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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the Quarterly Period Ended June 30, 2019

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

(I.R.S. Employer

incorporation or organization)

Identification No.)

1001 Fannin Street

Houston, Texas 77002

(Address of principal executive offices)

(713) 512-6200

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbol

    

Name of each exchange on which registered

Common Stock, $0.01 par value

WM

New York Stock Exchange

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    No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes    No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

The number of shares of Common Stock, $0.01 par value, of the registrant outstanding at July 22, 2019 was 424,232,181 (excluding treasury shares of 206,050,280).

PART I.

Item 1.    Financial Statements.

WASTE MANAGEMENT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Millions, Except Share and Par Value Amounts)

June 30, 

December 31, 

    

2019

    

2018

(Unaudited)

ASSETS

Current assets:

 

 

  

Cash and cash equivalents

$

2,250

$

61

Accounts receivable, net of allowance for doubtful accounts of $28 and $29, respectively

 

2,017

 

1,931

Other receivables

 

243

 

344

Parts and supplies

 

104

 

102

Other assets

 

222

 

207

Total current assets

 

4,836

 

2,645

Property and equipment, net of accumulated depreciation and amortization of $18,619 and $18,264, respectively

 

12,665

 

11,942

Goodwill

 

6,512

 

6,430

Other intangible assets, net

 

547

 

572

Restricted trust and escrow accounts

 

354

 

296

Investments in unconsolidated entities

 

333

 

406

Other assets

 

739

 

359

Total assets

$

25,986

$

22,650

LIABILITIES AND EQUITY

Current liabilities:

 

  

 

  

Accounts payable

$

908

$

1,037

Accrued liabilities

 

1,296

 

1,117

Deferred revenues

 

526

 

522

Current portion of long-term debt

 

116

 

432

Total current liabilities

 

2,846

 

3,108

Long-term debt, less current portion

 

12,623

 

9,594

Deferred income taxes

 

1,289

 

1,291

Landfill and environmental remediation liabilities

 

1,900

 

1,828

Other liabilities

 

861

 

553

Total liabilities

 

19,519

 

16,374

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

 

4,962

 

4,993

Retained earnings

 

10,088

 

9,797

Accumulated other comprehensive income (loss)

 

(22)

 

(87)

Treasury stock at cost, 206,481,746 and 206,299,352 shares, respectively

 

(8,568)

 

(8,434)

Total Waste Management, Inc. stockholders’ equity

 

6,466

 

6,275

Noncontrolling interests

 

1

 

1

Total equity

 

6,467

 

6,276

Total liabilities and equity

$

25,986

$

22,650

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

Six Months Ended

June 30, 

June 30, 

    

2019

    

2018

    

2019

    

2018

Operating revenues

$

3,946

$

3,739

$

7,642

$

7,250

Costs and expenses:

 

  

 

  

Operating

 

2,443

 

2,313

 

4,741

 

4,497

Selling, general and administrative

 

391

 

365

 

800

 

738

Depreciation and amortization

 

409

 

384

 

775

 

731

Restructuring

 

 

1

 

2

 

3

(Gain) loss from divestitures, asset impairments and unusual items, net

 

7

 

(39)

 

7

 

(42)

 

3,250

 

3,024

 

6,325

 

5,927

Income from operations

 

696

 

715

 

1,317

 

1,323

Other income (expense):

 

  

 

Interest expense, net

 

(100)

 

(93)

 

(196)

 

(184)

Loss on early extinguishment of debt

(84)

(84)

Equity in net losses of unconsolidated entities

 

(16)

 

(13)

 

(25)

 

(20)

Other, net

 

1

 

 

(53)

 

1

 

(199)

 

(106)

 

(358)

 

(203)

Income before income taxes

 

497

 

609

 

959

 

1,120

Income tax expense

 

115

 

110

 

230

 

226

Consolidated net income

 

382

 

499

 

729

 

894

Less: Net income (loss) attributable to noncontrolling interests

 

1

 

 

1

 

(1)

Net income attributable to Waste Management, Inc.

$

381

$

499

$

728

$

895

Basic earnings per common share

$

0.90

$

1.16

$

1.71

$

2.07

Diluted earnings per common share

$

0.89

$

1.15

$

1.70

$

2.06

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Millions)

(Unaudited)

Three Months Ended

Six Months Ended

June 30, 

June 30, 

    

2019

    

2018

    

2019

    

2018

Consolidated net income

$

382

$

499

$

729

$

894

Other comprehensive income (loss), net of tax:

 

  

 

  

 

  

 

  

Derivative instruments, net

 

2

 

2

 

4

 

4

Available-for-sale securities, net

 

4

 

 

9

 

(1)

Foreign currency translation adjustments

 

25

 

(23)

 

53

 

(55)

Post-retirement benefit obligations, net

 

 

(1)

 

Other comprehensive income (loss), net of tax

 

31

(21)

 

65

 

(52)

Comprehensive income

 

413

 

478

 

794

 

842

Less: Comprehensive income (loss) attributable to noncontrolling interests

 

1

 

1

 

(1)

Comprehensive income attributable to Waste Management, Inc.

$

412

$

478

$

793

$

843

See Notes to Condensed Consolidated Financial Statements.

3

WASTE MANAGEMENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Millions)

(Unaudited)

Six Months Ended

June 30, 

    

2019

    

2018

Cash flows from operating activities:

 

 

  

  

Consolidated net income

 

$

729

$

894

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

 

 

  

Depreciation and amortization

 

775

 

731

Deferred income tax expense (benefit)

 

(12)

 

(21)

Interest accretion on landfill liabilities

 

47

 

47

Provision for bad debts

 

19

 

22

Equity-based compensation expense

 

43

 

41

Net gain on disposal of assets

 

(5)

 

(10)

(Gain) loss from divestitures, asset impairments and other, net

 

78

 

(42)

Equity in net losses of unconsolidated entities, net of dividends

 

25

 

20

Loss on early extinguishment of debt

84

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

 

  

 

  

Receivables

 

19

 

202

Other current assets

 

(5)

 

(9)

Other assets

 

4

 

(2)

Accounts payable and accrued liabilities

 

127

 

31

Deferred revenues and other liabilities

 

(28)

 

(120)

Net cash provided by operating activities

 

1,900

 

1,784

Cash flows from investing activities:

 

  

 

  

Acquisitions of businesses, net of cash acquired

 

(440)

 

(263)

Capital expenditures

 

(1,049)

 

(836)

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

 

20

 

96

Other, net

 

(96)

 

(7)

Net cash used in investing activities

 

(1,565)

 

(1,010)

Cash flows from financing activities:

 

  

 

  

New borrowings

 

3,971

 

83

Debt repayments

 

(385)

 

(196)

Premiums paid on early extinguishment of debt

(84)

Net commercial paper borrowings (repayments)

 

(1,001)

 

443

Common stock repurchase program

 

(248)

 

(550)

Cash dividends

 

(440)

 

(406)

Exercise of common stock options

 

45

 

33

Tax payments associated with equity-based compensation transactions

 

(30)

 

(28)

Other, net

 

(6)

 

(26)

Net cash provided by (used in) financing activities

 

1,822

 

(647)

Effect of exchange rate changes on cash, cash equivalents and restricted cash and cash equivalents

 

2

 

(1)

Increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents

 

2,159

 

126

Cash, cash equivalents and restricted cash and cash equivalents at beginning of period

 

183

 

293

Cash, cash equivalents and restricted cash and cash equivalents at end of period

 

$

2,342

$

419

Reconciliation of cash, cash equivalents and restricted cash and cash equivalents at end of period:

Cash and cash equivalents

$

2,250

$

47

Restricted cash and cash equivalents included in other current assets

18

70

Restricted cash and cash equivalents included in restricted trust and escrow accounts

74

302

Cash, cash equivalents and restricted cash and cash equivalents at end of period

 

$

2,342

$

419

See Notes to Condensed Consolidated Financial Statements.

4

WASTE MANAGEMENT, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(In Millions, Except Shares in Thousands)

(Unaudited)

Waste Management, Inc. Stockholders’ Equity

Accumulated

Additional

Other

Common Stock

Paid-In

Retained

Comprehensive

Treasury Stock

Noncontrolling

  

Total

  

Shares

  

Amounts

  

Capital

  

Earnings

  

Income (Loss)

  

Shares

  

Amounts

  

Interests

Three Months Ended June 30:

2019

Balance, March 31, 2019

$

6,417

630,282

$

6

$

4,978

$

9,924

$

(53)

 

(205,556)

$

(8,440)

$

2

Consolidated net income

 

382

 

 

 

381

 

 

 

 

1

Other comprehensive income (loss), net of tax

 

31

 

 

 

 

31

 

 

 

Cash dividends declared of $0.5125 per common share

 

(217)

 

 

 

(217)

 

 

 

 

Equity-based compensation transactions, net

 

36

 

 

20

 

 

 

387

 

16

 

Common stock repurchase program

 

(180)

 

 

(36)

 

 

 

(1,314)

 

(144)

 

Other, net

 

(2)

 

 

 

 

 

1

 

 

(2)

Balance, June 30, 2019

$

6,467

630,282

$

6

$

4,962

$

10,088

$

(22)

 

(206,482)

$

(8,568)

$

1

2018

Balance, March 31, 2018

$

6,065

630,282

$

6

$

4,916

$

8,867

$

(28)

 

(198,511)

$

(7,717)

$

21

Consolidated net income

 

499

 

 

 

499

 

 

 

 

Other comprehensive income (loss), net of tax

 

(21)

 

 

 

 

(21)

 

 

 

Cash dividends declared of $0.465 per common share

 

(200)

 

 

 

(200)

 

 

 

 

Equity-based compensation transactions, net

 

24

 

 

19

 

 

 

141

 

5

 

Common stock repurchase program

 

(292)

 

 

 

 

 

(3,537)

 

(292)

 

Divestiture of noncontrolling interest

 

(19)

 

 

 

 

 

 

 

(19)

Other, net

 

 

 

 

 

 

1

 

 

Balance, June 30, 2018

$

6,056

630,282

$

6

$

4,935

$

9,166

$

(49)

 

(201,906)

$

(8,004)

$

2

See Notes to Condensed Consolidated Financial Statements.

5

WASTE MANAGEMENT, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ─ (Continued)

(In Millions, Except Shares in Thousands)

(Unaudited)

Waste Management, Inc. Stockholders’ Equity

Accumulated

Additional

Other

Common Stock

Paid-In

Retained

Comprehensive

Treasury Stock

Noncontrolling

Total

  

Shares

  

Amounts

  

Capital

  

Earnings

  

Income (Loss)

  

Shares

  

Amounts

  

Interests

Six Months Ended June 30:

2019

Balance, December 31, 2018

$

6,276

630,282

$

6

$

4,993

$

9,797

$

(87)

 

(206,299)

$

(8,434)

$

1

Consolidated net income

 

729

 

 

 

728

 

 

 

 

1

Other comprehensive income (loss), net of tax

 

65

 

 

 

 

65

 

 

 

Cash dividends declared of $1.025 per common share

 

(440)

 

 

 

(440)

 

 

 

 

Equity-based compensation transactions, net

 

82

 

 

5

 

3

 

 

1,808

 

74

 

Common stock repurchase program

 

(244)

 

 

(36)

 

 

 

(1,993)

 

(208)

 

Other, net

 

(1)

 

 

 

 

 

2

 

 

(1)

Balance, June 30, 2019

$

6,467

630,282

$

6

$

4,962

$

10,088

$

(22)

 

(206,482)

$

(8,568)

$

1

2018

Balance, December 31, 2017

$

6,042

630,282

$

6

$

4,933

$

8,588

$

8

 

(196,964)

$

(7,516)

$

23

Adoption of new accounting standards

 

80

 

 

 

85

 

(5)

 

 

 

Consolidated net income

 

894

 

 

 

895

 

 

 

 

(1)

Other comprehensive income (loss), net of tax

 

(52)

 

 

 

 

(52)

 

 

 

Cash dividends declared of $0.93 per common share

 

(406)

 

 

 

(406)

 

 

 

 

Equity-based compensation transactions, net

 

68

 

 

2

 

4

 

 

1,624

 

62

 

Common stock repurchase program

 

(550)

 

 

 

 

 

(6,568)

 

(550)

 

Divestiture of noncontrolling interest

 

(19)

 

 

 

 

 

 

 

(19)

Other, net

 

(1)

 

 

 

 

 

2

 

 

(1)

Balance, June 30, 2018

$

6,056

630,282

$

6

$

4,935

$

9,166

$

(49)

 

(201,906)

$

(8,004)

$

2

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; its wholly-owned and majority-owned subsidiaries; and certain variable interest entities for which Waste Management, Inc. or its subsidiaries are the primary beneficiaries as described in Note 14. Waste Management, Inc. 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 are North America’s leading provider of comprehensive waste management environmental services. We partner with our residential, commercial, industrial and municipal customers and the communities we serve to manage and reduce waste at each stage from collection to disposal, while recovering valuable resources and creating clean, renewable energy. Our “Solid Waste” business is operated and managed locally by our subsidiaries that focus on distinct geographic areas and provide collection, transfer, disposal, and recycling and resource recovery services. Through our subsidiaries, we are also a leading developer, operator and owner of landfill gas-to-energy facilities in the United States (“U.S.”).

We evaluate, oversee and manage the financial performance of our Solid Waste business subsidiaries through our 17 Areas. We also provide additional services that are not managed through our Solid Waste business, which are presented in this report as “Other.” Additional information related to our segments is included in Note 8.

The Condensed Consolidated Financial Statements as of June 30, 2019 and for the three and six months ended June 30, 2019 and 2018 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, comprehensive income, cash flows, and changes in equity 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 conjunction with the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.

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 precision from available data or simply cannot be calculated. In some cases, these estimates are 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, long-lived asset impairments 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.

Revenue Recognition

We generally recognize revenue as services are performed or products are delivered. For example, revenue typically is recognized as waste is collected, tons are received at our landfills or transfer stations, or recycling commodities are collected or delivered as product. We bill for certain services prior to performance. Such services include, among others, certain commercial and residential contracts and equipment rentals. These advance billings are included in deferred revenues and recognized as revenue in the period service is provided. Substantially all our deferred revenues during the reported periods are realized as revenues within one to three months when the related services are performed.

7

WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Contract Acquisition Costs

Our incremental direct costs of obtaining a contract, which consist primarily of sales incentives, are generally deferred and amortized to selling, general and administrative expense over the estimated life of the relevant customer relationship, ranging from 5 to 13 years. Contract acquisition costs that are paid to the customer are deferred and amortized as a reduction in revenue over the contract life. Our contract acquisition costs are classified as current or noncurrent based on the timing of when we expect to recognize amortization and are included in other assets in our Condensed Consolidated Balance Sheet.

As of June 30, 2019 and December 31, 2018, we had $149 million and $145 million, respectively, of deferred contract costs, of which $113 million and $109 million, respectively, was related to deferred sales incentives. During the three and six months ended June 30, 2019, we amortized $6 million and $11 million of sales incentives to selling, general and administrative expense, and $5 million and $11 million of other contract acquisition costs as a reduction in revenue, respectively. During the three and six months ended June 30, 2018, we amortized $5 million and $11 million of sales incentives to selling, general and administrative expense, and $9 million and $19 million of other contract acquisition costs as a reduction in revenue, respectively.

Adoption of New Accounting Standard

Leases — In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02 associated with lease accounting. There were further amendments, including practical expedients, with the issuance of ASU 2018-01 in January 2018, ASU 2018-11 in July 2018 and ASU 2018-20 in December 2018. On January 1, 2019, we adopted these ASUs using the optional transition method which allows entities to continue to apply historical accounting guidance in the comparative periods presented in the year of adoption. Accordingly, our financial statements for the reported periods after January 1, 2019 are presented under this amended guidance, while prior period amounts are not adjusted and continue to be reported in accordance with historical accounting guidance.

We elected to apply the following package of practical expedients on a consistent basis permitting entities not to reassess: (i) whether any expired or existing contracts are or contain a lease; (ii) lease classification for any expired or existing leases and (iii) whether initial direct costs for any expired or existing leases qualify for capitalization under the amended guidance. In addition, we applied (i) the practical expedient for land easements, which allows the Company to not apply the lease standard to certain existing land easements at transition and (ii) the practical expedient to include both the lease and non-lease components as a single component and account for it as a lease.

The impact of adopting the amended guidance primarily relates to the recognition of lease assets and lease liabilities on the balance sheet for all leases previously classified as operating leases. We recognized $385 million of right-of-use assets and $385 million of related lease liabilities as of January 1, 2019 for our contracts that are classified as operating leases. Leases with an initial term of 12 months, which are not expected to be renewed beyond one year, are not recorded on the balance sheet and are recognized as lease expense on a straight-line basis over the lease term. Our accounting for financing leases, which were formerly referred to as capital leases, remained substantially unchanged. There were no other material impacts on our consolidated financial statements. See Note 4 for additional information and disclosures related to our adoption of this amended guidance.

New Accounting Standard Pending Adoption

Financial Instrument Credit Losses — In June 2016, the FASB issued ASU 2016-13 associated with the measurement of credit losses on financial instruments. The amended guidance replaces the current incurred loss impairment methodology of recognizing credit losses when a loss is probable, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to assess credit loss estimates.

8

WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The amended guidance is effective for the Company on January 1, 2020. We are assessing the provisions of this amended guidance and evaluating the impact on our consolidated financial statements.

Reclassifications

When necessary, reclassifications have been made to our prior period financial information to conform to the current year presentation and are not material to 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, 2019

December 31, 2018

Environmental

Environmental

    

Landfill

    

Remediation

    

Total

    

Landfill

    

Remediation

    

Total

Current (in accrued liabilities)

 

$

125

$

26

$

151

$

143

$

26

$

169

Long-term

 

1,685

 

215

 

1,900

  

 

1,617

 

211

 

1,828

 

$

1,810

$

241

$

2,051

$

1,760

$

237

$

1,997

The changes to landfill and environmental remediation liabilities for the six months ended June 30, 2019 are reflected in the table below (in millions):

Environmental

    

Landfill

    

Remediation

December 31, 2018

$

1,760

$

237

Obligations incurred and capitalized

 

36

  

 

Obligations settled

 

(41)

  

 

(9)

Interest accretion

 

47

  

 

3

Revisions in estimates and interest rate assumptions (a)

 

3

  

 

10

Acquisitions, divestitures and other adjustments

 

5

  

 

June 30, 2019

$

1,810

$

241

(a)The amount reported for our environmental remediation liabilities includes an increase of $8 million due to a decrease in the risk-free discount rate used to measure our liabilities from 2.75% at December 31, 2018 to 2.0% at June 30, 2019.

At several of our landfills, we provide financial assurance by depositing cash into restricted trust funds or escrow accounts for purposes of settling our 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 14 for additional information related to these trusts.

9

WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

3.    Debt

The following table summarizes the major components of debt as of each balance sheet date (in millions) and provides the maturities and interest rate ranges of each major category as of June 30, 2019:

June 30, 

December 31, 

    

2019

    

2018

$2.75 billion revolving credit facility (weighted average interest rate of 3.1% as of December 31, 2018)

$

$

11

Commercial paper program (weighted average interest rate of 2.9% as of December 31, 2018)

990

Senior notes, maturing through 2049, interest rates ranging from 2.4% to 7.75% (weighted average interest rate of 3.9% as of June 30, 2019 and 4.3% as of December 31, 2018)

 

9,965

 

6,222

Tax-exempt bonds, maturing through 2048, fixed and variable interest rates ranging from 1.35% to 4.3% (weighted average interest rate of 2.4% as of June 30, 2019 and 2.35% as of December 31, 2018)

 

2,294

 

2,388

Financing leases and other, maturing through 2056, interest rates up to 9%

 

563

 

467

Debt issuance costs, discounts and other

 

(83)

 

(52)

 

12,739

 

10,026

Current portion of long-term debt

 

116

 

432

$

12,623

$

9,594

Debt Classification

As of June 30, 2019, we had $1.2 billion of debt maturing within the next 12 months, including (i) $600 million of 4.75% senior notes that mature in June 2020; (ii) $524 million of tax-exempt bonds with term interest rate periods that expire within the next 12 months, which is prior to their scheduled maturities, and (iii) $116 million of other debt with scheduled maturities within the next 12 months, including $42 million of tax-exempt bonds. As of June 30, 2019, we have classified $1.1 billion of debt maturing in the next 12 months as long-term because we have the intent and ability to refinance these borrowings on a long-term basis as supported by the forecasted available capacity under our $2.75 billion long-term U.S. and Canadian revolving credit facility (“$2.75 billion revolving credit facility”), as discussed below. The remaining $116 million is classified as current obligations.

As of June 30, 2019, we also have $268 million of variable-rate tax-exempt bonds that are supported by letters of credit under our $2.75 billion revolving credit facility. The interest rates on our variable-rate tax-exempt bonds are generally reset on either a daily or weekly basis through a remarketing process. All recent tax-exempt bond remarketings have successfully placed Company bonds with investors at market-driven rates and we currently expect future remarketings to be successful. However, if the remarketing agent is unable to remarket our bonds, the remarketing agent can put the bonds to us. In the event of a failed remarketing, we have the availability under our $2.75 billion revolving credit facility to fund these bonds until they are remarketed successfully. Accordingly, we have also classified these borrowings as long-term in our Condensed Consolidated Balance Sheet as of June 30, 2019.

Access to and Utilization of Credit Facilities and Commercial Paper Program

$2.75 Billion Revolving Credit Facility — Our $2.75 billion revolving credit facility provides us with credit capacity to be used for either cash borrowings or to support letters of credit or commercial paper. The rates we pay for outstanding U.S. or Canadian loans are generally based on LIBOR or CDOR, respectively, plus a spread depending on the Company’s debt rating assigned by Moody’s Investors Service and Standard and Poor’s. As of June 30, 2019, we had no borrowings outstanding under this facility. We had $512 million of letters of credit issued and no outstanding borrowings under our commercial paper program, both supported by this facility, leaving unused and available credit capacity of $2.2 billion as

10

WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

of June 30, 2019. WM Holdings, a wholly-owned subsidiary of WM, guarantees all of the obligations under the $2.75 billion revolving credit facility.

Commercial Paper Program — We have a commercial paper program that enables us to borrow funds for up to 397 days at competitive interest rates. The rates we pay for outstanding borrowings are based on the term of the notes. The commercial paper program is fully supported by our $2.75 billion revolving credit facility. As of June 30, 2019, we had no outstanding borrowings under our commercial paper program.

Other Letter of Credit Facilities — As of June 30, 2019, we utilized $542 million of other letter of credit facilities, which are both committed and uncommitted, with terms maturing through December 2020.

Debt Borrowings and Repayments

$2.75 Billion Revolving Credit Facility — During the six months ended June 30, 2019, we repaid C$15 million, or $11 million, of Canadian borrowings under our $2.75 billion revolving credit facility with available cash.

Senior Notes — In May 2019, WM issued $4.0 billion of senior notes consisting of:

$750 million of 2.95% senior notes due June 15, 2024;
$750 million of 3.20% senior notes due June 15, 2026;
$1.0 billion of 3.45% senior notes due June 15, 2029;
$500 million of 4.00% senior notes due July 15, 2039; and
$1.0 billion of 4.15% senior notes due July 15, 2049.

The net proceeds from these debt issuances were $3.97 billion. Concurrently, we used $344 million of the net proceeds from the newly issued senior notes to retire $257 million of certain high-coupon senior notes. The cash paid includes the principal amount of the debt retired, $84 million of related premiums, which are classified as loss on early extinguishment of debt in our Condensed Consolidated Statement of Operations, and $3 million of accrued interest. The principal amount of senior notes redeemed within each series was as follows:

$304 million of WM Holdings 7.10% senior notes due 2026, of which $56 million were tendered;
$395 million of WM 7.00% senior notes due 2028, of which $64 million were tendered;
$139 million of WM 7.375% senior notes due 2029, of which $58 million were tendered;
$210 million of WM 7.75% senior notes due 2032, of which $57 million were tendered; and
$274 million of WM 6.125% senior notes due 2039, of which $22 million were tendered.

We used a portion of the proceeds to repay our commercial paper borrowings as discussed further below. We intend to use the remaining net proceeds to pay a portion of the consideration related to our pending acquisition of Advanced Disposal Services, Inc. (“Advanced Disposal”), pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) which is discussed further in Note 9, and for general corporate purposes. The newly-issued senior notes due 2024, 2026, 2029 and 2039 include a special mandatory redemption feature, which provides that if the acquisition of Advanced Disposal is not completed on or prior to July 14, 2020, or if, prior to such date, the Merger Agreement is terminated for any reason, we will be required to redeem all of the outstanding notes equal to 101% of the aggregate principal amounts of such notes, plus accrued but unpaid interest on the principal amount of such notes.

Commercial Paper Program — During the six months ended June 30, 2019, we made net cash repayments of $1.0 billion (net of the related discount on issuance). During the first quarter of 2019, we had net cash borrowings of $357 million (net of the related discount on issuance), which were primarily used to support our acquisition of Petro Waste Environmental LP (“Petro Waste”), which is discussed further in Note 9, and for general corporate purposes. In the second quarter of 2019, we repaid the outstanding balance with proceeds from the May 2019 issuance of senior notes discussed above.

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WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Tax-Exempt Bonds — During the six months ended June 30, 2019, we repaid $94 million of our tax-exempt bonds with available cash.

Financing Leases and Other — The change during the six months ended June 30, 2019, is due to an increase of $119 million primarily related to non-cash financing arrangements offset, in part, by $23 million of net cash repayments of debt at maturity.

4.    Leases

Our operating lease activities primarily consist of leases for real estate, landfills and operating equipment. Our financing lease activities primarily consist of leases for operating equipment, railcars and landfill assets. Leases with an initial term of 12 months or less, which are not expected to be renewed beyond one year, are not recorded on the balance sheet and are recognized as lease expense on a straight-line basis over the lease term. Most leases include one or more options to renew, with renewal terms generally ranging from one to 10 years. The exercise of lease renewal options is at our sole discretion. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements is limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Certain of our lease agreements include rental payments based on usage and other lease agreements include rental payments adjusted periodically for inflation; these payments are treated as variable lease payments. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.  

When the implicit interest rate is not readily available for our operating leases, we discount future cash flows of the remaining lease payments using the current interest rate that would be paid to borrow on collateralized debt over a similar term, or incremental borrowing rate, at the commencement date.

Supplemental balance sheet information for our leases is as follows (in millions):

Leases

    

Classification

    

June 30, 2019

Assets

 

Long-term:

 

Operating

Other assets

$

378

Financing

Property and equipment, net of accumulated depreciation and amortization

349

Total lease assets

$

727

Liabilities

Current:

Operating

Accrued liabilities

$

89

Financing

Current portion of long-term debt

33

Long-term:

Operating

Other liabilities

300

Financing

Long-term debt, less current portion

296

Total lease liabilities

$

718

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WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Our operating lease expense for the three and six months ended June 30, 2019 was $31 million and $59 million, respectively, and is included in operating and selling, general and administrative expenses in our Condensed Consolidated Statement of Operations. Our financing lease expense for the three and six months ended June 30, 2019 was $11 million and $25 million, respectively, and is included in depreciation and amortization expense and interest expense, net in our Condensed Consolidated Statement of Operations.

Minimum contractual obligations for our leases (undiscounted) as of June 30, 2019 are as follows (in millions):

    

Operating

    

Financing

2019 (excluding six months ended June 30, 2019)

 

$

45

$

22

2020

 

87

42

2021

 

55

40

2022

 

45

39

2023

37

38

Thereafter

268

235

Total lease payments

$

537

$

416

Less: interest

(148)

(87)

Discounted lease liabilities

$

389

$

329

As of June 30, 2019, we entered into leases, primarily for real estate, that have not yet commenced with future lease payments of $167 million that are not reflected in the table above. These leases will commence through 2020 with non-cancelable lease terms up to 15 years.

Cash paid for our operating and financing leases was $44 million and $17 million, respectively, for the six months ended June 30, 2019. Right-of-use assets obtained in exchange for lease obligations for our operating and financing leases were $32 million and $110 million, respectively, for the six months ended June 30, 2019.

As of June 30, 2019, the weighted average remaining lease terms of our operating and financing leases were 16 years and 15 years, respectively. The weighted average discount rates used to determine the lease liabilities as of June 30, 2019 for our operating and financing leases were 3.79% and 4.16%, respectively.

5.    Income Taxes

Our income tax expense was $115 million and $230 million for the three and six months ended June 30, 2019, respectively, compared to $110 million and $226 million for the three and six months ended June 30, 2018, respectively. Our effective income tax rate was 23.3% and 24.0% for the three and six months ended June 30, 2019, respectively, compared with 18.1% and 20.2% for the three and six months ended June 30, 2018, respectively. We evaluate our effective income tax rate at each interim period and adjust it as facts and circumstances warrant. The increase in our effective income tax rate when comparing the three and six months ended June 30, 2019 with the prior year periods is due to a $33 million income tax benefit related to the settlement of various tax audits during 2018 and a $52 million impairment charge in the first quarter of 2019 which was not deductible for tax purposes.

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, 2019 were primarily due to the unfavorable impact of state and local income taxes offset, in part, by the favorable impact of federal tax credits and excess tax benefits related to equity-based compensation. The six months ended June 30, 2019 was also unfavorably impacted by an impairment as discussed below.

13

WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, 2018 were primarily due to the favorable impact of tax audit settlements and federal tax credits offset, in part, by the unfavorable impact of state and local income taxes. The six months ended June 30, 2018 was also favorably impacted by excess tax benefits related to equity-based compensation.

Investments Qualifying for Federal Tax Credits — We have significant financial interests in entities established to invest in and manage low-income housing properties and a refined coal facility. We support the operations of these entities in exchange for a pro-rata share of the tax credits they generate. The low-income housing investments and the coal facility’s refinement processes qualify for federal tax credits that we expect to realize through 2030 under Sections 42 and 45D, and through the end of 2019 under Section 45, respectively, of the Internal Revenue Code. We account for our investments in these entities using the equity method of accounting, recognizing our share of each entity’s results of operations and other reductions in the value of our investments in equity in net losses of unconsolidated entities, in our Condensed Consolidated Statements of Operations.

During the three and six months ended June 30, 2019, we recognized $12 million and $21 million of net losses and a reduction in our income tax expense of $18 million and $33 million, respectively, primarily due to tax credits realized from these investments. In addition, during the three and six months ended June 30, 2019, we recognized interest expense of $2 million and $4 million, respectively, associated with our investments in low-income housing properties.

During the three and six months ended June 30, 2018, we recognized $6 million and $12 million of net losses and a reduction in our income tax expense of $12 million and $22 million, respectively, primarily due to tax credits realized from these investments. Interest expense associated with our investments in low-income housing properties was not material for the three and six months ended June 30, 2018.

See Note 14 for additional information related to these unconsolidated variable interest entities.

Tax Audit Settlements — We are currently under audit by the IRS and various state and local taxing authorities and our audits are in various stages of completion. In June 2018, we settled various tax audits, which resulted in a reduction in our income tax expense of $33 million.

Equity-Based Compensation — During the three and six months ended June 30, 2019, we recognized a reduction in income tax expense of $5 million and $17 million, respectively, for excess tax benefits related to the vesting or exercise of equity-based compensation awards compared with $1 million and $12 million, respectively, for the comparable prior year periods.

Tax Implications of Impairment — We recognized a $52 million impairment charge in the first quarter of 2019 which was not deductible for tax purposes. See Note 10 for additional information.

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

Six Months Ended

June 30, 

June 30, 

    

2019

    

2018

    

2019

    

2018

Number of common shares outstanding at end of period

 

423.8

 

428.4

 

423.8

 

428.4

Effect of using weighted average common shares outstanding

 

1.0

 

1.5

 

0.8

 

3.2

Weighted average basic common shares outstanding

 

424.8

 

429.9

 

424.6

 

431.6

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

 

2.7

 

2.4

 

2.6

 

2.5

Weighted average diluted common shares outstanding

 

427.5

 

432.3

 

427.2

 

434.1

Potentially issuable shares

 

7.2

 

8.0

 

7.2

 

8.0

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

 

1.1

 

1.9

 

1.9

 

1.9

7.    Commitments and Contingencies

Financial Instruments — We have obtained letters of credit, surety 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 $2.75 billion revolving credit facility and other credit facilities established for that purpose. These facilities are discussed further in Note 3. Surety bonds and insurance policies are supported by (i) a diverse group of third-party surety and insurance companies; (ii) an entity in which we have a noncontrolling financial interest or (iii) a wholly-owned insurance captive, the sole business of which is to issue surety bonds and/or insurance policies on our behalf.

Management does not expect that any claims against or draws on these instruments would have a material adverse effect on our financial condition, results of operations or cash flows. 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 general liability, automobile liability, workers’ compensation, real and personal property, 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 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 general liability, automobile 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 portions, the exposure for unpaid claims and associated expenses, including incurred but not reported losses, is based on an actuarial valuation or internal estimates. The accruals for these liabilities could be revised if future occurrences or loss development significantly differ from such valuations and estimates. We use a wholly-owned insurance captive to insure the deductibles for our general liability, automobile liability and workers’ compensation claims programs.

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. See Note 15 for additional information.

As of June 30, 2019, we have guaranteed the obligations and certain performance requirements of third parties in connection with both consolidated and unconsolidated entities, including (i) guarantees to cover certain market value losses for approximately 850 homeowners’ properties adjacent to or near 18 of our landfills and (ii) guarantees totaling $73 million for performance obligations of our Wheelabrator business, divested in 2014. In February 2019, Wheelabrator was acquired by a third party, at which time we agreed to continue to provide such guarantees through July 2019. We have also agreed to indemnify certain third-party purchasers against liabilities associated with divested operations prior to such sale. Additionally, under certain of our acquisition agreements, we have provided for additional consideration to be paid to the sellers if established financial targets or other market conditions 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. We do not believe that these contingent obligations will have a material adverse effect on the Company’s financial condition, results of operations or cash flows, and we do not expect the financial impact of operational and financial performance guarantees to materially exceed the recorded fair value.

Environmental Matters — A significant portion of our operating costs and capital expenditures could be characterized as costs of environmental protection. The nature of our operations, particularly with respect to the construction, operation and maintenance of our landfills, subjects us 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 (“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 environmental impact investigation. In these cases, we use the amount within the range that is 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 $145 million higher than the $241 million recorded in the Condensed Consolidated Balance Sheet as of June 30, 2019. 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 our balance sheet and income from operations. These adjustments could be material in any given period.

As of June 30, 2019, we have been notified by the government that we are a PRP in connection with 75 locations listed on the Environmental Protection Agency’s (“EPA’s”) Superfund National Priorities List (“NPL”). Of the 75 sites at which claims have been made against us, 15 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 evaluate 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 other 60 NPL

16

WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 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.

On October 11, 2017, the EPA issued its Record of Decision (“ROD”) with respect to the previously proposed remediation plan for the San Jacinto waste pits in Harris County, Texas. McGinnes Industrial Maintenance Corporation (“MIMC”), an indirect wholly-owned subsidiary of WM, operated some of the waste pits from 1965 to 1966 and has been named as a site PRP. In 1998, WM acquired the stock of the parent entity of MIMC. MIMC has been working with the EPA and other named PRPs as the process of addressing the site proceeds. On April 9, 2018, MIMC and International Paper Company entered into an Administrative Order on Consent agreement with the EPA to develop a remedial design for the EPA’s selected remedy for the site. Allocation of responsibility among the PRPs for the selected remedy has not been established. As of June 30, 2019 and December 31, 2018, the recorded liability for MIMC’s estimated potential share of the EPA’s selected remedy and related costs was $56 million and $55 million, respectively. MIMC’s ultimate liability could be materially different from current estimates.

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 July 10, 2013, the EPA issued a Notice of Violation ("NOV") to Waste Management of Wisconsin, Inc., an indirect wholly-owned subsidiary of WM, alleging violations of the Resource Conservation Recovery Act concerning acceptance of certain waste that was not permitted to be disposed of at the Metro Recycling & Disposal Facility in Franklin, Wisconsin. The parties are exchanging information and working to resolve the NOV.

The Hawaii Department of Health and the EPA have asserted civil penalty claims against Waste Management of Hawaii, Inc. (“WMHI”), an indirect wholly-owned subsidiary of WM, based on stormwater discharges at the Waimanalo Gulch Sanitary Landfill following two major rainstorms in December 2010 and January 2011 and alleged violations of stormwater permit requirements prior to and after the storms. WMHI operates the landfill for the City and County of Honolulu. On July 3, 2019, this matter was resolved through a consent decree, and WMHI subsequently made payment of $300,000.

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

17

WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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