| WASTE MANAGEMENT INC Item 1A Risk Factors |
| When we make statements containing projections about our accounting and finances, plans and objectives for the future, future economic performance or when we make statements containing any other projections or estimates about our assumptions relating to these types of statements, we are making forward-looking statements |
| These statements usually relate to future events and anticipated revenues, earnings, cash flows or other aspects of our operations or operating results |
| We make these statements in an effort to keep stockholders and the public informed about our business and have based them on our current expectations about future events |
| You should view such statements with caution |
| These statements are not guarantees of future performance or events |
| All phases 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 or developments |
| The following discussion should be read together with the Consolidated Financial Statements and the notes to the Consolidated Financial Statements |
| 13 _________________________________________________________________ [69]Table of Contents Outlined below are some of the risks that we face and that could affect our business and financial position for 2006 and beyond |
| However, they are not the only risks that we face |
| There may be additional risks that we do not presently know of or that we currently believe are immaterial which could also impair our business and financial position |
| The waste industry is highly competitive, and if we cannot successfully compete in the marketplace, our business, financial condition and operating results may be materially adversely affected |
| We encounter intense competition from governmental, quasi-governmental and private sources in all aspects of our operations |
| In North America, the industry consists of large national waste management companies, and local and regional companies of varying sizes and financial resources |
| We compete with these companies as well as with counties and municipalities that maintain their own waste collection and disposal operations |
| These counties and municipalities may have financial competitive advantages because tax revenues are available to them and tax-exempt financing is more readily available to them |
| Also, such governmental units may attempt to impose flow control or other restrictions that would give them a competitive advantage |
| In addition, competitors may reduce their prices to expand sales volume or to win competitively bid contracts |
| When this happens, we may rollback prices or offer lower pricing to attract or retain our customers, resulting in a negative impact to our yield on base business |
| If we are unable to successfully manage our costs, our income from operations could be lower than expected |
| In recent years, we have implemented several profit improvement initiatives aimed at lowering our costs and enhancing our revenues, and continue to seek ways to reduce our selling, general and administrative and operating expenses |
| While we have generally been successful in reducing our selling, general and administrative costs, managing subcontractor costs and managing the effect of fuel price increases, these initiatives may not be sufficient |
| Even as our revenues increase, if we are unable to control variable costs or increases to our fixed costs in the future, we will be unable to maintain or expand our margins |
| In recent periods, rising employee-related costs and expenses, including health care and other employee benefits such as unemployment insurance and workers’ compensation have negatively impacted our measures to reduce costs |
| We cannot guarantee that we will be able to successfully implement our plans and strategies to improve margins and increase our income from operations We have announced several programs and strategies that we have implemented or planned to improve our margins and operating results |
| For example, we have implemented price increases and environmental fees and continue our fuel surcharge programs, all of which have increased our internal revenue growth |
| Additionally, we have announced plans to divest of under-performing assets if we cannot improve their profitability |
| It is possible that we may lose volumes as a result of price increases or that we may not be able to increase prices or pass on increased costs to all of our customers due to contractual restraints |
| Additionally, we may not be able to successfully negotiate the divestiture of under-performing operations, which could result in asset impairments or the continued operation of low margin businesses |
| If we are not able to fully implement our plans for any reason, many of which are out of our control, we may not see the expected improvements in our income from operations or our operating margins |
| The seasonal nature of our business and changes in general and local economic conditions cause our quarterly results to fluctuate, and prior performance is not necessarily indicative of our future results |
| Our operating revenues tend to be somewhat higher in the summer months, primarily due to the higher volume of construction and demolition waste |
| The volumes of industrial and residential waste in certain regions where we operate also tend 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 can actually increase our revenues in 14 _________________________________________________________________ [70]Table of Contents the areas affected |
| However, for several reasons, including significant start-up costs, such revenue often generates comparatively lower margins |
| Certain weather conditions 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 electrical demand is generally lower, to perform scheduled maintenance at our waste-to-energy facilities |
| Our business is affected by changes in national and general economic factors that are also outside of our control, including interest rates and consumer confidence |
| We have dlra3dtta0 billion of debt as of December 31, 2005 that is exposed to changes in market interest rates because of the combined impact of our variable rate tax-exempt bonds and our interest rate swap agreements |
| Therefore, any increase in interest rates can significantly increase our expenses |
| Additionally, although our services are of an essential nature, a weak economy generally results in decreases in volumes of waste generated, which decreases our revenues |
| We also face risks related to other adverse external factors, such as the ability of our insurers to meet their commitments in a timely manner and the effect that significant claims or litigation against insurance companies may have on such ability |
| Any of the factors described above could materially adversely affect our results of operations and cash flows |
| Additionally, due to these and other factors, operating results in any interim period are not necessarily indicative of operating results for an entire year, and operating results for any historical period are not necessarily indicative of operating results for a future period |
| We cannot predict with certainty the extent of future costs under environmental, health and safety laws, and cannot guarantee that they will not be material |
| We could be liable if our operations cause environmental damage to our properties or to the property of other landowners, particularly as a result of the contamination of drinking water sources or soil |
| Under current law, we could even be held liable for damage caused by conditions that existed before we acquired the assets or operations involved |
| Also, we could be liable if we arrange for the transportation, disposal or treatment of hazardous substances that cause environmental contamination, or if a predecessor owner made such arrangements and under applicable law we are treated as a successor to the prior owner |
| Any substantial liability for environmental damage could have a material adverse effect on our financial condition, results of operations and cash flows |
| In the ordinary course of our business, we have in the past, and may in the future, become involved in a variety of legal and administrative proceedings relating to land use and environmental laws and regulations |
| These include proceedings in which: • agencies of federal, state, local or foreign governments seek to impose liability on us under applicable statutes, sometimes involving civil or criminal penalties for violations, or to revoke or deny renewal of a permit we need; and • local communities and citizen groups, adjacent landowners or governmental agencies oppose the issuance of a permit or approval we need, allege violations of the permits under which we operate or laws or regulations to which we are subject, or seek to impose liability on us for environmental damage |
| We generally seek to work with the authorities or other persons involved in these proceedings to resolve any issues raised |
| If we are not successful, the adverse outcome of one or more of these proceedings could result in, among other things, material increases in our costs or liabilities as well as material charges for asset impairments |
| The waste industry is subject to extensive government regulation, and any such regulations, or new regulations, could restrict our operations or increase our costs of operations or impose additional capital expenditures |
| Stringent government regulations at the federal, state, provincial, and local level in the United States and Canada have a substantial impact on our business |
| A large number of complex laws, rules, orders and 15 _________________________________________________________________ [71]Table of Contents interpretations govern environmental protection, health, safety, land use, zoning, transportation and related matters |
| Among other things, they may restrict our operations and adversely affect our financial condition, results of operations and cash flows by imposing conditions such as: • limitations on siting and constructing new waste disposal, transfer or processing facilities or expanding existing facilities; • limitations, regulations or levies on collection and disposal prices, rates and volumes; • limitations or bans on disposal or transportation of out-of-state waste or certain categories of waste; or • mandates regarding the disposal of solid waste Regulations affecting the siting, design and closure of landfills could require us to undertake investigatory or remedial activities, curtail operations or close landfills temporarily or permanently |
| Future changes in these regulations may require us to modify, supplement or replace equipment or facilities |
| The costs of complying with these regulations could be substantial |
| In order to develop, expand or operate a landfill or other waste management facility, we must have various facility permits and other governmental approvals, including those relating to zoning, environmental protection and land use |
| The permits and approvals are often difficult, time consuming and costly to obtain and could contain conditions that limit our operations |
| Significant increases in fuel prices for any extended periods of time will increase our operating expenses and may increase our tax expense |
| The price and supply of fuel are unpredictable, and can fluctuate significantly based on international, political and economic circumstances, as well as other factors outside our control, such as actions by OPEC and other oil and gas producers, regional production patterns, weather conditions and environmental concerns |
| In the past two years, the year-over-year changes in the average quarterly fuel prices have ranged from an increase of 41prca to a decrease of 2prca |
| We need fuel to run our collection and transfer trucks and equipment used in our landfill operations, and price escalations or reductions in the supply will likely increase our operating expenses and have a negative impact on income from operations and cash flows |
| Additionally, as fuel prices increase, many of our vendors raise their prices as a means to offset their own rising costs |
| We have in place a fuel surcharge program, designed to offset increased fuel expenses; however, we may not be able to pass through all of our increased costs and some customers’ contracts prohibit any pass through of the increased costs |
| We may initiate other programs or means to guard against the rising costs of fuel, although there can be no assurances that we will be able to do so or that such programs will be successful |
| Additionally, our current effective tax rate is estimated to be significantly lower than statutory tax rates due in part to Section 29 tax credits we realize from our landfill gas sales and investments in coal-based synthetic fuel partnerships |
| The ability to earn Section 29 tax credits is tied to an average benchmark oil price determined by the Internal Revenue Service, and the credits are phased out as the benchmark average price increases |
| Higher fuel prices or continued high fuel prices will phase out our credits and increase our effective tax rate, which will result in higher tax expense |
| We have substantial financial assurance and insurance requirements, and increases in the costs of obtaining adequate financial assurance, or the inadequacy of our insurance coverages, could negatively impact our liquidity and increase our liabilities |
| The amount of insurance required to be maintained for environmental liability is governed by statutory requirements |
| We believe that the cost for such insurance is high relative to the coverage it would provide, and therefore, our coverages are generally maintained at the minimum statutorily required levels |
| We face the risk of incurring liabilities for environmental damage if our insurance coverage is ultimately inadequate to cover those damages |
| We also carry a broad range of insurance coverages that are customary for a company our size |
| We use these programs to mitigate risk of loss, thereby allowing us to manage our self-insurance exposure 16 _________________________________________________________________ [72]Table of Contents associated with claims |
| To the extent our insurers were unable to meet their obligations, or our own obligations for claims were more than we estimated, there could be a material adverse effect to our financial results |
| In addition, to fulfill our financial assurance obligations with respect to environmental closure and post-closure liabilities, we generally obtain letters of credit or surety bonds, rely on insurance, including captive insurance, or fund trust and escrow accounts |
| We currently have in place all financial assurance instruments necessary for our operations |
| We do not anticipate any unmanageable difficulty in obtaining financial assurance instruments in the future |
| However, we are aware of recent increases in the cost of surety bonds and in the event we are unable to obtain sufficient surety bonding, letters of credit or third-party insurance coverage at reasonable cost, or one or more states cease to view captive insurance as adequate coverage, we would need to rely on other forms of financial assurance |
| These types of financial assurance could be more expensive to obtain, which could negatively impact our liquidity and capital resources and our ability to meet our obligations as they become due |
| The possibility of disposal site developments, expansion projects or pending acquisitions not being completed or certain other events could result in a material charge against our earnings |
| In accordance with generally accepted accounting principles, we capitalize certain expenditures and advances relating to disposal site development, expansion projects, acquisitions, software development costs and other projects |
| If a facility or operation is permanently shut down or determined to be impaired, a pending acquisition is not completed, a development or expansion project is not completed or is determined to be impaired, we will charge against earnings any unamortized capitalized expenditures and advances relating to such facility, acquisition or project |
| We reduce the charge against earnings by any portion of the capitalized expenditures and advances that we estimate will be recoverable, through sale or otherwise |
| In future periods, we may be required to incur charges against earnings in accordance with this policy, or due to other events that cause impairments |
| Depending on the magnitude, any such charges could have a material adverse effect on our results of operations |
| Our revenues will fluctuate based on changes in commodity prices |
| Our recycling operations process for sale certain recyclable materials, including fibers, aluminum and glass, all of which are subject to significant price fluctuations |
| The majority of the recyclables that we process for sale are paper fibers, including old corrugated cardboard (“OCC”), and old newsprint (“ONP”) |
| We enter into commodity price derivatives in an effort to mitigate some of the variability in cash flows from the sales of recyclable materials at floating prices |
| In the past three years, the year-over-year changes in the quarterly average market prices for OCC ranged from a decrease of as much as 37prca to an increase of as much as 36prca |
| The same comparisons for ONP have ranged from a decrease of as much as 17prca to an increase of as much as 34prca |
| These fluctuations can affect future operating income and cash flows |
| Additionally, our recycling operations offer rebates to suppliers, based on the market prices of commodities we purchase |
| Therefore, even if we experience higher revenues based on increased market prices for commodities, the rebates we pay will also increase |
| Additionally, there may be significant price fluctuations in the price of methane gas, electricity and other energy related products that are marketed and sold by our landfill gas recovery, waste-to-energy and independent power production plant operations |
| The marketing and sales of energy related products by our landfill gas and waste-to-energy operations are generally pursuant to long-term sales agreements |
| Therefore, market fluctuations do not have a significant effect on these operations in the short-term |
| However, revenues from our independent power production plants can be affected by price fluctuations |
| In the past two years, the year-over-year changes in the average quarterly electricity prices have ranged from increases of as much as 12prca to decreases of as much as 4prca |
| 17 _________________________________________________________________ [73]Table of Contents The development and acceptance of alternatives to landfill disposal and waste-to-energy facilities could reduce our ability to operate at full capacity |
| Our customers are increasingly using alternatives to landfill disposal, such as recycling and composting |
| In addition, some state and local governments mandate recycling and waste reduction at the source and prohibit the disposal of certain types of wastes, such as yard wastes, at landfills or waste-to-energy facilities |
| Although such mandates are a useful tool to protect our environment, these developments reduce the volume of waste going to landfills and waste-to-energy facilities in certain areas, which may affect our ability to operate our landfills and waste-to-energy facilities at full capacity, as well as the prices that we can charge for landfill disposal and waste-to-energy services |
| Our recycling operations benefit from these mandates, but those operations generally generate much lower margins than our disposal operations |
| Efforts by labor unions to organize our employees could divert management’s attention and increase our operating expenses |
| Labor unions constantly make attempts to organize our employees, and these efforts will likely continue in the future |
| Certain groups of our employees have already chosen to be represented by unions, and we have negotiated collective bargaining agreements with some of the groups |
| Additional groups of employees may seek union representation in the future, and, if successful, the negotiation of collective bargaining agreements could divert management attention and result in increased operating expenses and lower net income |
| If we are unable to negotiate acceptable collective bargaining agreements, work stoppages, including strikes, could ensue |
| Depending on the type and duration of any labor disruptions, our operating expenses could increase significantly, which could adversely affect our financial condition, results of operations and cash flows |
| Currently pending or future litigation or governmental proceedings could result in material adverse consequences, including judgments or settlements |
| We are currently involved in civil litigation and governmental proceedings relating to the conduct of our business |
| The timing of the final resolutions to these matters is uncertain |
| Additionally, the possible outcomes or resolutions to these matters could include adverse judgments or settlements, either of which could require substantial payments, adversely affecting our liquidity |
| We are increasingly dependent on technology in our operations and if our technology fails, our business could be adversely affected |
| We may experience problems with either the operation of our current information technology systems or the development and deployment of new information technology systems that could adversely affect, or even temporarily disrupt, all or a portion of our operations until resolved |
| We have purchased a new revenue management system and plan to begin piloting the system in the second half of 2006 |
| We may encounter problems in the development or deployment of this system that could result in significant errors in, or disruption of, our billing processes |
| Additionally, any systems failures could impede our ability to timely collect and report financial results in accordance with applicable law and regulations |
| We may experience adverse impacts on our results of operations as a result of adopting new accounting standards or interpretations |
| Our implementation of and compliance with changes in accounting rules, including new accounting rules and interpretations, could adversely affect our operating results or cause unanticipated fluctuations in our operating results in future periods |
| Unforeseen circumstances could result in a need for additional capital |
| We currently expect to meet our anticipated cash needs for capital expenditures, acquisitions and other cash expenditures with our cash flows from operations and, to the extent necessary, additional financings |
| However, materially adverse events could reduce our cash flows from operations |
| Our Board of Directors approved a capital allocation program that provides for up to dlra1dtta2 billion in aggregate dividend payments and 18 _________________________________________________________________ [74]Table of Contents share repurchases each year during 2005, 2006 and 2007 and recently announced that it expects future quarterly dividend payments to be dlra0dtta22 per share |
| If our cash flows from operations were negatively affected, we could be forced to reduce capital expenditures, acquisition activity, share repurchase activity or dividend declarations |
| In these circumstances we instead may elect to incur more indebtedness |
| If we made such an election, there can be no assurances that we would be able to obtain additional financings on acceptable terms |
| In these circumstances, we would likely use our revolving credit facility to meet our cash needs |
| Our credit facility requires us to comply with certain financial covenants |
| In the event our interest expense is more than expected due to higher interest rates or our ratio of debt to earnings (as determined pursuant to the terms of the credit facility) is more than expected, we may not be in compliance with the covenants |
| This would result in a default under our credit facility |
| If we were unable to obtain waivers or amendments to the credit facility, the lenders could choose to declare all outstanding borrowings immediately due and payable, which we may not be able to pay in full |
| Additionally, any such default could cause a default under all of our other credit agreements and debt instruments |
| Any such default would have a material adverse effect on our ability to operate |