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 March 31, 2015 |
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 1-31507
WASTE
CONNECTIONS, INC.
(Exact name of registrant as specified in
its charter)
Delaware
(State or other jurisdiction of incorporation
or organization)
94-3283464
(I.R.S. Employer Identification No.)
3 Waterway Square Place, Suite 110
The Woodlands, TX 77380
(Address of principal executive offices)
(Zip code)
(832) 442-2200
(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. (Check one):
þ Large accelerated filer |
¨ Accelerated filer |
¨ Non-accelerated filer |
¨ Smaller reporting company |
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes ¨
No þ
Indicate the number of shares outstanding of each of the issuer's
classes of common stock:
As of April 20, 2015:
123,863,782 shares of common stock
WASTE CONNECTIONS, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
| |
March 31, 2015 | | |
December 31, 2014 | |
ASSETS | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and equivalents | |
$ | 15,734 | | |
$ | 14,353 | |
Accounts receivable, net of allowance for doubtful accounts of $8,615 and $9,175 at March 31, 2015 and December 31, 2014, respectively | |
| 250,431 | | |
| 259,969 | |
Deferred income taxes | |
| 38,405 | | |
| 49,508 | |
Prepaid expenses and other current assets | |
| 31,905 | | |
| 42,314 | |
Total current assets | |
| 336,475 | | |
| 366,144 | |
| |
| | | |
| | |
Property and equipment, net | |
| 2,597,232 | | |
| 2,594,205 | |
Goodwill | |
| 1,721,759 | | |
| 1,693,789 | |
Intangible assets, net | |
| 544,778 | | |
| 509,995 | |
Restricted assets | |
| 42,161 | | |
| 40,841 | |
Other assets, net | |
| 37,169 | | |
| 36,661 | |
| |
$ | 5,279,574 | | |
$ | 5,241,635 | |
LIABILITIES AND EQUITY | |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 108,000 | | |
$ | 120,717 | |
Book overdraft | |
| 12,471 | | |
| 12,446 | |
Accrued liabilities | |
| 125,080 | | |
| 120,947 | |
Deferred revenue | |
| 83,678 | | |
| 80,915 | |
Current portion of contingent consideration | |
| 23,962 | | |
| 21,637 | |
Current portion of long-term debt and notes payable | |
| 3,917 | | |
| 3,649 | |
Total current liabilities | |
| 357,108 | | |
| 360,311 | |
| |
| | | |
| | |
Long-term debt and notes payable | |
| 1,983,854 | | |
| 1,967,520 | |
Long-term portion of contingent consideration | |
| 48,486 | | |
| 48,528 | |
Other long-term liabilities | |
| 97,922 | | |
| 92,900 | |
Deferred income taxes | |
| 543,621 | | |
| 538,635 | |
Total liabilities | |
| 3,030,991 | | |
| 3,007,894 | |
| |
| | | |
| | |
Commitments and contingencies (Note 15) | |
| | | |
| | |
| |
| | | |
| | |
Equity: | |
| | | |
| | |
Preferred stock: $0.01 par value per share; 7,500,000 shares authorized; none issued and outstanding | |
| - | | |
| - | |
Common stock: $0.01 par value per share; 250,000,000 shares authorized; 123,863,782 and 123,984,527 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively | |
| 1,239 | | |
| 1,240 | |
Additional paid-in capital | |
| 792,925 | | |
| 811,289 | |
Accumulated other comprehensive loss | |
| (8,268 | ) | |
| (5,593 | ) |
Retained earnings | |
| 1,456,917 | | |
| 1,421,249 | |
Total Waste Connections’ equity | |
| 2,242,813 | | |
| 2,228,185 | |
Noncontrolling interest in subsidiaries | |
| 5,770 | | |
| 5,556 | |
Total equity | |
| 2,248,583 | | |
| 2,233,741 | |
| |
$ | 5,279,574 | | |
$ | 5,241,635 | |
The accompanying
notes are an integral part of these condensed consolidated financial statements.
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF NET INCOME
(Unaudited)
(In thousands, except share and per share amounts)
| |
Three months ended March 31, | |
| |
2015 | | |
2014 | |
Revenues | |
$ | 506,100 | | |
$ | 481,710 | |
Operating expenses: | |
| | | |
| | |
Cost of operations | |
| 281,123 | | |
| 263,061 | |
Selling, general and administrative | |
| 58,144 | | |
| 55,647 | |
Depreciation | |
| 57,307 | | |
| 55,817 | |
Amortization of intangibles | |
| 6,999 | | |
| 6,737 | |
Impairments and other operating charges | |
| 662 | | |
| 525 | |
Operating income | |
| 101,865 | | |
| 99,923 | |
| |
| | | |
| | |
Interest expense | |
| (15,697 | ) | |
| (16,910 | ) |
Other income (expense), net | |
| (220 | ) | |
| 142 | |
Income before income tax provision | |
| 85,948 | | |
| 83,155 | |
Income tax provision | |
| (33,867 | ) | |
| (33,932 | ) |
Net income | |
| 52,081 | | |
| 49,223 | |
Less: Net income attributable to noncontrolling interests | |
| (257 | ) | |
| (208 | ) |
Net income attributable to Waste Connections | |
$ | 51,824 | | |
$ | 49,015 | |
Earnings per common share attributable to Waste Connections’ common stockholders: | |
| | | |
| | |
Basic | |
$ | 0.42 | | |
$ | 0.40 | |
Diluted | |
$ | 0.42 | | |
$ | 0.39 | |
Shares used in the per share calculations: | |
| | | |
| | |
Basic | |
| 124,008,687 | | |
| 123,963,001 | |
Diluted | |
| 124,367,668 | | |
| 124,714,097 | |
| |
| | | |
| | |
Cash dividends per common share | |
$ | 0.13 | | |
$ | 0.115 | |
The accompanying notes are an integral part
of these condensed consolidated financial statements.
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
(Unaudited)
(In thousands, except share and per share amounts)
| |
Three months ended March 31, | |
| |
2015 | | |
2014 | |
Net income | |
$ | 52,081 | | |
$ | 49,223 | |
| |
| | | |
| | |
Other comprehensive income (loss), before tax: | |
| | | |
| | |
Interest rate swap amounts reclassified into interest expense | |
| 1,036 | | |
| 1,068 | |
Fuel hedge amounts reclassified into cost of operations | |
| 614 | | |
| (323 | ) |
Changes in fair value of interest rate swaps | |
| (5,473 | ) | |
| (294 | ) |
Changes in fair value of the fuel hedge | |
| (516 | ) | |
| (285 | ) |
Other comprehensive income (loss), before tax | |
| (4,339 | ) | |
| 166 | |
Income tax (expense) benefit related to items of other comprehensive income (loss) | |
| 1,664 | | |
| (61 | ) |
Other comprehensive income (loss), net of tax | |
| (2,675 | ) | |
| 105 | |
Comprehensive income | |
| 49,406 | | |
| 49,328 | |
Less: Comprehensive income attributable to noncontrolling interests | |
| (257 | ) | |
| (208 | ) |
Comprehensive income attributable to Waste Connections | |
$ | 49,149 | | |
$ | 49,120 | |
The accompanying notes are an integral part
of these condensed consolidated financial statements.
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
THREE MONTHS ENDED MARCH 31, 2015
(Unaudited)
(In thousands, except share amounts)
| |
Waste
Connections’ Equity | | |
| |
| |
Common
Stock | | |
Additional
Paid-In | | |
Accumulated
Other Comprehensive | | |
Retained | | |
Noncontrolling | | |
| |
| |
Shares | | |
Amount | | |
Capital | | |
Income
(Loss) | | |
Earnings | | |
Interests | | |
Total | |
Balances
at December 31, 2014 | |
| 123,984,527 | | |
$ | 1,240 | | |
$ | 811,289 | | |
$ | (5,593 | ) | |
$ | 1,421,249 | | |
$ | 5,556 | | |
$ | 2,233,741 | |
Vesting
of restricted stock units | |
| 422,902 | | |
| 4 | | |
| (4 | ) | |
| - | | |
| - | | |
| - | | |
| - | |
Restricted
stock units released from deferred compensation plan | |
| 13,652 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Tax withholdings
related to net share settlements of restricted stock units | |
| (135,531 | ) | |
| (1 | ) | |
| (6,298 | ) | |
| - | | |
| - | | |
| - | | |
| (6,299 | ) |
Equity-based compensation | |
| - | | |
| - | | |
| 4,821 | | |
| - | | |
| - | | |
| - | | |
| 4,821 | |
Exercise of warrants | |
| 6,901 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Excess
tax benefit associated with equity-based compensation | |
| - | | |
| - | | |
| 1,479 | | |
| - | | |
| - | | |
| - | | |
| 1,479 | |
Repurchase
of common stock | |
| (428,669 | ) | |
| (4 | ) | |
| (18,362 | ) | |
| - | | |
| - | | |
| - | | |
| (18,366 | ) |
Cash
dividends on common stock | |
| - | | |
| - | | |
| - | | |
| - | | |
| (16,156 | ) | |
| - | | |
| (16,156 | ) |
Amounts
reclassified into earnings, net of taxes | |
| - | | |
| - | | |
| - | | |
| 1,017 | | |
| - | | |
| - | | |
| 1,017 | |
Changes
in fair value of cash flow hedges, net of taxes | |
| - | | |
| - | | |
| - | | |
| (3,692 | ) | |
| - | | |
| - | | |
| (3,692 | ) |
Distributions
to noncontrolling interests | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (43 | ) | |
| (43 | ) |
Net
income | |
| - | | |
| - | | |
| - | | |
| - | | |
| 51,824 | | |
| 257 | | |
| 52,081 | |
Balances
at March 31, 2015 | |
| 123,863,782 | | |
$ | 1,239 | | |
$ | 792,925 | | |
$ | (8,268 | ) | |
$ | 1,456,917 | | |
$ | 5,770 | | |
$ | 2,248,583 | |
The accompanying notes are an integral
part of these condensed consolidated financial statements.
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF EQUITY
THREE MONTHS ENDED MARCH 31, 2014
(Unaudited)
(In thousands, except share amounts)
| |
Waste
Connections’ Equity | | |
| |
| |
Common
Stock | | |
Additional
Paid-In | | |
Accumulated
Other Comprehensive | | |
Retained | | |
Noncontrolling | | |
| |
| |
Shares | | |
Amount | | |
Capital | | |
Income
(Loss) | | |
Earnings | | |
Interests | | |
Total | |
Balances
at December 31, 2013 | |
| 123,566,487 | | |
$ | 1,236 | | |
$ | 796,085 | | |
$ | (1,869 | ) | |
$ | 1,247,630 | | |
$ | 5,125 | | |
$ | 2,048,207 | |
Vesting
of restricted stock units | |
| 493,623 | | |
| 5 | | |
| (5 | ) | |
| - | | |
| - | | |
| - | | |
| - | |
Tax withholdings
related to net share settlements of restricted stock units | |
| (156,902 | ) | |
| (2 | ) | |
| (6,669 | ) | |
| - | | |
| - | | |
| - | | |
| (6,671 | ) |
Equity-based compensation | |
| - | | |
| - | | |
| 4,169 | | |
| - | | |
| - | | |
| - | | |
| 4,169 | |
Exercise
of stock options and warrants | |
| 46,963 | | |
| - | | |
| 529 | | |
| - | | |
| - | | |
| - | | |
| 529 | |
Excess
tax benefit associated with equity-based compensation | |
| - | | |
| - | | |
| 5,060 | | |
| - | | |
| - | | |
| - | | |
| 5,060 | |
Cash
dividends on common stock | |
| - | | |
| - | | |
| - | | |
| - | | |
| (14,242 | ) | |
| - | | |
| (14,242 | ) |
Amounts
reclassified into earnings, net of taxes | |
| - | | |
| - | | |
| - | | |
| 459 | | |
| - | | |
| - | | |
| 459 | |
Changes
in fair value of cash flow hedges, net of taxes | |
| - | | |
| - | | |
| - | | |
| (354 | ) | |
| - | | |
| - | | |
| (354 | ) |
Distributions
to noncontrolling interests | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (371 | ) | |
| (371 | ) |
Net
income | |
| - | | |
| - | | |
| - | | |
| - | | |
| 49,015 | | |
| 208 | | |
| 49,223 | |
Balances
at March 31, 2014 | |
| 123,950,171 | | |
$ | 1,239 | | |
$ | 799,169 | | |
$ | (1,764 | ) | |
$ | 1,282,403 | | |
$ | 4,962 | | |
$ | 2,086,009 | |
The accompanying notes are an integral part
of these condensed consolidated financial statements.
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| |
Three months ended March 31, | |
| |
2015 | | |
2014 | |
Cash flows from operating activities: | |
| | | |
| | |
Net income | |
$ | 52,081 | | |
$ | 49,223 | |
Adjustments to reconcile net income to net cash provided by operating activities: | |
| | | |
| | |
Gain on disposal of assets and impairments | |
| (241 | ) | |
| (141 | ) |
Depreciation | |
| 57,307 | | |
| 55,817 | |
Amortization of intangibles | |
| 6,999 | | |
| 6,737 | |
Deferred income taxes, net of acquisitions | |
| 17,753 | | |
| 9,844 | |
Amortization of debt issuance costs | |
| 1,169 | | |
| 808 | |
Equity-based compensation | |
| 4,821 | | |
| 4,169 | |
Interest income on restricted assets | |
| (117 | ) | |
| (103 | ) |
Interest accretion | |
| 1,914 | | |
| 1,213 | |
Excess tax benefit associated with equity-based compensation | |
| (1,479 | ) | |
| (5,060 | ) |
Adjustments to contingent consideration not settled in cash | |
| 903 | | |
| 666 | |
Net change in operating assets and liabilities, net of acquisitions | |
| 21,461 | | |
| 21,784 | |
Net cash provided by operating activities | |
| 162,571 | | |
| 144,957 | |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Payments for acquisitions, net of cash acquired | |
| (90,849 | ) | |
| (27,215 | ) |
Proceeds from adjustment to acquisition consideration | |
| - | | |
| 843 | |
Capital expenditures for property and equipment | |
| (41,706 | ) | |
| (35,592 | ) |
Proceeds from disposal of assets | |
| 598 | | |
| 1,312 | |
Change in restricted assets, net of interest income | |
| (1,202 | ) | |
| (1,966 | ) |
Other | |
| 985 | | |
| 91 | |
Net cash used in investing activities | |
| (132,174 | ) | |
| (62,527 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from long-term debt | |
| 263,000 | | |
| 65,000 | |
Principal payments on notes payable and long-term debt | |
| (249,624 | ) | |
| (129,101 | ) |
Payment of contingent consideration recorded at acquisition date | |
| - | | |
| (506 | ) |
Change in book overdraft | |
| 25 | | |
| 135 | |
Proceeds from option and warrant exercises | |
| - | | |
| 529 | |
Excess tax benefit associated with equity-based compensation | |
| 1,479 | | |
| 5,060 | |
Payments for repurchase of common stock | |
| (18,366 | ) | |
| - | |
Payments for cash dividends | |
| (16,156 | ) | |
| (14,242 | ) |
Tax withholdings related to net share settlements of restricted stock units | |
| (6,299 | ) | |
| (6,671 | ) |
Distributions to noncontrolling interests | |
| (43 | ) | |
| (371 | ) |
Debt issuance costs | |
| (3,032 | ) | |
| - | |
Net cash used in financing activities | |
| (29,016 | ) | |
| (80,167 | ) |
| |
| | | |
| | |
Net increase in cash and equivalents | |
| 1,381 | | |
| 2,263 | |
Cash and equivalents at beginning of period | |
| 14,353 | | |
| 13,591 | |
Cash and equivalents at end of period | |
$ | 15,734 | | |
$ | 15,854 | |
| |
| | | |
| | |
Non-cash financing activity: | |
| | | |
| | |
Liabilities assumed and notes payable issued to sellers of businesses acquired | |
$ | 7,919 | | |
$ | 2,939 | |
The accompanying notes are an integral part
of these condensed consolidated financial statements.
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE,
PER TON AND PER GALLON AMOUNTS)
1. BASIS
OF PRESENTATION AND SUMMARY
The accompanying condensed
consolidated financial statements relate to Waste Connections, Inc. and its subsidiaries (“WCI” or the “Company”)
for the three month periods ended March 31, 2015 and 2014. In the opinion of management, the accompanying balance sheets
and related interim statements of net income, comprehensive income, cash flows and equity include all adjustments, consisting only
of normal recurring items, necessary for their fair statement in conformity with U.S. generally accepted accounting principles
(“GAAP”). Preparing financial statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue and expenses. Examples include accounting for landfills, self-insurance
accruals, income taxes, allocation of acquisition purchase price, contingent consideration accruals and asset impairments.
An additional area that involves estimation is when the Company estimates the amount of potential exposure it may have with respect
to litigation, claims and assessments in accordance with the accounting guidance on contingencies. Actual results for all
estimates could differ materially from the estimates and assumptions that the Company uses in the preparation of its condensed
consolidated financial statements.
Interim results are not
necessarily indicative of results for a full year. These interim financial statements should be read in conjunction with
the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2014.
2. NEW
ACCOUNTING STANDARDS
Reporting Discontinued
Operations and Disclosures of Disposals of Components of an Entity. In April 2014, the Financial Accounting Standards Board
(the “FASB”) issued guidance that changes the threshold for reporting discontinued operations and adds new disclosures.
The new guidance defines a discontinued operation as a disposal of a component or group of components that is disposed of or is
classified as held for sale and "represents a strategic shift that has (or will have) a major effect on an entity's operations
and financial results." For disposals of individually significant components that do not qualify as discontinued operations,
an entity must disclose pre-tax earnings of the disposed component. For public business entities, this guidance is effective prospectively
for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on
or after December 15, 2014, and interim periods within those years. Early adoption is permitted, but only for disposals (or classifications
as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company
adopted this guidance as of January 1, 2015. The adoption of this guidance did not have a material impact on the Company’s
financial position or results of operations.
Revenue From Contracts
With Customers. In May 2014, the FASB issued guidance to provide a single, comprehensive revenue recognition model for all
contracts with customers. The revenue guidance contains principles that an entity will apply to determine the measurement of revenue
and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of
goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services.
The standard will be effective for the first interim period within annual reporting periods beginning after December 15, 2016 for
public entities, with no early adoption permitted. The Company does not expect the adoption of this guidance to have a material
impact on the Company’s financial position or results of operations.
Accounting for Share-Based
Payment When the Terms of an Award Provide That a Performance Target Could Be Achieved After the Requisite Service Period.
In June 2014, the FASB issued guidance that applies to all reporting entities that grant their employees share-based payments in
which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service
period. It requires that a performance target that affects vesting and that could be achieved after the requisite service period
be treated as a performance condition and follows existing accounting guidance for the treatment of performance conditions. The
standard will be effective for annual periods and interim periods within those annual periods beginning after December 15, 2015,
with early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact on the Company’s
financial position or results of operations.
Presentation of Debt
Issuance Costs. In April 2015, the FASB issued guidance which requires debt issuance costs to be presented in the balance sheet
as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount.
The standard does not affect the recognition and measurement of debt issuance costs. Therefore, the amortization of such costs
should continue to be calculated using the interest method and be reported as interest expense. The standard is effective for financial
statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE,
PER TON AND PER GALLON AMOUNTS)
adoption is permitted
for financial statements that have not been previously issued. The new guidance has been applied on a retrospective basis. The
Company early adopted this guidance effective January 1, 2015.
3. RECLASSIFICATION
Certain amounts reported
in the Company’s prior year financial statements have been reclassified to conform with the 2015 presentation.
4. LANDFILL
ACCOUNTING
At March 31, 2015, the
Company owned or operated 42 municipal solid waste (“MSW”) landfills, nine exploration and production (“E&P”)
waste landfills, which only accept E&P waste, and eight non-MSW landfills, which only accept construction and demolition, industrial
and other non-putrescible waste. At March 31, 2015, the Company’s landfills consisted of 49 owned landfills, five landfills
operated under life-of-site operating agreements and five landfills operated under limited-term operating agreements. The
Company’s landfills had site costs with a net book value of $1,718,237 at March 31, 2015. For the Company’s landfills
operated under limited-term operating agreements and life-of-site operating agreements, the owner of the property (generally a
municipality) usually owns the permit and the Company operates the landfill for a contracted term. Where the contracted term
is not the life of the landfill, the property owner is generally responsible for final capping, closure and post-closure obligations.
The Company is responsible for all final capping, closure and post-closure liabilities at the landfills it operates under life-of-site
operating agreements.
The Company’s internal
and third-party engineers perform surveys at least annually to estimate the remaining disposal capacity at its landfills.
Many of the Company’s existing landfills have the potential for expanded disposal capacity beyond the amount currently permitted.
The Company’s landfill depletion rates are based on the remaining disposal capacity, considering both permitted and probable
expansion airspace, at the landfills it owns and landfills it operates, but does not own, under life-of-site agreements.
The Company’s landfill depletion rate is based on the term of the operating agreement at its operated landfill that has capitalized
expenditures. Expansion airspace consists of additional disposal capacity being pursued through means of an expansion that has
not yet been permitted. Expansion airspace that meets certain criteria is included in the estimate of total landfill airspace.
Based on remaining permitted
capacity as of March 31, 2015, and projected annual disposal volumes, the average remaining landfill life for the Company’s
owned landfills and landfills operated under life-of-site operating agreements is estimated to be approximately 35 years.
As of March 31, 2015, the Company is seeking to expand permitted capacity at seven of its owned landfills and two landfills that
it operates under life-of-site operating agreements, and considers the achievement of these expansions to be probable. Although
the Company cannot be certain that all future expansions will be permitted as designed, the average remaining life, when considering
remaining permitted capacity, probable expansion capacity and projected annual disposal volume, of the Company’s owned landfills
and landfills operated under life-of-site operating agreements is approximately 41 years, with lives ranging from approximately
2 to 184 years.
During the three months
ended March 31, 2015 and 2014, the Company expensed $18,849 and $19,071, respectively, or an average of $4.13 and $4.20 per
ton consumed, respectively, related to landfill depletion at owned landfills and landfills operated under life-of-site agreements.
The Company reserves for
final capping, closure and post-closure maintenance obligations at the landfills it owns and landfills it operates under life-of-site
operating agreements. The Company calculates the net present value of its final capping, closure and post-closure liabilities
by estimating the total obligation in current dollars, inflating the obligation based upon the expected date of the expenditure
and discounting the inflated total to its present value using a credit-adjusted risk-free rate. Any changes in expectations
that result in an upward revision to the estimated undiscounted cash flows are treated as a new liability and are inflated and
discounted at rates reflecting current market conditions. Any changes in expectations that result in a downward revision
(or no revision) to the estimated undiscounted cash flows result in a liability that is inflated and discounted at rates reflecting
the market conditions at the time the cash flows were originally estimated. This policy results in the Company’s final
capping, closure and post-closure liabilities being recorded in “layers.” The Company’s discount rate assumption
for purposes of computing 2015 and 2014 “layers” for final capping, closure and post-closure obligations was 4.75%
and 5.75%, respectively, which reflects the Company’s long-term cost of borrowing as of the end of 2014 and 2013. The
Company’s inflation rate assumption is 2.5% for the years ending December 31, 2015 and 2014. The resulting final capping,
closure and post-closure obligations are recorded on the condensed consolidated balance sheet
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE,
PER TON AND PER GALLON AMOUNTS)
along with an offsetting
addition to site costs which is amortized to depletion expense as the remaining landfill airspace is consumed. Interest is
accreted on the recorded liability using the corresponding discount rate. During the three months ended March 31, 2015 and
2014, the Company expensed $901 and $823, respectively, or an average of $0.20 and $0.18 per ton consumed, respectively, related
to final capping, closure and post-closure accretion expense.
The following is a reconciliation
of the Company’s final capping, closure and post-closure liability balance from December 31, 2014 to March 31, 2015:
Final capping, closure and post-closure liability at December 31, 2014 | |
$ | 61,500 | |
Adjustments to final capping, closure and post-closure liabilities | |
| (743 | ) |
Liabilities incurred | |
| 1,067 | |
Accretion expense associated with landfill obligations | |
| 901 | |
Closure payments | |
| (46 | ) |
Final capping, closure and post-closure liability at March 31, 2015 | |
$ | 62,679 | |
The Company performs its
annual review of its cost and capacity estimates in the first quarter of each year.
At March 31, 2015, $39,336
of the Company’s restricted assets balance was for purposes of securing its performance of future final capping, closure
and post-closure obligations.
5. LONG-TERM
DEBT
Long-term debt consists
of the following:
| |
March 31, 2015 | | |
December 31, 2014 | |
Revolver under new credit agreement, bearing interest ranging from 1.37% to 3.45%* | |
$ | 554,000 | | |
$ | - | |
Term loan under new credit agreement, bearing interest at 1.37%* | |
| 800,000 | | |
| - | |
Revolver under prior credit agreement | |
| - | | |
| 680,000 | |
Prior term loan agreement | |
| - | | |
| 660,000 | |
2015 Notes, bearing interest at 6.22% | |
| 175,000 | | |
| 175,000 | |
2016 Notes, bearing interest at 3.30% | |
| 100,000 | | |
| 100,000 | |
2018 Notes, bearing interest at 4.00% | |
| 50,000 | | |
| 50,000 | |
2019 Notes, bearing interest at 5.25% | |
| 175,000 | | |
| 175,000 | |
2021 Notes, bearing interest at 4.64% | |
| 100,000 | | |
| 100,000 | |
Tax-exempt bonds, bearing interest ranging from 0.06% to 0.09%* | |
| 31,430 | | |
| 31,430 | |
Notes payable to sellers and other third parties, bearing interest at 2.5% to 10.9%* | |
| 12,600 | | |
| 8,135 | |
| |
| 1,998,030 | | |
| 1,979,565 | |
Less – current portion | |
| (3,917 | ) | |
| (3,649 | ) |
Less – debt issuance costs | |
| (10,259 | ) | |
| (8,396 | ) |
| |
$ | 1,983,854 | | |
$ | 1,967,520 | |
*Interest rates in the table above represent the range
of interest rates incurred during the three month period ended March 31, 2015.
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE,
PER TON AND PER GALLON AMOUNTS)
New Revolving Credit and Term Loan Agreement
On January 26, 2015, the
Company entered into a new revolving credit and term loan agreement (the “credit agreement”) with Bank of America,
N.A., as Administrative Agent, and the other lenders from time to time party thereto (the “Lenders”) which refinanced
and replaced the Company’s prior credit agreement and its prior term loan agreement. The credit agreement has a scheduled
maturity date of January 24, 2020.
Pursuant to the credit
agreement, the Lenders have committed to provide revolving advances up to an aggregate principal amount of $1,200,000 at any one
time outstanding. The Lenders have also provided a term loan in an aggregate principal amount of $800,000. The Company has the
option to request increases in the aggregate commitments for revolving advances and one or more additional term loans, provided
that the aggregate principal amount of commitments and term loans never exceeds $2,300,000. For any such increase, the Company
may ask one or more Lenders to increase their existing commitments or provide additional term loans and/or invite additional eligible
lenders to become Lenders under the credit agreement. As part of the aggregate commitments under the facility, the credit agreement
provides for letters of credit to be issued at the request of the Company in an aggregate amount not to exceed $250,000 and for
swing line loans to be issued at the request of the Company in an aggregate amount not to exceed the lesser of $35,000 and the
aggregate commitments.
Interest accrues on advances,
at the Company’s option, at a LIBOR rate or a base rate plus an applicable margin for each interest period. The issuing fees
for all letters of credit are also based on an applicable margin. The applicable margin used in connection with interest rates
and fees is based on the Company’s consolidated leverage ratio. The applicable margin for LIBOR rate loans and letter of
credit fees ranges from 1.00% to 1.500% and the applicable margin for base rate loans and swing line loans ranges from 0.00% to
0.500%. The Company will also pay a fee based on its consolidated leverage ratio on the actual daily unused amount of the aggregate
revolving commitments. The borrowings under the credit agreement are not collateralized. Proceeds of the borrowings under the credit
agreement were used to refinance the prior credit agreement, which had a maturity of May 4, 2018, and the prior term loan agreement,
which had a maturity of October 25, 2017, and will be used for general corporate purposes, including working capital, capital expenditures
and permitted acquisitions.
The credit agreement contains
representations, warranties, covenants and events of default, including a change of control event of default and limitations on
incurrence of indebtedness and liens, limitations on new lines of business, mergers, transactions with affiliates and restrictive
agreements. The credit agreement also includes covenants limiting, as of the last day of each fiscal quarter, (a) the ratio of
the consolidated funded debt as of such date to the Consolidated EBITDA (as defined in the credit agreement), measured for the
preceding 12 months, to not more than 3.50x (or 3.75x during material acquisition periods, subject to certain limitations) and
(b) the ratio of Consolidated EBIT (as defined in the credit agreement) to consolidated interest expense, in each case, measured
for the preceding 12 months, to not less than 2.75x. During the continuance of an event of default, the Lenders may take a number
of actions, including declaring the entire amount then outstanding under the credit agreement due and payable.
Amendment No. 5 to Master
Note Purchase Agreement
On February 20, 2015,
the Company entered into Amendment No. 5 to the Master Note Purchase Agreement, dated July 15, 2008, as amended, which
(i) increases the aggregate amount of permitted investments in other lines of business from $50,000 to $100,000 and (ii) increases
the limit on certain restricted payments, including dividends and share repurchases, in any fiscal year from $200,000 to $300,000
(which limit applies whenever the leverage ratio exceeds 3.0 to 1.0). The Company’s 2015 Notes, 2016 Notes, 2018 Notes, 2019
Notes and 2021 Notes were issued under the Master Note Purchase Agreement.
6. ACQUISITIONS
In January 2015, the Company
acquired Shale Gas Services, LLC (“Shale Gas”), which owns two E&P waste stream treatment and recycling operations
in Arkansas and Texas, for cash consideration of $41,000 and potential future contingent consideration. The contingent consideration
would be paid to the former owners of Shale Gas based on the achievement of certain operating targets for the acquired operations,
as specified in the membership purchase agreement, over a two-year period following the close of the acquisition. The Company used
probability assessments of the expected future cash flows and determined that no liability for payment of future contingent consideration
existed as of the acquisition close date.
In March 2015, the Company
acquired DNCS Properties, LLC (“DNCS”), which owns land and permits to construct and operate an E&P waste facility
in the Permian Basin, for cash consideration of $30,000 and a long-term note issued to the former owners of
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE,
PER TON AND PER GALLON AMOUNTS)
DNCS with a fair value
of $5,088. The long-term note requires ten annual principal payments of $500, followed by an additional ten annual principal payments
of $250, for total future cash payments of $7,500. The fair value of the long-term note was determined by applying a discount rate
of 4.75% to the payments over the 20-year payment period.
The Company also acquired
four individually immaterial non-hazardous solid waste collection businesses during the three months ended March 31, 2015.
In March 2014, the Company
acquired Screwbean Landfill, LLC (“Screwbean”), which owns land and permits to construct and operate an E&P waste
facility, and S.A. Dunn & Company, LLC (“Dunn”), which owns land and permits to construct and operate a construction
and demolition landfill, for aggregate total cash consideration of $27,020 and contingent consideration of $2,923. Contingent consideration
represents the fair value of up to $3,000 of amounts payable to the former Dunn owners based on the successful modification of
site construction permits that would enable increased capacity at the landfill. The fair value of the contingent consideration
was determined using probability assessments of the expected future cash flows over the two-year period in which the obligations
are expected to be settled, and applying discount rates ranging from 2.4% to 2.7%.
During the three months
ended March 31, 2015 and 2014, the Company incurred $512 and $258, respectively, of acquisition-related costs. These expenses
are included in Selling, general and administrative expenses in the Company’s Condensed Consolidated Statements of Net Income.
7. INTANGIBLE
ASSETS, NET
Intangible assets, exclusive
of goodwill, consisted of the following at March 31, 2015:
| |
Gross Carrying Amount | | |
Accumulated Amortization | | |
Net Carrying Amount | |
Finite-lived intangible assets: | |
| | | |
| | | |
| | |
Long-term franchise agreements and contracts | |
$ | 197,096 | | |
$ | (54,447 | ) | |
$ | 142,649 | |
Customer lists | |
| 163,498 | | |
| (82,650 | ) | |
| 80,848 | |
Permits and non-competition agreements | |
| 78,440 | | |
| (12,058 | ) | |
| 66,382 | |
| |
| 439,034 | | |
| (149,155 | ) | |
| 289,879 | |
Indefinite-lived intangible assets: | |
| | | |
| | | |
| | |
Solid waste collection and transportation permits | |
| 152,761 | | |
| - | | |
| 152,761 | |
Material recycling facility permits | |
| 42,283 | | |
| - | | |
| 42,283 | |
E&P facility permits | |
| 59,855 | | |
| - | | |
| 59,855 | |
| |
| 254,899 | | |
| - | | |
| 254,899 | |
Intangible assets, exclusive of goodwill | |
$ | 693,933 | | |
$ | (149,155 | ) | |
$ | 544,778 | |
The weighted-average amortization
period of long-term franchise agreements and contracts acquired during the three months ended March 31, 2015 was 10.0 years. The
weighted-average amortization period of customer lists acquired during the three months ended March 31, 2015 was 5.7 years. The
weighted-average amortization period of finite-lived permits acquired during the three months ended March 31, 2015 was 38.1 years.
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE,
PER TON AND PER GALLON AMOUNTS)
Intangible assets, exclusive
of goodwill, consisted of the following at December 31, 2014:
| |
Gross Carrying Amount | | |
Accumulated Amortization | | |
Net Carrying Amount | |
Finite-lived intangible assets: | |
| | | |
| | | |
| | |
Long-term franchise agreements and contracts | |
$ | 195,676 | | |
$ | (52,448 | ) | |
$ | 143,228 | |
Customer lists | |
| 161,463 | | |
| (77,931 | ) | |
| 83,532 | |
Permits and non-competition agreements | |
| 41,369 | | |
| (11,777 | ) | |
| 29,592 | |
| |
| 398,508 | | |
| (142,156 | ) | |
| 256,352 | |
Indefinite-lived intangible assets: | |
| | | |
| | | |
| | |
Solid waste collection and transportation permits | |
| 151,505 | | |
| - | | |
| 151,505 | |
Material recycling facility permits | |
| 42,283 | | |
| - | | |
| 42,283 | |
E&P facility permits | |
| 59,855 | | |
| - | | |
| 59,855 | |
| |
| 253,643 | | |
| - | | |
| 253,643 | |
Intangible assets, exclusive of goodwill | |
$ | 652,151 | | |
$ | (142,156 | ) | |
$ | 509,995 | |
Estimated future amortization
expense for the next five years relating to finite-lived intangible assets is as follows:
For the year ending December 31, 2015 | |
$ | 28,484 | |
For the year ending December 31, 2016 | |
$ | 24,608 | |
For the year ending December 31, 2017 | |
$ | 22,547 | |
For the year ending December 31, 2018 | |
$ | 21,621 | |
For the year ending December 31, 2019 | |
$ | 17,034 | |
8. SEGMENT
REPORTING
The Company’s revenues
are generated from the collection, transfer, recycling and disposal of non-hazardous solid waste and the treatment, recovery and
disposal of non-hazardous E&P waste. No single contract or customer accounted for more than 10% of the Company’s
total revenues at the consolidated or reportable segment level during the periods presented.
The Company manages its
operations through three geographic operating segments (Western, Central and Eastern) and its E&P segment, which includes the
majority of the Company’s E&P waste treatment and disposal operations. The Company’s three geographic operating
segments and its E&P segment comprise the Company’s reportable segments. Each operating segment is responsible for managing
several vertically integrated operations, which are comprised of districts. The Company’s Western segment is comprised
of operating locations in Alaska, California, Idaho, Montana, Nevada, Oregon, Washington and western Wyoming; the Company’s
Central segment is comprised of operating locations in Arizona, Colorado, Kansas, Louisiana, Minnesota, Nebraska, New Mexico, Oklahoma,
South Dakota, Texas, Utah and eastern Wyoming; and the Company’s Eastern segment is comprised of operating locations in Alabama,
Illinois, Iowa, Kentucky, Massachusetts, Michigan, Mississippi, New York, North Carolina, South Carolina and Tennessee. The E&P
segment is comprised of the Company’s E&P operations in Arkansas, Louisiana, New Mexico, North Dakota, Oklahoma, Texas,
Wyoming and along the Gulf of Mexico.
The Company’s Chief
Operating Decision Maker (“CODM”) evaluates operating segment profitability and determines resource allocations based
on several factors, of which the primary financial measure is segment EBITDA. The Company defines segment EBITDA as earnings before
interest, taxes, depreciation, amortization, impairments and other operating charges and other
income (expense). Segment EBITDA is not a measure of operating income, operating performance or liquidity under GAAP and
may not be comparable to similarly titled measures reported by other companies. The Company’s management uses segment
EBITDA in the evaluation of segment operating performance as it is a profit measure that is generally within the control of the
operating segments. A reconciliation of segment EBITDA to Income before income tax provision is included at the end of this
Note 8.
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE,
PER TON AND PER GALLON AMOUNTS)
Summarized financial information
concerning the Company’s reportable segments for the three months ended March 31, 2015 and 2014, is shown in the following
tables:
Three Months
Ended March 31, 2015 | |
Revenue | | |
Intercompany Revenue(b) | | |
Reported
Revenue | | |
Segment EBITDA(c) | |
Western | |
$ | 229,065 | | |
$ | (23,439 | ) | |
$ | 205,626 | | |
$ | 68,892 | |
Central | |
| 150,546 | | |
| (15,611 | ) | |
| 134,935 | | |
| 47,350 | |
Eastern | |
| 117,099 | | |
| (19,075 | ) | |
| 98,024 | | |
| 30,072 | |
E&P | |
| 70,854 | | |
| (3,339 | ) | |
| 67,515 | | |
| 20,976 | |
Corporate(a) | |
| - | | |
| - | | |
| - | | |
| (457 | ) |
| |
$ | 567,564 | | |
$ | (61,464 | ) | |
$ | 506,100 | | |
$ | 166,833 | |
Three Months
Ended March 31, 2014 | |
Revenue | | |
Intercompany Revenue(b) | | |
Reported Revenue | | |
Segment EBITDA(c) | |
Western | |
$ | 217,603 | | |
$ | (22,248 | ) | |
$ | 195,355 | | |
$ | 62,492 | |
Central | |
| 143,384 | | |
| (14,317 | ) | |
| 129,067 | | |
| 45,843 | |
Eastern | |
| 109,367 | | |
| (18,041 | ) | |
| 91,326 | | |
| 27,137 | |
E&P | |
| 70,306 | | |
| (4,344 | ) | |
| 65,962 | | |
| 31,479 | |
Corporate(a) | |
| - | | |
| - | | |
| - | | |
| (3,949 | ) |
| |
$ | 540,660 | | |
$ | (58,950 | ) | |
$ | 481,710 | | |
$ | 163,002 | |
| (a) | Corporate functions include accounting, legal, tax, treasury, information technology, risk management,
human resources, training and other administrative functions. Amounts reflected are net of allocations to the four operating
segments. |
| (b) | Intercompany revenues reflect each segment’s total intercompany sales, including intercompany
sales within a segment and between segments. Transactions within and between segments are generally made on a basis intended
to reflect the market value of the service. |
| (c) | For those items included in the determination of segment EBITDA, the accounting policies of the
segments are the same as those described in the Company’s most recent Annual Report on Form 10-K. |
The following tables show
changes in goodwill during the three months ended March 31, 2015 and 2014, by reportable segment:
| |
Western | | |
Central | | |
Eastern | | |
E&P | | |
Total | |
Balance as of December 31, 2014 | |
$ | 372,915 | | |
$ | 460,381 | | |
$ | 392,423 | | |
$ | 468,070 | | |
$ | 1,693,789 | |
Goodwill acquired | |
| - | | |
| 590 | | |
| 6,497 | | |
| 20,910 | | |
| 27,997 | |
Goodwill adjustments | |
| (27 | ) | |
| - | | |
| - | | |
| - | | |
| (27 | ) |
Balance as of March 31, 2015 | |
$ | 372,888 | | |
$ | 460,971 | | |
$ | 398,920 | | |
$ | 488,980 | | |
$ | 1,721,759 | |
| |
Western | | |
Central | | |
Eastern | | |
E&P | | |
Total | |
Balance as of December 31, 2013 | |
$ | 372,915 | | |
$ | 459,054 | | |
$ | 380,570 | | |
$ | 462,615 | | |
$ | 1,675,154 | |
Goodwill adjustments | |
| - | | |
| (843 | ) | |
| (1 | ) | |
| - | | |
| (844 | ) |
Balance as of March 31, 2014 | |
$ | 372,915 | | |
$ | 458,211 | | |
$ | 380,569 | | |
$ | 462,615 | | |
$ | 1,674,310 | |
The Company has no accumulated
impairment losses associated with goodwill.
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE,
PER TON AND PER GALLON AMOUNTS)
A reconciliation of the
Company’s primary measure of segment profitability (segment EBITDA) to Income before income tax provision in the Condensed
Consolidated Statements of Net Income is as follows:
| |
Three months ended March 31, | |
| |
2015 | | |
2014 | |
Western segment EBITDA | |
$ | 68,892 | | |
$ | 62,492 | |
Central segment EBITDA | |
| 47,350 | | |
| 45,843 | |
Eastern segment EBITDA | |
| 30,072 | | |
| 27,137 | |
E&P segment EBITDA | |
| 20,976 | | |
| 31,479 | |
Subtotal reportable segments | |
| 167,290 | | |
| 166,951 | |
Unallocated corporate overhead | |
| (457 | ) | |
| (3,949 | ) |
Depreciation | |
| (57,307 | ) | |
| (55,817 | ) |
Amortization of intangibles | |
| (6,999 | ) | |
| (6,737 | ) |
Impairments and other operating charges | |
| (662 | ) | |
| (525 | ) |
Interest expense | |
| (15,697 | ) | |
| (16,910 | ) |
Other income (expense), net | |
| (220 | ) | |
| 142 | |
Income before income tax provision | |
$ | 85,948 | | |
$ | 83,155 | |
The following tables reflect
a breakdown of the Company’s revenue and inter-company eliminations for the periods indicated:
| |
Three months ended March 31, 2015 | |
| |
Revenue | | |
Intercompany Revenue | | |
Reported Revenue | | |
% of Reported Revenue | |
Solid waste collection | |
$ | 327,005 | | |
$ | (919 | ) | |
$ | 326,086 | | |
| 57.6 | % |
Solid waste disposal and transfer | |
| 142,430 | | |
| (56,326 | ) | |
| 86,104 | | |
| 25.1 | |
Solid waste recycling | |
| 11,069 | | |
| (221 | ) | |
| 10,848 | | |
| 1.9 | |
E&P waste treatment, recovery and disposal | |
| 72,556 | | |
| (3,998 | ) | |
| 68,558 | | |
| 12.8 | |
Intermodal and other | |
| 14,504 | | |
| - | | |
| 14,504 | | |
| 2.6 | |
Total | |
$ | 567,564 | | |
$ | (61,464 | ) | |
$ | 506,100 | | |
| 100.0 | % |
| |
Three months ended March 31, 2014 | |
| |
Revenue | | |
Intercompany Revenue | | |
Reported Revenue | | |
% of Reported Revenue | |
Solid waste collection | |
$ | 306,003 | | |
$ | (847 | ) | |
$ | 305,156 | | |
| 56.6 | % |
Solid waste disposal and transfer | |
| 135,563 | | |
| (52,508 | ) | |
| 83,055 | | |
| 25.1 | |
Solid waste recycling | |
| 14,904 | | |
| (619 | ) | |
| 14,285 | | |
| 2.7 | |
E&P waste treatment, recovery and disposal | |
| 73,318 | | |
| (4,765 | ) | |
| 68,553 | | |
| 13.6 | |
Intermodal and other | |
| 10,872 | | |
| (211 | ) | |
| 10,661 | | |
| 2.0 | |
Total | |
$ | 540,660 | | |
$ | (58,950 | ) | |
$ | 481,710 | | |
| 100.0 | % |
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE,
PER TON AND PER GALLON AMOUNTS)
9. DERIVATIVE
FINANCIAL INSTRUMENTS
The Company recognizes
all derivatives on the Condensed Consolidated Balance Sheet at fair value. All of the Company’s derivatives have been
designated as cash flow hedges; therefore, the effective portion of the changes in the fair value of derivatives will be recognized
in accumulated other comprehensive loss (“AOCL”) until the hedged item is recognized in earnings. The ineffective
portion of the changes in the fair value of derivatives will be immediately recognized in earnings. The Company classifies
cash inflows and outflows from derivatives within operating activities in the Condensed Consolidated Statements of Cash Flows.
One of the Company’s
objectives for utilizing derivative instruments is to reduce its exposure to fluctuations in cash flows due to changes in the variable
interest rates of certain borrowings issued under its prior credit agreement and credit agreement. The Company’s strategy
to achieve that objective involves entering into interest rate swaps. The interest rate swaps outstanding at March 31, 2015 were
specifically designated to the Company’s credit agreement and accounted for as cash flow hedges.
At March 31, 2015, the
Company’s derivative instruments included six interest rate swap agreements as follows:
Date Entered | |
Notional
Amount | | |
Fixed
Interest Rate Paid* | | |
Variable
Interest Rate Received | |
Effective
Date | |
Expiration
Date |
December 2011 | |
$ | 175,000 | | |
| 1.600 | % | |
1-month LIBOR | |
February 2014 | |
February 2017 |
April 2014 | |
$ | 100,000 | | |
| 1.800 | % | |
1-month LIBOR | |
July 2014 | |
July 2019 |
May 2014 | |
$ | 50,000 | | |
| 2.344 | % | |
1-month LIBOR | |
October 2015 | |
October 2020 |
May 2014 | |
$ | 25,000 | | |
| 2.326 | % | |
1-month LIBOR | |
October 2015 | |
October 2020 |
May 2014 | |
$ | 50,000 | | |
| 2.350 | % | |
1-month LIBOR | |
October 2015 | |
October 2020 |
May 2014 | |
$ | 50,000 | | |
| 2.350 | % | |
1-month LIBOR | |
October 2015 | |
October 2020 |
____________________
* Plus applicable
margin.
Another of the Company’s
objectives for utilizing derivative instruments is to reduce its exposure to fluctuations in cash flows due to changes in the price
of diesel fuel. The Company’s strategy to achieve that objective involves periodically entering into fuel hedges that
are specifically designated to certain forecasted diesel fuel purchases and accounted for as cash flow hedges.
At March 31, 2015, the
Company’s derivative instruments included one fuel hedge agreement as follows:
Date
Entered | |
Notional
Amount (in gallons per month) | | |
Diesel
Rate Paid Fixed (per gallon) | | |
Diesel
Rate Received Variable | |
Effective
Date | |
Expiration
Date |
June 2012 | |
| 300,000 | | |
$ | 3.60 | | |
DOE Diesel Fuel Index* | |
January 2014 | |
December 2015 |
____________________
* If the national
U.S. on-highway average price for a gallon of diesel fuel (“average price”), as published by the Department of Energy
(“DOE”), exceeds the contract price per gallon, the Company receives the difference between the average price and the
contract price (multiplied by the notional number of gallons) from the counterparty. If the average price is less than the
contract price per gallon, the Company pays the difference to the counterparty.
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE,
PER TON AND PER GALLON AMOUNTS)
The fair values of derivative
instruments designated as cash flow hedges as of March 31, 2015, were as follows:
Derivatives
Designated as Cash | |
Asset
Derivatives | | |
Liability
Derivatives |
Flow Hedges | |
Balance Sheet Location | | |
Fair Value | | |
Balance Sheet Location | |
Fair Value | |
Interest rate
swaps | |
| | | |
$ | - | | |
Accrued liabilities(a) | |
$ | (4,828 | ) |
| |
| | | |
| | | |
Other long-term liabilities | |
| (6,703 | ) |
| |
| | | |
| | | |
| |
| | |
Fuel
hedge | |
| | | |
| - | | |
Accrued liabilities(b) | |
| (1,881 | ) |
Total
derivatives designated as cash flow hedges | |
| | | |
$ | - | | |
| |
$ | (13,412 | ) |
____________________
(a) Represents
the estimated amount of the existing unrealized losses on interest rate swaps as of March 31, 2015 (based on the interest rate
yield curve at that date), included in AOCL expected to be reclassified into pre-tax earnings within the next 12 months.
The actual amounts reclassified into earnings are dependent on future movements in interest rates.
(b) Represents
the estimated amount of the existing unrealized losses on the fuel hedge as of March 31, 2015 (based on the forward DOE diesel
fuel index curve at that date), included in AOCL expected to be reclassified into pre-tax earnings within the next 12 months.
The actual amounts reclassified into earnings are dependent on future movements in diesel fuel prices.
The fair values of derivative
instruments designated as cash flow hedges as of December 31, 2014, were as follows:
Derivatives
Designated as Cash | |
Asset
Derivatives | |
Liability
Derivatives |
Flow Hedges | |
Balance Sheet Location | |
Fair Value | | |
Balance Sheet Location | |
Fair Value | |
Interest rate
swaps | |
Other assets, net | |
$ | 250 | | |
Accrued liabilities | |
$ | (4,044 | ) |
| |
| |
| | | |
Other long-term liabilities | |
| (3,300 | ) |
| |
| |
| | | |
| |
| | |
Fuel
hedge | |
| |
| | | |
Accrued liabilities | |
| (1,979 | ) |
Total
derivatives designated as cash flow hedges | |
| |
$ | 250 | | |
| |
$ | (9,323 | ) |
The following table summarizes
the impact of the Company’s cash flow hedges on the results of operations, comprehensive income and AOCL for the three months
ended March 31, 2015 and 2014:
Derivatives
Designated as Cash Flow Hedges | |
Amount
of Gain or (Loss) Recognized as AOCL on Derivatives, Net of Tax (Effective Portion)(a) | | |
Statement
of Net Income Classification | |
Amount
of (Gain) or Loss Reclassified from AOCL into Earnings, Net of Tax (Effective Portion)
(b),(c) | |
| |
Three Months Ended March 31, | | |
| |
Three Months Ended March 31, | |
| |
2015 | | |
2014 | | |
| |
2015 | | |
2014 | |
Interest rate swaps | |
$ | (3,374 | ) | |
$ | (176 | ) | |
Interest expense | |
$ | 638 | | |
$ | 658 | |
Fuel hedge | |
| (318 | ) | |
| (178 | ) | |
Cost of operations | |
| 379 | | |
| (199 | ) |
Total | |
$ | (3,692 | ) | |
$ | (354 | ) | |
| |
$ | 1,017 | | |
$ | 459 | |
___________________
(a) In
accordance with the derivatives and hedging guidance, the effective portions of the changes in fair values of interest rate swaps
and the fuel hedge have been recorded in equity as a component of AOCL. As the critical terms of the interest rate swaps
match the underlying debt being hedged, no ineffectiveness is recognized on these swaps and, therefore, all unrealized changes
in fair value are recorded in AOCL. Because changes in the actual price of diesel fuel and changes in the DOE index price
do not offset exactly each reporting period, the Company assesses whether the fuel hedge is highly effective using the cumulative
dollar offset approach.
(b) Amounts
reclassified from AOCL into earnings related to realized gains and losses on interest rate swaps are recognized when interest payments
or receipts occur related to the swap contracts, which correspond to when interest payments are made on the Company’s hedged
debt.
(c) Amounts
reclassified from AOCL into earnings related to realized gains and losses on the fuel hedge are recognized when settlement payments
or receipts occur related to the hedge contract, which correspond to when the underlying fuel is consumed.
The Company measures and
records ineffectiveness on the fuel hedge in Cost of operations in the Condensed Consolidated Statements of Net Income on a monthly
basis based on the difference between the DOE index price and the actual price of diesel fuel purchased, multiplied by the notional
number of gallons on the contract. There was no significant ineffectiveness recognized on the fuel hedge during the three
months ended March 31, 2015 and 2014.
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE,
PER TON AND PER GALLON AMOUNTS)
See Note 13 for further discussion on the impact
of the Company’s hedge accounting to its consolidated comprehensive income and AOCL.
10. FAIR
VALUE OF FINANCIAL INSTRUMENTS
The Company’s financial
instruments consist primarily of cash and equivalents, trade receivables, restricted assets, trade payables, debt instruments,
contingent consideration obligations, interest rate swaps and a fuel hedge. As of March 31, 2015 and December 31, 2014,
the carrying values of cash and equivalents, trade receivables, restricted assets, trade payables and contingent consideration
are considered to be representative of their respective fair values. The carrying values of the Company’s debt instruments,
excluding certain notes as listed in the table below, approximate their fair values as of March 31, 2015 and December 31,
2014, based on current borrowing rates, current remaining average life to maturity and borrower credit quality for similar types
of borrowing arrangements, and are classified as Level 2 within the fair value hierarchy. The carrying values and fair values
of the Company’s debt instruments where the carrying values do not approximate their fair values as of March 31, 2015 and
December 31, 2014, are as follows:
| |
Carrying Value at | | |
Fair Value* at | |
| |
March 31, 2015 | | |
December 31, 2014 | | |
March 31, 2015 | | |
December 31, 2014 | |
6.22% Senior Notes due 2015 | |
$ | 175,000 | | |
$ | 175,000 | | |
$ | 179,448 | | |
$ | 181,476 | |
3.30% Senior Notes due 2016 | |
$ | 100,000 | | |
$ | 100,000 | | |
$ | 102,054 | | |
$ | 102,253 | |
4.00% Senior Notes due 2018 | |
$ | 50,000 | | |
$ | 50,000 | | |
$ | 52,929 | | |
$ | 52,500 | |
5.25% Senior Notes due 2019 | |
$ | 175,000 | | |
$ | 175,000 | | |
$ | 195,981 | | |
$ | 192,974 | |
4.64% Senior Notes due 2021 | |
$ | 100,000 | | |
$ | 100,000 | | |
$ | 110,451 | | |
$ | 108,088 | |
______________________
*Senior Notes are
classified as Level 2 within the fair value hierarchy. Fair value is based on quotes of bonds with similar ratings in similar industries.
For details on the fair
value of the Company’s interest rate swaps, fuel hedge and restricted assets, refer to Note 12.
11. NET
INCOME PER SHARE INFORMATION
The following table sets
forth the calculation of the numerator and denominator used in the computation of basic and diluted net income per common share
attributable to the Company’s common stockholders for the three months ended March 31, 2015 and 2014:
| |
Three months ended March 31, | |
| |
2015 | | |
2014 | |
Numerator: | |
| | | |
| | |
Net income attributable to Waste Connections for basic and diluted earnings per share | |
$ | 51,824 | | |
$ | 49,015 | |
| |
| | | |
| | |
Denominator: | |
| | | |
| | |
Basic shares outstanding | |
| 124,008,687 | | |
| 123,963,001 | |
Dilutive effect of stock options and warrants | |
| 41,770 | | |
| 137,594 | |
Dilutive effect of restricted stock units | |
| 317,211 | | |
| 613,502 | |
Diluted shares outstanding | |
| 124,367,668 | | |
| 124,714,097 | |
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE,
PER TON AND PER GALLON AMOUNTS)
For the three months ended
March 31, 2015, stock options and warrants to purchase 50,898 shares of common stock were excluded from the computation of diluted
earnings per share as they were anti-dilutive. For the three months ended March 31, 2014, all outstanding stock options and warrants
were dilutive and included in the computation of diluted earnings per share.
12. FAIR
VALUE MEASUREMENTS
The Company uses a three-tier
fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as
assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement.
These tiers include: Level 1, defined as quoted market prices in active markets for identical assets or liabilities;
Level 2, defined as inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices
for similar assets or liabilities, quoted prices in markets that are not active, model-based valuation techniques for which all
significant assumptions are observable in the market, or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities; and Level 3, defined as unobservable inputs that
are not corroborated by market data.
The Company’s financial
assets and liabilities recorded at fair value on a recurring basis include derivative instruments and restricted assets.
The Company’s derivative instruments are pay-fixed, receive-variable interest rate swaps and a pay-fixed, receive-variable
diesel fuel hedge. The Company’s interest rate swaps are recorded at their estimated fair values based on quotes received
from financial institutions that trade these contracts. The Company verifies the reasonableness of these quotes using similar
quotes from another financial institution as of each date for which financial statements are prepared. The Company uses a
discounted cash flow (“DCF”) model to determine the estimated fair value of the diesel fuel hedge. The assumptions
used in preparing the DCF model include: (i) estimates for the forward DOE index curve; and (ii) the discount rate
based on risk-free interest rates over the term of the hedge contract. The DOE index curve used in the DCF model was obtained
from financial institutions that trade these contracts and ranged from $2.86 to $2.93 at March 31, 2015 and from $2.96 to $3.41
at December 31, 2014. The weighted average DOE index curve used in the DCF model was $2.90 and $3.04 at March 31, 2015 and December
31, 2014, respectively. Significant increases (decreases) in the forward DOE index curve would result in a significantly higher
(lower) fair value measurement. For the Company’s interest rate swaps and fuel hedge, the Company also considers the Company’s
creditworthiness in its determination of the fair value measurement of these instruments in a net liability position and the banks’
creditworthiness in its determination of the fair value measurement of these instruments in a net asset position. The Company’s
restricted assets are valued at quoted market prices in active markets for similar assets, which the Company receives from the
financial institutions that hold such investments on its behalf. The Company’s restricted assets measured at fair value
are invested primarily in U.S. government and agency securities.
The Company’s assets
and liabilities measured at fair value on a recurring basis at March 31, 2015 and December 31, 2014, were as follows:
| |
Fair Value Measurement at March 31, 2015 Using | |
| |
Total | | |
Quoted Prices in Active Markets for Identical Assets (Level 1) | | |
Significant Other Observable Inputs (Level 2) | | |
Significant Unobservable Inputs (Level 3) | |
Interest rate swap derivative instruments – net liability position | |
$ | (11,531 | ) | |
$ | - | | |
$ | (11,531 | ) | |
$ | - | |
Fuel hedge derivative instrument – net liability position | |
$ | (1,881 | ) | |
$ | - | | |
$ | - | | |
$ | (1,881 | ) |
Restricted assets | |
$ | 41,704 | | |
$ | - | | |
$ | 41,704 | | |
$ | - | |
Contingent consideration | |
$ | (72,448 | ) | |
$ | - | | |
$ | - | | |
$ | (72,448 | ) |
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE,
PER TON AND PER GALLON AMOUNTS)
| |
Fair Value Measurement at December 31, 2014 Using | |
| |
Total | | |
Quoted Prices in Active Markets for Identical Assets (Level 1) | | |
Significant Other Observable Inputs (Level 2) | | |
Significant Unobservable Inputs (Level 3) | |
Interest rate swap derivative instruments – net liability position | |
$ | (7,094 | ) | |
$ | - | | |
$ | (7,094 | ) | |
$ | - | |
Fuel hedge derivative instrument – net liability position | |
$ | (1,979 | ) | |
$ | - | | |
$ | - | | |
$ | (1,979 | ) |
Restricted assets | |
$ | 40,870 | | |
$ | - | | |
$ | 40,870 | | |
$ | - | |
Contingent consideration | |
$ | (70,165 | ) | |
$ | - | | |
$ | - | | |
$ | (70,165 | ) |
The following table
summarizes the change in the fair value for Level 3 derivatives for the three months ended March 31, 2015:
| |
Level 3
Derivatives | |
Balance as of December 31, 2014 | |
$ | (1,979 | ) |
Realized losses included in earnings | |
| 614 | |
Unrealized losses included in AOCL | |
| (516 | ) |
Balance as of March 31, 2015 | |
$ | (1,881 | ) |
The following table summarizes
the change in the fair value for Level 3 derivatives for the three months ended March 31, 2014:
| |
Level 3 Derivatives | |
Balance as of December 31, 2013 | |
$ | 2,199 | |
Realized gains included in earnings | |
| (323 | ) |
Unrealized losses included in AOCL | |
| (285 | ) |
Balance as of March 31, 2014 | |
$ | 1,591 | |
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE,
PER TON AND PER GALLON AMOUNTS)
13. OTHER
COMPREHENSIVE INCOME (LOSS)
Other comprehensive income
(loss) includes changes in the fair value of interest rate swaps and the fuel hedge that qualify for hedge accounting. The
components of other comprehensive income (loss) and related tax effects for the three month periods ended March 31, 2015 and 2014,
are as follows:
| |
Three months ended March 31, 2015 | |
| |
Gross | | |
Tax effect | | |
Net of tax | |
Interest rate swap amounts reclassified into interest expense | |
$ | 1,036 | | |
$ | (398 | ) | |
$ | 638 | |
Fuel hedge amounts reclassified into cost of operations | |
| 614 | | |
| (235 | ) | |
| 379 | |
Changes in fair value of interest rate swaps | |
| (5,473 | ) | |
| 2,099 | | |
| (3,374 | ) |
Changes in fair value of fuel hedge | |
| (516 | ) | |
| 198 | | |
| (318 | ) |
| |
$ | (4,339 | ) | |
$ | 1,664 | | |
$ | (2,675 | ) |
| |
Three months ended March 31, 2014 | |
| |
Gross | | |
Tax effect | | |
Net of tax | |
Interest rate swap amounts reclassified into interest expense | |
$ | 1,068 | | |
$ | (410 | ) | |
$ | 658 | |
Fuel hedge amounts reclassified into cost of operations | |
| (323 | ) | |
| 124 | | |
| (199 | ) |
Changes in fair value of interest rate swaps | |
| (294 | ) | |
| 118 | | |
| (176 | ) |
Changes in fair value of fuel hedge | |
| (285 | ) | |
| 107 | | |
| (178 | ) |
| |
$ | 166 | | |
$ | (61 | ) | |
$ | 105 | |
A rollforward of the amounts
included in AOCL, net of taxes, for the three months ended March 31, 2015 and 2014, is as follows:
| |
Fuel Hedge | | |
Interest Rate Swaps | | |
Accumulated Other Comprehensive Loss | |
Balance at December 31, 2014 | |
$ | (1,221 | ) | |
$ | (4,372 | ) | |
$ | (5,593 | ) |
Amounts reclassified into earnings | |
| 379 | | |
| 638 | | |
| 1,017 | |
Changes in fair value | |
| (318 | ) | |
| (3,374 | ) | |
| (3,692 | ) |
Balance at March 31, 2015 | |
$ | (1,160 | ) | |
$ | (7,108 | ) | |
$ | (8,268 | ) |
| |
Fuel Hedge | | |
Interest Rate Swaps | | |
Accumulated Other Comprehensive Loss | |
Balance at December 31, 2013 | |
$ | 1,357 | | |
$ | (3,226 | ) | |
$ | (1,869 | ) |
Amounts reclassified into earnings | |
| (199 | ) | |
| 658 | | |
| 459 | |
Changes in fair value | |
| (178 | ) | |
| (176 | ) | |
| (354 | ) |
Balance at March 31, 2014 | |
$ | 980 | | |
$ | (2,744 | ) | |
$ | (1,764 | ) |
See Note 9 for further discussion on the
Company’s derivative instruments.
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE,
PER TON AND PER GALLON AMOUNTS)
14. STOCKHOLDERS'
EQUITY
Stock-Based Compensation
Restricted Stock Units
A summary of activity
related to restricted stock units (“RSUs”) during the three month period ended March 31, 2015, is presented below:
| |
Unvested Shares | |
Outstanding at December 31, 2014 | |
| 1,200,884 | |
Granted | |
| 327,884 | |
Forfeited | |
| (7,487 | ) |
Vested and Issued | |
| (422,902 | ) |
Vested and Unissued | |
| (46,521 | ) |
Outstanding at March 31, 2015 | |
| 1,051,858 | |
The weighted average grant-date
fair value per share for the shares of common stock underlying the RSUs granted during the three month period ended March 31, 2015
was $46.43.
Recipients of the Company’s
RSUs who participate in the Company’s Nonqualified Deferred Compensation Plan may have elected in years prior to 2015 to
defer some or all of their RSUs as they vest until a specified date or dates they choose. At the end of the deferral periods,
the Company issues to recipients who deferred their RSUs shares of the Company’s common stock underlying the deferred RSUs.
At March 31, 2015 and 2014, the Company had 256,621 and 223,752 vested deferred RSUs outstanding, respectively.
Performance-Based Restricted Stock Units
A summary of activity
related to performance-based restricted stock units (“PSUs”) during the three month period ended March 31, 2015, is
presented below:
| |
Unvested Shares | |
Outstanding at December 31, 2014 | |
| 54,723 | |
Granted | |
| 238,690 | |
Outstanding at March 31, 2015 | |
| 293,413 | |
During the three months
ended March 31, 2015, the Compensation Committee granted PSUs to the Company’s executive officers with three-year performance-based
metrics that the Company must meet before those awards may be earned, and the performance period for those grants ends on December
31, 2017. During the same period, the Compensation Committee also granted PSUs to the Company’s executive officers
and non-executive officers with a new one-year performance-based metric that the Company must meet before those awards may be earned,
with the awards then subject to time-based vesting for the remaining three years of their four-year vesting period. The Compensation
Committee will determine the achievement of performance results and corresponding vesting of PSUs for each performance period.
The weighted average grant-date fair value per share for the shares of common stock underlying all PSUs granted during the
three month period ended March 31, 2015 was $46.47.
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE,
PER TON AND PER GALLON AMOUNTS)
Share Repurchase Program
The Company’s Board
of Directors has authorized a common stock repurchase program for the repurchase of up to $1,200,000 of common stock through December 31,
2017. Under the program, stock repurchases may be made in the open market or in privately negotiated transactions from time
to time at management’s discretion. The timing and amounts of any repurchases will depend on many factors, including
the Company’s capital structure, the market price of the common stock and overall market conditions. During the three
months ended March 31, 2015, the Company repurchased 428,669 shares of its common stock at an aggregate cost of $18,366. During
the three months ended March 31, 2014, the Company did not repurchase any shares of its common stock. As of March 31, 2015, the
remaining maximum dollar value of shares available for repurchase under the program was approximately $390,277. The Company’s
policy related to repurchases of its common stock is to charge any excess of cost over par value entirely to additional paid-in
capital.
Cash Dividend
In October 2014, the Company
announced that its Board of Directors increased its regular quarterly cash dividend by $0.015, from $0.115 to $0.13 per share.
Cash dividends of $16,156 and $14,242 were paid during the three months ended March 31, 2015 and 2014, respectively.
15. COMMITMENTS
AND CONTINGENCIES
In the normal course of
its business and as a result of the extensive governmental regulation of the solid waste and E&P waste industries, the Company
is subject to various judicial and administrative proceedings involving federal, state or local agencies. In these proceedings,
an agency may seek to impose fines on the Company or to revoke or deny renewal of an operating permit held by the Company. From
time to time, the Company may also be subject to actions brought by special interest or other groups, adjacent landowners or residents
in connection with the permitting and licensing of landfills, transfer stations, and E&P waste treatment, recovery and disposal
operations, or alleging environmental damage or violations of the permits and licenses pursuant to which the Company operates.
In addition, the Company
is a party to various claims and suits pending for alleged damages to persons and property, alleged violations of certain laws
and alleged liabilities arising out of matters occurring during the normal operation of the waste management business. Except as
noted in the matters described below, as of March 31, 2015, there is no current proceeding or litigation involving the Company
or its property that the Company believes could have a material adverse impact on its business, financial condition, results of
operations or cash flows.
Madera County, California Materials Recovery
Facility Contract Litigation
The Company’s subsidiary,
Madera Disposal Systems, Inc. (“MDSI”) was named in a complaint captioned County of Madera vs. Madera Disposal Systems,
Inc., et al, filed in Madera County Superior Court (Case No. MCV 059402) on March 5, 2012, and subsequently transferred to Fresno
County Superior Court. Madera County alleges in the complaint that from 2007 through 2010, MDSI breached a contract with the County
for the operation of a materials recovery facility by withholding profits from facility operations in excess of those authorized
by the contract. The County further alleges that the breach gives the County the unilateral right to terminate all of its contracts
with MDSI, including contracts for (1) the collection of residential and commercial waste in the unincorporated parts of the County,
(2) operation of the materials recovery facility, (3) operation of the North Fork Transfer Station and (4) operation of the Fairmead
Landfill. The County seeks monetary damages of $2,962 from MDSI, plus pre-judgment interest at 10% per annum.
MDSI had been under contract
with the County to collect residential and commercial waste and operate the county-owned Fairmead Landfill continuously since at
least 1981. In 1993, MDSI contracted with the County to construct and operate a materials recovery facility for the County on the
premises of the Fairmead Landfill. After it entered into the materials recovery facility contract, MDSI entered into new contracts
with the County for waste collection and landfill operation to run concurrently with the materials recovery facility contract.
In 1998, MDSI and the County agreed to extend the terms of the County contracts until November 10, 2012, with MDSI holding a unilateral
option to extend the contracts for an additional five-year term.
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE,
PER TON AND PER GALLON AMOUNTS)
In March 2011, the County
issued a Notice of Default to MDSI under the materials recovery facility contract and gave MDSI 30 days to cure the default. MDSI
provided information that it believed demonstrated that it was not in default under the contract and had not withheld profits that
it was obligated to deliver to the County under the terms of the contract.
On February 7, 2012, the
County issued a Notice of Termination to MDSI terminating all of its contracts effective November 1, 2012. The lawsuit followed
on March 5, 2012. MDSI answered the complaint and asserted a claim against the County for wrongful termination of the contracts.
On October 31, 2012, MDSI ceased providing services and vacated the County premises. The case is set for trial in Fresno in September
2015.
At this point, the Company
is not able to determine the likelihood of any outcome in this matter. The Company disputes Madera County’s right to terminate
the MDSI contracts effective November 1, 2012, and seeks damages for the profits lost as a result of the wrongful termination.
The Company estimates that the current annual impact to its pre-tax earnings resulting from the termination of MDSI’s contracts
with Madera County is approximately $2,300 per year, not including any monetary damages and interest the Court could order MDSI
to pay the County.
Lower Duwamish Waterway Superfund Site Allocation
Process
The Company’s subsidiary,
Northwest Container Services, Inc. (“NWCS”), has been named by the U.S. Environmental Protection Agency, Region 10
(the “EPA”), along with more than 100 others, as a potentially responsible party (“PRP”) under the Comprehensive
Environmental Response, Compensation and Liability Act (“CERCLA”) with respect to the Lower Duwamish Waterway Superfund
Site (the “LDW Site”). Listed on the National Priorities List in 2001, the LDW Site is a five-mile stretch of the Duwamish
River flowing into Elliott Bay in Seattle, Washington. A group of PRPs consisting of the City of Seattle, King County, the Port
of Seattle, and Boeing Company conducted a Remedial Investigation/Feasibility Study for the LDW Site, and on December 2, 2014,
the EPA issued its Record of Decision (“ROD”) describing the selected remedy. The EPA estimates the total cleanup costs
(in present value dollars) at $342,000, and estimates that it will take seven years to implement the remedy. Implementation will
not begin until after the ongoing Early Action Area cleanups have been completed (estimated to be in mid-2015), as well as additional
baseline sampling throughout the LDW Site and the preparation of a remedial design, activities that will take a number of years.
The ROD also specifies ten years of monitoring following the cleanup, and provides that if the cleanup goals have not been met
by the close of this period, then additional remediation activities may be required at that time. In August 2014, NWCS entered
into an Alternative Dispute Resolution Memorandum of Agreement with several dozen other PRPs and a neutral allocator to conduct
a non-binding allocation of certain past and future response costs allegedly incurred at the LDW Site. The allocation process is
designed to develop evidence relating to each PRP’s nexus, if any, to the LDW Site (whether or not that PRP is participating
in the allocation process), for the allocator to hear arguments as to how each PRP’s nexus affects the allocation of response
costs, and to determine each PRP’s share of the cleanup costs. NWCS is defending itself vigorously in this confidential allocation
process and does not anticipate being allocated material liability. The allocation process is currently scheduled to be completed
in mid-2018 with the entry of cleanup implementation and cash-out settlement agreements between and amongst the PRPs and the EPA.
At this point the Company is not able to determine the likelihood of any outcome in this matter.
16. SUBSEQUENT EVENT
On April 16, 2015, the
Company announced that its Board of Directors approved a regular quarterly cash dividend of $0.13 per share on the Company’s
common stock. The dividend will be paid on May 14, 2015, to stockholders of record on the close of business on April 30,
2015.
Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
Certain
statements contained in this Quarterly Report on Form 10-Q are forward-looking in nature, including statements related
to our ability to provide adequate cash to fund our operating activities, our ability to draw on our credit agreement or
raise additional capital, the impact of global, regional and local economic conditions, including the price of crude oil, on
our volume, business and results of operations, the effects of seasonality on our business and results of operations, demand
for recyclable commodities and recyclable commodity pricing, our expectations with respect to capital expenditures,
our expectations with respect to our ability to obtain expansions of permitted landfill capacity, our expectations with
respect to our stock repurchase program and future dividend payments, our expectations with respect to the outcomes of our
legal proceedings and our expectations with respect to the purchase of fuel and fuel prices. These statements can
be identified by the use of forward-looking terminology such as “believes,”
“expects,” “may,” “will,” “should,” or “anticipates,” or the
negative thereof or comparable terminology, or by discussions of strategy.
Our business and operations
are subject to a variety of risks and uncertainties and, consequently, actual results may differ materially from those projected
by any forward-looking statements. Factors that could cause actual results to differ from those projected include, but are
not limited to, the following:
| · | Negative trends or volatility in crude oil prices may adversely affect the level of exploration,
development and production activity of E&P companies and the demand for our E&P waste services; |
| · | Our results are vulnerable to economic conditions; |
| · | Our E&P waste business depends on the willingness of E&P companies to outsource their waste
services activities; |
| · | Our industry is highly competitive and includes larger and better capitalized companies, companies
with lower prices, return expectations or other advantages, and governmental service providers, which could adversely affect our
ability to compete and our operating results; |
| · | Our financial and operating performance may be affected by the inability to renew landfill operating
permits, obtain new landfills and expand existing ones; |
| · | Competition for acquisition candidates, consolidation within the waste industry and economic and
market conditions may limit our ability to grow through acquisitions; |
| · | Our indebtedness could adversely affect our financial condition and limit our financial flexibility; |
| · | Price increases may not be adequate to offset the impact of increased costs, or may cause us to
lose volume; |
| · | Fluctuations in prices for recycled commodities that we sell and rebates we offer to customers
may cause our revenues and operating results to decline; |
| · | We have limited experience in running an E&P waste treatment, recovery and disposal business; |
| · | The seasonal nature of our business and “event-driven” waste projects cause our results
to fluctuate; |
| · | We may lose contracts through competitive bidding, early termination or governmental action; |
| · | Alternatives to landfill disposal may cause our revenues and operating results to decline; |
| · | Increases in labor costs could impact our financial results; |
| · | Increases in the price of diesel or compressed natural gas fuel may adversely affect our collection
business and reduce our operating margins; |
| · | Labor union activity could divert management attention and adversely affect our operating results; |
| · | We could face significant withdrawal liability if we withdraw from participation in one or more
multiemployer pension plans in which we participate and the accrued pension benefits are not fully funded; |
| · | Our financial results could be adversely affected by impairments of goodwill or indefinite-lived
intangibles; |
| · | Pending or future litigation or governmental proceedings could result in material adverse consequences,
including judgments or settlements; |
| · | We may be subject in the normal course of business to judicial, administrative or other third-party
proceedings that could interrupt or limit our operations, require expensive remediation, result in adverse judgments, settlements
or fines and create negative publicity; |
| · | Increases in insurance costs and the amount that we self-insure for various risks could reduce
our operating margins and reported earnings; |
| · | We rely on computer systems to run our business and disruptions or privacy breaches in these systems
could impact our ability to service our customers and adversely affect our financial results, damage our reputation, and expose
us to litigation risk; |
| · | A portion of our growth and future financial performance depends on our ability to integrate acquired
businesses, and the success of our acquisitions; |
| · | Each business that we acquire or have acquired may have liabilities or risks that we fail or are
unable to discover, or that become more adverse to our business than we anticipated at the time of acquisition; |
| · | Extensive and evolving environmental, health and safety laws and regulations may restrict our operations
and growth and increase our costs; |
| · | Our E&P waste business could be adversely affected by changes in laws regulating E&P waste; |
| · | Changes in laws or government regulations regarding hydraulic fracturing could increase our customers’
costs of doing business and reduce oil and gas production by our customers, which could adversely impact our business; |
| · | Future changes in laws regulating the flow of solid waste in interstate commerce could adversely
affect our operating results; |
| · | Extensive regulations that govern the design, operation and closure of landfills may restrict our
landfill operations or increase our costs of operating landfills; |
| · | Our financial results are based upon estimates and assumptions that may differ from actual results; |
| · | Our accruals for our landfill site closure and post-closure costs may be inadequate; |
| · | We depend significantly on the services of the members of our senior and regional management team,
and the departure of any of those persons could cause our operating results to suffer; |
| · | Our decentralized decision-making structure could allow local managers to make decisions that adversely
affect our operating results; |
| · | Liabilities for environmental damage may adversely affect our financial condition, business and
earnings; and |
| · | If we are not able to develop and protect intellectual property, or if a competitor develops or
obtains exclusive rights to a breakthrough technology, our financial results may suffer. |
These risks and uncertainties,
as well as others, are discussed in greater detail in this Quarterly Report on Form 10-Q and our other filings with the Securities
and Exchange Commission, or SEC, including our most recent Annual Report on Form 10-K. There may be additional risks
of which we are not presently aware or that we currently believe are immaterial which could have an adverse
impact on our business. We make no commitment
to revise or update any forward-looking statements in order to reflect events or circumstances that may change.
OVERVIEW
We are an integrated municipal
solid waste services company that provides solid waste collection, transfer, disposal and recycling services primarily in exclusive
and secondary markets in the U.S. and a leading provider of non-hazardous exploration and production, or E&P, waste treatment,
recovery and disposal services in several of the most active natural resource producing areas of the U.S. We also provide intermodal
services for the rail haul movement of cargo and solid waste containers in the Pacific Northwest through a network of intermodal
facilities.
We seek to avoid highly
competitive, large urban markets and instead target markets where we can attain high market share either through exclusive contracts,
vertical integration or asset positioning. In markets where waste collection services are provided under exclusive arrangements,
or where waste disposal is municipally owned or funded or available at multiple municipal sources, we believe that controlling
the waste stream by providing collection services under exclusive arrangements is often more important to our growth and profitability
than owning or operating landfills. We also target niche markets, like E&P waste treatment and disposal services, with
similar characteristics and, we believe, higher comparative growth potential over the long term.
As of March 31, 2015,
we served residential, commercial, industrial and E&P customers in 32 states: Alabama, Alaska, Arizona, Arkansas,
California, Colorado, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Michigan, Minnesota, Mississippi, Montana,
Nebraska, Nevada, New Mexico, New York, North Carolina, North Dakota, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee,
Texas, Utah, Washington and Wyoming. As of March 31, 2015, we owned or operated a network of 149 solid waste collection
operations; 69 transfer stations; seven intermodal facilities, 35 recycling operations, 59 active MSW, E&P and/or
non-MSW landfills, 24 E&P liquid waste injection wells, 21 E&P waste treatment and recovery facilities and 24 oil recovery
facilities.
The municipal solid waste
industry is a local and highly competitive business, requiring substantial labor and capital resources. The participants
compete for collection accounts primarily on the basis of price and, to a lesser extent, the quality of service, and compete for
landfill business on the basis of tipping fees, geographic location and quality of operations. The municipal solid waste
industry has been consolidating and continues to consolidate as a result of a number of factors, including the increasing costs
and complexity associated with waste management operations and regulatory compliance. Many small independent operators and
municipalities lack the capital resources, management, operating skills and technical expertise necessary to operate effectively
in such an environment. The consolidation trend has caused municipal solid waste companies to operate larger landfills that
have complementary collection routes that can use company-owned disposal capacity. Controlling the point of transfer from
haulers to landfills has become increasingly important as landfills continue to close and disposal capacity moves further from
collection markets.
Generally, the most profitable
operators within the municipal solid waste industry are those companies that are vertically integrated or enter into long-term
collection contracts. A vertically integrated operator will benefit from: (1) the internalization of waste, which
is bringing waste to a company-owned landfill; (2) the ability to charge third-party haulers tipping fees either at landfills
or at transfer stations; and (3) the efficiencies gained by being able to aggregate and process waste at a transfer station
prior to landfilling.
The E&P waste services
industry is regional in nature and is also highly fragmented, with acquisition opportunities available in several active natural
resource basins. Competition for E&P waste comes primarily from smaller regional companies that utilize a variety of disposal
methods and generally serve specific geographic markets. In addition, customers in many markets have the option of using internal
disposal methods or outsourcing to another third-party disposal company. The principal competitive factors in this business include:
gaining customer approval of treatment and disposal facilities; location of facilities in relation to customer activity; reputation;
reliability of services; track record of environmental compliance; ability to accept multiple waste types at a single facility;
and price.
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
The preparation of financial
statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities,
revenues and expenses and related disclosures of contingent assets and liabilities in the condensed consolidated financial statements.
As described by the SEC, critical accounting estimates and assumptions are those that may be material due to the levels of subjectivity
and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that have a
material impact on the financial condition or operating performance of a company. Such critical
accounting estimates and assumptions are applicable to our reportable segments. Refer to our most
recent Annual Report on Form 10-K for a complete description of our critical accounting estimates and assumptions.
NEW ACCOUNTING PRONOUNCEMENTS
For a description of the
new accounting standards that affect us, see Note 2 to our Condensed Consolidated Financial Statements included in Part I,
Item 1 of this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS FOR THE THREE MONTHS
ENDED MARCH 31, 2015 AND 2014
The following table sets
forth items in our condensed consolidated statements of net income in thousands and as a percentage of revenues for the periods
indicated.
| |
Three months ended March 31, | |
| |
2015 | | |
2014 | |
Revenues | |
$ | 506,100 | | |
| 100.0 | % | |
$ | 481,710 | | |
| 100.0 | % |
Cost of operations | |
| 281,123 | | |
| 55.6 | | |
| 263,061 | | |
| 54.6 | |
Selling, general and administrative | |
| 58,144 | | |
| 11.5 | | |
| 55,647 | | |
| 11.5 | |
Depreciation | |
| 57,307 | | |
| 11.3 | | |
| 55,817 | | |
| 11.6 | |
Amortization of intangibles | |
| 6,999 | | |
| 1.4 | | |
| 6,737 | | |
| 1.4 | |
Impairments and other operating charges | |
| 662 | | |
| 0.1 | | |
| 525 | | |
| 0.1 | |
Operating income | |
| 101,865 | | |
| 20.1 | | |
| 99,923 | | |
| 20.8 | |
| |
| | | |
| | | |
| | | |
| | |
Interest expense | |
| (15,697 | ) | |
| (3.1 | ) | |
| (16,910 | ) | |
| (3.5 | ) |
Other income (expense), net | |
| (220 | ) | |
| 0.0 | | |
| 142 | | |
| 0.0 | |
Income tax provision | |
| (33,867 | ) | |
| (6.7 | ) | |
| (33,932 | ) | |
| (7.0 | ) |
Net income attributable to noncontrolling interests | |
| (257 | ) | |
| (0.1 | ) | |
| (208 | ) | |
| (0.1 | ) |
Net income attributable to Waste Connections | |
$ | 51,824 | | |
| 10.2 | % | |
$ | 49,015 | | |
| 10.2 | % |
Revenues.
Total revenues increased $24.4 million, or 5.1%, to $506.1 million for the three months ended March 31, 2015, from $481.7
million for the three months ended March 31, 2014.
During the three months
ended March 31, 2015, incremental revenue from acquisitions closed during, or subsequent to, the three months ended March 31, 2014,
increased revenues by approximately $14.3 million. Operations divested during, or subsequent to, the three months ended March 31,
2014, decreased revenues by approximately $0.4 million.
During the three months
ended March 31, 2015, the net increase in core prices charged to our solid waste customers was $11.7 million.
During the three months
ended March 31, 2015, volume increases in our existing business increased solid waste revenues by $6.5 million from increases in
commercial collection, roll off collection and transfer station volumes resulting from increased construction and general economic
activity in our markets. During the three months ended March 31, 2015, E&P disposal facilities which opened, or significantly
increased the scale of their operations, subsequent to March 31, 2014 increased E&P revenues by $3.7 million. During the three
months ended March 31, 2015, E&P revenues at all other sites owned or fully-operated in each of the comparable periods decreased
by a total of $11.6 million as the substantial reductions in crude oil prices that began in October 2014, and have continued into
2015, have resulted in a decline in the level of drilling and production activity, reducing the demand for E&P waste services
in the basins in which we operate. Further or sustained declines in commodity prices may lead to further reductions in drilling
activities by our E&P customers and further declines in our E&P volumes and revenues.
During the three months
ended March 31, 2015, the closure of a recycling operation in our Western segment decreased revenues by $1.8 million. Revenues
from sales of recyclable commodities at all other facilities owned during the three months ended March 31, 2015 and 2014 decreased
$1.7 million due primarily to decreased overseas demand for recyclable commodities.
During the three months
ended March 31, 2015, intermodal revenues increased $3.7 million due to cargo volume from a new large intermodal customer and higher
cargo volume with existing customers.
Cost of Operations.
Total cost of operations increased $18.0 million, or 6.9%, to $281.1 million for the three months ended March 31, 2015, from
$263.1 million for the three months ended March 31, 2014. The increase was primarily the result of $7.5 million of additional
operating costs from acquisitions closed during, or subsequent to, the three months ended March 31, 2014, an increase in labor
expenses of $4.2 million due primarily to employee pay rate increases and headcount increases to support new facilities, an increase
of $3.9 million for additional material handling, transportation and disposal expenses at an E&P disposal operation in New
Mexico resulting from heavy precipitation causing significant on-site flooding and other surface damage, an increase in third-party
disposal expense of $2.1 million due to disposal rate increases and higher disposal costs associated with increased collection
and transfer station volumes, an increase in truck, container, equipment and facility maintenance and repair expenses of
$2.0 million due to variability in the timing
and severity of major repairs, an increase in third-party trucking and transportation expenses of $1.9 million due to increased
transfer station and landfill volumes that require us to transport the waste to our disposal sites, an increase in rail transportation
expenses at our intermodal operations of $1.7 million due to increased rail cargo volume, an increase of $1.5 million due to start-up
related expenses at two new E&P disposal facilities that are expected to be fully operational subsequent to March 31, 2015,
an increase of $1.1 million for E&P treatment cell remediation at an E&P disposal operation in New Mexico and $0.5 million
of other net expense increases, partially offset by a decrease in fuel expense of $6.0 million due to lower market prices for diesel
fuel not purchased under diesel fuel hedge agreements and a decrease in auto, workers’ compensation and property claims expense
under our high deductible insurance program of $2.4 million due primarily to adjustments to projected losses on prior period claims.
Cost of operations as
a percentage of revenues increased 1.0 percentage point to 55.6% for the three months ended March 31, 2015, from 54.6% for the
three months ended March 31, 2014. The increase as a percentage of revenues was comprised of a combined 1.0 percentage point
increase from additional material handling, transportation, disposal and remediation work at two of our E&P disposal sites
in New Mexico, a 0.5 percentage point increase associated with increased labor expenses, a 0.3 percentage point increase from higher
third-party trucking expenses, a 0.3 percentage point increase in truck, container, equipment and facility maintenance and repair
expenses, a 0.3 percentage point increase in rail transportation expenses at our intermodal operations, a 0.3 percentage point
increase in third-party disposal expenses and a 0.3 percentage point increase associated with start-up related expenses at two
new E&P disposal facilities that are expected to be fully operational subsequent to March 31, 2015, partially offset by a 1.3
percentage point decrease in fuel expense, a 0.5 percentage point decrease in auto, workers’ compensation and property claims
expense and a 0.2 percentage point decrease from other net expense decreases.
SG&A.
SG&A expenses increased $2.5 million, or 4.5%, to $58.1 million for the three months ended March 31, 2015, from $55.6 million
for the three months ended March 31, 2014. The increase was primarily the result of $1.1 million of additional SG&A expenses
from acquisitions closed during, or subsequent to, the three months ended March 31, 2014, an increase in equity-based compensation
expense of $0.6 million associated with an increase in the total fair value of our annual recurring grant of restricted stock units
to our personnel, an increase in employee training and travel expenses of $0.6 million, an increase in professional fees of $0.5
million due primarily to increased expenses for external accounting services, employee recruitment services and sales consulting
services, an increase in payroll and payroll-related expenses of $0.5 million primarily related to annual compensation increases,
an increase in direct acquisition expenses of $0.3 million due to an increase in acquisition activity, an increase in deferred
compensation expense of $0.2 million as a result of increases in the market value of investments to which employee deferred compensation
liability balances are tracked and $0.1 million of other net expense increases, partially offset by a decrease in accrued cash
incentive compensation expense of $1.4 million as we are not projected to achieve the same level of certain financial targets that
were met in the prior year period.
SG&A expenses as a
percentage of revenues were unchanged at 11.5% for the three months ended March 31, 2015 and 2014 as a result of the decrease from
lower cash incentive compensation expense being offset by increased equity-based compensation expenses, professional fees and employee
training and travel expenses.
Depreciation.
Depreciation expense increased $1.5 million, or 2.7%, to $57.3 million for the three months ended March 31, 2015, from $55.8 million
for the three months ended March 31, 2014. The increase was primarily the result of $1.4 million of additional depreciation
and depletion expense from acquisitions closed during, or subsequent to, the three months ended March 31, 2014, an increase in
depletion expense of $1.0 million at our existing solid waste landfills due primarily to an increase in volumes and an increase
in depreciation expense of $0.3 million associated with additions to our fleet and equipment purchased to support our existing
operations, partially offset by a $1.2 million decrease in depletion expense at our existing E&P landfills due to volume decreases
resulting from a decline in the level of oil drilling and production activity due to reductions in crude oil prices.
Depreciation expense as
a percentage of revenues decreased 0.3 percentage points to 11.3% for the three months ended March 31, 2015, from 11.6% for
the three months ended March 31, 2014. The decrease as a percentage of revenues was due primarily to the decrease in depletion
expense at our E&P disposal operations.
Amortization of Intangibles.
Amortization of intangibles expense increased $0.3 million, or 3.9%, to $7.0 million for the three months ended March 31, 2015,
from $6.7 million for the three months ended March 31, 2014. The increase was attributable to additional amortization expense during
the three months ended March 31, 2015 from acquisitions closed during, or subsequent to, the three months ended March 31, 2014.
Amortization expense as
a percentage of revenues was unchanged at 1.4% for the three months ended March 31, 2015 and 2014.
Impairments and Other
Operating Charges. Impairments and other operating charges increased $0.2 million, to an expense total of $0.7 million
for the three months ended March 31, 2015, from an expense total of $0.5 million for the three months ended March 31, 2014.
The primary components of the charges for both periods were increases to the fair value of amounts payable under liability-classified
contingent consideration arrangements.
Operating Income.
Operating income increased $2.0 million, or 1.9%, to $101.9 million for the three months ended March 31, 2015, from $99.9 million
for the three months ended March 31, 2014. The increase was attributable to the $24.4 million increase in revenues, partially
offset by an $18.0 million increase in costs of operations, $2.5 million increase in SG&A expense, $1.5 million increase in
depreciation expense, $0.3 million increase in amortization of intangibles expense and $0.2 million increase in impairments and
other operating charges.
Operating income as a
percentage of revenues decreased 0.7 percentage points to 20.1% for the three months ended March 31, 2015, from 20.8% for the three
months ended March 31, 2014. The decrease as a percentage of revenues was comprised of a 1.0 percentage point increase in
cost of operations, partially offset by a 0.3 percentage point decrease in depreciation expense.
Interest Expense.
Interest expense decreased $1.2 million, or 7.2%, to $15.7 million for the three months ended March 31, 2015, from $16.9 million
for the three months ended March 31, 2014, resulting from a decrease of $1.5 million due to refinancing and replacing our prior
term loan agreement and prior credit agreement with our new revolving credit and term loan agreement resulting in a reduction in
the applicable margin above the base rate or LIBOR rate for outstanding borrowings, partially offset by other net interest expense
increases of $0.3 million.
Other Income (Expense),
Net. Other income (expense), net, decreased $0.3 million, to an expense total of $0.2 million for the three months ended
March 31, 2015, from an income total of $0.1 million for the three months ended March 31, 2014. The decrease was primarily attributable
to recording an expense charge of $0.6 million for the write off of a portion of unamortized debt issuance costs resulting from
refinancing our prior term loan agreement and prior credit agreement, partially offset by a $0.3 million increase in investment
income.
Income Tax Provision.
Income taxes were $33.9 million for the three months ended March 31, 2015 and 2014.
Our effective tax rates
for the three months ended March 31, 2015 and 2014, were 39.4% and 40.8%, respectively. During the three months ended March 31,
2014, a non-recurring adjustment in deferred tax liabilities resulting from the enactment of New York State’s 2014-2015 Budget
Act increased our income tax expense and our effective tax rate by $1.2 million and 1.5 percentage points, respectively.
SEGMENT RESULTS
General
No single contract or
customer accounted for more than 10% of our total revenues at the consolidated or reportable segment level during the periods presented.
The following tables reflect a breakdown of our revenue and inter-company eliminations for the periods indicated (dollars in thousands).
| |
Three months ended March 31, 2015 | |
| |
Revenue | | |
Intercompany Revenue | | |
Reported Revenue | | |
% of Reported Revenue | |
Solid waste collection | |
$ | 327,005 | | |
$ | (919 | ) | |
$ | 326,086 | | |
| 57.6 | % |
Solid waste disposal and transfer | |
| 142,430 | | |
| (56,326 | ) | |
| 86,104 | | |
| 25.1 | |
Solid waste recycling | |
| 11,069 | | |
| (221 | ) | |
| 10,848 | | |
| 1.9 | |
E&P waste treatment, recovery and disposal | |
| 72,556 | | |
| (3,998 | ) | |
| 68,558 | | |
| 12.8 | |
Intermodal and other | |
| 14,504 | | |
| - | | |
| 14,504 | | |
| 2.6 | |
Total | |
$ | 567,564 | | |
$ | (61,464 | ) | |
$ | 506,100 | | |
| 100.0 | % |
| |
Three months ended March 31, 2014 | |
| |
Revenue | | |
Intercompany Revenue | | |
Reported Revenue | | |
% of Reported Revenue | |
Solid waste collection | |
$ | 306,003 | | |
$ | (847 | ) | |
$ | 305,156 | | |
| 56.6 | % |
Solid waste disposal and transfer | |
| 135,563 | | |
| (52,508 | ) | |
| 83,055 | | |
| 25.1 | |
Solid waste recycling | |
| 14,904 | | |
| (619 | ) | |
| 14,285 | | |
| 2.7 | |
E&P waste treatment, recovery and disposal | |
| 73,318 | | |
| (4,765 | ) | |
| 68,553 | | |
| 13.6 | |
Intermodal and other | |
| 10,872 | | |
| (211 | ) | |
| 10,661 | | |
| 2.0 | |
Total | |
$ | 540,660 | | |
$ | (58,950 | ) | |
$ | 481,710 | | |
| 100.0 | % |
Our CODM evaluates operating
segment profitability and determines resource allocations based on several factors, of which the primary financial measure is segment
EBITDA. Segment EBITDA is not a measure of operating income, operating performance or liquidity under GAAP and may not be
comparable to similarly titled measures reported by other companies. Our management uses segment EBITDA in the evaluation
of segment operating performance as it is a profit measure that is generally within the control of the operating segments.
We manage our operations
through three geographic operating segments (Western, Central and Eastern) and our E&P segment, which includes the majority
of our E&P waste treatment and disposal operations. Our three geographic operating segments and our E&P segment comprise
our reportable segments. Each operating segment is responsible for managing several vertically integrated operations, which are
comprised of districts. Our Western segment is comprised of operating locations in Alaska, California, Idaho, Montana,
Nevada, Oregon, Washington and western Wyoming; our Central segment is comprised of operating locations in Arizona, Colorado, Kansas,
Louisiana, Minnesota, Nebraska, New Mexico, Oklahoma, South Dakota, Texas, Utah and eastern Wyoming; and our Eastern segment is
comprised of operating locations in Alabama, Illinois, Iowa, Kentucky, Massachusetts, Michigan, Mississippi, New York, North Carolina,
South Carolina and Tennessee. The E&P segment is comprised of our E&P operations in Arkansas, Louisiana, New Mexico, North
Dakota, Oklahoma, Texas, Wyoming and along the Gulf of Mexico.
Revenues, net of intercompany
eliminations, for our reportable segments are shown in the following table in thousands and as a percentage of total revenues for
the periods indicated:
| |
Three months ended March 31, | |
| |
2015 | | |
2014 | |
Western | |
$ | 205,626 | | |
| 40.6 | % | |
$ | 195,355 | | |
| 40.5 | % |
Central | |
| 134,935 | | |
| 26.7 | | |
| 129,067 | | |
| 26.8 | |
Eastern | |
| 98,024 | | |
| 19.4 | | |
| 91,326 | | |
| 19.0 | |
E&P | |
| 67,515 | | |
| 13.3 | | |
| 65,962 | | |
| 13.7 | |
| |
$ | 506,100 | | |
| 100.0 | % | |
$ | 481,710 | | |
| 100.0 | % |
Segment EBITDA for our
reportable segments is shown in the following table in thousands and as a percentage of segment revenues for the periods indicated:
| |
Three months ended March 31, | |
| |
2015 | | |
2014 | |
Western | |
$ | 68,892 | | |
| 33.5 | % | |
$ | 62,492 | | |
| 32.0 | % |
Central | |
| 47,350 | | |
| 35.1 | | |
| 45,843 | | |
| 35.5 | |
Eastern | |
| 30,072 | | |
| 30.7 | | |
| 27,137 | | |
| 29.7 | |
E&P | |
| 20,976 | | |
| 31.1 | | |
| 31,479 | | |
| 47.7 | |
Corporate(a) | |
| (457 | ) | |
| - | | |
| (3,949 | ) | |
| - | |
| |
$ | 166,833 | | |
| 33.0 | % | |
$ | 163,002 | | |
| 33.8 | % |
(a) Corporate
functions include accounting, legal, tax, treasury, information technology, risk management, human resources, training and other
administrative functions. Amounts reflected are net of allocations to the four operating segments.
A reconciliation of segment
EBITDA to Income before income tax provision is included in Note 8 to our Condensed Consolidated Financial Statements included
in Part 1, Item 1 of this report.
Significant changes in
revenue and segment EBITDA for our reportable segments for the three month periods ended March 31, 2015, compared to the three
month periods ended March 31, 2014, are discussed below:
Segment Revenue
Revenue in our Western
segment increased $10.2 million, or 5.3%, to $205.6 million for the three months ended March 31, 2015, from $195.4 million
for the three months ended March 31, 2014. The components of the increase consisted of solid waste volume increases of $7.0
million associated with our residential, commercial and roll off collection operations, transfer stations and landfill special
waste services, intermodal revenue increases of $3.7 million due to a new large intermodal customer and higher cargo volume with
existing customers, net price increases of $3.1 million and other revenue increases of $0.3 million, partially offset by recyclable
commodity sales decreases of $1.8 million and $1.3 million resulting from the closure of a recycling operation subsequent to March
31, 2014 and declines in the price of recyclable commodities, respectively, and decreases of $0.8 million from reduced E&P
disposal volumes.
Revenue in our Central
segment increased $5.8 million, or 4.5%, to $134.9 million for the three months ended March 31, 2015, from $129.1 million
for the three months ended March 31, 2014. The components of the increase consisted of net price increases of $5.6 million,
E&P disposal volume increases of $1.0 million and $0.4 million of other revenue increases, partially offset by $1.2 million
of decreases primarily from declines in residential collection volumes and landfill special waste volumes exceeding increases in
commercial and roll off collection volumes.
Revenue in our Eastern
segment increased $6.7 million, or 7.3%, to $98.0 million for the three months ended March 31, 2015, from $91.3 million
for the three months ended March 31, 2014. The components of the increase consisted of revenue growth from acquisitions closed
during, or subsequent to, the three months ended March 31, 2014, of $3.8 million, net price increases of $3.0 million and
solid waste volume increases of $0.7 million primarily from volume increases in our roll off collection business exceeding volume
decreases in landfill special waste volumes, partially offset by recyclable commodity sales decreases of $0.5 million due primarily
to declines in the price of recyclable commodities and other revenue decreases of $0.3 million.
Revenue in our E&P
segment increased $1.5 million, or 2.4%, to $67.5 million for the three months ended March 31, 2015, from $66.0 million
for the three months ended March 31, 2014. The components of the increase consisted of revenue growth from acquisitions closed
during, or subsequent to, the three months ended March 31, 2014, of $9.6 million, an increase in volume of $3.2 million from an
E&P site which commenced operations in 2014 and increased the scale of its operations subsequent to March 31, 2014 and $0.5
million of revenue from new E&P disposal facilities opened subsequent to March 31, 2014, partially offset by $11.8 million
of volume decreases at facilities owned and fully-operated in each of the comparable periods. During the three months ended March
31, 2015, our E&P segment was adversely affected by the substantial reductions in crude oil prices that began in October 2014,
and continue into 2015, resulting in a decline in the level of drilling and production activity, reducing the demand for E&P
waste services in the basins in which we operate. Further or sustained declines in commodity prices may lead to further reductions
in drilling activities by our E&P customers and further declines in our E&P volumes and revenues.
Segment EBITDA
Segment EBITDA in our
Western segment increased $6.4 million, or 10.2%, to $68.9 million for the three months ended March 31, 2015, from $62.5 million
for the three months ended March 31, 2014. The increase was primarily due to an increase in revenues of $10.2 million, a
decrease in fuel expense of $2.3 million due to lower market prices for diesel fuel not purchased under diesel fuel hedge agreements
and a decrease in auto, workers’ compensation and property claims expense under our high deductible insurance program of
$1.0 million due primarily to adjustments to projected losses on prior period claims, partially offset by an increase in rail transportation
expenses at our intermodal operations of $1.7 million due to increased rail cargo volume, an increase in third-party disposal expense
of $1.6 million due to increased collection volumes and disposal rate increases, an increase in direct and administrative labor
expenses of $1.2 million due primarily to employee pay rate increases, an increase in truck, container, equipment and facility
maintenance and repair expenses of $1.0 million due to variability in the timing and severity of major repairs, an increase in
third-party trucking and transportation expenses of $0.4 million due to increased transfer station volumes that require us to transport
the waste to our disposal sites, an increase in taxes on revenues of $0.3 million due to increased revenues, a net $0.2 million
increase in cost of operations and SG&A expenses attributable to acquired operations, an increase in corporate overhead expense
allocations of $0.2 million due primarily to revenue growth and $0.5 million of other net expense increases.
Segment EBITDA in our
Central segment increased $1.6 million, or 3.3%, to $47.4 million for the three months ended March 31, 2015, from $45.8 million
for the three months ended March 31, 2014. The increase was primarily due to an increase in revenues of $5.8 million, a decrease
in fuel expense of $1.1 million due to lower market prices for diesel fuel not purchased under diesel fuel hedge agreements and
a decrease in auto, workers’ compensation and property claims expense under our high deductible insurance program of $0.5
million due primarily to adjustments to projected losses on prior period claims, partially offset by an increase in direct and
administrative labor expenses of $1.7 million due primarily to employee pay rate increases, an increase in third-party disposal
expense of $1.1 million due to disposal rate increases and higher disposal associated with increased roll off collection volumes,
an increase in corporate overhead expense allocations of $1.1 million due primarily to revenue growth and an increase to the overhead
allocation rate, an increase in third-party trucking and transportation expenses of $1.0 million due to increased volumes disposed
of at our transfer stations that require further transportation to our landfills, an increase in professional fees of $0.5 million
due primarily to increased expenses for legal and sales consulting services and $0.4 million of other net expense increases.
Segment EBITDA in our
Eastern segment increased $3.0 million, or 10.8%, to $30.1 million for the three months ended March 31, 2015, from $27.1 million
for the three months ended March 31, 2014. The increase was primarily due to an increase in revenues of $6.7 million and
a decrease in fuel expense of $1.6 million due to lower market prices for diesel fuel not purchased under diesel fuel hedge agreements,
partially offset by a net $2.6 million increase in cost of operations and SG&A expenses attributable to acquired operations,
an increase in direct and administrative labor expenses of $1.3 million due primarily to employee pay rate increases and increased
headcount to support internal growth, an increase in corporate overhead expense allocations of $0.9 million due primarily to revenue
growth and an increase to the overhead allocation rate and $0.5 million of other net expense increases.
Segment EBITDA in our
E&P segment decreased $10.5 million, or 33.4%, to $21.0 million for the three months ended March 31, 2015, from $31.5
million for the three months ended March 31, 2014. The decrease was primarily due to a net $6.1 million increase in cost
of operations and SG&A expenses attributable to acquired operations, an increase of $5.0 million due to site clean-up and remediation
work associated with flooding and other surface damage at two of our E&P disposal sites in New Mexico resulting from heavy
precipitation which occurred during the three months ended March 31, 2015, an increase of $1.5 million due to start-up related
expenses at two new E&P disposal facilities that are expected to be fully operational subsequent to March 31, 2015, an increase
in labor expenses of $0.5 million due primarily to headcount increases at an E&P disposal site which commenced operations during
the three months ended March 31, 2014 and increased the scale of its operations subsequent to March 31, 2014 and an increase in
truck, container, equipment and facility maintenance and repair expenses of $0.7 million due to variability in the timing and severity
of major repairs, partially offset by an increase in revenues of $1.5 million, a decrease in fuel expense of $1.0 million due to
lower market prices for diesel fuel not purchased under diesel fuel hedge agreements and $0.8 million of other net expense decreases.
Segment EBITDA at Corporate
improved $3.4 million, to a loss of $0.5 million for the three months ended March 31, 2015, from a loss of $3.9 million for the
three months ended March 31, 2014. The decreased loss was due to an increase in revenue-based corporate overhead expense
allocations to our segments of $2.6 million due primarily to our revenue growth and an increase in the allocation rate to our Central
and Eastern segments, a decrease in accrued cash incentive compensation expense of $1.5 million as we are not projected to achieve
the same level of certain financial targets that were met in the prior year period and $0.4 million of other net expense decreases,
partially offset by an increase in equity-based compensation expense of $0.6 million associated with an increase in the total fair
value of our annual recurring grant of restricted stock units to our personnel, an increase in direct acquisition expenses of $0.3
million due to an increase in acquisition activity and an increase in deferred compensation expense of $0.2 million resulting from
increases in the market value of investments to which employee deferred compensation liability balances are tracked.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets
forth certain cash flow information for the three month periods ended March 31, 2015
and 2014 (in thousands):
| |
Three Months Ended March 31, | |
| |
2015 | | |
2014 | |
Net cash provided by operating activities | |
$ | 162,571 | | |
$ | 144,957 | |
Net cash used in investing activities | |
| (132,174 | ) | |
| (62,527 | ) |
Net cash used in financing activities | |
| (29,016 | ) | |
| (80,167 | ) |
Net decrease in cash and equivalents | |
| 1,381 | | |
| 2,263 | |
Cash and equivalents at beginning of period | |
| 14,353 | | |
| 13,591 | |
Cash and equivalents at end of period | |
$ | 15,734 | | |
$ | 15,854 | |
Operating Activities Cash Flows
For the three months ended
March 31, 2015, net cash provided by operating activities was $162.6 million. For the three months ended March 31, 2014,
net cash provided by operating activities was $145.0 million. The $17.6 million increase was due primarily to the following:
| 1) | An increase in net income of $2.9 million, adjusted for a decrease in cash flows from operating
assets and liabilities, net of effects from acquisitions, of $0.3 million. Cash provided by operating assets and liabilities, net
of effects from acquisitions, was $21.5 million and $21.8 million for the three months ended March 31, 2015 and 2014, respectively.
The significant components of the $21.5 million in net cash inflows from changes in operating assets and liabilities, net of effects
from acquisitions, for the three months ended March 31, 2015, include the following: |
| a) | an increase in cash resulting from a $14.4 million decrease in accounts receivable due, in part,
to improved collection results; |
| b) | an increase in cash resulting from a $10.8 million decrease in prepaid expenses and other current
assets due primarily to a decrease in prepaid income taxes and a decrease in prepaid insurance premiums due to the amortization
of policies renewed on an annual basis; |
| c) | an increase in cash resulting from an increase in accrued liabilities of $3.9 million due primarily
to an increase in accrued interest due to semi-annual interest payments for notes issued under our master note purchase agreement
occurring in the second and fourth quarters of the calendar year, an increase in accrued income taxes as we did not remit an estimated
federal tax payment for 2015 during the three months ended March 31, 2015 and an increase in accrued payroll-related expenses due
to our pay cycle timing resulting in additional days of accrual at March 31, 2015, partially offset by a decrease in accrued cash
incentive compensation expense due to the payment of annual cash incentive compensation for 2014 during the three months ended
March 31, 2015; and |
| d) | an increase in cash resulting from a $1.8 million increase in deferred revenue due primarily to
increased revenues and the timing of billing for services; partially offset by |
| e) | a decrease in cash resulting from a $9.7 million decrease in accounts payable due primarily to
the timing of vendor payments; |
| 2) | An increase in depreciation expense of $1.5 million due primarily to increased depreciation expense
resulting from increased capital expenditures; |
| 3) | An increase in equity-based compensation expense of $0.6 million attributable to an increase in
the total fair value of our annual recurring grant of restricted stock units to our personnel; |
| 4) | An increase of $3.6 million attributable to a decrease in the excess tax benefits associated with
equity-based compensation, due to a decrease in stock option exercises resulting in decreased taxable income recognized by employees
that is tax deductible to us; and |
| 5) | An increase in our provision for deferred taxes of $7.9 million due primarily to tax deductible
timing differences associated with accrued expenses and equity-based compensation. |
As of March 31, 2015, we
had a working capital deficit of $20.6 million, including cash and equivalents of $15.7 million. Our working capital deficit
increased $26.4 million from a working capital surplus of $5.8 million at December 31, 2014, including cash and equivalents
of $14.4 million. To date, we have experienced no loss or lack of access to our cash or cash equivalents; however, we can
provide no assurances that access to our cash and cash equivalents will not be impacted by adverse conditions in the financial
markets. Our strategy in managing our working capital is generally to apply the cash generated from our operations that remains
after satisfying our working capital and capital expenditure requirements, along with stock repurchase and dividend programs, to
reduce the unhedged portion of our indebtedness under our credit agreement and to minimize our cash balances.
Investing Activities Cash
Flows
Net cash used in investing
activities increased $69.7 million to $132.2 million for the three months ended March 31, 2015, from $62.5 million for the three
months ended March 31, 2014. The significant components of the increase include the following:
| 1) | An increase in payments for acquisitions of $63.6 million primarily due to the acquisition of four
solid waste collection businesses, an E&P waste stream treatment and recycling business and a permitted, development stage
E&P landfill site during the three months ended March 31, 2015; and |
| 2) | An increase in capital expenditures for property and equipment of $6.1 million due primarily to
expenditures for acquisitions closed subsequent to March 31, 2014, increases in landfill site cost construction and increases in
expenditures for equipment. |
Financing Activities Cash
Flows
Net cash used in financing
activities decreased $51.2 million to $29.0 million for the three months ended March 31, 2015, from $80.2 million for the three
months ended March 31, 2014. The significant components of the decrease include the following:
| 1) | A decrease in net repayments of long-term borrowings of $77.5 million due primarily to increased
proceeds from borrowings under our credit agreement as a result of the increases in payments for acquisitions and payments to repurchase
our common stock during the three months ended March 31, 2015; less |
| 2) | An increase in payments to repurchase our common stock of $18.4 million due to no shares being
repurchased during the three months ended March 31, 2014; less |
| 3) | A decrease of $3.6 million attributable to a decrease in the excess tax benefits associated with
equity-based compensation, due to a decrease in stock option exercises resulting in decreased taxable income recognized by employees
that is tax deductible to us; less |
| 4) | An increase in payments for debt issuance costs of $3.0 million incurred in connection with our
new revolving credit and term loan agreement that we entered into in January 2015; less |
| 5) | An increase in cash dividends paid of $1.9 million due to an increase in our quarterly dividend
rate to $0.13 per share for the three months ended March 31, 2015, from a quarterly dividend rate of $0.115 per share for the three
months ended March 31, 2014. |
Our business is capital
intensive. Our capital requirements include acquisitions and capital expenditures for landfill cell construction, landfill
development, landfill closure activities and intermodal facility construction in the future.
Our Board of Directors
has authorized a common stock repurchase program for the repurchase of up to $1.2 billion of our common stock through December 31,
2017. Under the program, stock repurchases may be made in the open market or in privately negotiated transactions from time to
time at management’s discretion. The timing and amounts of any repurchases will depend on many factors, including our capital
structure, the market price of the common stock and overall market conditions. As of March 31, 2015 and 2014, we had repurchased
in aggregate 40.5 million and 39.9 million shares, respectively, of our common stock at an aggregate cost of $809.7 million and
$784.0 million, respectively. As of March 31, 2015, the remaining maximum dollar value of shares available for purchase under
the program was approximately $390.3 million. No shares were repurchased under the program during the three months ended March
31, 2014.
Our Board of Directors
authorized the initiation of a quarterly cash dividend in October 2010 and has increased it on an annual basis. In October 2014,
our Board of Directors authorized an increase to our regular quarterly cash dividend of $0.015, from $0.115 to $0.13 per share.
Cash dividends of $16.2 million and $14.2 million were paid during the three months ended March 31, 2015 and 2014, respectively.
We cannot assure you as to the amounts or timing of future dividends.
We made $41.7 million
in capital expenditures during the three months ended March 31, 2015. We expect to make capital expenditures between $200
million and $210 million in 2015 in connection with our existing business. We have funded and intend to fund the balance
of our planned 2015 capital expenditures principally through cash on hand, internally generated funds and borrowings under our
credit agreement. In addition, we may make substantial additional capital expenditures in acquiring MSW and E&P waste
businesses. If we acquire additional landfill disposal facilities, we may also have to make significant expenditures to bring them
into compliance with applicable regulatory requirements, obtain permits or expand our available disposal capacity. We cannot
currently determine the amount of these expenditures because they will depend on the number, nature, condition and permitted status
of any acquired landfill disposal facilities. We believe that our cash and equivalents, credit agreement and the funds we
expect to generate from operations will provide adequate cash to fund our working capital and other cash needs for the foreseeable
future. However, disruptions in the capital and credit markets could adversely affect our ability to draw on our credit agreement
or raise other capital. Our access to funds under the credit agreement is dependent on the ability of the banks that are
parties to the agreement to meet their funding commitments. Those banks may not be able to meet their funding commitments
if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests within a short
period of time.
We are a well-known seasoned
issuer with an effective shelf registration statement on Form S-3 filed in February 2015, which registers an unspecified amount
of debt and equity securities, including preferred securities, warrants, stockholder rights and units. In the future, we may issue
debt or equity securities under our shelf registration statement or in private placements from time to time on an opportunistic
basis, based on market conditions and available pricing. We expect to use the proceeds from any such offerings for general corporate
purposes, including repaying, redeeming or repurchasing debt, acquiring additional assets or businesses, capital expenditures and
increasing our working capital.
On January 26, 2015, we
entered into a new revolving credit and term loan agreement, or the credit agreement, with Bank of America, N.A., as administrative
agent, and the other lenders from time to time party thereto, or the Lenders, which refinanced and replaced our prior credit agreement
and our prior term loan agreement. The credit agreement consists of a $1.2 billion revolving credit facility and an $800 million
term loan. Under the credit agreement, we may request increases in the aggregate commitments under the revolving credit facility
and one or more additional term loans, provided that the aggregate principal amount of commitments and term loans never exceeds
$2.3 billion. Under the credit agreement, swing line loans may be issued at our request in an aggregate amount not to exceed a
$35 million sublimit and letters of credit may be issued at our request in an aggregate amount not to exceed a $250 million sublimit;
however, both the issuance of swing line loans and letters of credit reduce the amount of total borrowings available. As
of March 31, 2015, we had $1.354 billion outstanding under our credit agreement, exclusive of outstanding standby letters
of credit of $73.1 million.
The credit agreement requires
us to pay a commitment fee ranging from 0.090% per annum to 0.200% per annum of the unused portion of the facility. The borrowings
under the credit agreement bear interest, at our option, at either the base rate plus the applicable base rate margin on base rate
loans and swing line loans, or the LIBOR rate plus the applicable LIBOR margin on LIBOR loans. The base rate for any day
is a fluctuating rate per annum equal to the highest of: (1) the federal funds rate plus one half of one percent (0.500%); (2)
the LIBOR rate plus one percent (1.000%), and (3) the rate of interest in effect for such day as publicly announced from time to
time by Bank of America as its “prime rate.” The LIBOR rate is determined by the administrative agent pursuant to a
formula in the credit agreement. The applicable margins under the credit agreement vary depending on our leverage ratio, as defined
in the credit agreement, and range from 1.000% per annum to 1.500% per annum for LIBOR loans and 0.000% per annum to 0.500% per
annum for base rate and swing line loans. The borrowings under the credit agreement are not collateralized.
The credit agreement contains
representations, warranties, covenants and events of default, including a change of control event of default and limitations on
incurrence of indebtedness and liens, new lines of business, mergers, transactions with affiliates and restrictive payments. During
the continuance of an event of default, the lenders may take a number of actions, including declaring the entire amount then outstanding
under the credit agreement due and payable. The credit agreement contains cross-defaults if we default on the master note purchase
agreement or certain other debt. The credit agreement requires that we maintain specified quarterly leverage and interest coverage
ratios. The required leverage ratio cannot exceed 3.50x total debt to EBITDA (or 3.75x during material acquisition periods, subject
to certain limitations). The required interest coverage ratio must be at least 2.75x total interest expense to EBIT. We expect
to be in compliance with all applicable covenants under the credit agreement for the next 12 months. We use the credit agreement
for acquisitions, capital expenditures, working capital, standby letters of credit and general corporate purposes.
As of March 31, 2015,
we had the following contractual obligations:
| |
Payments Due by Period | |
| |
(amounts in thousands) | |
Recorded Obligations | |
Total | | |
Less Than 1 Year | | |
1 to 3 Years | | |
3 to 5 Years | | |
Over 5 Years | |
Long-term debt | |
$ | 1,998,030 | | |
$ | 3,917 | | |
$ | 151,967 | | |
$ | 1,720,870 | | |
$ | 121,276 | |
Cash interest payments | |
$ | 233,445 | | |
$ | 57,471 | | |
$ | 88,800 | | |
$ | 77,192 | | |
$ | 9,982 | |
Contingent consideration | |
$ | 98,150 | | |
$ | 24,246 | | |
$ | 15,137 | | |
$ | 21,415 | | |
$ | 37,352 | |
Final capping, closure and post-closure | |
$ | 716,253 | | |
$ | - | | |
$ | 5,517 | | |
$ | 2,837 | | |
$ | 707,899 | |
Long-term debt payments
include:
| 1) | $554.0 million in principal payments due January 2020 related to our revolving credit facility
under our new credit agreement. We may elect to draw amounts on our credit agreement in either base rate loans or LIBOR loans.
At March 31, 2015, $546.0 million of the outstanding borrowings drawn under the revolving credit facility were in LIBOR loans,
which bear interest at the LIBOR rate plus the applicable LIBOR margin (approximately 1.38% at March 31, 2015) and $8.0 million
of the outstanding borrowings drawn under the revolving credit facility were in swing line loans, which bear interest at the base
rate plus the applicable base rate margin (approximately 3.45% at March 31, 2015). |
| 2) | $800.0 million in principal payments due January 2020 related to our term loan under our new
credit agreement. Outstanding amounts on the term loan can be either base rate loans or LIBOR loans. At March 31, 2015, all
amounts outstanding under the term loan were in LIBOR loans which bear interest at the LIBOR rate plus the applicable LIBOR margin
(approximately 1.37% at March 31, 2015). |
| 3) | $175.0 million in principal payments due October 1, 2015 related to our 2015 Notes.
Holders of the 2015 Notes may require us to purchase their notes in cash at a purchase price of 100% of the principal amount
of the 2015 Notes plus accrued and unpaid interest, if any, upon a change in control, as defined in the Master Note Purchase
Agreement. The 2015 Notes bear interest at a rate of 6.22%. We have recorded this obligation in the payments due
in 3 to 5 years category in the table above as we have the intent and ability to redeem the 2015 Notes on October 1, 2015 using
borrowings under our credit agreement. |
| 4) | $100.0 million in principal payments due 2016 related to our 2016 Notes. Holders
of the 2016 Notes may require us to purchase their notes in cash at a purchase price of 100% of the principal amount of the
2016 Notes plus accrued and unpaid interest, if any, upon a change in control, as defined in the Master Note Purchase Agreement.
We have the intent and ability to redeem the 2016 Notes on April 1, 2016 using borrowings under our credit agreement. The 2016 Notes
bear interest at a rate of 3.30%. |
| 5) | $50.0 million in principal payments due 2018 related to our 2018 Notes. Holders
of the 2018 Notes may require us to purchase their notes in cash at a purchase price of 100% of the principal amount of the
2018 Notes plus accrued and unpaid interest, if any, upon a change in control, as defined in the Master Note Purchase Agreement.
The 2018 Notes bear interest at a rate of 4.00%. |
| 6) | $175.0 million in principal payments due 2019 related to our 2019 Notes. Holders of the 2019 Notes
may require us to purchase their notes in cash at a purchase price of 100% of the principal amount of the 2019 Notes plus
accrued and unpaid interest, if any, upon a change in control, as defined in the Master Note Purchase Agreement. The 2019 Notes
bear interest at a rate of 5.25%. |
| 7) | $100.0 million in principal payments due 2021 related to our 2021 Notes. Holders of
the 2021 Notes may require us to purchase their notes in cash at a purchase price of 100% of the principal amount of the 2021 Notes
plus accrued and unpaid interest, if any, upon a change in control, as defined in the Master Note Purchase Agreement. The
2021 Notes bear interest at a rate of 4.64%. |
| 8) | $31.4 million in principal payments related to our tax-exempt bonds, which bear interest at
variable rates (between 0.06% and 0.08%) at March 31, 2015. The tax-exempt bonds have maturity dates ranging from 2018 to
2033. |
| 9) | $12.6 million in principal payments related to our notes payable to sellers and other third parties.
Our notes payable to sellers and other third parties bear interest at rates between 2.5% and 10.9% at March 31, 2015, and have
maturity dates ranging from 2015 to 2036. |
The following assumptions
were made in calculating cash interest payments:
| 1) | We calculated cash interest payments on the credit agreement using the LIBOR rate plus the applicable
LIBOR margin at March 31, 2015. We assumed the credit agreement is paid off when it matures in January 2020. |
| 2) | We calculated cash interest payments on our interest rate swaps using the stated interest rate
in the swap agreement less the LIBOR rate through the earlier expiration of the term of the swaps or the term of the credit facility. |
Contingent consideration payments
include $72.5 million recorded as liabilities in our condensed consolidated financial statements at March 31, 2015, and $25.7 million
of future interest accretion on the recorded obligations.
The estimated final capping, closure
and post-closure expenditures presented above are in current dollars.
| |
Amount of Commitment Expiration Per Period | |
| |
(amounts in thousands) | |
Unrecorded Obligations(1) | |
Total | | |
Less Than 1 Year | | |
1 to 3 Years | | |
3 to 5 Years | | |
Over 5 Years | |
Operating leases | |
$ | 132,578 | | |
$ | 17,299 | | |
$ | 29,769 | | |
$ | 19,966 | | |
$ | 65,544 | |
Unconditional purchase obligations | |
$ | 20,777 | | |
$ | 20,777 | | |
$ | - | | |
$ | - | | |
$ | - | |
____________________
| (1) | We are party to operating lease agreements and unconditional purchase obligations. These
lease agreements and purchase obligations are established in the ordinary course of our business and are designed to provide us
with access to facilities and products at competitive, market-driven prices. At March 31, 2015, our unconditional purchase
obligations consisted of multiple fixed-price fuel purchase contracts under which we have 5.4 million gallons remaining to
be purchased for a total of $20.8 million. The current fuel purchase contracts expire on or before December 31, 2015.
These arrangements have not materially affected our financial position, results of operations or liquidity during the three months
ended March 31, 2015, nor are they expected to have a material impact on our future financial position, results of operations or
liquidity. |
We have obtained financial
surety bonds, primarily to support our financial assurance needs and landfill and E&P operations. We provided customers
and various regulatory authorities with surety bonds in the aggregate amounts of approximately $439.7 million and $437.0 million
at March 31, 2015 and December 31, 2014, respectively. These arrangements have not materially affected our financial
position, results of operations or liquidity during the three months ended March 31, 2015, nor are they expected to have a material
impact on our future financial position, results of operations or liquidity.
From time to time, we
evaluate our existing operations and their strategic importance to us. If we determine that a given operating unit does not
have future strategic importance, we may sell or otherwise dispose of those operations. Although we believe our reporting
units would not be impaired by such dispositions, we could incur losses on them.
The disposal tonnage that
we received in the three month periods ended March 31, 2015 and 2014, at all of our landfills during the respective period, is
shown below (tons in thousands):
| |
Three months ended March 31, | |
| |
2015 | | |
2014 | |
| |
Number of Sites | | |
Total Tons | | |
Number of Sites | | |
Total Tons | |
Owned operational landfills and landfills operated under life-of-site agreements | |
54 | | |
| 4,566 | | |
50 | | |
| 4,545 | |
Operated landfills | |
5 | | |
| 116 | | |
5 | | |
| 116 | |
| |
59 | | |
| 4,682 | | |
55 | | |
| 4,661 | |
| |
| | | |
| | | |
| | | |
| | |
NON-GAAP FINANCIAL MEASURES
Free Cash Flow
We present free cash flow,
a non-GAAP financial measure, supplementally because it is widely used by investors as a valuation and liquidity measure in the
solid waste industry. Management uses free cash flow as one of the principal measures to evaluate and monitor the ongoing
financial performance of our operations. We define free cash flow as net cash provided by operating activities, plus proceeds
from disposal of assets, plus or minus change in book overdraft, plus excess tax benefit associated with equity-based compensation,
less capital expenditures for property and equipment and distributions to noncontrolling interests. This measure is not a
substitute for, and should be used in conjunction with, GAAP liquidity or financial measures. Other companies may calculate
free cash flow differently. Our free cash flow for the three month periods ended March 31, 2015 and 2014, are calculated
as follows (amounts in thousands):
| |
Three months ended March 31, | |
| |
2015 | | |
2014 | |
Net cash provided by operating activities | |
$ | 162,571 | | |
$ | 144,957 | |
Plus: Change in book overdraft | |
| 25 | | |
| 135 | |
Plus: Proceeds from disposal of assets | |
| 598 | | |
| 1,312 | |
Plus: Excess tax benefit associated with equity-based compensation | |
| 1,479 | | |
| 5,060 | |
Less: Capital expenditures for property and equipment | |
| (41,706 | ) | |
| (35,592 | ) |
Less: Distributions to noncontrolling interests | |
| (43 | ) | |
| (371 | ) |
Free cash flow | |
$ | 122,924 | | |
$ | 115,501 | |
Adjusted EBITDA
We present adjusted EBITDA,
a non-GAAP financial measure, supplementally because it is widely used by investors as a performance and valuation measure in the
solid waste industry. Management uses adjusted EBITDA as one of the principal measures to evaluate and monitor the ongoing
financial performance of our operations. We define adjusted EBITDA as net income, plus income tax provision, plus interest
expense, plus depreciation and amortization expense, plus closure and post-closure accretion expense, plus or minus any impairments
and other operating charges or gains, plus other expense, less other income. We further adjust this calculation to exclude
the effects of other items management believes impact the ability to assess the operating performance of our business. This
measure is not a substitute for, and should be used in conjunction with, GAAP financial measures. Other companies may calculate
adjusted EBITDA differently. Our adjusted EBITDA for the three month periods ended March 31, 2015 and 2014, are calculated
as follows (amounts in thousands):
| |
Three months ended
March 31, | |
| |
2015 | | |
2014 | |
Net income | |
$ | 52,081 | | |
$ | 49,223 | |
Plus: Income tax provision | |
| 33,867 | | |
| 33,932 | |
Plus: Interest expense | |
| 15,697 | | |
| 16,910 | |
Plus: Depreciation and amortization | |
| 64,306 | | |
| 62,554 | |
Plus: Closure and post-closure accretion | |
| 955 | | |
| 878 | |
Plus/less: Impairments and other operating charges (a) | |
| 662 | | |
| 525 | |
Plus: Other (income) expense, net | |
| 220 | | |
| (142 | ) |
Adjustments: | |
| | | |
| | |
Plus: Acquisition-related costs (b) | |
| 512 | | |
| 258 | |
Adjusted EBITDA | |
$ | 168,300 | | |
$ | 164,138 | |
____________________
| (a) | Reflects the addback of impairments and other operating charges. |
| (b) | Reflects the addback of acquisition-related transaction costs. |
Adjusted Net Income and Adjusted Net Income
per Diluted Share
We present adjusted net
income and adjusted net income per diluted share, both non-GAAP financial measures, supplementally because they are widely used
by investors as a valuation measure in the solid waste industry. Management uses adjusted net income and adjusted net income per
diluted share as one of the principal measures to evaluate and monitor the ongoing financial performance of our operations. We
provide adjusted net income to exclude the effects of items management believes impact the comparability of operating results between
periods. Adjusted net income has limitations due to the fact that it excludes items that have an impact on our financial condition
and results of operations. Adjusted net income and adjusted net income per diluted share are not a substitute for, and should be
used in conjunction with, GAAP financial measures. Other companies may calculate adjusted net income and adjusted net income per
diluted share differently. Our adjusted net income and adjusted net income per diluted share for the three month periods
ended March 31, 2015 and 2014, are calculated as follows (amounts in thousands, except per share amounts):
| |
Three months ended March 31, | |
| |
2015 | | |
2014 | |
Reported net income attributable to Waste Connections | |
$ | 51,824 | | |
$ | 49,015 | |
Adjustments: | |
| | | |
| | |
Amortization of intangibles (a) | |
| 6,999 | | |
| 6,737 | |
Acquisition-related expenses (b) | |
| 512 | | |
| 258 | |
Impairments and other operating charges (c) | |
| 662 | | |
| 525 | |
Tax effect (d) | |
| (3,134 | ) | |
| (2,884 | ) |
Impact of deferred tax adjustment (e) | |
| - | | |
| 1,220 | |
Adjusted net income attributable to Waste Connections | |
$ | 56,863 | | |
$ | 54,871 | |
| |
| | | |
| | |
Diluted earnings per common share attributable to Waste Connections’ common stockholders: | |
| | | |
| | |
Reported net income | |
$ | 0.42 | | |
$ | 0.39 | |
Adjusted net income | |
$ | 0.46 | | |
$ | 0.44 | |
____________________
| (a) | Reflects the elimination of the non-cash amortization
of acquisition-related intangible assets. |
| (b) | Reflects the elimination of acquisition-related transaction
costs. |
| (c) | Reflects the addback of impairments and other operating
charges. |
| (d) | The aggregate tax effect of the adjustments in footnotes
(a) through (c) is calculated based on the applied tax rates for the respective periods. |
| (e) | Reflects the elimination of an increase to the income
tax provision associated with an increase in our deferred tax liabilities resulting from the enactment of New York State’s
2014-2015 Budget Act on March 31, 2014. |
INFLATION
Other than volatility
in fuel prices and labor costs in certain markets, inflation has not materially affected our operations in recent years.
Consistent with industry practice, many of our contracts allow us to pass through certain costs to our customers, including increases
in landfill tipping fees and, in some cases, fuel costs. Therefore, we believe that we should be able to increase prices
to offset many cost increases that result from inflation in the ordinary course of business. However, competitive pressures
or delays in the timing of rate increases under our contracts may require us to absorb at least part of these cost increases, especially
if cost increases exceed the average rate of inflation. Management's estimates associated with inflation have an impact on
our accounting for landfill liabilities.
SEASONALITY
We expect our operating
results to vary seasonally, with revenues typically lowest in the first quarter, higher in the second and third quarters and lower
in the fourth quarter than in the second and third quarters. This seasonality reflects (a) the lower volume of solid waste
generated during the late fall, winter and early spring because of decreased construction and demolition activities during winter
months in the U.S. and (b) reduced E&P activity during harsh weather conditions, with expected fluctuation due to such
seasonality between our highest and lowest
quarters of approximately 12% to 15%. In addition, some of our operating costs may be higher in the winter months.
Adverse winter weather conditions slow waste collection activities, resulting in higher labor and operational costs. Greater
precipitation in the winter increases the weight of collected municipal solid waste, resulting in higher disposal costs, which
are calculated on a per ton basis.
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
In the normal course of
business, we are exposed to market risk, including changes in interest rates and prices of certain commodities. We use hedge
agreements to manage a portion of our risks related to interest rates and fuel prices. While we are exposed to credit risk
in the event of non-performance by counterparties to our hedge agreements, in all cases such counterparties are highly rated financial
institutions and we do not anticipate non-performance. We do not hold or issue derivative financial instruments for trading
purposes. We monitor our hedge positions by regularly evaluating the positions at market and by performing sensitivity analyses
over the unhedged fuel and variable rate debt positions.
At March 31, 2015, our
derivative instruments included six interest rate swap agreements that effectively fix the interest rate on the applicable notional
amounts of our variable rate debt as follows (dollars in thousands):
Date Entered | |
Notional Amount | | |
Fixed Interest Rate Paid* | |
Variable Interest Rate Received | | |
Effective Date | |
Expiration Date | |
December 2011 | |
$ | 175,000 | | |
1.600% | |
| 1-month LIBOR | | |
February 2014 | |
| February 2017 | |
April 2014 | |
$ | 100,000 | | |
1.800% | |
| 1-month LIBOR | | |
July 2014 | |
| July 2019 | |
May 2014 | |
$ | 50,000 | | |
2.344% | |
| 1-month LIBOR | | |
October 2015 | |
| October 2020 | |
May 2014 | |
$ | 25,000 | | |
2.326% | |
| 1-month LIBOR | | |
October 2015 | |
| October 2020 | |
May 2014 | |
$ | 50,000 | | |
2.350% | |
| 1-month LIBOR | | |
October 2015 | |
| October 2020 | |
May 2014 | |
$ | 50,000 | | |
2.350% | |
| 1-month LIBOR | | |
October 2015 | |
| October 2020 | |
____________________
Under derivatives and
hedging guidance, the interest rate swap agreements are considered cash flow hedges for a portion of our variable rate debt, and
we apply hedge accounting to account for these instruments. The notional amounts and all other significant terms of the swap
agreements are matched to the provisions and terms of the variable rate debt being hedged.
We have performed sensitivity
analyses to determine how market rate changes will affect the fair value of our unhedged floating rate debt. Such an analysis
is inherently limited in that it reflects a singular, hypothetical set of assumptions. Actual market movements may vary significantly
from our assumptions. Fair value sensitivity is not necessarily indicative of the ultimate cash flow or earnings effect we
would recognize from the assumed market rate movements. We are exposed to cash flow risk due to changes in interest rates
with respect to the unhedged floating rate balances owed at March 31, 2015 and December 31, 2014, of $1.110 billion and $946.4 million,
respectively, including floating rate debt under our credit agreement and floating rate municipal bond obligations. A one
percentage point increase in interest rates on our variable-rate debt as of March 31, 2015 and December 31, 2014, would decrease
our annual pre-tax income by approximately $11.1 million and $9.5 million, respectively. All of our remaining debt
instruments are at fixed rates, or effectively fixed under the interest rate swap agreements described above; therefore, changes
in market interest rates under these instruments would not significantly impact our cash flows or results of operations, subject
to counterparty default risk.
The market price of diesel
fuel is unpredictable and can fluctuate significantly. We purchase approximately 32.3 million gallons of fuel per year;
therefore, a significant increase in the price of fuel could adversely affect our business and reduce our operating margins.
To manage a portion of this risk, we periodically enter into fuel hedge agreements related to forecasted diesel fuel purchases.
At March 31, 2015, our
derivative instruments included one fuel hedge agreement as follows:
Date
Entered | |
Notional
Amount (in gallons per month) | | |
Diesel
Rate Paid Fixed | | |
Diesel
Rate Received Variable | |
Effective
Date | |
Expiration
Date |
June 2012 | |
| 300,000 | | |
$ | 3.60 | | |
DOE Diesel Fuel Index* | |
January 2014 | |
December 2015 |
____________________
| * | If the national U.S. on-highway average price for a gallon of diesel fuel (“average price”),
as published by the Department of Energy, exceeds the contract price per gallon, we receive the difference between the average
price and the contract price (multiplied by the notional number of gallons) from the counterparty. If the average price is
less than the contract price per gallon, we pay the difference to the counterparty. |
Under derivatives and
hedging guidance, the fuel hedge is considered a cash flow hedge for a portion of our forecasted diesel fuel purchases, and we
apply hedge accounting to account for this instrument.
We have performed sensitivity
analyses to determine how market rate changes will affect the fair value of our unhedged diesel fuel purchases. Such an analysis
is inherently limited in that it reflects a singular, hypothetical set of assumptions. Actual market movements may vary significantly
from our assumptions. Fair value sensitivity is not necessarily indicative of the ultimate cash flow or earnings effect we
would recognize from the assumed market rate movements. For the year ending December 31, 2015, we expect to purchase
approximately 32.3 million gallons of fuel, of which 17.1 million gallons will be purchased at market prices, 11.6 million
gallons will be purchased under our fixed price fuel purchase contracts and 3.6 million gallons are hedged at a fixed price
under our fuel hedge agreement. During the nine month period of April 1, 2015 to December 31, 2015, we expect to purchase
approximately 12.8 million gallons of fuel at market prices; therefore, a $0.10 per gallon increase in the price of fuel
over the remaining nine months in 2015 would decrease our pre-tax income during this period by approximately $1.3 million.
We market a variety of
recyclable materials, including cardboard, office paper, plastic containers, glass bottles and ferrous and aluminum metals.
We own and operate 35 recycling processing operations and sell other collected recyclable materials to third parties for processing
before resale. To reduce our exposure to commodity price risk with respect to recycled materials, we have adopted a
pricing strategy of charging collection and processing fees for recycling volume collected from third parties. In the event
of a decline in recycled commodity prices, a 10% decrease in average recycled commodity prices from the average prices that were
in effect during the three months ended March 31, 2015 and 2014, would have had a $1.1 million and $1.4 million impact on
revenues for the three months ended March 31, 2015 and 2014, respectively.
Item 4. Controls and Procedures
As required by Rule 13a-15(b)
under the Securities Exchange Act of 1934, as amended, or the Exchange Act, we carried out an evaluation, under the supervision
and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the
Exchange Act) as of the end of the fiscal quarter covered by this Quarterly Report on Form 10-Q. In designing and evaluating
the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management is required
to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Based on this evaluation,
our Chief Executive Officer and Chief Financial Officer concluded as of March 31, 2015, that our disclosure controls and procedures
were effective at the reasonable assurance level such that information required to be disclosed in our Exchange Act reports:
(1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms;
and (2) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
During the quarter ended
March 31, 2015, there was no change in our internal control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
PART II – OTHER
INFORMATION
Item 1. Legal
Proceedings
Information regarding
our legal proceedings can be found in Note 15 of our Condensed Consolidated Financial Statements included in Part I, Item 1 of
this report and is incorporated herein by reference.
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds
Our Board of Directors
has authorized a common stock repurchase program for the repurchase of up to $1.2 billion of our common stock through December 31,
2017. Under the program, stock repurchases may be made in the open market or in privately negotiated transactions from time
to time at management's discretion. The timing and amounts of any repurchases will depend on many factors, including our
capital structure, the market price of our common stock and overall market conditions. As of March 31, 2015, we have repurchased
approximately 40.5 million shares of our common stock at a cost of $809.7 million, or an average price of $20.01 per
share. The table below reflects repurchases we made during the three months ended March 31, 2015 (in thousands, except share
and per share amounts):
Period | |
Total Number of Shares Purchased | | |
Average Price Paid Per Share(1) | | |
Total Number of Shares Purchased as Part of Publicly Announced Program | | |
Maximum
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program | |
1/1/15 – 1/31/15 | |
| 370,297 | | |
$ | 42.78 | | |
| 370,297 | | |
$ | 392,801 | |
2/1/15 – 2/28/15 | |
| 58,372 | | |
| 43.23 | | |
| 58,372 | | |
| 390,277 | |
3/1/15 – 3/31/15 | |
| - | | |
| - | | |
| - | | |
| 390,277 | |
| |
| 428,669 | | |
| 42.84 | | |
| 428,669 | | |
| | |
| (1) | This amount represents the weighted average price paid per common share. This price includes a per share commission paid
for all repurchases. |
Item 6. Exhibits
See Exhibit Index immediately
following the signature page of this Quarterly Report on Form 10-Q.
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: April 28, 2015 |
BY: |
/s/ Ronald J. Mittelstaedt |
|
|
Ronald J. Mittelstaedt, |
|
|
Chief Executive Officer |
Date: April 28, 2015 |
BY: |
/s/ Worthing F. Jackman |
|
|
Worthing F. Jackman, |
|
|
Executive Vice President and |
|
|
Chief Financial Officer |
EXHIBIT INDEX
Exhibit
Number |
|
Description of Exhibits |
|
|
|
3.1 |
|
Amended and Restated Certificate of Incorporation of the Registrant, dated as of June 14, 2013 (incorporated by reference to the exhibit filed with the Registrant’s Form 10-Q filed on July 24, 2013) |
|
|
|
3.2 |
|
Fourth Amended and Restated Bylaws of the Registrant, effective July 17, 2014 (incorporated by reference to the exhibit filed with the Registrant’s Form 10-Q filed on July 21, 2014) |
|
|
|
4.1 |
|
Amendment No. 5 to Master Note Purchase Agreement, dated February 20, 2015 (incorporated by reference to the exhibit filed with the Registrant's Form 8-K filed on February 26, 2015) |
|
|
|
10.1 |
|
Revolving Credit and Term Loan Agreement, dated as of January 26, 2015 (incorporated by reference to the exhibit filed with the Registrant's Form 8-K filed on January 30, 2015) |
|
|
|
31.1 |
|
Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a) |
|
|
|
31.2 |
|
Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a) |
|
|
|
32.1 |
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. §1350 |
|
|
|
32.2 |
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. §1350 |
|
|
|
101.INS |
|
XBRL Instance Document |
|
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.LAB |
|
XBRL Taxonomy Extension Labels Linkbase Document |
|
|
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document |
+ Management contract or compensatory plan, contract or arrangement.
Exhibit 31.1
CERTIFICATION OF CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
I, Ronald J. Mittelstaedt, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Waste Connections, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared; |
| b) | designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting. |
Date: April 28, 2015
|
/s/ Ronald J. Mittelstaedt |
|
Ronald J. Mittelstaedt |
|
Chairman and |
|
Chief Executive Officer |
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Worthing F. Jackman, certify that:
| 1. | I have reviewed this quarterly report on Form 10-Q of Waste Connections, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant
as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared; |
| b) | designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and |
| d) | disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent functions): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and |
| b) | any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting. |
Date: April 28, 2015
|
/s/ Worthing F. Jackman |
|
Worthing F. Jackman |
|
Executive Vice President and |
|
Chief Financial Officer |
Exhibit 32.1
CERTIFICATE OF CHIEF EXECUTIVE OFFICER
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(Subsections (a) and (b) of Section 1350,
Chapter 63 of Title 18, United States Code)
The undersigned, Ronald J. Mittelstaedt,
being the duly elected and acting Chief Executive Officer of Waste Connections, Inc., a Delaware corporation (the “Company”),
hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that,
to his knowledge, the quarterly report of the Company on Form 10-Q for the three months ended March 31, 2015, fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in
such report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: April 28, 2015 |
By: |
/s/ Ronald J. Mittelstaedt |
|
|
Ronald J. Mittelstaedt |
|
|
Chief Executive Officer |
Exhibit 32.2
CERTIFICATE OF CHIEF FINANCIAL OFFICER
Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(Subsections (a) and (b) of Section 1350,
Chapter 63 of Title 18, United States Code)
The undersigned, Worthing F. Jackman, being
the duly elected and acting Chief Financial Officer of Waste Connections, Inc., a Delaware corporation (the “Company”),
hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that,
to his knowledge, the quarterly report of the Company on Form 10-Q for the three months ended March 31, 2015, fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and that information contained in
such report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: April 28, 2015 |
By: |
/s/ Worthing F. Jackman |
|
|
Worthing F. Jackman |
|
|
Executive Vice President and Chief Financial Officer |
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