XNYS:WM Waste Management Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

 

  þ      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
     OF THE SECURITIES EXCHANGE ACT OF 1934
    

For the Quarterly Period Ended June 30, 2012

     or
  ¨      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
     OF THE SECURITIES EXCHANGE ACT OF 1934
    

For the transition period from              to             

Commission file number 1-12154

Waste Management, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   73-1309529

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1001 Fannin

Suite 4000

Houston, Texas 77002

(Address of principal executive offices)

(713) 512-6200

(Registrant’s telephone number, including area code)

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  ¨

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

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.

Large accelerated filer  þ       Accelerated filer  ¨      Non-accelerated filer  ¨       Smaller reporting company  ¨

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  þ

The number of shares of Common Stock, $0.01 par value, of the registrant outstanding at July 20, 2012 was 463,557,830 (excluding treasury shares of 166,724,631).

 

 

 

 


PART I.

 

Item 1.    Financial Statements.

WASTE MANAGEMENT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Millions, Except Share and Par Value Amounts)

 

     June 30,
2012
    December 31,
2011
 
     (Unaudited)        
ASSETS   

Current assets:

    

Cash and cash equivalents

   $ 237      $ 258   

Accounts receivable, net of allowance for doubtful accounts of $34 and $29, respectively

     1,694        1,631   

Other receivables

     137        144   

Parts and supplies

     147        153   

Deferred income taxes

     73        78   

Other assets

     166        115   
  

 

 

   

 

 

 

Total current assets

     2,454        2,379   

Property and equipment, net of accumulated depreciation and amortization of $15,735 and $15,308 respectively

     12,360        12,242   

Goodwill

     6,237        6,215   

Other intangible assets, net

     416        457   

Investments in unconsolidated entities

     656        637   

Other assets

     568        639   
  

 

 

   

 

 

 

Total assets

   $ 22,691      $ 22,569   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY   

Current liabilities:

    

Accounts payable

   $ 720      $ 838   

Accrued liabilities

     1,145        1,129   

Deferred revenues

     469        470   

Current portion of long-term debt

     853        631   
  

 

 

   

 

 

 

Total current liabilities

     3,187        3,068   

Long-term debt, less current portion

     8,973        9,125   

Deferred income taxes

     1,879        1,884   

Landfill and environmental remediation liabilities

     1,437        1,404   

Other liabilities

     728        698   
  

 

 

   

 

 

 

Total liabilities

     16,204        16,179   
  

 

 

   

 

 

 

Commitments and contingencies

    

Equity:

    

Waste Management, Inc. stockholders’ equity:

    

Common stock, $0.01 par value; 1,500,000,000 shares authorized; 630,282,461 shares issued

     6        6   

Additional paid-in capital

     4,540        4,561   

Retained earnings

     6,771        6,721   

Accumulated other comprehensive income

     163        172   

Treasury stock at cost, 167,283,574 and 169,749,709 shares, respectively

     (5,312     (5,390
  

 

 

   

 

 

 

Total Waste Management, Inc. stockholders’ equity

     6,168        6,070   

Noncontrolling interests

     319        320   
  

 

 

   

 

 

 

Total equity

     6,487        6,390   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 22,691      $ 22,569   
  

 

 

   

 

 

 

See notes to Condensed Consolidated Financial Statements.

 

2


WASTE MANAGEMENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Millions, Except per Share Amounts)

(Unaudited)

 

     Three Months
Ended
June 30,
    Six Months
Ended
June 30,
 
     2012     2011     2012     2011  

Operating revenues

   $ 3,459      $ 3,347      $ 6,754      $ 6,450   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

        

Operating

     2,260        2,140        4,426        4,135   

Selling, general and administrative

     374        382        781        764   

Depreciation and amortization

     323        319        640        618   

Restructuring

     3               7          

(Income) expense from divestitures, asset impairments and unusual items

     33               33          
  

 

 

   

 

 

   

 

 

   

 

 

 
     2,993        2,841        5,887        5,517   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     466        506        867        933   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

        

Interest expense

     (121     (119     (243     (240

Interest income

     1        2        2        5   

Equity in net losses of unconsolidated entities

     (11     (9     (18     (13

Other, net

     (1     1        (2     2   
  

 

 

   

 

 

   

 

 

   

 

 

 
     (132     (125     (261     (246
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     334        381        606        687   

Provision for income taxes

     115        131        204        241   
  

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income

     219        250        402        446   

Less: Net income attributable to noncontrolling interests

     11        13        23        23   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Waste Management, Inc.

   $ 208      $ 237      $ 379      $ 423   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

   $ 0.45      $ 0.50      $ 0.82      $ 0.89   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

   $ 0.45      $ 0.50      $ 0.82      $ 0.89   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends declared per common share

   $ 0.355      $ 0.34      $ 0.71      $ 0.68   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

See notes to Condensed Consolidated Financial Statements.

 

3


WASTE MANAGEMENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Millions)

(Unaudited)

 

     Three Months
Ended
June 30,
    Six Months
Ended
June 30,
 
     2012     2011     2012     2011  

Consolidated net income

   $ 219      $ 250      $ 402      $ 446   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of taxes:

        

Unrealized gains (losses) on derivative instruments:

        

Unrealized losses, resulting from changes in fair value, net of tax benefit of $(10), $(5), $(8) and $(8), respectively

     (16     (8     (12     (13

Reclassification adjustment for (gains) losses included in net income, net of tax (expense) benefit of $(2), $1, $0 and $6, respectively

     (4     1               9   
  

 

 

   

 

 

   

 

 

   

 

 

 
     (20     (7     (12     (4

Unrealized gains (losses) on available-for-sale securities, net of tax expense (benefit) of $0, $0, $1 and $(1), respectively

     (1     1        1        (1

Foreign currency translation adjustments

     (22     8        2        36   

Change in funded status of post-retirement benefit obligation, net of tax benefit of $0, $0, $0 and $(1), respectively

                          (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of taxes

     (43     2        (9     29   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     176        252        393        475   

Less: Comprehensive income attributable to noncontrolling interests

     11        13        23        23   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Waste Management, Inc.

   $ 165      $ 239      $ 370      $ 452   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

See notes to Condensed Consolidated Financial Statements.

 

4


WASTE MANAGEMENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Millions)

(Unaudited)

 

     Six Months Ended June 30,  
         2012             2011      

Cash flows from operating activities:

    

Consolidated net income

   $ 402      $ 446   

Adjustments to reconcile consolidated net income to net cash provided by operating activities:

    

Depreciation and amortization

     640        618   

Deferred income tax provision

     8        39   

Interest accretion on landfill liabilities

     41        41   

Interest accretion on and discount rate adjustments to environmental remediation liabilities and recovery assets

     1        3   

Provision for bad debts

     26        15   

Equity-based compensation expense

     15        27   

Excess tax benefits associated with equity-based transactions

     (9     (7

Net gain on disposal of assets

     (7     (8

Effect of (income) expense from divestitures, asset impairments and unusual items

     33          

Equity in net losses of unconsolidated entities, net of dividends

     18        13   

Change in operating assets and liabilities, net of effects of acquisitions and divestitures:

    

Receivables

     (72     (115

Other current assets

     (26     (18

Other assets

     92        31   

Accounts payable and accrued liabilities

     5        25   

Deferred revenues and other liabilities

     (23     (32
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,144        1,078   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions of businesses, net of cash acquired

     (154     (157

Capital expenditures

     (730     (596

Proceeds from divestitures of businesses (net of cash divested) and other sales of assets

     20        13   

Net receipts from restricted trust and escrow accounts

     17        7   

Investments in unconsolidated entities

     (40     (91

Other

     (16       
  

 

 

   

 

 

 

Net cash used in investing activities

     (903     (824
  

 

 

   

 

 

 

Cash flows from financing activities:

    

New borrowings

     312        404   

Debt repayments

     (271     (314

Common stock repurchases

            (168

Cash dividends

     (329     (323

Exercise of common stock options

     31        35   

Excess tax benefits associated with equity-based transactions

     9        7   

Distributions paid to noncontrolling interests

     (23     (22

Other

     9        (44
  

 

 

   

 

 

 

Net cash used in financing activities

     (262     (425
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

            3   
  

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (21     (168

Cash and cash equivalents at beginning of period

     258        539   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 237      $ 371   
  

 

 

   

 

 

 

See notes to Condensed Consolidated Financial Statements.

 

5


WASTE MANAGEMENT, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(In Millions, Except Shares in Thousands)

(Unaudited)

 

          Waste Management, Inc. Stockholders’ Equity        
          Common Stock     Additional
Paid-In
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income

(Loss)
    Treasury Stock     Noncontrolling
Interests
 
    Total     Shares     Amounts           Shares     Amounts    

Balance, December 31, 2011

  $ 6,390        630,282      $ 6      $ 4,561      $ 6,721      $ 172        (169,750   $ (5,390   $ 320   

Consolidated net income

    402                             379                             23   

Other comprehensive income, net of taxes

    (9                                 (9                     

Cash dividends declared

    (329                          (329                            

Equity-based compensation transactions, including dividend equivalents, net of taxes

    56                      (22                   2,463        78          

Distributions paid to noncontrolling interests

    (23                                                      (23

Other

                         1                      3               (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2012

  $ 6,487        630,282      $ 6      $ 4,540      $ 6,771      $ 163        (167,284   $ (5,312   $ 319   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

See notes to Condensed Consolidated Financial Statements.

 

6


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.    Basis of Presentation

The financial statements presented in this report represent the consolidation of Waste Management, Inc., a Delaware corporation; Waste Management’s wholly-owned and majority-owned subsidiaries; and certain variable interest entities for which Waste Management or its subsidiaries are the primary beneficiary as described in Note 13. Waste Management is a holding company and all operations are conducted by its subsidiaries. When the terms “the Company,” “we,” “us” or “our” are used in this document, those terms refer to Waste Management, Inc., its consolidated subsidiaries and consolidated variable interest entities. When we use the term “WM,” we are referring only to Waste Management, Inc., the parent holding company.

We currently manage and evaluate our principal operations through five Groups. Our four geographic operating Groups, which are comprised of our Eastern, Midwest, Southern and Western Groups, provide collection, transfer, disposal (in both solid waste and hazardous waste landfills) and recycling services. Our fifth Group is the Wheelabrator Group, which provides waste-to-energy services and manages waste-to-energy facilities and independent power production plants. We also provide additional services that are not managed through our five Groups, including the operations of Oakleaf Global Holdings acquired on July 28, 2011 (“Oakleaf”), which are presented in this report as “Other.” Additional information related to our segments and to our acquisition of Oakleaf can be found in Note 8 and in Note 9, respectively.

The Condensed Consolidated Financial Statements as of June 30, 2012 and for the three and six months ended June 30, 2012 and 2011 are unaudited. In the opinion of management, these financial statements include all adjustments, which, unless otherwise disclosed, are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. The results for interim periods are not necessarily indicative of results for the entire year. The financial statements presented herein should be read in connection with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011.

In preparing our financial statements, we make numerous estimates and assumptions that affect the accounting for and recognition and disclosure of assets, liabilities, equity, revenues and expenses. We must make these estimates and assumptions because certain information that we use is dependent on future events, cannot be calculated with a high degree of precision from data available or simply cannot be readily calculated based on generally accepted methods. In some cases, these estimates are particularly difficult to determine and we must exercise significant judgment. In preparing our financial statements, the most difficult, subjective and complex estimates and the assumptions that present the greatest amount of uncertainty relate to our accounting for landfills, environmental remediation liabilities, asset impairments, deferred income taxes and reserves associated with our insured and self-insured claims. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our financial statements.

Adoption of New Accounting Pronouncements

Fair Value Measurement — In May 2011, the Financial Accounting Standards Board (“FASB”) amended authoritative guidance associated with fair value measurements. This amended guidance defines certain requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. generally accepted accounting principles. The amendments to authoritative guidance associated with fair value measurements were effective for the Company on January 1, 2012 and have been applied prospectively. The adoption of this guidance did not have a material impact on our consolidated financial statements.

Comprehensive Income — In June 2011, the FASB issued amended authoritative guidance associated with comprehensive income, which requires companies to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This update eliminates the option to

 

7


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

present the components of other comprehensive income as part of the statement of changes in equity. In December 2011, the FASB deferred the effective date of the specific requirement to present items that are reclassified out of accumulated other comprehensive income to net income alongside their respective components of net income and other comprehensive income. The amendments to authoritative guidance associated with comprehensive income were effective for the Company on January 1, 2012 and have been applied retrospectively. The adoption of this guidance did not have a material impact on our consolidated financial statements.

2.    Landfill and Environmental Remediation Liabilities

Liabilities for landfill and environmental remediation costs are presented in the table below (in millions):

 

 

     June 30, 2012      December 31, 2011  
     Landfill      Environmental
Remediation
     Total      Landfill      Environmental
Remediation
     Total  

Current (in accrued liabilities)

   $ 119       $ 37       $ 156       $ 123       $ 38       $ 161   

Long-term

     1,210         227         1,437         1,169         235         1,404   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,329       $ 264       $ 1,593       $ 1,292       $ 273       $ 1,565   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The changes to landfill and environmental remediation liabilities for the year ended December 31, 2011 and the six months ended June 30, 2012 are reflected in the table below (in millions):

 

 

     Landfill     Environmental
Remediation
 

December 31, 2010

   $ 1,266      $ 284   

Obligations incurred and capitalized

     49          

Obligations settled

     (80     (37

Interest accretion

     84        6   

Revisions in cost estimates and interest rate assumptions

     (30     23   

Acquisitions, divestitures and other adjustments

     3        (3
  

 

 

   

 

 

 

December 31, 2011

     1,292        273   

Obligations incurred and capitalized

     28          

Obligations settled

     (31     (14

Interest accretion

     41        2   

Revisions in cost estimates and interest rate assumptions

     1        3   

Acquisitions, divestitures and other adjustments

     (2       
  

 

 

   

 

 

 

June 30, 2012

   $ 1,329      $ 264   
  

 

 

   

 

 

 

At several of our landfills, we provide financial assurance by depositing cash into restricted trust funds or escrow accounts for purposes of settling final capping, closure, post-closure and environmental remediation obligations. Generally, these trust funds are established to comply with statutory requirements and operating agreements. See Note 13 for additional information related to these trusts.

 

8


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

3.    Debt

The following table summarizes the major components of debt at each balance sheet date (in millions) and provides the maturities and interest rate ranges of each major category as of June 30, 2012:

 

     June 30,
2012
     December 31,
2011
 

Revolving credit facility (weighted average interest rate of 1.4% at June 30, 2012 and 1.5% at December 31, 2011)

   $ 300       $ 150   

Letter of credit facilities

               

Canadian credit facility (weighted average effective interest rate of 2.0% at June 30, 2012 and 1.8% at December 31, 2011)

     112         137   

Senior notes and debentures, maturing through 2039, interest rates ranging from 2.60% to 7.75% (weighted average interest rate of 6.0% at June 30, 2012 and December 31, 2011)

     6,220         6,228   

Tax-exempt bonds maturing through 2041, fixed and variable interest rates ranging from 0.2% to 7.4% (weighted average interest rate of 2.9% at June 30, 2012 and 3.1% at December 31, 2011)

     2,722         2,771   

Tax-exempt project bonds, maturing through 2029, fixed and variable interest rates ranging from 0.2% to 3.4% (weighted average interest rate of 1.4% at June 30, 2012 and 1.3% at December 31, 2011 )

     86         86   

Capital leases and other, maturing through 2055, interest rates up to 12%

     386         384   
  

 

 

    

 

 

 
     9,826         9,756   

Current portion of long-term debt

     853         631   
  

 

 

    

 

 

 
   $ 8,973       $ 9,125   
  

 

 

    

 

 

 

Debt Classification

As of June 30, 2012, we had $1,004 million of debt maturing within the next twelve months, including $300 million of borrowings outstanding under the revolving credit facility, U.S. $112 million of advances outstanding under our Canadian credit facility, $400 million of 6.375% senior notes that mature in November 2012 and $143 million of tax-exempt bonds. We have classified $151 million of these borrowings as long-term as of June 30, 2012 based on our intent and ability to refinance these borrowings on a long-term basis. We also had $550 million of tax-exempt borrowings subject to repricing within the next twelve months, which were classified as long-term based on our intent and ability to fund any failed remarketings with available capacity under our revolving credit facility.

Revolving Credit and Letter of Credit Facilities

As of June 30, 2012, we had an aggregate committed capacity of $2.5 billion for letters of credit under various credit facilities. Our $2.0 billion revolving credit facility expires in May 2016 and is our primary source of letter of credit capacity. Our remaining letter of credit capacity is provided under facilities with terms that extend from June 2013 to June 2015. As of June 30, 2012, we had an aggregate of $1.5 billion of letters of credit outstanding under various credit facilities. Approximately $1.0 billion of these letters of credit have been issued under our revolving credit facility.

Debt Borrowings and Repayments

The significant changes in our debt balances from December 31, 2011 to June 30, 2012 are related to the following:

Revolving credit facility — During the six months ended June 30, 2012, we incurred net borrowings of $150 million under our revolving credit facility for general corporate purposes.

 

9


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Canadian credit facility — We repaid $27 million of net advances under our Canadian credit facility during the six months ended June 30, 2012.

Tax-exempt bonds — During the six months ended June 30, 2012, we repaid $66 million of our tax-exempt bonds with available cash upon their scheduled maturities. In addition, we issued $43 million of new tax-exempt bonds, of which $25 million was used to repay tax-exempt bonds that matured in May 2012. The remaining $18 million of tax-exempt bond proceeds was held in a trust account as of June 30, 2012 and was used to repay tax-exempt debt maturing in July 2012.

4.    Derivative Instruments and Hedging Activities

The following table summarizes the fair values of derivative instruments recorded in our Condensed Consolidated Balance Sheet (in millions):

 

 

Derivatives Designated as Hedging Instruments

  

Balance Sheet Location

   June 30,
2012
     December 31,
2011
 

Electricity commodity contracts

   Current other assets    $ 3       $ 5   

Interest rate contracts

   Long-term other assets              73   
     

 

 

    

 

 

 

Total derivative assets

      $ 3       $ 78   
     

 

 

    

 

 

 

Interest rate contracts

   Current accrued liabilities    $ 55       $ 42   

Electricity commodity contracts

   Current accrued liabilities      1           

Interest rate contracts

   Long-term accrued liabilities      44         32   

Foreign exchange contracts

   Long-term accrued liabilities      1         2   
     

 

 

    

 

 

 

Total derivative liabilities

      $ 101       $ 76   
     

 

 

    

 

 

 

We have not offset fair value amounts recognized for our derivative instruments. For information related to the inputs used to measure our derivative assets and liabilities at fair value, refer to Note 12.

Interest Rate Derivatives

Interest Rate Swaps

We have used interest rate swaps to maintain a portion of our debt obligations at variable market interest rates. As of June 30, 2012 and December 31, 2011, we had approximately $6.1 billion in fixed-rate senior notes outstanding. As of December 31, 2011, the interest payments on $1 billion, or 16%, of these senior notes were swapped to variable interest rates to protect the debt against changes in fair value due to changes in benchmark interest rates. In April 2012, we elected to terminate our interest rate swaps and, upon termination, we received $76 million in cash for their fair value plus accrued interest receivable. The terminated interest rate swaps were associated with senior notes that are scheduled to mature from November 2012 to March 2018. The associated fair value adjustments to long-term debt will be amortized as a reduction to interest expense over the remaining terms of the underlying debt using the effective interest method. The cash proceeds received from our termination of the swaps have been classified as a change in “Other assets” within “Net cash provided by operating activities” in the Consolidated Statement of Cash Flows.

We designated our interest rate swaps as fair value hedges of our fixed-rate senior notes. Fair value hedge accounting for interest rate swap contracts increased the carrying value of our debt instruments by $93 million as of June 30, 2012 and $102 million as of December 31, 2011. Gains or losses on the derivatives as well as the offsetting losses or gains on the hedged items attributable to our interest rate swaps are recognized in current earnings. We include gains and losses on our interest rate swaps as adjustments to interest expense, which is the same financial statement line item where offsetting gains and losses on the related hedged items are recorded.

 

10


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table summarizes the fair value adjustments from interest rate swaps and the underlying hedged items on our results of operations (in millions):

 

Three Months Ended June 30,

  

Statement of Operations Classification

   Gain (Loss) on Swap     Gain (Loss) on
Fixed-Rate Debt
 

2012

                 Interest expense                   $ 2      $ (2

2011

   Interest expense    $ 18      $ (18

Six Months Ended June 30,

  

Statement of Operations Classification

   Gain (Loss) on Swap     Gain (Loss) on
Fixed-Rate Debt
 

2012

                 Interest expense                   $ (1   $ 1   

2011

   Interest expense    $ 12      $ (12

We also recognize the impacts of (i) net periodic settlements of current interest on our active interest rate swaps and (ii) the amortization of previously terminated interest rate swap agreements as adjustments to interest expense. The following table summarizes the impact of periodic settlements of active swap agreements and the impact of terminated swap agreements on our results of operations (in millions):

 

     Three Months
Ended June  30,
     Six Months
Ended June 30,
 

Decrease to Interest Expense Due to Hedge Accounting for Interest Rate Swaps

   2012      2011      2012      2011  

Periodic settlements of active swap agreements(a)

   $ 2       $ 6       $ 7       $ 11   

Terminated swap agreements(b)

     7         3         9         6   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 9       $ 9       $ 16       $ 17   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a)

These amounts represent the net of our periodic variable-rate interest obligations and the swap counterparties’ fixed-rate interest obligations. Our variable-rate obligations are based on a spread from the three-month LIBOR.

(b)

The amortization to interest expense of terminated swap agreements has increased due to our election to terminate our interest rate swap portfolio with a notional amount of $1 billion in April 2012.

Forward-Starting Interest Rate Swaps

In 2009, we entered into forward-starting interest rate swaps with a total notional value of $525 million to hedge the risk of changes in semi-annual interest payments due to fluctuations in the forward ten-year LIBOR swap rate for anticipated fixed-rate debt issuances in 2011, 2012 and 2014. We designated these forward-starting interest rate swaps as cash flow hedges.

During the first quarter of 2011, $150 million of these forward-starting interest rate swaps were terminated contemporaneously with the actual issuance of senior notes in February 2011, and we paid cash of $9 million to settle the liability related to these swap agreements. The ineffectiveness recognized upon termination of the hedges was immaterial and the related deferred loss continues to be recognized as a component of “Accumulated other comprehensive income.” The deferred loss is being amortized as an increase to interest expense over the ten-year life of the senior notes issued in February 2011 using the effective interest method. The incremental interest expense associated with these forward-starting interest rate swaps was immaterial during the three and six months ended June 30, 2012 and 2011 and is expected to be immaterial over the next twelve months.

The forward-starting interest rate swaps outstanding as of June 30, 2012 relate to anticipated debt issuances in November 2012 and March 2014. As of June 30, 2012, the fair value of these active interest rate derivatives was comprised of $55 million of current liabilities and $44 million of long-term liabilities compared with $42 million of current liabilities and $32 million of long-term liabilities as of December 31, 2011.

 

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WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

We recognized pre-tax and after-tax losses of $30 million and $18 million, respectively, to other comprehensive income for changes in the fair value of our forward-starting interest rate swaps during the three months ended June 30, 2012 and $25 million and $15 million, respectively, during the six months ended June 30, 2012. We recognized pre-tax and after-tax losses of $11 million and $7 million, respectively, to other comprehensive income for changes in the fair value of our forward-starting interest rate swaps during the three months ended June 30, 2011 and $7 million and $5 million, respectively, during the six months ended June 30, 2011. There was no significant ineffectiveness associated with these hedges during the three and six months ended June 30, 2012 or 2011.

Treasury Rate Locks

In prior years, we used Treasury rate locks to secure underlying interest rates in anticipation of senior note issuances. These cash flow hedging agreements resulted in deferred losses, net of taxes, of $10 million at June 30, 2012 and $12 million at December 31, 2011, which are included in “Accumulated other comprehensive income.” These deferred losses are reclassified as an increase to interest expense over the life of the related senior note issuances, which extend through 2032. Pre-tax and after-tax amounts of $2 million and $1 million, respectively, for the three-month periods ended June 30, 2012 and 2011, and pre-tax and after-tax amounts of $4 million and $2 million, respectively, for the six-month periods ended June 30, 2012 and 2011, were reclassified out of accumulated other comprehensive income and into interest expense. As of June 30, 2012, $4 million (on a pre-tax basis) is scheduled to be reclassified as an increase to interest expense over the next twelve months.

Credit-Risk-Related Contingent Features

Our interest rate derivative instruments have in the past and may in the future contain provisions related to the Company’s credit rating. These provisions generally provide that if the Company’s credit rating were to fall to specified levels below investment grade, the counterparties have the ability to terminate the derivative agreements, resulting in settlement of all affected transactions. As of June 30, 2012, we did not have any interest rate derivatives outstanding that contained these credit-risk related provisions.

Foreign Currency Derivatives

We use foreign currency exchange rate derivatives to hedge our exposure to fluctuations in exchange rates for anticipated intercompany cash transactions between Waste Management Holdings, Inc., a wholly-owned subsidiary (“WM Holdings”), and its Canadian subsidiaries. As of June 30, 2012, we had foreign currency forward contracts outstanding for all of the anticipated cash flows associated with a debt arrangement between these wholly-owned subsidiaries. The hedged cash flows as of June 30, 2012 include C$370 million of principal, which is scheduled for payment on October 31, 2013, and scheduled interest payments of C$11 million on November 30, 2012 and C$10 million on October 31, 2013. We designated the forward contracts as cash flow hedges.

Gains or losses on the underlying hedged items attributable to foreign currency exchange risk are recognized in current earnings. The gains or losses on our foreign currency forward contracts that are reclassified out of accumulated other comprehensive income are recognized as adjustments to other income and expense, which is the same financial statement line item where offsetting gains or losses on the related hedged items are recorded. The following table summarizes the pre-tax impacts of our foreign currency cash flow derivatives on our comprehensive income and results of operations (in millions):

 

 

Three Months

Ended June 30,

   Derivative Gain or
(Loss) Recognized
in OCI
(Effective Portion)
   

Statement of

    Operations Classification    

   Derivative Gain or
(Loss) Reclassified
from AOCI into
Income
(Effective Portion)
 

2012

   $ 6      Other income (expense)    $ 6   

2011

   $ (3   Other income (expense)    $ (2

 

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WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Six Months

Ended June 30,

   Derivative Gain or
(Loss) Recognized
in OCI
(Effective Portion)
   

Statement of

    Operations Classification    

   Derivative Gain or
(Loss) Reclassified
from AOCI into
Income
(Effective Portion)
 

2012

   $ 1      Other income (expense)    $ (3

2011

   $ (14   Other income (expense)    $ (12

Amounts reported in other comprehensive income and accumulated other comprehensive income are reported net of tax. Adjustments to other comprehensive income for changes in the fair value of our foreign currency cash flow hedges resulted in the recognition of after-tax gains of $4 million and less than $1 million during the three and six months ended June 30, 2012, respectively, and after-tax losses of $2 million and $8 million during the three and six months ended June 30, 2011, respectively. After-tax adjustments for the reclassification of gains (losses) from accumulated other comprehensive income into income were $4 million and $(2) million during the three and six months ended June 30, 2012, respectively. After-tax adjustments for the reclassification of losses from accumulated other comprehensive income into income were $1 million and $7 million during the three and six months ended June 30, 2011, respectively. Ineffectiveness has been included in other income and expense during each of the reported periods. There was no significant ineffectiveness associated with these hedges during the three and six months ended June 30, 2012 or 2011.

Electricity Commodity Derivatives

We use short-term “receive fixed, pay variable” electricity commodity swaps to reduce the variability in our revenues and cash flows caused by fluctuations in the market prices for electricity. We hedged 1.55 million megawatt hours, or approximately 50%, of our Wheelabrator Group’s full year 2011 merchant electricity sales, and the swaps executed through June 30, 2012 are expected to hedge about 628,800 megawatt hours, or 19%, of the Wheelabrator Group’s full year 2012 merchant electricity sales. For the three- month periods ended June 30, 2012 and 2011, we hedged 16% and 49%, respectively, of our merchant electricity sales. For the six-month periods ended June 30, 2012 and 2011, we hedged 24% and 51%, respectively, of our merchant electricity sales.

We recognized pre-tax and after-tax losses of $2 million in other comprehensive income for changes in the fair value of our electricity commodity derivatives during the three months ended June 30, 2012 and pre-tax and after-tax gains of $4 million and $3 million, respectively, for the six months ended June 30, 2012. We recognized pre-tax and after-tax adjustments of $2 million and $1 million, respectively, for the reclassification of gains from accumulated other comprehensive income into income as a component of “Operating revenues” during the three months ended June 30, 2012 and $7 million and $4 million, respectively, for the six months ended June 30, 2012. All financial statement impacts associated with these derivatives were immaterial for the three and six months ended June 30, 2011. There was no significant ineffectiveness associated with these cash flow hedges during the three and six months periods ended June 30, 2012 or 2011.

5.    Income Taxes

Our effective income tax rate for the three and six months ended June 30, 2012 was 34.3% and 33.6%, respectively, compared with 34.5% and 35.1% for the comparable prior year periods. We evaluate our effective income tax rate at each interim period and adjust it accordingly as facts and circumstances warrant. The difference between federal income taxes computed at the federal statutory rate and reported income taxes for the three and six months ended June 30, 2012 was primarily due to the favorable impact of federal and state tax credits and audit settlements, offset in part by the unfavorable impact of state and local income taxes and a Canadian provincial tax rate increase. The differences between federal income taxes computed at the federal statutory rate and reported income taxes for the three and six months ended June 30, 2011 were primarily due to the favorable impact of federal tax credits offset by the unfavorable impact of state and local income taxes.

 

13


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Investment in Refined Coal Facility — In January 2011, we acquired a noncontrolling interest in a limited liability company, which was established to invest in and manage a refined coal facility in North Dakota. The facility’s refinement processes qualify for federal tax credits that are expected to be realized through 2019 in accordance with Section 45 of the Internal Revenue Code. Our initial consideration for this investment consisted of a cash payment of $48 million.

We account for our investment in this entity using the equity method of accounting, recognizing our share of the entity’s results and other reductions in “Equity in net losses of unconsolidated entities,” within our Condensed Consolidated Statement of Operations. During the three and six months ended June 30, 2012, we recognized $1 million and $2 million of net losses resulting from our share of the entity’s operating losses and $2 million during both the three and six months ended June 30, 2011. Our tax provision for the three and six months ended June 30, 2012 was reduced by $5 million and $8 million, respectively, primarily as a result of tax credits realized from this investment and by $4 million and $7 million for the three and six months ended June 30, 2011, respectively. See Note 13 for additional information related to this investment.

Investment in Federal Low-income Housing Tax Credits — In April 2010, we acquired a noncontrolling interest in a limited liability company established to invest in and manage low-income housing properties. The entity’s low-income housing investments qualify for federal tax credits that are expected to be realized through 2020 in accordance with Section 42 of the Internal Revenue Code.

We account for our investment in this entity using the equity method of accounting. We recognize our share of the entity’s results and reductions in the value of our investment in “Equity in net losses of unconsolidated entities,” within our Condensed Consolidated Statement of Operations. The value of our investment decreases as the tax credits are generated and utilized. During the three and six months ended June 30, 2012, we recognized $6 million and $12 million of losses relating to our equity investment in this entity, $2 million and $3 million of interest expense, and a reduction in our tax provision of $9 million (including $6 million of tax credits) and $16 million (including $10 million of tax credits), respectively. During the three and six months ended June 30, 2011, we recognized $6 million and $12 million of losses relating to our equity investment in this entity, $2 million and $4 million of interest expense, and a reduction in our tax provision of $11 million (including $7 million of tax credits) and $18 million (including $11 million of tax credits), respectively. See Note 13 for additional information related to this investment.

Recent Legislation — The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act, signed into law on December 17, 2010, included an extension of the bonus depreciation allowance through the end of 2012 and increased the amount of qualifying capital expenditures that can be depreciated immediately from 50% to 100%. The 100% depreciation deduction applied to qualifying property placed in service from September 8, 2010 through December 31, 2011. The depreciation deduction for qualifying property placed in service in 2012 has been reduced to 50%. The acceleration of deductions on capital expenditures resulting from the bonus depreciation provisions has no impact on our effective tax rates, but reduces our cash taxes in the periods in which the deductions are taken.

Subject to the finalization of our 2011 income tax return, we estimate that the acceleration of depreciation deductions related to qualifying property additions in 2011 decreased our full year 2011 cash taxes by approximately $190 million and, based on our current forecast of 2012 capital expenditures, we estimate a reduction in our full year 2012 cash taxes of approximately $90 million related to qualifying property additions in 2012. However, taking accelerated deductions results in increased cash taxes in subsequent periods when the accelerated deductions for these capital expenditures would have otherwise been taken.

 

14


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

6.    Earnings Per Share

Basic and diluted earnings per share were computed using the following common share data (shares in millions):

 

 

     Three Months
Ended June 30,
     Six Months
Ended June 30,
 
     2012      2011      2012     2011  

Number of common shares outstanding at end of period

     463.0         472.3         463.0        472.3   

Effect of using weighted average common shares outstanding

     0.4         1.9         (0.1     2.6   
  

 

 

    

 

 

    

 

 

   

 

 

 

Weighted average basic common shares outstanding

     463.4         474.2         462.9        474.9   

Dilutive effect of equity-based compensation awards and other contingently issuable shares

     0.6         1.8         0.8        2.1   
  

 

 

    

 

 

    

 

 

   

 

 

 

Weighted average diluted common shares outstanding

     464.0         476.0         463.7        477.0   
  

 

 

    

 

 

    

 

 

   

 

 

 

Potentially issuable shares

     17.1         17.3         17.1        17.3   

Number of anti-dilutive potentially issuable shares excluded from diluted common shares outstanding

     8.3         6.1         8.2        6.1   

7.    Commitments and Contingencies

Financial Instruments — We have obtained letters of credit, performance bonds and insurance policies and have established trust funds and issued financial guarantees to support tax-exempt bonds, contracts, performance of landfill final capping, closure and post-closure requirements, environmental remediation, and other obligations. Letters of credit generally are supported by our revolving credit facility and other credit facilities established for that purpose. We obtain surety bonds and insurance policies from an entity in which we have a noncontrolling financial interest. We also obtain insurance from a wholly-owned insurance company, the sole business of which is to issue policies for us. In those instances where our use of financial assurance from entities we own or have financial interests in is not allowed, we have available alternative financial assurance mechanisms.

Management does not expect that any claims against or draws on these instruments would have a material adverse effect on our consolidated financial statements. We have not experienced any unmanageable difficulty in obtaining the required financial assurance instruments for our current operations. In an ongoing effort to mitigate risks of future cost increases and reductions in available capacity, we continue to evaluate various options to access cost-effective sources of financial assurance.

Insurance — We carry insurance coverage for protection of our assets and operations from certain risks including automobile liability, general liability, real and personal property, workers’ compensation, directors’ and officers’ liability, pollution legal liability and other coverages we believe are customary to the industry. Our exposure to loss for insurance claims is generally limited to the per incident deductible under the related insurance policy. Our exposure, however, could increase if our insurers are unable to meet their commitments on a timely basis.

We have retained a significant portion of the risks related to our automobile, general liability and workers’ compensation claims programs. “General liability” refers to the self-insured portion of specific third party claims made against us that may be covered under our commercial General Liability Insurance Policy. For our self-insured retentions, the exposure for unpaid claims and associated expenses, including incurred but not reported losses, is based on an actuarial valuation and internal estimates. The accruals for these liabilities could be revised if future occurrences or loss development significantly differ from our assumptions used. We do not expect the impact of any known casualty, property, environmental or other contingency to have a material impact on our financial condition, results of operations or cash flows.

 

15


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Guarantees — In the ordinary course of our business, WM and WM Holdings enter into guarantee agreements associated with their subsidiaries’ operations. Additionally, WM and WM Holdings have each guaranteed all of the senior debt of the other entity. No additional liabilities have been recorded for these intercompany guarantees because all of the underlying obligations are reflected in our Condensed Consolidated Balance Sheets.

We also have guaranteed the obligations and certain performance requirements of, and provided indemnification to, third parties in the ordinary course of business for both consolidated and unconsolidated entities. Guarantee agreements outstanding as of June 30, 2012 include (i) guarantees of unconsolidated entities’ financial obligations maturing through 2020 for maximum future payments of $20 million; and (ii) agreements guaranteeing certain market value losses for approximately 850 homeowners’ properties adjacent to or near 20 of our landfills. Our indemnification obligations generally arise from divestitures and provide that we will be responsible for liabilities associated with our operations for events that occurred prior to the sale of the operations. Additionally, under certain of our acquisition agreements, we have provided for additional consideration to be paid to the sellers if established financial targets are achieved post-closing, and we have recognized liabilities for these contingent obligations based on an estimate of the fair value of these contingencies at the time of acquisition. Contingent obligations related to indemnifications arising from our divestitures and contingent consideration provided for by our acquisitions are not expected to be material to our financial position, results of operations or cash flows.

Environmental Matters — A significant portion of our operating costs and capital expenditures could be characterized as costs of environmental protection as we are subject to an array of laws and regulations relating to the protection of the environment. Under current laws and regulations, we may have liabilities for environmental damage caused by our operations, or for damage caused by conditions that existed before we acquired a site. In addition to remediation activity required by state or local authorities, such liabilities include potentially responsible party, or PRP, investigations. The costs associated with these liabilities can include settlements, certain legal and consultant fees, as well as incremental internal and external costs directly associated with site investigation and clean-up.

Estimating our degree of responsibility for remediation is inherently difficult. We recognize and accrue for an estimated remediation liability when we determine that such liability is both probable and reasonably estimable. Determining the method and ultimate cost of remediation requires that a number of assumptions be made. There can sometimes be a range of reasonable estimates of the costs associated with the likely site remediation alternatives identified in the investigation of the extent of environmental impact. In these cases, we use the amount within the range that constitutes our best estimate. If no amount within a range appears to be a better estimate than any other, we use the amount that is the low end of such range. If we used the high ends of such ranges, our aggregate potential liability would be approximately $150 million higher than the $264 million recorded in the Condensed Consolidated Financial Statements as of June 30, 2012. Our ultimate responsibility may differ materially from current estimates. It is possible that technological, regulatory or enforcement developments, the results of environmental studies, the inability to identify other PRPs, the inability of other PRPs to contribute to the settlements of such liabilities, or other factors could require us to record additional liabilities. Our ongoing review of our remediation liabilities, in light of relevant internal and external facts and circumstances, could result in revisions to our accruals that could cause upward or downward adjustments to income from operations. These adjustments could be material in any given period.

As of June 30, 2012, we had been notified that we are a PRP in connection with 80 locations listed on the EPA’s Superfund National Priorities List, or NPL. Of the 80 sites at which claims have been made against us, 16 are sites we own. Each of the NPL sites we own was initially developed by others as a landfill disposal facility. At each of these facilities, we are working in conjunction with the government to characterize or remediate identified site problems, and we have either agreed with other legally liable parties on an arrangement for sharing the costs of remediation or are working toward a cost-sharing agreement. We generally expect to receive any amounts due from other participating parties at or near the time that we make the remedial expenditures. The

 

16


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

other 64 NPL sites, which we do not own, are at various procedural stages under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, known as CERCLA or Superfund.

The majority of these proceedings involving NPL sites that we do not own are based on allegations that certain of our subsidiaries (or their predecessors) transported hazardous substances to the sites, often prior to our acquisition of these subsidiaries. CERCLA generally provides for liability for those parties owning, operating, transporting to or disposing at the sites. Proceedings arising under Superfund typically involve numerous waste generators and other waste transportation and disposal companies and seek to allocate or recover costs associated with site investigation and remediation, which costs could be substantial and could have a material adverse effect on our consolidated financial statements. At some of the sites at which we have been identified as a PRP, our liability is well defined as a consequence of a governmental decision and an agreement among liable parties as to the share each will pay for implementing that remedy. At other sites, where no remedy has been selected or the liable parties have been unable to agree on an appropriate allocation, our future costs are uncertain.

Item 103 of the SEC’s Regulation S-K requires disclosure of certain environmental matters when a governmental authority is a party to the proceedings, or such proceedings are known to be contemplated, unless we reasonably believe that the matter will result in no monetary sanctions, or in monetary sanctions, exclusive of interest and costs, of less than $100,000. The following matters are disclosed in accordance with that requirement. We do not currently believe that the eventual outcome of any such matters, individually or in the aggregate, could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

On April 4, 2006, the EPA issued a Notice of Violation (“NOV”) to Waste Management of Hawaii, Inc., an indirect wholly-owned subsidiary of WM, and to the City and County of Honolulu for alleged violations of the federal Clean Air Act, based on alleged failure to submit certain reports and design plans required by the EPA, and the failure to begin and timely complete the installation of a gas collection and control system (“GCCS”) for the Waimanalo Gulch Sanitary Landfill on Oahu. The EPA has also indicated that it will seek penalties and injunctive relief as part of the NOV enforcement for elevated landfill temperatures that were recorded after installation of the GCCS. The parties have been in confidential settlement negotiations. Pursuant to an indemnity agreement, any penalty assessed will be paid by the Company, and not by the City and County of Honolulu.

On November 16, 2011, the Regional Water Quality Control Board for the San Francisco Bay Region (the “Water Board”) issued an Administrative Civil Liability (“ACL”) Complaint to Guadalupe Rubbish Disposal Company, Inc. (“GRDC”), an indirect wholly-owned subsidiary of WM. The ACL Complaint seeks penalties for alleged violations of California’s water pollution statutes and GRDC’s stormwater permit relating to handling of landfill gas condensate from an on-site landfill gas-to-energy facility owned and operated by a third party. GRDC and the Water Board have agreed to a settlement under which GRDC would pay a penalty of $167,285 upon final approval by the Water Board. The third party operator has agreed to fully reimburse GRDC for the penalty amount.

On December 22, 2011, the Harris County Attorney in Houston, Texas filed suit against McGinnes Industrial Maintenance Corporation (“MIMC”), WM and Waste Management of Texas, Inc., et al, seeking civil penalties and attorneys’ fees for alleged violations of the Texas Water Code and the Texas Health and Safety Code. The County’s Original Petition pending in the District Court of Harris County, Texas alleges the mismanagement of certain waste pits that were operated from 1965 to 1966 by MIMC. In 1998, a predecessor of WM acquired the stock of the parent entity of MIMC.

On April 20, 2012, the Pennsylvania Department of Environmental Protection (“PADEP”) transmitted a proposed Consent Order and Agreement to Waste Management of Pennsylvania, Inc., an indirect wholly-owned subsidiary of WM, for alleged violations of Pennsylvania solid waste regulations, including certain operations failures, at the Northwest Sanitary Landfill. PADEP has indicated that it is seeking penalties and corrective action.

 

17


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Additionally, the United States Attorney’s Office for the District of Hawaii has commenced an investigation into allegations of violations of the federal Clean Water Act involving discharge of stormwater at the Waimanalo Gulch Sanitary Landfill, located on Oahu, in connection with three major storm events in December 2010 and January 2011. No formal enforcement action has been brought against the Company. While we could potentially be subject to sanctions, including requirements to pay monetary penalties, in connection with a future proceeding that may arise from the investigation, a range of loss cannot currently be estimated because no proceeding has yet commenced and significant factual and legal issues remain. We are cooperating with the U.S. Attorney’s Office.

Litigation — In April 2002, certain former participants in the ERISA plans of WM Holdings filed a lawsuit in the U.S. District Court for the District of Columbia in a case entitled William S. Harris, et al. v. James E. Koenig, et al. The lawsuit attempts to increase the recovery of a class of ERISA plan participants on behalf of the plan based on allegations related to both the events alleged in, and the settlements relating to, the securities class action against WM Holdings that was settled in 1998, the litigation against WM in Texas that was settled in 2002, as well as the decision to offer WM common stock as an investment option within the plan beginning in 1990, despite alleged knowledge by at least two members of the investment committee of financial misstatement by WM during the relevant time period.

During the second quarter of 2010, the Court dismissed certain claims against individual defendants, including all claims against each of the current members of our Board of Directors. Previously, plaintiffs dismissed all claims related to the settlement of the securities class action against WM that was settled in 2002, and the court certified a limited class of participants who may bring claims on behalf of the plan, but not individually. During the third quarter of 2011, the Court ruled in favor of WM and two former employees dismissing all claims brought by the plaintiffs related to the decision to offer WM stock as an investment option within the plan. The Court still has under consideration additional motions that, if granted, would resolve the few remaining claims against WM and its Committees. However, we currently estimate any impact on the Company’s results of operations as a result of any liability to the plaintiffs incurred as a result of this matter will be less than $1 million, and we do not believe the outcome of this matter could have a material adverse effect on the Company’s business, financial condition, results of operations, or cash flows.

In October 2011 and January 2012, we were named as a defendant in a purported class action in the Circuit Court of Sarasota County, Florida and the Circuit Court of Lawrence County Alabama, respectively. These cases primarily pertain to our fuel and environmental charges, generally alleging that such charges were not properly disclosed, were unfair and were contrary to the customer service contracts. The law firm that filed these lawsuits had filed, in 2008, a purported class action against subsidiaries of WM in Bullock County, Alabama, making similar allegations. The prior Alabama suit was removed to federal court, where the federal court ultimately dismissed the plaintiffs’ national class action claims. The plaintiffs then elected to dismiss the case without prejudice. We will vigorously defend against these pending lawsuits. Given the inherent uncertainties of litigation, including the early stage of these cases, the unknown size of any potential class, and legal and factual issues in dispute, the outcome of these cases cannot be predicted and a range of loss cannot currently be estimated.

From time to time, we are also named as defendants in personal injury and property damage lawsuits, including purported class actions, on the basis of having owned, operated or transported waste to a disposal facility that is alleged to have contaminated the environment or, in certain cases, on the basis of having conducted environmental remediation activities at sites. Some of the lawsuits may seek to have us pay the costs of monitoring of allegedly affected sites and health care examinations of allegedly affected persons for a substantial period of time even where no actual damage is proven. While we believe we have meritorious defenses to these lawsuits, the ultimate resolution is often substantially uncertain due to the difficulty of determining the cause, extent and impact of alleged contamination (which may have occurred over a long period of time), the potential for successive groups of complainants to emerge, the diversity of the individual plaintiffs’ circumstances, and the potential contribution or indemnification obligations of co-defendants or other third

 

18


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

parties, among other factors. Additionally, we often enter into contractual arrangements with landowners imposing obligations on us to meet certain regulatory or contractual conditions upon site closure or upon termination of the agreements. Compliance with these arrangements is inherently subject to subjective determinations and may result in disputes, including litigation.

As a large company with operations across the United States and Canada, we are subject to various proceedings, lawsuits, disputes and claims arising in the ordinary course of our business. Many of these actions raise complex factual and legal issues and are subject to uncertainties. Actions filed against us include commercial, customer, and employment-related claims, including purported class action lawsuits related to our sales and marketing practices and our customer service agreements and purported class actions involving federal and state wage and hour and other laws. The plaintiffs in some actions seek unspecified damages or injunctive relief, or both. These actions are in various procedural stages, and some are covered in part by insurance. We currently do not believe that the eventual outcome of any such actions could have a material adverse effect on the Company’s business, financial condition, results of operations, or cash flows.

WM’s charter and bylaws provide that WM shall indemnify against all liabilities and expenses, and upon request shall advance expenses to, any person who is subject to a pending or threatened proceeding because such person is a director or officer of the Company. Such indemnification is required to the maximum extent permitted under Delaware law. Accordingly, the director or officer must reimburse the Company for any fees advanced if it is later determined that the director or officer was not entitled to have such fees advanced under Delaware law. Additionally, WM has entered into separate indemnification agreements with each of the members of its Board of Directors, and the employment agreements between WM and its Chief Executive Officer, principal financial officer and other executive and senior vice presidents contain a direct contractual obligation of the Company to provide indemnification to the executive. The Company may incur substantial expenses in connection with the fulfillment of its advancement of costs and indemnification obligations in connection with current actions involving former officers of the Company or its subsidiaries or other actions or proceedings that may be brought against its former or current officers, directors and employees.

Multiemployer Defined Benefit Pension Plans — About 20% of our workforce is covered by collective bargaining agreements with various union locals across the United States and Canada. As a result of some of these agreements, certain of our subsidiaries are participating employers in a number of trustee-managed multiemployer, defined benefit pension plans for the affected employees. In connection with our ongoing renegotiation of various collective bargaining agreements, we may discuss and negotiate for the complete or partial withdrawal from one or more of these pension plans. A complete or partial withdrawal from a multiemployer pension plan may also occur if employees covered by a collective bargaining agreement vote to decertify a union from continuing to represent them.

One of the most significant multiemployer pension plans in which we have participated is the Central States Southeast and Southwest Areas Pension Plan (“Central States Pension Plan”). The Central States Pension Plan is in “critical status” as defined by the Pension Protection Act of 2006. Since 2008, certain of our affiliates have bargained to remove covered employees from the Central States Pension Plan, resulting in a series of withdrawals. In October 2011, employees at the last of our affiliates with active participants in the Central States Pension Plan voted to decertify the union that represented them, withdrawing themselves from the Central States Pension Plan.

We are still negotiating and litigating final resolutions of our withdrawal liability for previous withdrawals, including our recent final withdrawal mentioned above, but we do not believe any additional liability above the charges we have already recognized for such previous withdrawals could be material to the Company’s business, financial condition, results of operations or cash flows. We also do not believe that any future withdrawals, individually or in the aggregate, from the multiemployer plans to which we contribute, could have a material adverse effect on our business, financial condition or liquidity. However, such withdrawals could have a material adverse effect on our results of operations for a particular reporting period, depending on the number of

 

19


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

employees withdrawn in any future period and the financial condition of the multiemployer plan(s) at the time of such withdrawal(s).

Tax Matters — We are currently in the examination phase of IRS audits for the tax years 2011 and 2012 and expect these audits to be completed within the next six and 18 months, respectively. We participate in the IRS’s Compliance Assurance Program, which means we work with the IRS throughout the year in order to resolve any material issues prior to the filing of our year-end tax return. We are also currently undergoing audits by various state and local jurisdictions that date back to 2000. We have finalized audits in Canada through the 2005 tax year and are not currently under audit for any subsequent tax years in Canada. On July 28, 2011, we acquired Oakleaf, which is subject to IRS examinations for years dating back to 2008 and state income tax examinations for years dating back to 2002. Pursuant to the terms of our acquisition of Oakleaf, we are entitled to indemnification for Oakleaf’s pre-acquisition tax liabilities. We maintain a liability for uncertain tax positions, the balance of which management believes is adequate. Results of audit assessments by taxing authorities are not currently expected to have a material adverse impact on our results of operations or cash flows.

8.    Segment and Related Information

We currently manage and evaluate our operations primarily through our Eastern, Midwest, Southern, Western and Wheelabrator Groups. These five Groups are presented below as our reportable segments. Our four geographic operating Groups provide collection, transfer, disposal (in both solid waste and hazardous waste landfills) and recycling services. Our fifth Group is the Wheelabrator Group, which provides waste-to-energy services and manages waste-to-energy facilities and independent power production plants. We serve residential, commercial, industrial, and municipal customers throughout North America. In addition, the Oakleaf operations we acquired on July 28, 2011 represent a separate operating segment; however, they do not meet the criteria to be presented as a separate reportable segment. The operations not managed through our five operating Groups, including the Oakleaf operations, are presented herein as “Other.” See Note 9 for additional information related to our acquisition of Oakleaf.

 

20


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Summarized financial information concerning our reportable segments for the three and six months ended June 30 is shown in the following table (in millions):

 

     Gross
Operating
Revenues
     Intercompany
Operating
Revenues
    Net
Operating
Revenues
     Income
from

Operations
 

Three Months Ended:

          

June 30, 2012

          

Eastern

   $ 780       $ (148   $ 632       $ 143   

Midwest

     822         (136     686         176   

Southern

     865         (131     734         194   

Western

     836         (126     710         145   

Wheelabrator

     206         (32     174         15   

Other

     543         (20     523         (54
  

 

 

    

 

 

   

 

 

    

 

 

 
     4,052         (593     3,459         619   

Corporate and Other

                            (153
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 4,052       $ (593   $ 3,459       $ 466   
  

 

 

    

 

 

   

 

 

    

 

 

 

June 30, 2011

          

Eastern

   $ 800       $ (136   $ 664       $ 141   

Midwest

     828         (126     702         156   

Southern

     862         (105     757         193   

Western

     825         (114     711         142   

Wheelabrator

     226         (30     196         42   

Other

     330         (13     317         (21
  

 

 

    

 

 

   

 

 

    

 

 

 
     3,871         (524     3,347         653   

Corporate and Other

                            (147
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 3,871       $ (524   $ 3,347       $ 506   
  

 

 

    

 

 

   

 

 

    

 

 

 

Six Months Ended:

          

June 30, 2012

          

Eastern

   $ 1,516       $ (276   $ 1,240       $ 274   

Midwest

     1,579         (247     1,332         329   

Southern

     1,713         (246     1,467         387   

Western

     1,632         (238     1,394         276   

Wheelabrator

     413         (62     351         19   

Other

     1,012         (42     970         (72
  

 

 

    

 

 

   

 

 

    

 

 

 
     7,865         (1,111     6,754         1,213   

Corporate and Other

                            (346
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 7,865       $ (1,111   $ 6,754       $ 867   
  

 

 

    

 

 

   

 

 

    

 

 

 

June 30, 2011

          

Eastern

   $ 1,504       $ (248   $ 1,256       $ 261   

Midwest

     1,556         (232     1,324         285   

Southern

     1,700         (203     1,497         385   

Western

     1,615         (222     1,393         282   

Wheelabrator

     436         (61     375         55   

Other

     623         (18     605         (35
  

 

 

    

 

 

   

 

 

    

 

 

 
     7,434         (984     6,450         1,233   

Corporate and Other

                            (300
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 7,434       $ (984   $ 6,450       $ 933   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

21


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Fluctuations in our operating results may be caused by many factors, including period-to-period changes in the relative contribution of revenue by each line of business and operating segment and by general economic conditions. In addition, our revenues and income from operations typically reflect seasonal patterns. Our operating revenues normally tend to be somewhat higher in the summer months, primarily due to the traditional seasonal increase in the volume of construction and demolition waste. Historically, the volumes of industrial and residential waste in certain regions in which we operate have tended to increase during the summer months. Our second and third quarter revenues and results of operations typically reflect these seasonal trends.

Additionally, certain destructive weather conditions that tend to occur during the second half of the year, such as hurricanes that most often impact our Southern Group, can actually increase our revenues in the areas affected. While weather-related and other “one-time” occurrences can boost revenues through additional work, as a result of significant start-up costs and other factors, such revenue sometimes generates earnings at comparatively lower margins. Certain weather conditions, including severe winter storms, may result in the temporary suspension of our operations, which can significantly affect the operating results of the affected regions. The operating results of our first quarter also often reflect higher repair and maintenance expenses because we rely on the slower winter months, when waste flows are generally lower, to perform scheduled maintenance at our waste-to-energy facilities.

9.    Acquisitions

Oakleaf — On July 28, 2011, we paid $432 million, net of cash received of $4 million and inclusive of certain adjustments, to acquire Oakleaf. Oakleaf provides outsourced waste and recycling services principally through a nationwide network of third-party haulers. The operations we acquired generated approximately $580 million in revenues in 2010. We acquired Oakleaf to advance our growth and transformation strategies and increase our national accounts customer base while enhancing our ability to provide comprehensive environmental solutions. For the year ended December 31, 2011, we incurred $1 million of acquisition-related costs, which were classified as “Selling, general and administrative” expenses. For the three- and six-month periods ended June 30, 2012, Oakleaf recognized revenues of $147 million and $295 million, respectively, and net losses of $4 million for each period. These amounts are included in our Condensed Consolidated Statement of Operations.

The following table shows adjustments since December 31, 2011 to the preliminary allocation of the purchase price of Oakleaf to the assets acquired and liabilities assumed based on their estimated fair value (in millions):

 

     December 31,
2011
    Adjustments     June 30,
2012
 

Accounts and other receivables

   $ 70      $ 1      $ 71   

Other current assets

     28               28   

Property and equipment

     72        (2     70   

Goodwill

     327        1        328   

Other intangible assets

     87               87   

Accounts payable

     (82            (82

Accrued liabilities

     (48            (48

Deferred income taxes, net

     (10     1        (9

Other liabilities

     (12     (1     (13
  

 

 

   

 

 

   

 

 

 

Total purchase price

   $ 432      $      $ 432   
  

 

 

   

 

 

   

 

 

 

 

22


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The purchase price allocation, which is still preliminary and may change, will be finalized in the third quarter of 2012. The following table presents the preliminary allocation of the purchase price to other intangible assets (amounts in millions, except for amortization periods):

 

 

     Amount      Weighted
Average
Amortization
Periods
(In Years)

Customer relationships

   $ 74       10.0

Vendor relationships

     4       10.0

Trademarks

     9       15.0
  

 

 

    
   $ 87       10.5
  

 

 

    

Goodwill of $328 million was calculated as the excess of the consideration paid over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill is a result of expected synergies from combining the Company’s operations with Oakleaf’s national accounts customer base and vendor network. The vendor-hauler network expands our partnership with third-party service providers. In many cases we can provide vendor-haulers with opportunities to maintain and increase their business by utilizing our extensive post-collection network. We believe this will generate significant benefits for the Company and for the vendor-haulers. Based on our preliminary valuation, goodwill has been assigned to our four geographic Groups as they are expected to benefit from the synergies of the combination. Goodwill related to this acquisition is not deductible for income tax purposes.

The following pro forma consolidated results of operations for the three and six months ended June 30, 2011 have been prepared as if the acquisition of Oakleaf occurred at January 1, 2011 (in millions, except per share amounts):

 

     Three Months Ended
June 30, 2011
   Six Months Ended
June 30, 2011

Operating revenues

     $ 3,488        $ 6,721  

Net income attributable to Waste Management, Inc. .

       235          417  

Basic earnings per common share

       0.49          0.88  

Diluted earnings per common share

       0.49          0.87  

Other — During the first half of 2012, we paid $94 million for interests in oil and gas producing properties through two transactions. The purchase price was allocated primarily to “Property and equipment.” Additionally, during the six months ended June 30, 2012 we acquired 16 other businesses related to our collection and recycling operations.

10.    Restructuring

Beginning in July 2011, we took steps to streamline our organization as part of our cost savings programs. This reorganization eliminated over 700 employee positions throughout the Company, including approximately 300 open positions. Additionally, subsequent to our acquisition of Oakleaf, we incurred charges in connection with restructuring that organization. During the year ended December 31, 2011, we recognized a total of $19 million of pre-tax restructuring charges, of which $18 million were related to employee severance and benefit costs associated with these restructuring efforts. The remaining charges were primarily related to operating lease obligations for property that will no longer be utilized.

During the first half of 2012, we recognized additional employee severance and benefit restructuring charges of $7 million, including $3 million associated with the reorganization of Oakleaf and additional amounts associated with certain other actions taken by the Company primarily in our Southern Group.

 

23


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Through June 30, 2012, we have paid approximately $17 million of the employee severance and benefit costs incurred as a result of these restructuring efforts.

11.    (Income) Expense from Divestitures, Asset Impairments and Unusual Items

During the second quarter of 2012, we recognized impairment charges of $34 million, relating primarily to two facilities in our medical waste services business as a result of projected operating losses at each of these facilities. We wrote down the carrying values of the facilities’ operating permits and property, plant and equipment to their estimated fair values. Our medical waste services business is included in our “Other” operations in Note 8.

In addition, the negative effect on our revenues of the continued deterioration of electricity commodity prices, coupled with our continued increased exposure to market prices as a result of the expiration of several long-term, fixed-rate electricity commodity contracts at our waste-to-energy and independent power facilities, and the expiration of several long-term disposal contracts at above-market rates indicated that the fair value of our Wheelabrator Group could potentially be less than its carrying amount. As a result, in the second quarter of 2012, we performed an interim impairment analysis of our Wheelabrator Group’s goodwill balance, which was $788 million as of June 30, 2012.

We performed an interim quantitative assessment using both an income and a market approach, which indicated that the estimated fair value of our Wheelabrator Group exceeded its carrying value; however, the amount by which the fair value exceeded the carrying value declined significantly from the most recent annual impairment test performed at October 1, 2011. At that time, our Wheelabrator Group’s estimated fair value exceeded its carrying value by approximately 30%, as compared with slightly greater than 10% as of the interim impairment test performed this quarter. If market prices for electricity worsen or do not recover as we have projected, if our disposal rates continue to decline, or if our costs and capital expenditures exceed our forecasts, the estimated fair value of our Wheelabrator Group could decrease further and potentially result in an impairment charge in a future period.

12.    Fair Value Measurements

Assets and Liabilities Accounted for at Fair Value

Our assets and liabilities that are measured at fair value on a recurring basis include the following (in millions):

 

            Fair Value Measurements at
June 30, 2012 Using
 
     Total      Quoted
Prices in
Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets:

           

Cash equivalents

   $ 112       $ 112       $       $   

Available-for-sale securities

     162         137                 25   

Electricity commodity derivatives

     3                 3           
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 277       $ 249       $ 3       $ 25   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Interest rate derivatives

   $ 99       $       $ 99       $   

Foreign currency derivatives

     1                 1           

Electricity commodity derivatives

     1                 1           
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 101       $       $ 101       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

24


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

            Fair Value Measurements at
December 31, 2011 Using
 
     Total      Quoted
Prices in
Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets:

           

Cash equivalents

   $ 120       $ 120       $       $   

Available-for-sale securities

     179         154                 25   

Interest rate derivatives

     73                 73           

Electricity commodity derivatives

     5                 5           
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 377       $ 274       $ 78       $ 25   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Interest rate derivatives

   $ 74       $       $ 74       $   

Foreign currency derivatives

     2                 2           
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 76       $       $ 76       $   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair Value of Available-for-sale Securities — The available-for-sale securities measured using Level 1 inputs are primarily included in long-term “Other assets” in our Condensed Consolidated Balance Sheets. The fair value of available-for-sale securities measured using Level 3 inputs consists of redeemable preferred stock that was acquired in November 2011 and is included in “Investments in unconsolidated entities” in our Condensed Consolidated Balance Sheets. The redeemable preferred stock is recorded at fair value based on other third-party investors’ recent or pending transactions in these securities, which are considered to be the best evidence of fair value currently available. When this evidence is not available, we use other valuation techniques as appropriate and available. These valuation methodologies may include transactions in similar instruments, discounted cash flow techniques, third-party appraisals or industry multiples and public comparables.

Fair Value of Debt

At June 30, 2012 and December 31, 2011, the carrying value of our debt was approximately $9.8 billion. The carrying value of our debt includes adjustments associated with fair value hedge accounting related to our interest rate swaps as discussed in Note 4.

The estimated fair value of our debt was approximately $11.1 billion at June 30, 2012 and approximately $10.8 billion at December 31, 2011. The estimated fair value of our senior notes is based on quoted market prices. The carrying value of remarketable debt and borrowings under our revolving credit facilities approximates fair value due to the short-term nature of the interest rates. The fair value of our other debt is estimated using discounted cash flow analysis, based on current market rates for similar types of instruments.

Although we have determined the estimated fair value amounts using available market information and commonly accepted valuation methodologies, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, our estimates are not necessarily indicative of the amounts that we, or holders of the instruments, could realize in a current market exchange. The use of different assumptions and/or estimation methodologies could have a material effect on the estimated fair values. The fair value estimates are based on Level 2 inputs of the fair value hierarchy available as of June 30, 2012 and December 31, 2011. These amounts have not been revalued since those dates, and current estimates of fair value could differ significantly from the amounts presented.

 

25


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

13.    Variable Interest Entities

Following is a description of our financial interests in variable interest entities that we consider significant, including (i) those for which we have determined that we are the primary beneficiary of the entity and, therefore, have consolidated the entities into our financial statements; and (ii) those that represent a significant interest in an unconsolidated entity.

Consolidated Variable Interest Entities

Waste-to-Energy LLCs — In June 2000, two limited liability companies were established to purchase interests in existing leveraged lease financings at three waste-to-energy facilities that we lease, operate and maintain. We own a 0.5% interest in one of the LLCs (“LLC I”) and a 0.25% interest in the second LLC (“LLC II”). John Hancock Life Insurance Company (“Hancock”) owns 99.5% of LLC I and 99.75% of LLC II is owned by LLC I and the CIT Group (“CIT”). In 2000, Hancock and CIT made an initial investment of $167 million in the LLCs, which was used to purchase the three waste-to-energy facilities and assume the seller’s indebtedness. Under the LLC agreements, the LLCs shall be dissolved upon the occurrence of any of the following events: (i) a written decision of all members of the LLCs; (ii) December 31, 2063; (iii) a court’s dissolution of the LLCs; or (iv) the LLCs ceasing to own any interest in the waste-to-energy facilities.

Income, losses and cash flows of the LLCs are allocated to the members based on their initial capital account balances until Hancock and CIT achieve targeted returns; thereafter, we will receive 80% of the earnings of each of the LLCs and Hancock and CIT will be allocated the remaining 20% proportionate to their respective equity interests. All capital allocations made through June 30, 2012 have been based on initial capital account balances as the target returns have not yet been achieved.

Our obligations associated with our interests in the LLCs are primarily related to the lease of the facilities. In addition to our minimum lease payment obligations, we are required to make cash payments to the LLCs for differences between fair market rents and our minimum lease payments. These payments are subject to adjustment based on factors that include the fair market value of rents for the facilities and lease payments made through the re-measurement dates. In addition, we may also be required under certain circumstances to make capital contributions to the LLCs based on differences between the fair market value of the facilities and defined termination values as provided for in the underlying lease agreements, although we believe the likelihood of the occurrence of these circumstances is remote.

We have determined that we are the primary beneficiary of the LLCs and consolidate these entities in our Consolidated Financial Statements because (i) all of the equity owners of the LLCs are considered related parties for purposes of applying this accounting guidance; (ii) the equity owners share power over the significant activities of the LLCs; and (iii) we are the entity within the related party group whose activities are most closely associated with the LLCs.

As of June 30, 2012 and December 31, 2011, our Condensed Consolidated Balance Sheets included $302 million and $308 million, respectively, of net property and equipment associated with the LLCs’ waste-to-energy facilities and $248 million and $246 million, respectively, in noncontrolling interests associated with Hancock’s and CIT’s interests in the LLCs. As of June 30, 2012 and December 31, 2011, all debt obligations of the LLCs had been paid in full and, therefore, the LLCs had no liabilities. We recognized reductions in earnings of $12 million and $25 million for the three and six months ended June 30, 2012 and 2011, respectively, for Hancock’s and CIT’s noncontrolling interests in the LLCs’ earnings. The LLCs’ earnings relate to the rental income generated from leasing the facilities to our subsidiaries, reduced by depreciation expense. The LLCs’ rental income is eliminated in WM’s consolidation.

Significant Unconsolidated Variable Interest Entities

Investment in Waste-to-Energy and Recycling LLC — In the first quarter of 2012, we established a limited liability company (the “LLC”) along with our joint venture partner, a commercial entity in the waste management industry, to develop, construct, operate and maintain a waste-to-energy and recycling facility in

 

26


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

England. We own a 50% interest in this joint venture. The total cost of constructing this facility is expected to be £200 million, or $314 million based on the exchange rate as of June 30, 2012. The LLC will be funded primarily through loans from the joint venture partners and loans under the LLC’s credit facility agreements with third-party financial institutions. The funds loaned under the credit facility agreements will be used for the development and construction of the facility. We are committed to provide up to £57 million, or $90 million based on the exchange rate as of June 30, 2012, of funding to the LLC. Our actual commitment may be more or less depending on the actual cost of the facility. Through June 30, 2012, we had funded approximately £7 million, or $11 million, through loans and less than $1 million through equity contributions. These amounts are included in our Condensed Consolidated Balance Sheet as long-term “Other assets” and “Investments in unconsolidated entities,” respectively. We also have guaranteed the performance of certain management services for the project for which our maximum exposure under the guarantee is not material.

In addition, a wholly-owned subsidiary of the Company will be responsible for constructing the waste-to-energy facility for the LLC under a fixed-price construction contract. Once the facility is constructed, a majority-owned subsidiary of the Company will be responsible for operating and maintaining the facility for the LLC under a substantially fixed-price operating and maintenance contract. Under the operating and maintenance contract, we have guaranteed our ability to operate this facility at certain performance levels that we believe are within our control to achieve. We also will be jointly responsible, along with our LLC joint venture partner, for the performance of sales and marketing services for the LLC through a 50%-owned and unconsolidated entity. The fixed-price components of the above-mentioned contracts were established based on estimates of expected construction, operation and maintenance costs. However, we are subject to variation in our expected profits or potential losses if the actual costs differ from the costs established in the contracts. Our maximum exposure to loss under these contracts cannot be quantified.

We determined that we are not the primary beneficiary of the LLC as all decision-making responsibility is shared jointly with our joint venture partner. As such, we do not have the power to individually direct the entity’s activities. Accordingly, we account for this investment under the equity method of accounting and do not consolidate this entity.

Investment in Refined Coal Facility — In January 2011, we acquired a noncontrolling interest in a limited liability company, which was established to invest in and manage a refined coal facility. Along with the other equity investor, we support the operations of the entity in exchange for a pro-rata share of the tax credits it generates. Our initial consideration for this investment consisted of a cash payment of $48 million. As of June 30, 2012 and December 31, 2011, our investment balance was $30 million and $35 million, respectively, representing our current maximum pre-tax exposure to loss. Under the terms and conditions of the transaction, we do not believe that we have any material exposure to loss. Future contributions will commence once certain levels of tax credits have been generated and will continue through the expiration of the tax credits under Section 45 of the Internal Revenue Code, which occurs at the end of 2019. We are only obligated to make future contributions to the extent tax credits are generated. We determined that we are not the primary beneficiary of this entity as we do not have the power to individually direct the entity’s activities. Accordingly, we account for this investment under the equity method of accounting and do not consolidate the entity. Additional information related to this investment is discussed in Note 5.

Investment in Federal Low-income Housing Tax Credits — In April 2010, we acquired a noncontrolling interest in a limited liability company established to invest in and manage low-income housing properties. We support the operations of the entity in exchange for a pro-rata share of the tax credits it generates. Our target return on the investment is guaranteed and, therefore, we do not believe that we have any material exposure to loss. Our consideration for this investment totaled $221 million, which was comprised of a $215 million note payable and an initial cash payment of $6 million. As of June 30, 2012 and December 31, 2011, our investment balance was $166 million and $178 million, respectively, and our debt balance was $164 million and $176 million, respectively. We determined that we are not the primary beneficiary of this entity as we do not have the

 

27


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

power to individually direct the entity’s activities. Accordingly, we account for this investment under the equity method of accounting and do not consolidate the entity. Additional information related to this investment is discussed in Note 5.

Trusts for Final Capping, Closure, Post-Closure or Environmental Remediation Obligations — We have significant financial interests in trust funds that were created to settle certain of our final capping, closure, post-closure or environmental remediation obligations. Generally, we are the sole beneficiary of these restricted balances; however, certain of the funds have been established for the benefit of both the Company and the host community in which we operate. We have determined that these trust funds are variable interest entities; however, we are not the primary beneficiary of these entities because either (i) we do not have the power to direct the significant activities of the trusts or (ii) power over the trusts’ significant activities is shared.

We account for the trusts for which we are the sole beneficiary as long-term “Other assets” in our Condensed Consolidated Balance Sheet. These trusts had a fair value of $120 million at June 30, 2012 and $123 million at December 31, 2011. Our interests in the trusts that have been established for the benefit of both the Company and the host community in which we operate are accounted for as investments in unconsolidated entities and receivables. These amounts are recorded in “Other receivables,” “Investments in unconsolidated entities” and long-term “Other assets” in our Condensed Consolidated Balance Sheet, as appropriate. Our investments and receivables related to these trusts had an aggregate carrying value of $109 million as of June 30, 2012 and $107 million as of December 31, 2011. We reflect our interests in the unrealized gains and losses on available-for-sale securities held by these trusts as a component of “Accumulated other comprehensive income.”

As the party with primary responsibility to fund the related final capping, closure, post-closure or environmental remediation activities, we are exposed to risk of loss as a result of potential changes in the fair value of the assets of the trust. The fair value of trust assets can fluctuate due to (i) changes in the market value of the investments held by the trusts and (ii) credit risk associated with trust receivables. Although we are exposed to changes in the fair value of the trust assets, we currently expect the trust funds to continue to meet the statutory requirements for which they were established.

14.    Condensed Consolidating Financial Statements

WM Holdings has fully and unconditionally guaranteed all of WM’s senior indebtedness. WM has fully and unconditionally guaranteed all of WM Holdings’ senior indebtedness. None of WM’s other subsidiaries have guaranteed any of WM’s or WM Holdings’ debt. As a result of these guarantee arrangements, we are required to present the following condensed consolidating financial information (in millions):

 

28


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

CONDENSED CONSOLIDATING BALANCE SHEETS

June 30, 2012

(Unaudited)

 

     WM      WM
Holdings
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

ASSETS

  

Current assets:

             

Cash and cash equivalents

   $ 112       $       $ 125       $      $ 237   

Other current assets

                     2,217                2,217   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     112                 2,342                2,454   

Property and equipment, net

                12,360                12,360   

Investments in and advances to affiliates

     12,338         16,156         3,201         (31,695       

Other assets

     44         12         7,821                7,877   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 12,494       $ 16,168       $ 25,724       $ (31,695   $ 22,691   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
LIABILITIES AND EQUITY   

Current liabilities:

             

Current portion of long-term debt

   $ 552       $       $ 301       $      $ 853   

Accounts payable and other current liabilities

     150         13         2,171                2,334   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     702         13         2,472                3,187   

Long-term debt, less current portion

     5,580         449         2,944                8,973   

Other liabilities

     44                 4,000                4,044   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     6,326         462         9,416                16,204   

Equity:

             

Stockholders’ equity

     6,168         15,706         15,989         (31,695     6,168   

Noncontrolling interests

                     319                319   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     6,168         15,706         16,308         (31,695     6,487   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 12,494       $ 16,168       $ 25,724       $ (31,695   $ 22,691   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

29


WASTE MANAGEMENT, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

CONDENSED CONSOLIDATING BALANCE SHEETS (Continued)

 

 

December 31, 2011

 

     WM      WM
Holdings
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

ASSETS

  

Current assets:

             

Cash and cash equivalents

   $ 119       $       $ 139       $      $ 258   

Other current assets

     6                 2,115                2,121   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     125                 2,254                2,379   

Property and equipment, net

                     12,242                12,242   

Investments in and advances to affiliates

     12,006         14,905         3,033         (29,944       

Other assets

     120         12         7,816                7,948   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 12,251       $ 14,917       $ 25,345       $ (29,944   $ 22,569   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
LIABILITIES AND EQUITY   

Current liabilities:

             

Current portion of long-term debt

   $ 298       $       $ 333       $      $ 631   

Accounts payable and other current liabilities

     124         13         2,300                2,437   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     422         13         2,633                3,068   

Long-term debt, less current portion

     5,727         449         2,949                9,125   

Other liabilities

     32                 3,954                3,986   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     6,181         462         9,536                16,179   

Equity:

             

Stockholders’ equity

     6,070         14,455         15,489         (29,944     6,070   

Noncontrolling interests

                     320                320   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
     6,070         14,455         15,809         (29,944     6,390   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 12,251       $ 14,917       $ 25,345       $ (29,944   $ 22,569   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

30


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Three Months Ended June 30, 2012

(Unaudited)

 

    WM     WM
Holdings
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Operating revenues

  $      $      $ 3,459      $      $ 3,459   

Costs and expenses

                  2,993               2,993   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

                  466               466   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

         

Interest income (expense)

    (88     (8     (24            (120

Equity in earnings of subsidiaries, net of taxes

    262        267               (529       

Other, net

                  (12            (12
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    174        259        (36     (529     (132
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    174        259        430        (529     334   

Provision for (benefit from) income taxes

    (34     (3     152               115   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income

    208        262        278        (529     219   

Less: Net income attributable to noncontrolling interests

                  11               11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Waste Management, Inc.

  $ 208      $ 262      $ 267      $ (529   $ 208   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended June 30, 2011

(Unaudited)

 

    WM     WM
Holdings
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Operating revenues

  $      $      $ 3,347      $      $ 3,347   

Costs and expenses

                  2,841               2,841   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

                  506               506   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

         

Interest income (expense)

    (86     (8     (23            (117

Equity in earnings of subsidiaries, net of taxes

    290        295               (585       

Other, net

                  (8            (8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    204        287        (31     (585     (125
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    204        287        475        (585     381   

Provision for (benefit from) income taxes

    (33     (3     167               131   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income

    237        290        308        (585     250   

Less: Net income attributable to noncontrolling interests

                  13               13   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Waste Management, Inc.

  $ 237      $ 290      $ 295      $ (585   $ 237   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

31


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (Continued)

Six Months Ended June 30, 2012

(Unaudited)

 

    WM     WM
Holdings
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Operating revenues

  $      $      $ 6,754      $      $ 6,754   

Costs and expenses

                  5,887               5,887   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

                  867               867   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

         

Interest income (expense)

    (176     (16     (49            (241

Equity in earnings of subsidiaries, net of taxes

    486        496               (982       

Other, net

                  (20            (20
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    310        480        (69     (982     (261
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    310        480        798        (982     606   

Provision for (benefit from) income taxes

    (69     (6     279               204   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income

    379        486        519        (982     402   

Less: Net income attributable to noncontrolling interests

                  23               23   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Waste Management, Inc.

  $ 379      $ 486      $ 496      $ (982   $ 379   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2011

(Unaudited)

 

    WM     WM
Holdings
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Operating revenues

  $      $      $ 6,450      $      $ 6,450   

Costs and expenses

                  5,517               5,517   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

                  933               933   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense):

         

Interest income (expense)

    (171     (17     (47            (235

Equity in earnings of subsidiaries, net of taxes

    527        537               (1,064       

Other, net

                  (11            (11
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    356        520        (58     (1,064     (246
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    356        520        875        (1,064     687   

Provision for (benefit from) income taxes

    (67     (7     315               241   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated net income

    423        527        560        (1,064     446   

Less: Net income attributable to noncontrolling interests

                  23               23   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Waste Management, Inc.

  $ 423      $ 527      $ 537      $ (1,064   $ 423   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

32


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     WM      WM
Holdings
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Three Months Ended June 30, 2012

             

Comprehensive income

   $ 190       $ 262       $ 253       $ (529   $ 176   

Less: Comprehensive income attributable to noncontrolling interests

                     11                11   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to Waste Management, Inc.

   $ 190       $ 262       $ 242       $ (529   $ 165   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Three Months Ended June 30, 2011

             

Comprehensive income

   $ 231       $ 290       $ 316       $ (585   $ 252   

Less: Comprehensive income attributable to noncontrolling interests

                     13                13   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to Waste Management, Inc.

   $ 231       $ 290       $ 303       $ (585   $ 239   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

     WM      WM
Holdings
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Six Months Ended June 30, 2012

             

Comprehensive income

   $ 366       $ 486       $ 523       $ (982   $ 393   

Less: Comprehensive income attributable to noncontrolling interests

                     23                23   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to Waste Management, Inc.

   $ 366       $ 486       $ 500       $ (982   $ 370   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Six Months Ended June 30, 2011

             

Comprehensive income

   $ 421       $ 527       $ 591       $ (1,064   $ 475   

Less: Comprehensive income attributable to noncontrolling interests

                     23                23   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to Waste Management, Inc.

   $ 421       $ 527       $ 568       $ (1,064   $ 452   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

33


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

Six Months Ended June 30, 2012

(Unaudited)

 

     WM     WM
Holdings
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash flows from operating activities:

          

Consolidated net income

   $ 379      $ 486      $ 519      $ (982   $ 402   

Equity in earnings of subsidiaries, net of taxes

     (486     (496            982          

Other adjustments

     91               651               742   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (16     (10     1,170               1,144   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Acquisitions of businesses, net of cash acquired

                   (154            (154

Capital expenditures

                   (730            (730

Proceeds from divestitures of businesses (net of cash divested) and other sales of assets

                   20               20   

Net receipts from restricted trust and escrow accounts and other, net

                   (39            (39
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

                   (903            (903
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

New borrowings

     150               162               312   

Debt repayments

     (35            (236            (271

Cash dividends

     (329                          (329

Common stock repurchases

                                   

Exercise of common stock options

     31                             31   

Distributions paid to noncontrolling interests and other

     9               (14            (5

(Increase) decrease in intercompany and investments, net

     183        10        (193              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     9        10        (281            (262
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

                                   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     (7            (14            (21

Cash and cash equivalents at beginning of period

     119               139               258   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 112      $      $ 125      $      $ 237   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

34


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (Continued)

Six Months Ended June 30, 2011

(Unaudited)

 

     WM     WM
Holdings
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash flows from operating activities:

          

Consolidated net income

   $ 423      $ 527      $ 560      $ (1,064   $ 446   

Equity in earnings of subsidiaries, net of taxes

     (527     (537            1,064          

Other adjustments

     2        (3     633               632   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (102     (13     1,193               1,078   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Acquisitions of businesses, net of cash acquired

                   (157            (157

Capital expenditures

                   (596            (596

Proceeds from divestitures of businesses (net of cash divested) and other sales of assets

                   13               13   

Net receipts from restricted trust and escrow accounts and other, net

     (5            (79            (84
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (5            (819            (824
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

New borrowings

     396               8               404   

Debt repayments

            (147     (167            (314

Cash dividends

     (323                          (323

Common stock repurchases

     (168                          (168

Exercise of common stock options

     35                             35   

Distributions paid to noncontrolling interests and other

     (10            (49            (59

(Increase) decrease in intercompany and investments, net

     37        160        (197              
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (33     13        (405            (425
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

                   3               3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Decrease in cash and cash equivalents

     (140            (28            (168

Cash and cash equivalents at beginning of period

     465               74               539   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 325      $      $ 46      $      $ 371   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

15.    Subsequent Event

In July 2012, we announced a reorganization of operations, designed to flatten the management structure and reduce our cost structure. Principal organizational changes anticipated include removal of the management layer consisting of our four geographic Groups; consolidation and reduction of the number of Areas managing the core collection, disposal and recycling business from 22 to 17; and reduction of corporate support staff in an

 

35


WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

effort to better align their support with the needs of the operating units. This restructuring has been designed around the primary goals of streamlining delivery of corporate support, while not disrupting our front line operations.

We currently estimate that approximately 700 employee positions throughout the Company, including positions at both the management and support level, will be eliminated. Voluntary separation arrangements were offered to many in management.

We expect that this restructuring plan will be implemented through the end of 2012. We currently anticipate a pre-tax charge to earnings in the range of $50 million to $60 million, primarily related to employee severance and benefit expenses. This charge, which will be recorded primarily in the third quarter of 2012, is an estimate, and actual charges may vary materially based on various factors, including the level of employee terminations and changes in management’s assumptions. This charge estimate does not include facility, lease or other charges that are not yet estimable but that the Company may incur in connection with this restructuring.

 

36


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included under Item 1 and our Consolidated Financial Statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2011.

In an effort to keep our stockholders and the public informed about our business, we may make “forward-looking statements.” Forward-looking statements usually relate to future events and anticipated revenues, earnings, cash flows or other aspects of our operations or operating results. Forward-looking statements are often identified by the words, “will,” “may,” “should,” “continue,” “anticipate,” “believe,” “expect,” “plan,” “forecast,” “project,” “estimate,” “intend,” and words of similar nature and generally include statements containing:

 

  Ÿ  

projections about accounting and finances;

 

  Ÿ  

plans and objectives for the future;

 

  Ÿ  

any projections of the amount, timing or impact of cost savings, restructuring actions, workforce reductions or related charges;

 

  Ÿ  

projections or estimates about assumptions relating to our performance; or

 

  Ÿ  

our opinions, views or beliefs about the effects of current or future events, circumstances or performance.

You should view these statements with caution. These statements are not guarantees of future performance, circumstances or events. They are based on the facts and circumstances known to us as of the date the statements are made. All aspects of our business are subject to uncertainties, risks and other influences, many of which we do not control. Any of these factors, either alone or taken together, could have a material adverse effect on us and could change whether any forward-looking statement ultimately turns out to be true. Additionally, we assume no obligation to update any forward-looking statement as a result of future events, circumstances or developments. The following discussion should be read together with the Condensed Consolidated Financial Statements and the notes thereto.

Some of the risks that we believe could affect our financial statements for 2012 and beyond and that could cause actual results to be materially different from those that may be set forth in forward-looking statements made by the Company include the following:

 

  Ÿ  

competition may negatively affect our profitability or cash flows, our pricing strategy may have negative effects on volumes, and inability to execute our pricing strategy in order to retain and attract customers may negatively affect our average yield on collection and disposal business;

 

  Ÿ  

we may fail in implementing our optimization and growth initiatives and overall business strategy, which could adversely impact our financial performance and growth;

 

  Ÿ  

our restructuring may not achieve the goals and cost savings intended, implementing the restructuring may result in business disruption and employee distraction, and changes in our organizational structure and workforce could result in significant restructuring charges;

 

  Ÿ  

regulations may negatively impact our business by, among other things, restricting our operations, increasing costs of operations or requiring additional capital expenditures;

 

  Ÿ  

possible changes in our estimates of costs for site remediation requirements, final capping, closure and post-closure obligations, compliance and regulatory developments may increase our expenses;

 

  Ÿ  

certain materials processed by our recycling operations are subject to significant commodity price fluctuations, as are methane gas, electricity and other energy-related products marketed and sold by our landfill gas recovery, waste-to-energy and independent power production plant operations; fluctuations in commodity prices may have negative effects on our operating results;

 

37


  Ÿ  

increasing customer preference for alternatives to traditional disposal, government mandates requiring recycling and prohibiting disposal of certain types of waste, and overall reduction of waste generated could continue to have a negative effect on volumes of waste going to landfills and waste-to-energy facilities;

 

  Ÿ  

developments in technology could trigger a fundamental change in the waste management industry, as waste streams are increasingly viewed as a resource, which may adversely impact volumes at our landfills and waste-to-energy facilities and our profitability;

 

  Ÿ  

our existing and proposed service offerings to customers may require that we develop or license, and protect, new technologies; and our inability to obtain or protect new technologies could impact our services to customers and development of new revenue sources;

 

  Ÿ  

adverse publicity (whether or not justified) relating to activities by our operations, employees or agents could tarnish our reputation and reduce the value of our brand;

 

  Ÿ  

there is a risk of incurring significant environmental liabilities in the use, treatment, storage, transfer and disposal of waste materials; any substantial liability for environmental damage could have a material adverse effect on our financial condition and cash flows;

 

  Ÿ  

weak economic conditions may negatively affect the volumes of waste generated;

 

  Ÿ  

some of our customers, including governmental entities, have suffered financial difficulties that could affect our business and operating results, due to their credit risk and the impact of the municipal debt market on remarketing of our tax-exempt bonds;

 

  Ÿ  

if we are unable to obtain and maintain permits needed to open, operate, and/or expand our facilities, our results of operations will be negatively impacted;

 

  Ÿ  

fuel price increases or fuel supply shortages may increase our expenses and restrict our ability to operate;

 

  Ÿ  

problems with the operation of current information technology or the development and deployment of new information systems could decrease our efficiencies and increase our costs;

 

  Ÿ  

a cybersecurity incident could negatively impact our business and our relationships with customers;

 

  Ÿ  

efforts by labor unions to organize our employees may increase operating expenses and we may be unable to negotiate acceptable collective bargaining agreements with those who have chosen to be represented by unions, which could lead to labor disruptions, including strikes and lock-outs, which could adversely affect our results of operations and cash flows;

 

  Ÿ  

we could face significant liability for withdrawal from multiemployer pension plans;

 

  Ÿ  

we are subject to operational and safety risks, including the risk of personal injury to employees and others;

 

  Ÿ  

increased costs for financial assurance or the inadequacy of our insurance coverage could negatively impact our liquidity and increase our liabilities;

 

  Ÿ  

possible charges as a result of shut-down operations, uncompleted development or expansion projects or other events may negatively affect earnings;

 

  Ÿ  

we may reduce or suspend capital expenditures, acquisition activity, dividend declarations or share repurchases if we suffer a significant reduction in cash flows;

 

  Ÿ  

we may be unable to incur future indebtedness on terms we deem acceptable or to refinance our debt obligations, including near-term maturities, on acceptable terms and higher interest rates and market conditions may increase our expense;

 

  Ÿ  

climate change legislation, including possible limits on carbon emissions, may negatively impact our results of operations by increasing expenses;

 

38


  Ÿ  

weather conditions and one-time special projects cause our results to fluctuate, and harsh weather or natural disasters may cause us to temporarily suspend operations; our stock price may be negatively impacted by interim variations in our results;

 

  Ÿ  

we could be subject to significant fines and penalties, and our reputation could be adversely affected, if our business, or third parties with whom we have relationships, were to fail to comply with United States or foreign laws or regulations;

 

  Ÿ  

negative outcomes of litigation or threatened litigation or governmental proceedings may increase our costs, limit our ability to conduct or expand our operations, or limit our ability to execute our business plans and strategies; and

 

  Ÿ  

the adoption of new accounting standards or interpretations may cause fluctuations in reported quarterly results of operations or adversely impact our reported results of operations.

General

Our principal executive offices are located at 1001 Fannin Street, Suite 4000, Houston, Texas 77002. Our telephone number at that address is (713) 512-6200. Our website address is www.wm.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K are all available, free of charge, on our website as soon as practicable after we file the reports with the SEC. Our stock is traded on the New York Stock Exchange under the symbol “WM.”

We are the leading provider of comprehensive waste management services in North America. Our subsidiaries provide collection, transfer, recycling and disposal services. We are also a leading developer, operator and owner of waste-to-energy and landfill gas-to-energy facilities in the United States. Our customers include residential, commercial, industrial and municipal customers throughout North America.

Overview

Our Company is dedicated to three transformational goals that we believe will drive continued growth and leadership in a dynamic industry: know more about our customers and how to service them than anyone else; use conversion and processing technology to extract more value from the materials we manage; and continuously improve our operational efficiency. Our strategy supports diversion from landfills and converting waste into valuable products as customers seek more economically and environmentally sound alternatives. We intend to pursue achievement of our long-term goals in the short-term through efforts to:

 

  Ÿ  

grow our markets by implementing customer-focused growth, through customer segmentation and through strategic acquisitions, while maintaining our pricing discipline and increasing the amount of recyclable materials we manage each year;

 

  Ÿ  

grow our customer loyalty;

 

  Ÿ  

grow into new markets by investing in greener technologies; and

 

  Ÿ  

pursue initiatives that improve our operations and cost structure.

These efforts will be supported by ongoing improvements in information technologies. We believe that execution of our strategy will provide long-term value to our stockholders.

Our second quarter of 2012 results of operations reflect the impact of our continued investment in our strategic initiatives, including our July 28, 2011 acquisition of the primary operations of Oakleaf Global Holdings (“Oakleaf”); improvement in our core solid waste business; and the impact of decreases in commodity prices. Highlights of our financial results for the current quarter include:

 

  Ÿ  

Revenues of $3,459 million compared with $3,347 million in the second quarter of 2011, an increase of $112 million, or 3.3%. This increase in revenues is primarily attributable to:

 

  Ÿ  

Increases associated with acquired businesses of $199 million;

 

39


  Ÿ  

Internal revenue growth from volume of 0.6%, compared with negative 1.7% in 2011, which increased revenue by $19 million; and

 

  Ÿ  

Internal revenue growth from yield on our collection and disposal business of 0.6% in the current period, including a negative impact of 0.4% from our waste-to-energy business, primarily as a result of lower disposal rates associated with the expiration and renegotiation of a long-term disposal contract.

 

  Ÿ  

The impact of decreases in commodity prices decreased our revenue as follows: $95 million related to recyclable commodity prices; $9 million related to our fuel surcharge program; and $8 million related to electricity prices.

 

  Ÿ  

Operating expenses of $2,260 million, or 65.3% of revenues, compared with $2,140 million, or 63.9% of revenues, in the second quarter of 2011. This increase of $120 million, or 5.6%, is due primarily to our acquisitions and growth initiatives, offset partially by a decrease in customer rebates because of lower recyclable commodity prices;

 

  Ÿ  

Selling, general and administrative expenses decreased by $8 million, or 2.1%, from $382 million in the second quarter of 2011 to $374 million in the second quarter of 2012. Reductions in our bonus and long-term incentive plan expenses more than offset increases resulting from our acquisitions;

 

  Ÿ  

Income from operations of $466 million, or 13.5% of revenues, compared with $506 million, or 15.1% of revenues, in the second quarter of 2011; and

 

  Ÿ  

Net income attributable to Waste Management, Inc. of $208 million, or $0.45 per diluted share, as compared with $237 million, or $0.50 per diluted share in the second quarter of 2011. The comparability of our diluted earnings per share has been affected by the following items that occurred in the second quarter of 2012:

 

  Ÿ  

The recognition of impairment charges of $34 million, related primarily to two facilities in our medical waste services business, which had an unfavorable impact of $0.04 on our diluted earnings per share;

 

  Ÿ  

The recognition of a pre-tax noncash charge of $10 million associated with the partial withdrawal from an underfunded multiemployer pension plan, which had a negative impact of $0.01 on our diluted earnings per share; and

 

  Ÿ  

Pre-tax costs aggregating $5 million from a combination of restructuring charges and integration costs associated with our acquisition of Oakleaf, which had a negative impact of $0.01 on our diluted earnings per share.

We are pleased with the growth we are experiencing in our core solid waste business, which has helped to offset the negative effect of decreases in commodity prices on both our revenues and earnings. We anticipate continued improvement in our pricing and cost savings initiatives, including the restructuring activities announced in July 2012, which are outlined below in the Subsequent Event discussion. However, in the second half of 2012, we expect to see a continued decline in recyclable commodity prices and a negative year-over-year impact from our waste-to-energy business. Because commodity markets are inherently volatile, this prediction could materially change if markets either improve or deteriorate beyond our current predictions.

Free Cash Flow — As is our practice, we are presenting free cash flow, which is a non-GAAP measure of liquidity, in our disclosures because we use this measure in the evaluation and management of our business. We define free cash flow as net cash provided by operating activities, less capital expenditures, plus proceeds from divestitures of businesses (net of cash divested) and other sales of assets. We believe it is indicative of our ability to pay our quarterly dividends, repurchase common stock, fund acquisitions and other investments and, in the absence of refinancings, to repay our debt obligations. Free cash flow is not intended to replace “Net cash provided by operating activities,” which is the most comparable U.S. GAAP measure. However, we believe free cash flow gives investors greater insight into how we view our liquidity. Nonetheless, the use of free cash flow as a liquidity measure has material limitations because it excludes certain expenditures that are required or that we have committed to, such as declared dividend payments and debt service requirements.

 

40


Our calculation of free cash flow and reconciliation to “Net cash provided by operating activities,” is shown in the table below (in millions), and may not be the same as similarly-titled measures presented by other companies:

 

     Three Months
Ended
June 30,
    Six Months
Ended
June 30,
 
     2012     2011     2012     2011  

Net cash provided by operating activities

   $ 669      $ 478      $ 1,144      $ 1,078   

Capital expenditures

     (351     (280     (730     (596

Proceeds from divestitures of businesses (net of cash divested) and other sales of assets

     14        8        20        13   
  

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

   $ 332      $ 206      $ 434      $ 495   
  

 

 

   

 

 

   

 

 

   

 

 

 

When comparing our cash flow from operating activities for the three months and six months ended June 30, 2012 to the comparable periods in 2011, decreases in our income tax payments have positively affected our cash flow from operations this year, as well as a favorable cash receipt of $72 million resulting from the termination of interest rate swaps in April 2012. These year-over-year benefits were impacted by lower cash earnings and unfavorable impacts of working capital changes, particularly the change in accounts payable, which is affected by both cost changes and timing of payments.

The increase in capital expenditures when comparing the first six months of 2012 with the prior year period can generally be attributed to increased spending on fueling infrastructure and growth initiatives, and the impact of timing differences associated with cash payments for the previous years’ fourth quarter capital spending. We generally use a significant portion of our free cash flow on capital spending in the fourth quarter of each year. A more significant portion of our fourth quarter 2011 spending was paid in cash in 2012 than in the preceding year.

Acquisition of Oakleaf — On July 28, 2011, we paid $432 million, net of cash received of $4 million and inclusive of certain adjustments, to acquire Oakleaf. Oakleaf provides outsourced waste and recycling services principally through a nationwide network of third-party haulers. We acquired Oakleaf to advance our growth and transformatio