Company time to explore a
possible relocation of the landfill to a new site. Since 2007, the Department has issued several
orders postponing the limited public hearing, currently scheduled for November 2012, as HDSWF has
continued to evaluate the suitability of a new site.
In July 2009, HDSWF purchased approximately 325 acres of undeveloped land comprising a
proposed new site from the State of New Mexico. HDSWF filed a formal landfill permit application
for the new site with the Department on September 17, 2010. On September 12, 2011, the Department
deemed the permit application complete and a public hearing on the matter had been tentatively
scheduled for April 9, 2012 in Chaparral, New Mexico. On November 9, 2011, HDSWF filed a motion
with the Department to hold in abeyance indefinitely the notice for public hearing and the permit
hearing. As part of its motion, HDSWF agreed to provide the Department with at least 120 days
prior notice of any desired, future permit hearing. The Department issued a response in which it
did not oppose the motion and agreed to the 120-day notice provision. HDSWF requested the abeyance
to defer capital expenditures related to permitting the new site until mid to late 2014, when HDSWF
expects to have a better understanding of several current market conditions and regulatory factors
that affect the timing and feasibility of the project. These conditions and factors include: the
status of the Companys Solid Waste Disposal and Operating Agreement for the collection and
disposal of solid waste generated within the City of El Paso, effective April 28, 2004, which has a
10-year term; the status of El Paso Disposal, LPs Solid Waste Franchise Agreement for the
collection of solid waste generated within the City of El Paso, effective September 1, 2011, which
has a 40-month term; whether the City of El Paso implements flow control in September 2014
directing waste collected within its boundaries to City-owned disposal facilities; and whether
certain closed or non-operating disposal facilities in the El Paso market area are reopened and
whether those facilities are operated by private or public entities.
80
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
At December 31, 2011, the Company had $11,772 of capitalized expenditures related to this
landfill development project. Depending on the outcome of the market conditions and regulatory
factors described above, the Company may decide in mid to late 2014 to abandon the project and
expense in a future period the $11,772 of capitalized expenditures, less the recoverable value
of the undeveloped properties and other amounts recovered, which would likely have a material
adverse effect on the Companys results of operations for that period. Alternatively, if the
outcome of the market conditions and regulatory factors described above is such that the Company
believes the market for disposal of solid waste generated in the City of El Paso will remain
competitive, HDSWF may decide in mid to late 2014 to resume its permitting process for the new
site. Under those circumstances, if the Department ultimately denies the landfill permit
application for the new site, HDSWF intends to actively resume its efforts to enforce the
previously issued landfill permit for the original site in Chaparral. If the Company is ultimately
issued a permit to operate the landfill at the new site purchased in July 2009, the Company will be
required to expense in a future period $10,318 of capitalized expenditures related to the original
Chaparral property, less the recoverable value of that undeveloped property and other amounts
recovered, which would likely have a material adverse effect on the Companys results of operations
for that period. If the Company instead is ultimately issued a permit to operate the landfill at
the original Chaparral property, the Company will be required to expense in a future period $1,454
of capitalized expenditures related to the new site purchased in July 2009, less the recoverable
value of that undeveloped property and other amounts recovered. If the Company is not ultimately
issued a permit to operate the landfill at either one of the two sites, the Company will be
required to expense in a future period the $11,772 of capitalized expenditures, less the
recoverable value of the undeveloped properties and other amounts recovered, which would likely
have a material adverse effect on the Companys results of operations for that period.
Harper County, Kansas Landfill Permit Litigation
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 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. The Company intervened in this lawsuit shortly after it was filed. 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 that 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 also set a new briefing schedule, and the parties completed the briefing during the first
half of 2010. Oral argument in the case occurred on September 27, 2010. There is no scheduled
time limit within which the District Court has to decide this administrative appeal. 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, materially 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. If as a result of this litigation, after exhausting all appeals, the Company was unable to
continue to operate the landfill, the Company estimates that it would be required to record a
pre-tax impairment charge of approximately $17,700 to reduce the carrying value of the landfill to
its estimated fair value. In addition, the Company estimates the current annual impact to its
pre-tax earnings that would result if it was unable to continue to operate the landfill would be
approximately $4,600 per year.
Solano County, California Measure E/Landfill Expansion Litigation
The Company and one of its subsidiaries, Potrero Hills Landfill, Inc. (PHLF), were named as
real parties in interest in an amended complaint captioned Sustainability, Parks, Recycling and
Wildlife Legal Defense Fund v. 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 Solano County to comply with Measure E, a ballot initiative and County
ordinance passed in 1984 that the County has not enforced against PHLF since at least 1992.
Measure E directs in part that Solano County 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 and accepts for beneficial reuse and recycling
approximately 840,000 tons of solid waste annually,
approximately 650,000 tons of
which originate from sources outside of Solano County. The Sustainability, Parks, Recycling and
Wildlife Legal Defense Fund (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
81
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 lawsuits 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 in April 2009, but which NCRA later dismissed.
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 in the Measure E litigation. It is also supported by the Attorney General of the
State of California, the National Solid Wastes Management Association (NSWMA) and the California
Refuse Recycling Council (CRRC), 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 challenging Measure E discussed below. A hearing on the merits for all three
Measure E state cases was held on February 18, 2010.
On May 12, 2010, the Solano County Superior Court issued a written opinion addressing all
three cases. The Court upheld Measure E in part by judicially rewriting the law, and then issued a
writ of mandamus directing Solano County to enforce Measure E as rewritten. The Court decided that
it could cure the laws discrimination against out-of-county waste by revising Measure E to only
limit the importation of waste into Solano County from other counties in California, but not from
other states. In the same opinion, the Court rejected the requests from petitioners in the cases
for a writ of administrative mandamus to overturn the permit approved by Solano County in June 2009
for the expansion of PHLFs landfill, thereby leaving the expansion permit in place. Petitioners
Sierra Club and SPRAWLDEF filed motions to reconsider in which they asked the Court to issue a writ
of administrative mandamus and void PHLFs expansion permit. The County, the Company and PHLF
opposed the motions to reconsider and a hearing was held on June 25, 2010. On August 30, 2010, the
Court denied the motions to reconsider and reaffirmed its ruling denying the petitions for writs to
overturn PHLFs expansion permit.
In December 2010, the Court entered final judgments and writs of mandamus in the three cases,
and Solano County, the Company, PHLF and the waste hauling company intervenors filed notices of
appeal, which stayed the judgments and writs pending the outcome of the appeal. Petitioners Sierra
Club and SPRAWLDEF cross-appealed the Courts ruling denying their petitions for writs to overturn
PHLFs expansion permit. The appeals and cross-appeals were consolidated and the parties entered
into a stipulated briefing schedule that was completed in August 2011. In addition, seventeen
separate entities filed friend of court briefs on behalf of the Company and Solano County in
September 2011, including the California Attorney General on behalf of the California Department of
Resources Recycling and Recovery; the City and County of San Francisco; solid waste joint powers
authorities serving the areas of Napa County, the City of Vallejo, the South Lake Tahoe Basin,
Central Contra Costa County and the Salinas Valley; the California Association of Sanitation
Agencies; sanitation districts serving Los Angeles County and Orange County; the NSWMA; the
National Association of Manufacturers; the CRRC; the Los Angeles County Waste Management
Association; the Solid Waste Association of Orange County; the Inland Empire Disposal Association;
and the California Manufacturers and Technology Association. Sierra Club and SPRAWLDEF filed
responses to these briefs in October 2011. No friend of court briefs were filed on behalf of the
petitioners. The case is now fully briefed and all parties have requested oral argument.
As part of the final judgments, the Solano County Superior Court retained jurisdiction over
any motions for attorneys fees under Californias Private Attorney General statute. Petitioners
NCRA, SPRAWLDEF and Sierra Club each filed a bill of costs and a motion for attorney fees totaling
$771. The Company vigorously opposed the award of attorney fees. The motions were heard in March
2011. On May 31, 2011, the court issued a final order awarding petitioners $452 in attorneys
fees, $411 of which relates to the SPRAWLDEF and Sierra Club cases in which the Company or PHLF is
a named party. The court allocated 50% of the fee amount to PHLF, none of which the Company
recorded as a liability at December 31, 2011. The Company and Solano County appealed this
attorneys fees order in July 2011. Once procedural steps are completed, the Company will request
a stay of this appeal until the merits of the underlying Measure E cases have been finally
determined. If the Company prevails on the appeals of the three underlying cases, then none of the
Petitioners would be entitled to attorneys fees and costs. If the Company is unsuccessful on
these appeals and its future appeals of the attorneys fees judgment, PHLF and the County would
each ultimately be severally liable for $206 in attorneys fees for the SPRAWLDEF and Sierra Club
cases. However, in all three cases, the Company may reimburse the County for any such attorneys
fees under the indemnification provision in PHLFs land use permit.
82
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
At this point, the Company is not able to determine the likelihood of any outcome in this
matter. However, in the event that after all appeals are exhausted the Superior Courts writ of
mandamus enforcing Measure E as rewritten is upheld, the Company estimates that the current annual
impact to its pre-tax earnings resulting from the restriction on imports into Solano County would
be approximately $5,000 per year. The Companys estimate could be impacted by various factors,
including the Countys allocation of the 95,000 tons per year import restriction among PHLF and the
other disposal and composting facilities in Solano County. In addition, if the final rulings on
Measure E do not limit the importation of waste into Solano County from other states, the Company
could potentially offset a portion of the estimated reduction to its pre-tax earnings by
internalizing waste for disposal at PHLF from other states in which the Company operates, or by
accepting waste volumes from third party haulers operating outside of California.
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 federal 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 appealed this ruling and on September 23, 2011, the Ninth Circuit Court of
Appeals reversed the district courts decision. On remand, the district court held a hearing on
January 11, 2012 regarding the intervenors alternative grounds for abstention or dismissal. The
court requested supplemental briefing on one issue to be completed by early February 2012 and
indicated it would rule promptly thereafter.
Individual members of SPRAWLDEF were also plaintiffs in a lawsuit filed in the Solano County
Superior 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. On October
8, 2010, the California Court of Appeal dismissed Plaintiffs appeal for lack of standing.
SPRAWLDEF subsequently filed a petition for review of this decision with the California Supreme
Court. On December 21, 2010, the Supreme Court denied the petition, concluding this litigation in
favor of the County and the Company.
SPRAWLDEF additionally filed a lawsuit seeking a writ of mandate in Sacramento County
Superior Court on August 20, 2009, captioned SPRAWLDEF v. California Integrated Waste Management
Board (CIWMB), County of Solano, et al., challenging a CIWMB decision to dismiss SPRAWLDEFs
administrative appeal to the CIWMB seeking to set aside a 2006 solid waste facilities permit issued
to Potrero Hills Landfill by the Solano County Local Enforcement Agency. The case names the Company
and PHLF as real parties in interest. The appeal was dismissed by the CIWMB for failure to raise a
substantial issue. The 2006 facilities permit authorizes operational modifications and enhanced
environmental control measures. The case was tried in Sacramento County Superior Court in October
2010, and the Superior Court rejected all of SPRAWLDEFs claims and ordered the writ petition
dismissed. SPRAWLDEF appealed the dismissal to the Third District Court of Appeal. The case has
been fully briefed and a notification of oral argument and decision from the Court of Appeal are pending. While the Company believes
that the respondent agencies will prevail in this case, in the unlikely event that the 2006 permit
was set aside, PHLF would revert to operating the Potrero Hills Landfill under the sites 1996
solid waste facilities permit.
On December 17, 2010, SPRAWLDEF and one its members filed a petition for writ of mandate
in San Francisco Superior Court seeking to overturn the October 2010 approval of the marsh
development permit issued by the San Francisco Bay Conservation and Development Commission (BCDC)
for PHLFs landfill expansion, alleging that the approval is contrary to the Marsh Act and Measure
E. The petition, captioned SPRAWLDEF v. San Francisco Bay Conservation and Development Commission,
names BCDC as a respondent and the Company as the real party in interest. Petitioners seek a
declaration that the law does not allow BCDC to approve a marsh development permit beyond the
footprint and operational levels originally approved for PHLF in 1984, and that the approval
violates Measure E. BCDC has prepared the administrative record for its permit decision and the
parties have stipulated to a briefing schedule that will be completed by February 7, 2012. A
hearing date has been set for February 23, 2012. At this point the Company is not able to
determine the likelihood of any outcome in this matter.
83
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
On June 10, 2011, June Guidotti, a property owner adjacent to PHLF, and SPRAWLDEF and one of
its members, each filed administrative petitions for review with the State Water Resources Control
Board (State Board) seeking to overturn a May 11, 2011 Order No. 2166-(a) approving waste
discharge requirements issued by the San Francisco Bay Regional Water Quality Control Board
(Regional Board) for PHLFs landfill expansion, alleging that the order is contrary to the State
Boards Title 27 regulations authorizing waste discharge requirements for landfills, and in the
case of the SPRAWLDEF petition, further alleging that the Regional Boards issuance of a Clean
Water Act section 401 certification is not supported by an adequate alternatives analysis as
required by the federal Clean Water Act. The Regional Board is preparing the administrative record
of its decision to issue Order 2166-(a) to be filed with the State Board as well as its response to
the petitions for review. It is anticipated that the Regional Board will vigorously defend its
actions and seek dismissal of the petitions for review. A hearing date has not yet been set on
either petition, and the State Board has held both the Guidotti and SPRAWLDEF petitions in abeyance
at the petitioners requests. At this point the Company is not able to determine the likelihood of
any outcome in this matter.
If as a result of any of the matters described above, after exhausting all appeals, PHLF is
unable to secure an expansion permit, and the Superior Courts writ of mandamus enforcing Measure E
as rewritten is ultimately upheld, the Company estimates that it would be required to recognize a
pre-tax impairment charge of approximately $42,000 to reduce the carrying value of PHLF to its
estimated fair value, in addition to the approximately $5,000 annual impact to its pre-tax earnings
described above. If PHLF is unable to secure an expansion permit but Measure E is ultimately ruled
to be unenforceable, the Company estimates that it would be required to recognize a pre-tax
impairment charge of approximately $30,000 to reduce the carrying value of PHLF to its estimated
fair value.
Colonie, New York Landfill Privatization Litigation
One of the Companys wholly-owned subsidiaries, Capital Region Landfills, Inc. (CRL) and the
Town of Colonie, New York (Colonie), entered into a Solid Waste Facility Operating Agreement,
dated August 4, 2011 (Agreement). CRL was selected to operate the Towns solid waste management
operations, which include a landfill, pursuant to a request for proposals initiated by Colonie
pursuant to New York State General Municipal Law (GML) section 120-w. CRL commenced operating
the Towns solid waste management operations pursuant to the Agreement on September 19, 2011. By
notice of petition and petition, dated September 29, 2011, filed in New York State Supreme Court
for the County of Albany, seven individuals commenced a proceeding pursuant to Article 78 of the
New York State Civil Practice Law and Rules (CPLR) against Colonie, its Town Board and its
Supervisor, Paula A. Mahan (Town Respondents). The case is captioned, Conners, et al. v. Town of
Colonie, et al., Index No. 006312/2011 (Sup. Ct., Albany Co.). The Petitioners are: Michael
Conners, II, Anna M. Denney, Derrick D. Denney, Kirk E. Denney, Amy Steenburgh, Brian D. Steenburgh
and Mary Lou Swatling. On October 17, 2011, an amended petition, dated October 11, 2011, was
served on the Town, naming CRL and the Company as additional Respondents. The petition alleges
that the Petitioners are residents of Colonie, and own or reside on property abutting or in close
proximity to the landfill, or which is affected by the Agreement. Petitioners claim that the
Agreement is the functional equivalent of a lease and therefore should be subject to the permissive
referendum requirements of New York State Town Law (Town Law) sections 64(2) and 90. The
petition, as amended, asserts that Respondents failed, within ten days of the Town Boards adoption
of a July 28, 2011 resolution authorizing Colonie to enter into the Agreement with CRL, to post and
publish notice setting forth the date of adoption of the resolution, an abstract of the Town
Boards action and a statement that the resolution was adopted subject to a permissive referendum.
Petitioners seek judgment (i) annulling and setting aside the resolution, (ii) declaring the
Agreement invalid, unlawful and unenforceable, (iii) restraining and enjoining Respondents from
attempting to enforce the resolution or the Agreement, and (iv) awarding Petitioners costs,
disbursements and attorneys fees incurred in connection with this proceeding; and such other and
further relief as the Court deems just and proper.
On October 31, 2011 and November 2, 2011, the Town Respondents, CRL and the Company filed
motions to dismiss on various procedural and substantive grounds. On November 3, 2011, Petitioners
filed an opposition to the motions to dismiss and cross-moved to file a second amended petition
seeking to add the Town Clerk and the unions as Respondents. No more filings are expected prior to
a ruling on the motions to dismiss and cross-motion.
At this stage, the Company is not able to determine the likelihood of any outcome in this
matter. If, however, as a result of this litigation, after the parties have exhausted all appeals,
the Agreement is nullified and CRL is unable to continue to operate Colonies solid waste
management operations, the Agreement requires Colonie to repay to CRL an amount equal to a prorated
amount of $23,000 of the initial payment made by CRL to Colonie plus the amount of any capital that
CRL has invested in the Colonie Landfill. The prorated amount owed to CRL by Colonie would be
calculated by dividing the $23,000 plus the amount of invested capital by the number of years of
remaining airspace at the Colonie Landfill, as measured from the effective date of the Agreement,
and then multiplying the result by the number of years of remaining airspace at the Colonie
Landfill, as measured from the date the Agreement is nullified. Furthermore, if the Agreement is
nullified as a result of the litigation, Colonie would resume responsibility for all final capping,
closure and post-closure liabilities for the Colonie Landfill.
84
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Collective Bargaining Agreements
Seven of the Companys collective bargaining agreements are set to expire in 2012. The
Company does not expect any significant disruption in its overall business in 2012 as a result of
labor negotiations, employee strikes or organizational efforts.
12. STOCKHOLDERS EQUITY
Stock Split
On October 19, 2010, the Companys Board of Directors authorized a three-for-two split of its
common stock, in the form of a 50% stock dividend, payable to stockholders of record as of October
29, 2010. Shares resulting from the split were issued on November 12, 2010. In connection
therewith, the Company transferred $394 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
2,479 whole shares were repurchased for $101. All share and per share amounts for all periods
presented have been retroactively adjusted to reflect the stock split.
Cash Dividend
In October 2010, the Companys Board of Directors declared the initiation of a quarterly cash
dividend of $0.075 per share, as adjusted for the three-for-two stock split described above. In
October 2011, the Company announced that its Board of Directors increased its regular quarterly
cash dividend by $0.015, from $0.075 to $0.09 per share. Cash dividends of $35,566 and $8,561 were
paid during the years ended December 31, 2011 and 2010, respectively.
Share Repurchase Program
On December 5, 2011, the Company announced that its Board of Directors authorized a
$400,000 increase to, and extended the term of, its previously announced common stock repurchase
program. The Companys Board of Directors has authorized a common stock repurchase program for the
repurchase of up to $1,200,000 of common stock through December 31, 2014. 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, 2011 and 2010, the Company had repurchased in
aggregate 39,245,819 and 35,438,096 shares, respectively, of its common stock at an aggregate cost
of $765,443 and $648,626, respectively. As of December 31, 2011, the remaining maximum dollar
value of shares available for purchase under the program was approximately $434,557. 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 139,092,218 shares of common stock authorized but unissued as of December 31, 2011, the
following shares were reserved for issuance:
|
|
|
|
|
Stock option and restricted stock unit plans |
|
|
5,896,829 |
|
Consultant Incentive Plan |
|
|
330,072 |
|
2002 Restricted Stock Plan |
|
|
15,752 |
|
|
|
|
|
|
|
|
6,242,653 |
|
|
|
|
|
85
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Restricted Stock, Stock Options and Restricted Stock Units
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 320,625 shares of the Companys common stock were reserved for issuance under the 2002
Restricted Stock Plan. As of December 31, 2011, 15,752 shares of common stock were available for
future grants of restricted stock under the 2002 Restricted Stock Plan. There were no restricted
shares granted or outstanding under the 2002 Restricted Stock Plan during the years ended December
31, 2011, 2010 and 2009.
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 11,691,600 shares. As of December 31, 2011, 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
8,244,546 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 9,216,710 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, 2011, no options were available for future grants under
the 2002 Stock Option Plan and 1,500,000 shares of common stock were available for future grants
under the 2002 Senior Management Equity Incentive Plan.
In 2004, the Companys Board of Directors authorized the 2004 Equity Incentive Plan. On May 7,
2010, the Companys stockholders approved the latest amendment to the plan, now the Third Amended
and Restated 2004 Equity Incentive Plan (the 2004 Equity Incentive Plan). A total of 7,162,500
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 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, 2011, 2010 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, 2011, 2,159,879 shares of common stock were available to be issued
pursuant to future awards granted under the 2004 Equity Incentive Plan.
86
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following table summarizes restricted stock units activity for the 2004 Equity Incentive
Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Restricted stock units granted |
|
|
500,048 |
|
|
|
596,463 |
|
|
|
587,526 |
|
Weighted average grant-date fair value of restricted stock units granted |
|
$ |
29.28 |
|
|
$ |
21.32 |
|
|
$ |
17.51 |
|
Total fair value of restricted stock units granted |
|
$ |
14,643 |
|
|
$ |
12,750 |
|
|
$ |
10,265 |
|
Restricted stock units becoming free of restrictions |
|
|
576,522 |
|
|
|
511,196 |
|
|
|
409,136 |
|
Weighted average restriction period (in years) |
|
|
3.9 |
|
|
|
3.8 |
|
|
|
4.4 |
|
A summary of activity related to restricted stock units under the 2004 Equity Incentive Plan
as of December 31, 2010, and changes during the year ended December 31, 2011, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
Grant Date Fair |
|
|
|
Unvested Shares |
|
|
Value Per Share |
|
Outstanding at December 31, 2010 |
|
|
1,514,459 |
|
|
$ |
19.36 |
|
Granted |
|
|
500,048 |
|
|
|
29.28 |
|
Forfeited |
|
|
(44,976 |
) |
|
|
23.48 |
|
Vested and Issued |
|
|
(545,223 |
) |
|
|
18.99 |
|
Vested and Unissued |
|
|
(31,299 |
) |
|
|
21.22 |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2011 |
|
|
1,393,009 |
|
|
|
22.79 |
|
|
|
|
|
|
|
|
|
A summary of the Companys stock option activity and related information as of December
31, 2010, and changes during the year ended December 31, 2011, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Number of |
|
|
Average |
|
|
|
Shares (Options) |
|
|
Exercise Price |
|
Outstanding as of December 31, 2010 |
|
|
1,217,146 |
|
|
$ |
12.90 |
|
Granted |
|
|
|
|
|
|
|
|
Forfeited |
|
|
(5,064 |
) |
|
|
10.61 |
|
Exercised |
|
|
(398,315 |
) |
|
|
12.95 |
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2011 |
|
|
813,767 |
|
|
|
12.89 |
|
|
|
|
|
|
|
|
|
87
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, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Vested and 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) |
|
$7.00 to $10.00 |
|
|
112,949 |
|
|
$ |
9.10 |
|
|
|
0.9 |
|
|
|
112,949 |
|
|
$ |
9.10 |
|
|
|
0.9 |
|
$10.01 to $12.00 |
|
|
264,543 |
|
|
|
11.07 |
|
|
|
2.1 |
|
|
|
264,543 |
|
|
|
11.07 |
|
|
|
2.1 |
|
$12.01 to $15.00 |
|
|
262,312 |
|
|
|
14.65 |
|
|
|
3.1 |
|
|
|
262,312 |
|
|
|
14.65 |
|
|
|
3.1 |
|
$15.01 to $17.00 |
|
|
173,963 |
|
|
|
15.45 |
|
|
|
4.1 |
|
|
|
173,963 |
|
|
|
15.45 |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
813,767 |
|
|
|
12.89 |
|
|
|
2.7 |
|
|
|
813,767 |
|
|
|
12.89 |
|
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value for both options outstanding and options exercisable at
December 31, 2011, was $16,481. During the year ended December 31, 2010, the final 164,314 of
unvested options to purchase common stock became vested.
The total intrinsic value of stock options exercised during the years ended December 31,
2011, 2010 and 2009, was $7,597, $30,059 and $10,427, respectively. The total fair value of stock
options vested during the years ended December 31, 2010 and 2009, was $726 and $575, respectively.
As of December 31, 2011, 2010 and 2009, a total of 813,767, 1,217,146 and 3,628,542 options to
purchase common stock were exercisable under all stock option plans, respectively.
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 675,000 shares of the Companys common stock for
future issuance under the Consultant Incentive Plan. As of December 31, 2011, 279,872 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, 2010, and changes during the year ended
December 31, 2011, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
Warrants |
|
|
Exercise Price |
|
Outstanding at December 31, 2010 |
|
|
69,804 |
|
|
$ |
23.27 |
|
Granted |
|
|
9,324 |
|
|
|
31.21 |
|
Forfeited |
|
|
(20,231 |
) |
|
|
21.37 |
|
Exercised |
|
|
(8,697 |
) |
|
|
21.38 |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2011 |
|
|
50,200 |
|
|
|
25.83 |
|
|
|
|
|
|
|
|
|
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 warrants outstanding as of December 31, 2011
and 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
|
of |
|
|
|
|
|
|
Warrants |
|
|
|
|
Warrants |
|
|
Outstanding at December 31, |
|
Grant Date |
|
Issued |
|
|
Exercise Price |
|
Issued |
|
|
2011 |
|
|
2010 |
|
Throughout 2006 |
|
|
23,093 |
|
|
$15.15 to $18.31 |
|
$ |
115 |
|
|
|
|
|
|
|
3,915 |
|
Throughout 2007 |
|
|
21,206 |
|
|
$19.80 to $22.68 |
|
|
123 |
|
|
|
1,391 |
|
|
|
14,291 |
|
Throughout 2008 |
|
|
13,901 |
|
|
$18.97 to $22.70 |
|
|
79 |
|
|
|
|
|
|
|
|
|
Throughout 2009 |
|
|
5,589 |
|
|
$14.67 to $19.61 |
|
|
22 |
|
|
|
1,735 |
|
|
|
1,735 |
|
Throughout 2010 |
|
|
51,627 |
|
|
$20.64 to $27.41 |
|
|
351 |
|
|
|
37,750 |
|
|
|
49,863 |
|
Throughout 2011 |
|
|
9,324 |
|
|
$27.53 to $33.14 |
|
|
79 |
|
|
|
9,324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,200 |
|
|
|
69,804 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The warrants are exercisable when granted and expire between 2012 and 2016.
Warrants issued to consultants are valued using the Black-Scholes pricing model with a
contractual life of five years, a risk free interest rate based on the 5-year U.S. treasury yield
curve and expected volatility. The Company uses the historical volatility of its common stock over
a period equivalent to the contractual life of the warrants to estimate the expected volatility.
Warrants issued to consultants are recorded as an element of the related cost of landfill
development projects or to expense for warrants issued in connection with acquisitions.
89
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
13. COMPREHENSIVE INCOME
Comprehensive income includes changes in the fair value of interest rate swaps and fuel hedges
that qualify for hedge accounting. The components of other comprehensive income (loss) and related
tax effects for the years ended December 31, 2011, 2010 and 2009, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2011 |
|
|
|
Gross |
|
|
Tax effect |
|
|
Net of tax |
|
Interest rate swap amounts reclassified into interest expense |
|
$ |
5,803 |
|
|
$ |
(2,205 |
) |
|
$ |
3,598 |
|
Fuel hedge amounts reclassified into cost of operations |
|
|
(4,297 |
) |
|
|
1,633 |
|
|
|
(2,664 |
) |
Changes in fair value of interest rate swaps |
|
|
(5,200 |
) |
|
|
1,976 |
|
|
|
(3,224 |
) |
Changes in fair value of fuel hedges |
|
|
3,073 |
|
|
|
(1,168 |
) |
|
|
1,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(621 |
) |
|
$ |
236 |
|
|
$ |
(385 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010 |
|
|
|
Gross |
|
|
Tax effect |
|
|
Net of tax |
|
Interest rate swap amounts reclassified into interest expense |
|
$ |
9,052 |
|
|
$ |
(3,440 |
) |
|
$ |
5,612 |
|
Fuel hedge amounts reclassified into cost of operations |
|
|
3,932 |
|
|
|
(1,494 |
) |
|
|
2,438 |
|
Changes in fair value of interest rate swaps |
|
|
(11,013 |
) |
|
|
4,201 |
|
|
|
(6,812 |
) |
Changes in fair value of fuel hedges |
|
|
902 |
|
|
|
(343 |
) |
|
|
559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,873 |
|
|
$ |
(1,076 |
) |
|
$ |
1,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009 |
|
|
|
Gross |
|
|
Tax effect |
|
|
Net of tax |
|
Interest rate swap amounts reclassified into interest expense |
|
$ |
14,669 |
|
|
$ |
(5,545 |
) |
|
$ |
9,124 |
|
Fuel hedge amounts reclassified into cost of operations |
|
|
8,508 |
|
|
|
(3,216 |
) |
|
|
5,292 |
|
Changes in fair value of interest rate swaps |
|
|
5,367 |
|
|
|
(2,084 |
) |
|
|
3,283 |
|
Changes in fair value of fuel hedges |
|
|
2,199 |
|
|
|
(853 |
) |
|
|
1,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
30,743 |
|
|
$ |
(11,698 |
) |
|
$ |
19,045 |
|
|
|
|
|
|
|
|
|
|
|
A rollforward of the amounts included in AOCL, net of taxes, is as follows: