WASTE MANAGEMENT, INC. This section includes a discussion of our results of operations for the three years endedDecember 31, 2019 . This discussion may contain forward-looking statements that anticipate results based on management's plans that are subject to uncertainty. We discuss in more detail various factors that could cause actual results to differ materially from expectations in Item 1A. Risk Factors. The following discussion should be read considering those disclosures and together with the Consolidated Financial Statements and the notes thereto.
Overview
We areNorth America's leading provider of comprehensive waste management environmental services. We partner with our residential, commercial, industrial and municipal customers and the communities we serve to manage and reduce waste at each stage from collection to disposal, while recovering valuable resources and creating clean, renewable energy. We own or operate the largest network of landfills inNorth America . In order to make disposal more practical for larger urban markets, where the distance to landfills is typically farther, we manage transfer stations that consolidate, compact and transport waste efficiently and economically. We also use waste to create energy, recovering the gas produced naturally as waste decomposes in landfills and using the gas in generators to make electricity. Additionally, we are a leading recycler inNorth America , handling materials that include paper, cardboard, glass, plastic and metal. Our "Solid Waste" business is operated and managed locally by our subsidiaries that focus on distinct geographic areas and provides collection, transfer, disposal, and recycling and resource recovery services. Through our subsidiaries, we are also a leading developer, operator and owner of landfill gas-to-energy facilities in theU.S. Our Solid Waste operating revenues are primarily generated from fees charged for our collection, transfer, disposal, and recycling and resource recovery services, and from sales of commodities by our recycling and landfill gas-to-energy operations. Revenues from our collection operations are influenced by factors such as collection frequency, type of 32
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collection equipment furnished, type and volume or weight of the waste collected, distance to the disposal facility or material recovery facility and our disposal costs. Revenues from our landfill operations consist of tipping fees, which are generally based on the type and weight or volume of waste being disposed of at our disposal facilities. Fees charged at transfer stations are generally based on the weight or volume of waste deposited, taking into account our cost of loading, transporting and disposing of the solid waste at a disposal site. Recycling revenues generally consist of tipping fees and the sale of recycling commodities to third parties. The fees we charge for our services generally include our environmental fee, fuel surcharge and regulatory recovery fee which are intended to pass through to customers direct and indirect costs incurred. We also provide additional services that are not managed through our Solid Waste business, described under Results of Operations below.
Business Environment
The waste industry is a comparatively mature and stable industry. However, customers increasingly expect more of their waste materials to be recovered and those waste streams are becoming more complex. In addition, many state and local governments mandate diversion, recycling and waste reduction at the source and prohibit the disposal of certain types of waste at landfills. We monitor these developments to adapt our services offerings. As companies, individuals and communities look for ways to be more sustainable, we promote our comprehensive services that go beyond our core business of collecting and disposing of waste in order to meet their needs. Despite some industry consolidation in recent years, we encounter intense competition from governmental, quasi-governmental and private service providers based on pricing, service quality, customer experience and breadth of service offerings. Our industry is directly affected by changes in general economic factors, including increases and decreases in consumer spending, business expansions and construction starts. These factors generally correlate to volumes of waste generated and impact our revenue. Negative economic conditions, in addition to competitor actions, can make it more challenging to negotiate, renew or expand service contracts with acceptable margins and in addition, customers may reduce their service needs. We also encounter competition for acquisitions and growth opportunities. General economic factors and the market for consumer goods, in addition to regulatory developments, can also significantly impact commodity prices for the recyclable materials we sell. Our operating expenses are directly impacted by volume levels; as volume levels shift, due to economic and other factors, we must manage our network capacity and cost structure accordingly. In 2019, we have benefited from a generally favorable macro-economic environment, including steady spending by consumers and businesses, which have led to volume and gross margin growth. We experienced growth in our collection and disposal lines of business, particularly in the segments of our business driven by the consumer portion of the economy. Volume growth is also the result of proactive efforts taken to work with our customers as their needs expand to identify service upgrade opportunities. Overall in 2019, our landfill volumes were favorably impacted by growth in our municipal solid waste business, clean-up efforts from natural disasters inCalifornia during 2019 and event-driven projects. The portion of our business driven by the industrial segment of the economy, such as special waste, continues to show growth, although the pace of growth is starting to moderate as large industrial customers take a more cautious approach to awarding work for special projects. Additionally, we continued our focus on developing a sustainable recycling business model that meets customers' environmental needs, but is also economically sustainable. Given pressures on the business from lower market values for recycled commodities and higher contamination fees, we have been working to improve its financial returns by driving a fee-based pricing model that addresses the cost of processing materials and the impact on our costs of contamination. These efforts provided significant value to our 2019 results, though that value was more than offset by continued declines in market prices for recycled commodities. We will continue to take steps necessary to improve long-term profitability of our recycling line of business.
Overall, the Company's operations performed well in 2019. We expect the Company's industry-leading asset network and strategic focuses on investing in people, technology and growth to drive continued growth in the year ahead.
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Current Year Financial Results
During 2019, we continued to produce strong operating results from our collection and disposal business, driven by favorable market conditions and our focus on delivering an outstanding customer experience and continuous improvement. The Company continued its commitment to supporting both organic and inorganic growth during 2019, allocating$1,818 million of available cash to capital expenditures and$527 million to the acquisition of solid waste businesses, of which$6 million was recorded as cash flow from financing activities related to the timing of contingent consideration paid. We also allocated$1,124 million to our shareholders during 2019 through dividends and common stock repurchases.
Key items of our 2019 financial results include:
Revenues of
increase of
? to (i) higher yield and volumes in our collection and disposal business
and (ii) acquisitions, net of divestitures, partially offset by lower market
prices for recycling commodities;
Operating expenses of
with
? is primarily attributable to higher volumes and cost inflation in the current
year period, partially offset by (i) decreased cost of goods sold primarily due
to lower market prices for recycling commodities and (ii) the favorable impact
of a year-over-year increase in federal natural gas fuel credits;
Selling, general and administrative expenses of
10.6% of revenues, compared with
? This increase of
associated with planned investments in our people and technology; (ii) increased acquisition-related costs and (iii) litigation reserves; Income from operations of$2,706 million , or 17.5% of revenues, in 2019
compared with
benefited from strong operating results, primarily in our collection and
disposal business, and the favorable impact of a year-over-year increase in
federal natural gas fuel credits, cost inflation across various cost
? categories, costs associated with investments in our people and technology,
acquisition-related costs and goodwill impairments drove a reduction in income
from operations as compared with 2018. Additionally, 2018 was favorably
impacted by net gains associated with the sale of certain collection and
disposal operations and certain ancillary operations, partially offset by the
impairment of a landfill; Net income attributable toWaste Management, Inc. was$1,670 million , or
share, in the prior year period. In addition to the decrease in income from
operations, the current year was impacted by (i) increased depreciation and
amortization expense related to new collection fleet and increased landfill
? volume; (ii) an
waste conversion technology business that was not deductible for tax purposes
and (iv) a
period was favorably impacted by net gains associated with the sale of
operations discussed above;
? Net cash provided by operating activities was
Free cash flow was
year period. The increase in cash flow provided by operating activities noted
above was offset by an increase in capital expenditures resulting from our
intentional focus on accelerating certain collection fleet and landfill
spending to support the Company's strong collection and disposal growth and
? lower proceeds from divestitures, which resulted in free cash flow being
measure of liquidity. Refer to Free Cash Flow within Liquidity and Capital
Resources for our definition of free cash flow, additional information about
our use of this measure, and a reconciliation to net cash provided by operating
activities, which is the most comparable GAAP measure.
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Results of Operations
Operating Revenues
Our operating revenues set forth below are primarily generated from fees charged
for our collection, transfer, disposal, and recycling and resource recovery
services, and from sales of commodities by our recycling and landfill
gas-to-energy operations. We also provide additional services that are not
managed through our Solid Waste business, including both our WMSBS and EES
organizations, recycling brokerage services, landfill gas-to-energy services and
certain other expanded service offerings and solutions.
The mix of operating revenues from our major lines of business is reflected in
the table below for the years ended
2019 2018 2017
Commercial $ 4,229 $ 3,972 $ 3,714
Residential 2,613 2,529 2,528
Industrial 2,916 2,773 2,583
Other collection 482 450 439
Total collection 10,240 9,724 9,264
Landfill 3,846 3,560 3,370
Transfer 1,820 1,711 1,591
Recycling 1,040 1,293 1,432
Other (a) 1,758 1,736 1,713
Intercompany (b) (3,249) (3,110) (2,885)
Total $ 15,455 $ 14,914 $ 14,485 The "Other" line of business includes (i) our WMSBS organization; (ii) our
landfill gas-to-energy operations; (iii) certain services within our EES
organization, including our construction and remediation services and our
services associated with the disposal of fly ash and (iv) certain other (a) expanded service offerings and solutions. In addition, our "Other" line of
business reflects the results of non-operating entities that provide
financial assurance and self-insurance support, net of intercompany activity.
Activity related to collection, landfill, transfer and recycling has been
reclassified to the appropriate line of business for purposes of
presentation.
(b) Intercompany revenues between lines of business are eliminated in the
Consolidated Financial Statements included within this report.
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The following table provides details associated with the period-to-period change
in revenues and average yield for the years ended December 31 (dollars in
millions):
2019 vs. 2018 2018 vs. 2017
As a % of As a % of As a % of As a % of
Related Total Related Total
Amount Business(a) Amount Company(b) Amount Business(a) Amount Company(b)
Collection and disposal $ 364 2.8 % $ 291 2.3 %
Recycling commodities
(c) (248) (20.0) (273) (19.1)
Fuel surcharges and
mandated fees (22) (3.5) 111 21.3
Total average yield (d) $ 94 0.6 % $ 129 0.9 %
Volume 346 2.3 478 3.3
Internal revenue growth 440 2.9 607 4.2
Acquisitions 222 1.5 199 1.4
Divestitures (104) (0.7) (133) (0.9)
Foreign currency
translation and other (17) (0.1) (244) (1.7)
Total $ 541 3.6 % $ 429 3.0 %
Calculated by dividing the increase or decrease for the current year by the (a) prior year's related business revenue adjusted to exclude the impacts of
divestitures for the current year.
Calculated by dividing the increase or decrease for the current year by the (b) prior year's total Company revenue adjusted to exclude the impacts of
divestitures for the current year.
(c) Includes net impact of commodity price variability and changes in fees.
(d) The amounts reported herein represent the changes in our revenue attributable
to average yield for the total Company.
The following provides further details about our period-to-period change in revenues:
Average Yield
Collection and Disposal Average Yield - This measure reflects the effect on our revenue from the pricing activities of our collection, transfer and landfill operations, exclusive of volume changes. Revenue growth from collection and disposal average yield includes not only base rate changes and environmental and service fee increases, but also (i) certain average price changes related to the overall mix of services, which are due to the types of services provided; (ii) changes in average price from new and lost business and (iii) price decreases to retain customers.
The details of our revenue growth from collection and disposal average yield for
the years ended
2019 vs. 2018 2018 vs. 2017
As a % of As a % of
Related Related
Amount Business Amount Business
Commercial $ 109 3.0 % $ 99 2.9 %
Industrial 103 4.0 107 4.4
Residential 81 3.3 47 1.9
Total collection 293 3.3 253 2.9
Landfill 44 2.0 22 1.1
Transfer 27 2.9 16 1.9Total collection and disposal$ 364 2.8 %$ 291
2.3 %
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Our strategic pricing efforts focus on ensuring we overcome inflationary cost
pressures and grow margins. This strategy has been most successful in our
collection line of business for both 2019 and 2018. We are also experiencing
solid growth in our landfill and transfer businesses, with our municipal solid
waste business experiencing 3.8% and 2.2% average yield growth for the years
ended December 31, 2019 and 2018, respectively, as compared with the prior year
periods.
Recycling Commodities - Decreases in the market prices for recycling commodities
resulted in revenue declines of $248 million and $273 million for the years
ended December 31, 2019 and 2018, respectively, as compared with the prior year
periods. We partially offset our revenue decline by assessing fees to cover the
higher costs of handling contaminated recycling materials. Average market prices
for recycling commodities at the Company's facilities were 35% lower in 2019
compared to 2018 and 40% lower in 2018 compared to 2017. We have seen a
decreased demand from paper mills around the world which had driven prices to
historical low averages. There are several domestic mill projects anticipated to
start during 2020 that we expect will add additional capacity and more local
demand for recycled materials. However, we do not expect material changes in
market prices for recycling commodities as a result of this additional capacity.
The cardboard packaging industry has been impacted by slower global demand,
retail store closures and e-commerce packaging efficiency. We will continue to
take steps necessary to improve long-term profitability of our recycling line of
business.
Fuel Surcharges and Mandated Fees - These fees, which are predominantly
generated by our fuel surcharge program, declined $22 million for 2019 and
increased $111 million for 2018, as compared with the prior year periods. These
revenues are based on and fluctuate in response to changes in the national
average prices for diesel fuel. Market prices for diesel fuel decreased
approximately 4% and increased 20% for the years ended December 31, 2019 and
2018, respectively, compared with the prior year periods. The decline in fuel
surcharges for 2019 was partially offset by an increase in mandated fees. The
mandated fees are primarily related to fees and taxes assessed by various state,
county and municipal government agencies at our landfills and transfer stations.
Volume
Our revenues from volume increased$346 million , or 2.3%, and$478 million , or 3.3%, for the years endedDecember 31, 2019 and 2018, respectively, as compared with the prior year periods, excluding volumes from acquisitions and divestitures. We experienced higher volumes throughout 2019 and 2018 due to our focus on customer service and disciplined growth, combined with favorable market conditions in our collection and disposal business. We have experienced significant volume growth with existing customers, particularly in our commercial collection business as a result of proactive efforts taken to work with our customers as their needs expand to identify service upgrade opportunities. Our event-driven projects in our special waste business and growth in our municipal solid waste business contributed to our landfill volume growth in both 2019 and 2018. Additionally, a large contract executed in the second half of 2017 increased volume at our transfer stations for 2018, with incremental volume additions during 2018 that favorably impacted our volumes in 2019. Furthermore, our WMSBS organization experienced favorable volume growth in both 2019 and 2018. The clean-up efforts of natural disasters throughout theU.S. in the first half of 2019 also contributed to volume growth in 2019. However, volume decline from our recycling brokerage services negatively impacted our volume growth in 2019. Additionally, a volume increase from our recycling brokerage services affected the comparability of volumes for 2018 and 2017.
Foreign Currency Translation and Other
Fluctuations in foreign currency affect revenues from our Canadian operations. Additionally, 2018 was unfavorably impacted by a revenue decline associated
with
the adoption of ASU 2014-09.
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Operating Expenses
Our operating expenses are comprised of (i) labor and related benefits costs
(excluding labor costs associated with maintenance and repairs discussed below),
which include salaries and wages, bonuses, related payroll taxes, insurance and
benefits costs and the costs associated with contract labor; (ii) transfer and
disposal costs, which include tipping fees paid to third-party disposal
facilities and transfer stations; (iii) maintenance and repairs costs relating
to equipment, vehicles and facilities and related labor costs;
(iv) subcontractor costs, which include the costs of independent haulers who
transport waste collected by us to disposal facilities and are affected by
variables such as volumes, distance and fuel prices; (v) costs of goods sold,
which includes the cost to purchase recycling materials for our recycling line
of business, including certain rebates paid to suppliers; (vi) fuel costs, which
represent the costs of fuel and oil to operate our truck fleet and landfill
operating equipment; (vii) disposal and franchise fees and taxes, which include
landfill taxes, municipal franchise fees, host community fees, contingent
landfill lease payments and royalties; (viii) landfill operating costs, which
include interest accretion on landfill liabilities, interest accretion on and
discount rate adjustments to environmental remediation liabilities and recovery
assets, leachate and methane collection and treatment, landfill remediation
costs and other landfill site costs; (ix) risk management costs, which include
general liability, automobile liability and workers' compensation claims
programs costs and (x) other operating costs, which include gains and losses on
sale of assets, telecommunications, equipment and facility lease expenses,
property taxes, utilities and supplies. Variations in volumes year-over-year, as
discussed above in Operating Revenues, in addition to cost inflation, affect the
comparability of the components of our operating expenses.
The following table summarizes the major components of our operating expenses
for the years ended December 31 (dollars in millions and as a percentage of
revenues):
2019 2018 2017
Labor and related benefits $ 2,791 18.0 % $ 2,703 18.1 % $ 2,500 17.2 %
Transfer and disposal costs 1,160 7.5 1,105 7.4 996 6.9
Maintenance and repairs 1,355 8.8 1,255 8.4 1,170 8.1
Subcontractor costs 1,532 9.9 1,375 9.2 1,236 8.5
Cost of goods sold 553 3.6 783 5.3 969 6.7
Fuel 336 2.2 409 2.7 375 2.6Disposal and franchise fees and taxes 627 4.1 598
4.0 753 5.2
Landfill operating costs 379 2.4 331 2.2 328 2.3
Risk management 267 1.7 235 1.6 219 1.5
Other 496 3.2 455 3.1 475 3.3
$ 9,496 61.4 % $ 9,249 62.0 % $ 9,021 62.3 %
Significant items affecting the comparison of operating expenses between reported periods include:
Labor and Related Benefits - The increase in labor and related benefits costs in 2019 as compared with 2018 was driven by (i) volume growth in our collection and disposal business; (ii) merit increases and (iii) cost inflation noted above. These cost increases were offset, in part, by lower bonus costs related to a one-time plan established in early 2018 targeted at improving employee retention. The increase in labor and related benefits costs in 2018 as compared with 2017 was driven by (i) volume growth in our collection line of business; (ii) the one-time bonus plan established in early 2018 and (iii) merit increases. Transfer and Disposal Costs - The increase in transfer and disposal costs in 2019 as compared with 2018, and 2018 as compared with 2017, was driven by overall volume growth in our collection and disposal business and, to a lesser extent, cost inflation. Maintenance and Repairs - The increase in maintenance and repairs costs in 2019 as compared with 2018 was largely driven by (i) cost inflation noted above which primarily impacted labor, parts, third-party services, tires and building costs and (ii) a$16 million non-cash charge to write off certain equipment costs
related to our Other segment.
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The increase in maintenance and repairs costs in 2018 as compared with 2017 was primarily driven by (i) higher labor costs from volume growth and cost inflation and (ii) higher third-party service and parts costs. Subcontractor Costs - The increase in subcontractor costs in 2019 as compared to 2018 was primarily driven by (i) volume growth in our collection and disposal business, largely attributable to a significant contract executed in the second half of 2017 that generated incremental volumes in 2019; (ii) volume growth in our WMSBS and EES organizations and (iii) cost inflation related to capacity constraints of our subcontractors in certain markets. The increase in 2018 as compared to 2017 was driven primarily by volume growth in our collection and disposal business. Cost of Goods Sold - The decrease in cost of goods sold in 2019 as compared with 2018 was primarily driven by lower market prices for recycling commodities and by lower costs due to the sale of certain ancillary operations in the second quarter of 2018. The decrease in cost of goods sold in 2018 as compared with 2017 was primarily driven by (i) lower market prices for recycling commodities and (ii) a change in accounting for certain customer rebates due to the adoption of ASU 2014-09 in 2018. Fuel - The decrease in fuel costs in 2019 as compared with 2018 was due to (i) recognition of a$70 million benefit from the extension of federal natural gas fuel credits in 2019 compared to$28 million in 2018; (ii) lower costs resulting from the continued conversion of our fleet to natural gas vehicles and (iii) lower market prices for diesel fuel. The increase in fuel costs in 2018 as compared with 2017 was due to higher market prices for diesel fuel, partially offset by the recognition of a$28 million benefit from the extension of federal natural gas fuel credits. Disposal and Franchise Fees and Taxes - The increase in disposal and franchise fees and taxes in 2019 as compared with 2018 was primarily related to higher volumes in our landfill line of business. The decrease in disposal and franchise fees and taxes in 2018 as compared with 2017 was driven by the adoption of ASU 2014-09 in 2018; specifically, certain franchise fees were treated as disposal fees and taxes in the prior year periods and beginning in 2018, were treated as a reduction in operating revenues in the current year period. Landfill Operating Costs - The increase in landfill operating costs in 2019 as compared with 2018 was primarily due to higher leachate management costs driven largely by inclement weather in certain parts ofNorth America and increased ongoing site maintenance costs. Additionally, 2019 was impacted by a decrease in the risk-free discount rate used in the measurement of our environmental remediation obligations and recovery assets due to a decrease inU.S. treasury rates. See Note 4 to the Consolidated Financial Statements for additional information. Risk Management - The increase in risk management costs in 2019 as compared with 2018 was primarily due to an increase in claims expense as a result of growth in the business and cost inflation. The increase in risk management costs in 2018 as compared with 2017 was primarily due to an increase in claims expense.
Other - Net gains on sales of certain assets in 2018 impacted the comparability of the reported periods.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist of (i) labor and
related benefits costs, which include salaries, bonuses, related insurance and
benefits, contract labor, payroll taxes and equity-based compensation;
(ii) professional fees, which include fees for consulting, legal, audit and tax
services; (iii) provision for bad debts, which includes allowances for
uncollectible customer accounts and collection fees and (iv) other selling,
general and administrative expenses, which include, among other costs,
facility-related expenses, voice and data telecommunication, advertising, bank
charges, computer costs, travel and entertainment, rentals, postage and
printing. In addition, the financial impacts of litigation reserves generally
are included in our "Other" selling, general and administrative expenses.
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The following table summarizes the major components of our selling, general and administrative expenses for the years endedDecember 31 (dollars in millions and as a percentage of revenues): 2019 2018
2017
Labor and related benefits$ 1,020 6.6 %$ 957 6.4 %$ 1,000 6.9 % Professional fees 183 1.2 113 0.8 102 0.7 Provision for bad debts 38 0.3 53 0.3 42 0.3 Other 390 2.5 330 2.2 324 2.2$ 1,631 10.6 %$ 1,453 9.7 %$ 1,468 10.1 %
Significant items affecting the comparison of our selling, general and administrative expenses between reported periods include:
Labor and Related Benefits - The increase in labor and related benefits costs in
2019 compared with 2018 was primarily due to (i) an increase in headcount, merit
increases and higher incentive compensation and (ii) increased contract labor
costs driven by our planned investments in technology. The decrease in labor and
related benefits costs in 2018 compared with 2017 was primarily due to (i) lower
incentive compensation accruals in 2018 and (ii) severance costs for former
executives incurred in 2017, which were partially offset by merit increases and
a one-time bonus plan established in early 2018 targeted at improving employee
retention.
Professional Fees - The increase in professional fees in 2019 compared with 2018
was primarily driven by higher consulting fees related to our strategic
investments in operating, customer facing and back-office technologies, as well
as costs incurred in preparation for our pending acquisition of Advanced
Disposal Services, Inc. ("Advanced Disposal"). The increase in professional fees
in 2018 compared with 2017 was primarily due to the investments we are making in
technology and higher legal fees.
Provision for Bad Debts - The decrease in provision for bad debts in 2019 compared with 2018 was due to (i) collection of certain fully reserved receivables and (ii) higher prior year bad debt expense associated with the bankruptcy of a strategic customer. The increase in provision of bad debts in 2018 compared with 2017 was primarily due to increased revenues and the bankruptcy of a strategic customer.
Other - The increase in other expenses in 2019 compared with 2018 was principally driven by higher litigation reserves and increased infrastructure costs associated with our investments in technology. The increase in other expenses in 2018 compared with 2017 was primarily due to higher litigation reserves in 2018, which were partially offset by lower costs associated with advertising and travel and entertainment as we continued to focus on controlling costs.
Depreciation and Amortization Expenses
The following table summarizes the components of our depreciation and
amortization expenses for the years ended
2019 2018 2017
Depreciation of tangible property and equipment
575 3.7 538 3.6 497 3.4
Amortization of intangible assets 106 0.7
101 0.7 96 0.7
$ 1,574 10.2 % $ 1,477 9.9 % $ 1,376 9.5 %
The increase in depreciation of tangible property and equipment during the
reported periods was primarily related to higher capital expenditures due to an
intentional focus on accelerating certain fleet and landfill spending to support
the Company's strong collection and disposal growth. The increase in
amortization of landfill airspace during the reported periods was driven by
higher volumes at our landfills and changes in landfill estimates.
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(Gain) Loss from Divestitures, Asset Impairments and Unusual Items, Net
The following table summarizes the major components of (gain) loss from
divestitures, asset impairments and unusual items, net for the years ended
2019 2018 2017
(Gain) loss from divestitures $ - $ (96) $ (38)
Asset impairments 42 38 41
Other - - (19)
$ 42 $ (58) $ (16) During the year endedDecember 31, 2019 , we recognized asset impairments of$42 million , related to (i)$27 million of goodwill impairment charges, as discussed further in Note 6, of which$17 million related to our EES organization and$10 million related to our LampTracker® reporting unit and (ii)$15 million of asset impairment charges primarily related to certain solid waste operations. During the year endedDecember 31, 2018 , we recognized net gains of$58 million , primarily related to (i) a$52 million gain associated with the sale of certain collection and disposal operations in Tier 1 and (ii) net gains of$44 million substantially all from divestitures of certain ancillary operations. These gains were partially offset by (i) a$30 million charge to impair a landfill in Tier 3 based on an internally developed discounted projected cash flow analysis, taking into account continued volume decreases and revised capping cost estimates and (ii)$8 million of impairment charges primarily related to our LampTracker® reporting unit. During the year endedDecember 31, 2017 , we recognized net gains of$16 million , primarily related to (i) gains of$31 million from the sale of certain oil and gas producing properties and (ii) a$30 million reduction in post-closing, performance-based contingent consideration obligations associated with an acquired business in our EES organization. These gains were partially offset by (i)$34 million of goodwill impairment charges primarily related to our EES organization; (ii)$11 million of charges to adjust our subsidiary's estimated potential share of an environmental remediation liability and related costs for a closed site inHarris County, Texas , as discussed in Note 11 to the Consolidated Financial Statements and (iii)$7 million of charges to write down certain renewable energy assets.
See Note 3 to the Consolidated Financial Statements for additional information related to the accounting policy and analysis involved in identifying and calculating impairments.
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Income from Operations
The following table summarizes income from operations for the years ended
December 31 and has been updated to reflect our realigned segments which are
discussed further in Note 20 to the Consolidated Financial Statements (dollars
in millions):
Period-to- Period-to-
Period Period
2019 Change 2018 Change 2017
Solid Waste:
Tier 1 $ 1,682 $ 63 3.9 % $ 1,619 $ 113 7.5 % $ 1,506
Tier 2 854 70 8.9 784 7 0.9 777
Tier 3 1,136 144 14.5 992 (14) (1.4) 1,006
Solid Waste 3,672 277 8.2 3,395 106 3.2 3,289
Other (a) (203) (137) * (66) 2 (2.9) (68)Corporate and Other (b) (763) (223) 41.3 (540) 45 (7.7) (585) Total$ 2,706 $ (83) (3.0) %$ 2,789 $ 153 5.8 %$ 2,636 Percentage of revenues 17.5 % 18.7 % 18.2 %
* Percentage change does not provide a meaningful comparison.
"Other" includes (i) our WMSBS organization; (ii) those elements of our
landfill gas-to-energy operations and third-party subcontract and
administration revenues managed by our EES and WM Renewable Energy
organizations that are not included in the operations of our reportable (a) segments; (iii) our recycling brokerage services and (iv) certain other
expanded service offerings and solutions. In addition, our "Other" segment
reflects the results of non-operating entities that provide financial
assurance and self-insurance support for our Solid Waste business, net of
intercompany activity.
Corporate operating results reflect certain costs incurred for varioussupport services that are not allocated to our reportable segments. These
support services include, among other things, treasury, legal, information (b) technology, tax, insurance, centralized service center processes, other
administrative functions and the maintenance of our closed landfills.
"Corporate and Other" also includes costs associated with our long-term
incentive program and any administrative expenses or revisions to our
estimated obligations associated with divested operations.
Solid Waste - The most significant items affecting the results of operations of
our Solid Waste business during the three years ended
The following items affected both comparable periods:
Income from operations for our collection and disposal business continued to
? see strong operating results, primarily driven by (i) internal revenue growth;
(ii) acquisitions and divestitures and (iii) decreased fuel costs due in part
to a year-over-year increase in federal natural gas fuel credits.
However, the following items negatively impacted our results from operations and resulted in lower income from operations in 2019 when compared with 2018:
(i) higher operating costs, driven by increased volumes, higher depreciation
related to new collection fleet and higher labor, maintenance and repair costs;
? (ii) lower recycling commodity prices and (iii) asset impairments. The 2018
period was favorably impacted by net gains associated with the sale of certain
collection and disposal operations in our Tier 1 segment, partially offset by
the impairment of a landfill in our Tier 3 segment.
In addition, the following items affected 2018 when compared with 2017:
Our income from operations for our Solid Waste business benefited from certain
federal natural gas fuel credits in the first quarter of 2018 and was
? negatively impacted by (i) lower market prices for recycling commodities;
(ii) higher operating costs, including a one-time bonus plan established in
early 2018 targeted at improving
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employee retention and (iii) increased depreciation and amortization expenses to
support growth of our business. During 2018, Tier 1 also benefited from net
gains associated with the sale of certain collection and disposal operations and
Tier 3 was negatively impacted by an impairment of a landfill.
Other - In 2019 compared with 2018, lower income from operations is a result of (i) net gains from divestitures of certain ancillary operations in the prior year period of$44 million ; (ii)$27 million of goodwill impairment charges, of which$17 million related to our EES organization and$10 million related to our LampTracker® reporting unit; (iii) lower commodity prices in 2019 associated with our WM Renewable Energy organization; (iv) a$16 million non-cash charge to write off certain equipment costs in 2019 and (v) an increase in claims expense as a result of growth in the business and cost inflation. In 2018 compared with 2017, our Other segment benefited from net gains from divestitures of certain ancillary operations and improved results in our EES and WM Renewable Energy organizations, partially offset by higher risk management costs. Our 2017 results were also favorably affected by a reduction in contingent consideration obligations in our EES organization.
Corporate and Other - The most significant items affecting the results of
operations for Corporate and Other during the three years ended
The following items affected 2019 when compared with 2018:
The decrease in income from operations was driven by increased expenses as a
result of (i) higher consulting fees, largely due to the investments we are
making in operating, customer facing and back-office technologies; (ii) higher
? litigation reserves; (iii) preparation for our pending acquisition of Advanced
Disposal and (iv) a decrease in the risk-free discount rate used in the
measurement of our environmental remediation obligations and recovery assets in
2019. Additionally, we recognized higher incentive compensation costs during
2019.
In addition, the following items affected 2018 when compared with 2017:
Decreased expenses in 2018 as a result of lower incentive compensation costs
and severance costs for former executives incurred in 2017, and to a lesser
? extent, charges in 2017 to adjust our subsidiary's estimated potential share of
an environmental remediation liability and related costs for a closed site in
professional fees primarily due to investments in technology.
Interest Expense, Net
Our interest expense, net was$411 million ,$374 million and$363 million in 2019, 2018 and 2017, respectively. The increase in 2019 is primarily attributable to ourMay 2019 issuance of$4.0 billion senior notes, partially offset by related increases in interest income as a result of higher cash and cash equivalents balances. These items are discussed further below in Liquidity and Capital Resources.
Loss on Early Extinguishment of Debt
InMay 2019 , WM issued$4.0 billion of senior notes, which are discussed further below in Summary of Cash and Cash Equivalents,Restricted Trust and Escrow Accounts and Debt Obligations. Concurrently, we used$344 million of the net proceeds from the newly issued senior notes to retire$257 million of certain high-coupon senior notes. The cash paid includes the principal amount of the debt retired,$84 million of related premiums, which are classified as loss on early extinguishment of debt in our Consolidated Statement of Operations, and$3 million of accrued interest. The principal amount of senior notes redeemed within each series was as follows:
?
were tendered;
?
tendered;
?
tendered;
?
tendered; and
?$274 million of WM 6.125% senior notes due 2039, of which$22 million were tendered. 43 Table of Contents
In the third quarter of 2019, we elected to refund and reissue
Equity in Net Losses of Unconsolidated Entities
We recognized equity in net losses of unconsolidated entities of$55 million ,$41 million and$68 million in 2019, 2018 and 2017, respectively. The losses for each period are primarily related to our noncontrolling interests in entities established to invest in and manage low-income housing properties and a refined coal facility. We generate tax benefits, including tax credits, from the losses incurred from these investments, which are discussed further in Note 9 to the Consolidated Financial Statements. The amount in 2017 includes impairment charges of$29 million to write down equity method investments in waste diversion technology companies to their estimated fair values.
Other, Net
We recognized other, net expense of$50 million and$8 million in 2019 and 2017, respectively, compared to other, net income of$2 million in 2018. In 2019, we recognized a$52 million impairment charge related to our minority-owned investment in a waste conversion technology business. We wrote down our investment to its estimated fair value as the result of recent third-party investor's transactions in securities of this business. The fair value of our investment was not readily determinable; thus, we determined the fair value utilizing a combination of quoted price inputs for the equity in our investment (Level 2) and certain management assumptions pertaining to investment value (Level 3). The expense for 2017 was impacted by impairment charges of$11 million related to other-than-temporary declines in the value of minority-owned investments in waste diversion technology companies.
Income Tax Expense
We recorded income tax expense of$434 million ,$453 million and$242 million in 2019, 2018 and 2017 respectively, resulting in effective income tax rates of 20.6%, 19.0% and 11.0% for the years endedDecember 31, 2019 , 2018 and 2017, respectively. The comparability of our income tax expense for the reported periods has been primarily affected by the following:
Investments Qualifying for Federal Tax Credits - Our low-income housing
properties and refined coal facility investments reduced our income tax expense
? by
realized from these investments for the years ended
2017, respectively. See Note 19 for additional information related to these
unconsolidated variable interest entities.
Equity-Based Compensation - During 2019, 2018 and 2017, we recognized excess
? tax benefits related to the vesting or exercise of equity-based compensation
awards resulting in a reduction in our income tax expense of
Adjustments to Accruals and Deferred Taxes - Adjustments to our accruals and
deferred taxes due to the filing of our income tax returns, analysis of our
? deferred tax balances and changes in state and foreign laws resulted in a
reduction in our income tax expense of
for the years ended
Tax Audit Settlements - We file income tax returns in the
well as other state and local jurisdictions. We are currently under audit by
? various taxing authorities and our audits are in various stages of completion.
During the reported periods, we settled various tax audits, which resulted in a
reduction in our income tax expense of
for the years ended
Enactment of Tax Reform - In accordance with applicable accounting guidance,
the Company recognized the provisional tax impacts and subsequent measurement
period adjustments related to the remeasurement of our deferred income tax
? assets and liabilities and the one-time, mandatory transition tax on deemed
repatriation of previously tax-deferred and unremitted foreign earnings,
resulting in a reduction in our income tax expense of
$529 million for the years endedDecember 31, 2018 and 2017, respectively. 44 Table of Contents
See Note 9 to the Consolidated Financial Statements for more information related to income taxes.
Landfill and Environmental Remediation Discussion and Analysis
We owned or operated 244 solid waste landfills and five secure hazardous waste landfills as ofDecember 31, 2019 and 247 solid waste and five secure hazardous waste landfills as ofDecember 31, 2018 . For these landfills, the following table reflects changes in capacity, as measured in tons of waste, for the years endedDecember 31 and remaining airspace, measured in cubic yards of waste, as ofDecember 31 (in millions): 2019 2018 Remaining Remaining Permitted Expansion Total Permitted Expansion Total Capacity Capacity Capacity Capacity Capacity Capacity Balance as of beginning of year (in tons) 4,762 220 4,982 4,799 186 4,985 Acquisitions, divestitures, newly permitted landfills and closures 27 - 27 5 - 5 Changes in expansions pursued (a) - 36 36 - 72 72 Expansion permits granted (b) 57 (57) - 42 (42) - Tons received (121) - (121) (116) - (116) Changes in engineering estimates and other (c) 29 1 30 32 4 36 Balance as of end of year (in tons) 4,754 200 4,954 4,762 220 4,982 Balance as of end of year (in cubic yards) 4,694 166
4,860 4,735 194 4,929
Amounts reflected here relate to the combined impacts of (i) new expansions
pursued; (ii) increases or decreases in the airspace being pursued for (a) ongoing expansion efforts; (iii) adjustments for differences between the
airspace being pursued and airspace granted and (iv) decreases due to
decisions to no longer pursue expansion permits, if any.
We received expansion permits at seven of our landfills during 2019 and six (b) of our landfills during 2018, demonstrating our continued success in working
with municipalities and regulatory agencies to expand the disposal airspace
of our existing landfills.
Changes in engineering estimates can result in changes to the estimatedavailable remaining airspace of a landfill or changes in the utilization of
such landfill airspace, affecting the number of tons that can be placed in
the future. Estimates of the amount of waste that can be placed in the future
are reviewed annually by our engineers and are based on a number of factors,
including standard engineering techniques and site-specific factors such as (c) current and projected mix of waste type; initial and projected waste density;
estimated number of years of life remaining; depth of underlying waste;
anticipated access to moisture through precipitation or recirculation of
landfill leachate and operating practices. We continually focus on improving
the utilization of airspace through efforts that may include recirculating
landfill leachate where allowed by permit; optimizing the placement of daily
cover materials and increasing initial compaction through improved landfill
equipment, operations and training.
The tons received at our landfills for the years endedDecember 31 are shown below (tons in thousands): 2019 2018 # of Total Tons per # of Total Tons per Sites Tons Day Sites Tons Day Solid waste landfills 244 (a) 120,556 443 247 115,972 426 Hazardous waste landfills 5 703 3 5 739 3 249 121,259 446 252 116,711 429 Solid waste landfills closed, divested or contract expired during related year 8 692
1 424
121,951 (b) 117,135 (b)
(a) In 2019, we acquired five landfills, we closed one landfill and seven
landfills under contract either closed or the contract expired.
45
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These amounts include 1.3 million tons and 1.5 million tons as ofpermitted airspace to other areas of the landfill. Waste types that are
frequently identified for beneficial use include green waste for composting
and clean dirt for on-site construction projects.
When a landfill we own or operate receives certification of closure from the applicable regulatory agency, we generally transfer the management of the site, including any remediation activities, to our environmental legacy management group. As ofDecember 31, 2019 , our environmental legacy management group managed 212 closed landfills. Based on remaining permitted airspace as ofDecember 31, 2019 and projected annual disposal volume, the weighted average remaining landfill life for all of our owned or operated landfills is approximately 39 years. Many of our landfills have the potential for expanded airspace beyond what is currently permitted. We monitor the availability of permitted airspace at each of our landfills and evaluate whether to pursue an expansion at a given landfill based on estimated future disposal volume, disposal prices, construction and operating costs, remaining airspace and likelihood of obtaining an expansion permit. We are seeking expansion permits at 15 of our landfills that meet the expansion criteria outlined in the Critical Accounting Estimates and Assumptions - Landfills section below. Although no assurances can be made that all future expansions will be permitted or permitted as designed, the weighted average remaining landfill life for all owned or operated landfills is approximately 41 years when considering remaining permitted airspace, expansion airspace and projected annual disposal volume.
The number of landfills owned or operated as of
# of Landfills
0 to 5 years 27
6 to 10 years 16
11 to 20 years 39
21 to 40 years 65
41+ years 102
Total 249 (a)
Of the 249 landfills, 207 are owned, 32 are operated under lease agreements (a) and 10 are operated under other contractual agreements. For the landfills not
owned, we are usually responsible for final capping, closure and post-closure
obligations.
As ofDecember 31, 2019 , we have 14 landfills which are not currently accepting waste. During the year endedDecember 31, 2019 , we performed tests of recoverability for five of these landfills with an aggregate net recorded capitalized landfill asset cost of$272 million , for which the undiscounted expected future cash flows resulting from our probability-weighted estimation approach exceeded the carrying values. We did not perform recoverability tests for the remaining nine landfills as the net recorded capitalized landfill asset cost was not material. Landfill Assets - We capitalize various costs that we incur to prepare a landfill to accept waste. These costs generally include expenditures for land (including the landfill footprint and required landfill buffer property), permitting, excavation, liner material and installation, landfill leachate collection systems, landfill gas collection systems, environmental monitoring equipment for groundwater and landfill gas, directly related engineering, capitalized interest, and on-site road construction and other capital infrastructure costs. The cost basis of our landfill assets also includes estimates of future costs associated with landfill final capping, closure and post-closure activities, which are discussed further below. 46
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The changes to the cost basis of our landfill assets and accumulated landfill airspace amortization for the year endedDecember 31, 2019 are reflected in the table below (in millions): Accumulated Cost Basis of Landfill Airspace Landfill Assets Amortization Landfill Assets December 31, 2018 $ 15,240 $ (9,157) $ 6,083 Capital additions 656 - 656 Asset retirement obligations incurred and capitalized 72 - 72 Acquisitions 289 - 289 Amortization of landfill airspace - (575) (575) Foreign currency translation 52 (22) 30 Asset retirements and other adjustments (399)
428 29
December 31, 2019 $ 15,910 $ (9,326) $ 6,584
As of December 31, 2019 , we estimate that we will spend approximately
$600 million in 2020, and approximately $1.3 billion in 2021 and 2022 combined,
for the construction and development of our landfill assets. The specific timing
of landfill capital spending is dependent on future events and spending
estimates are subject to change due to fluctuations in landfill waste volumes,
changes in environmental requirements and other factors impacting landfill
operations.
Landfill and Environmental Remediation Liabilities - As we accept waste at our
landfills, we incur significant asset retirement obligations, which include
liabilities associated with landfill final capping, closure and post-closure
activities. These liabilities are accounted for in accordance with authoritative
guidance on accounting for asset retirement obligations and are discussed in
Note 3 to the Consolidated Financial Statements. We also have liabilities for
the remediation of properties that have incurred environmental damage, which
generally was caused by operations or for damage caused by conditions that
existed before we acquired operations or a site. We recognize environmental
remediation liabilities when we determine that the liability is probable and the
estimated cost for the likely remedy can be reasonably estimated.
The changes to landfill and environmental remediation liabilities for the year
ended
Environmental
Landfill Remediation
December 31, 2018 $ 1,760 $ 237Obligations incurred and capitalized 72
-
Obligations settled (113) (22)
Interest accretion 98 4Revisions in estimates and interest rate assumptions (a) (b) 33 21 Acquisitions, divestitures and other adjustments 5
-
December 31, 2019 $ 1,855 $ 240
The amount reported for our landfill liabilities includes revisions in (a) estimates resulting primarily from changes in the timing and amount of costs
as well as changes in estimates of remaining airspace.
The amount reported for our environmental remediation liabilities includes an
(b) increase of
to measure our liabilities from 2.75% at December 31, 2018 to 1.75% at
December 31, 2019 .
47
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Landfill Operating Costs - The following table summarizes our landfill operating
costs for the years ended
2019 2018 2017
Interest accretion on landfill liabilities$ 98 $
95
13 (2) 3
Leachate and methane collection and treatment 173 150 143
Landfill remediation costs 4 13 14
Other landfill site costs 91 75 76
Total landfill operating costs $ 379 $ 331 $ 328
Amortization of Landfill Airspace - Amortization of landfill airspace, which is
included as a component of depreciation and amortization expenses, includes the
following:
the amortization of landfill capital costs, including (i) costs that have been
? incurred and capitalized and (ii) estimated future costs for landfill
development and construction required to develop our landfills to their
remaining permitted and expansion airspace; and
the amortization of asset retirement costs arising from landfill final capping,
? closure and post-closure obligations, including (i) costs that have been
incurred and capitalized and (ii) projected asset retirement costs.
Amortization expense is recorded on a units-of-consumption basis, applying cost as a rate per ton. The rate per ton is calculated by dividing each component of the amortizable basis of a landfill (net of accumulated amortization) by the number of tons needed to fill the corresponding asset's remaining permitted and expansion airspace. Landfill capital costs and closure and post-closure asset retirement costs are generally incurred to support the operation of the landfill over its entire operating life and are, therefore, amortized on a per-ton basis using a landfill's total permitted and expansion airspace. Final capping asset retirement costs are related to a specific final capping event and are, therefore, amortized on a per-ton basis using each discrete final capping event's estimated permitted and expansion airspace. Accordingly, each landfill has multiple per-ton amortization rates.
The following table presents our landfill airspace amortization expense on a
per-ton basis for the years ended
2019 2018 2017
Amortization of landfill airspace (in millions)$ 575 $ 538 $ 497 Tons received, net of redirected waste (in millions) 121 116
112
Average landfill airspace amortization expense per ton
$ 4.44 Different per-ton amortization rates are applied at each of our 249 landfills, and per-ton amortization rates vary significantly from one landfill to another due to (i) inconsistencies that often exist in construction costs and provincial, state and local regulatory requirements for landfill development and landfill final capping, closure and post-closure activities and (ii) differences in the cost basis of landfills that we develop versus those that we acquire. Accordingly, our landfill airspace amortization expense measured on a per-ton basis can fluctuate due to changes in the mix of volumes we receive across the Company each year.
Liquidity and Capital Resources
The Company consistently generates cash flow from operations that meets and
exceeds its working capital needs, the payments of its dividend and investment
in the business through capital expenditures and acquisitions. We continually
monitor our actual and forecasted cash flows, our liquidity and our capital
resources, enabling us to plan for our present needs and fund unbudgeted
business activities that may arise during the year as a result of changing
business conditions or new opportunities. The Company believes that its
investment grade credit ratings, large value of unencumbered assets
48
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and modest leverage enable it to obtain adequate financing to meet its ongoing capital, operating and other liquidity requirements.
Summary of Cash and Cash Equivalents,
The following is a summary of our cash and cash equivalents, restricted trust
and escrow accounts and debt balances as of
2019 2018
Cash and cash equivalents $ 3,561 $ 61
Restricted trust and escrow accounts:
Insurance reserves (a) $ 270
109 103
Other 4
11
Total restricted trust and escrow accounts$ 383
$ 366 Debt: Current portion$ 218 $ 432 Long-term portion 13,280 9,594 Total debt$ 13,498 $ 10,026
(a) Includes
in our Consolidated Balance Sheets.
Cash and cash equivalents - Cash and cash equivalents at
Debt - We use long-term borrowings in addition to the cash we generate from
operations as part of our overall financial strategy to support and grow our
business. We primarily use senior notes and tax-exempt bonds to borrow on a
long-term basis, but we also use other instruments and facilities, when
appropriate. The components of our borrowings as of
As ofDecember 31, 2019 , we had$1.5 billion of debt maturing within the next 12 months, including (i)$600 million of 4.75% senior notes that mature inJune 2020 ; (ii)$669 million of tax-exempt bonds with term interest rate periods that expire within the next 12 months, which is prior to their scheduled maturities, and (iii)$218 million of other debt with scheduled maturities within the next 12 months, including$112 million of tax-exempt bonds. As ofDecember 31, 2019 , we have classified$1.3 billion of debt maturing in the next 12 months as long-term because we have the intent and ability to refinance these borrowings on a long-term basis as supported by the forecasted available capacity under our$3.5 billion long-termU.S. and Canadian revolving credit facility ("$3.5 billion revolving credit facility"), as discussed below. The remaining$218 million of debt maturing in the next 12 months is classified as current obligations. As ofDecember 31, 2019 , we also have$169 million of variable-rate tax-exempt bonds that are supported by letters of credit under our$3.5 billion revolving credit facility, of which$15 million mature within the next 12 months. The interest rates on our variable-rate tax-exempt bonds are generally reset on either a daily or weekly basis through a remarketing process. All recent tax-exempt bond remarketings have successfully placed Company bonds with investors at market-driven rates and we currently expect future remarketings to be successful. However, if the remarketing agent is unable to remarket our bonds, the remarketing agent can put the bonds to us. In the event of a failed remarketing, we have the availability under our$3.5 billion revolving credit facility to fund these bonds until they are remarketed successfully. Accordingly, we have classified$154 million of these borrowings as long-term in our Consolidated Balance Sheet as ofDecember 31, 2019 . 49
Table of Contents
In
?
?
?
?
?
The net proceeds from these debt issuances were$3.97 billion . Concurrently, we used$344 million of the net proceeds from the newly issued senior notes to retire$257 million of certain high-coupon senior notes. The cash paid includes the principal amount of the debt retired,$84 million of related premiums and$3 million of accrued interest as discussed above in Loss on Early Extinguishment of Debt. We used a portion of the proceeds to repay our commercial paper borrowings. We intend to use the remaining net proceeds to pay a portion of the consideration related to our pending acquisition of Advanced Disposal, which is discussed in Pending Acquisition below, and for general corporate purposes. The newly-issued senior notes due 2024, 2026, 2029 and 2039 include a special mandatory redemption feature, which provides that if the acquisition of Advanced Disposal is not completed on or prior toJuly 14, 2020 , or if, prior to such date, the Merger Agreement is terminated for any reason, we will be required to redeem all of such outstanding notes equal to 101% of the aggregate principal amounts of such notes, plus accrued but unpaid interest. InSeptember 2019 ,Waste Management of Canada Corporation , an indirect wholly-owned subsidiary of WM, issuedC$500 million , or$377 million , of 2.6% senior notes dueSeptember 23, 2026 , all of which are fully and unconditionally guaranteed on a senior unsecured basis byWM and WM Holdings . The net proceeds from the debt issuance wereC$496 million , or$373 million , which we intend to use for general corporate purposes.
See Note 7 to the Consolidated Financial Statements for more information related to the debt transactions.
We have credit facilities in place to support our liquidity and financial
assurance needs. The following table summarizes our outstanding letters of
credit, categorized by type of facility as of
2019 2018
Revolving credit facility (a) $ 412 $ 587 Other letter of credit facilities (b) 532 556
$ 944 $ 1,143
(a) As of
(b) As of
committed and uncommitted with terms extending through
Refinancing of Revolving Credit Facility
InNovember 2019 , we entered into the$3.5 billion revolving credit facility, which amended and restated our prior long-termU.S. and Canadian revolving credit facility. Amendments to the credit agreement included (i) increasing total capacity under the facility from$2.75 billion to$3.5 billion ; (ii) increasing the accordion feature that may be used to increase total capacity in future periods from$750 million to$1.0 billion and (iii) extending the term throughNovember 2024 . The agreement provides the Company with two one-year extension options.Waste Management of Canada Corporation andWM Quebec Inc. , each an indirect wholly-owned subsidiary of WM, are borrowers under the$3.5 billion revolving credit facility, and the agreement permits borrowing in Canadian dollars up to theU.S. dollar equivalent of$375 million , with such borrowings to be repaid in Canadian dollars.WM Holdings , a wholly-owned subsidiary of WM, guarantees all the obligations under the$3.5 billion revolving credit facility. 50 Table of Contents
Summary of Cash Flow Activity
The following is a summary of our cash flows for the years endedDecember 31 (in millions): 2019 2018 2017 Net cash provided by operating activities$ 3,874 $ 3,570 $ 3,180 Net cash used in investing activities$ (2,376) $
(2,169)
Net Cash Provided by Operating Activities - Our operating cash flows increased by$304 million for the year endedDecember 31, 2019 , as compared with the prior year period, as a result of (i) higher cash-based earnings in the current year period primarily associated with our collection and disposal business; (ii) lower bonus payments in the current year; (iii) lower income tax payments of$57 million in the current year and (iv) net favorable changes in our operating assets and liabilities, net of effects of acquisitions and divestitures, offset slightly by higher interest payments in the current year period primarily due to ourMay 2019 issuance of senior notes.
Our operating cash flows increased by
Net Cash Used in Investing Activities - The most significant items affecting the comparison of our investing cash flows for the periods presented are summarized below:
Acquisitions - Our spending on acquisitions was
investing activities. The remaining spend is either cash used in a financing or
an operating activity related to the timing of contingent consideration paid.
? Substantially all of these acquisitions are related to our Solid Waste
business. Our acquisition spending in 2019 is primarily attributable to Petro
for additional information. We continue to focus on accretive acquisitions and
growth opportunities that will enhance and expand our existing service offerings. Capital Expenditures - We used$1,818 million ,$1,694 million and
? The increase is primarily due to an intentional focus on accelerating certain
collection fleet and landfill spending to support the Company's strong collection and disposal growth.
Proceeds from Divestitures - Proceeds from divestitures of businesses and other
assets (net of cash divested) were
2019, 2018 and 2017, respectively. In 2019, 2018 and 2017,
?
part of our continuous focus on improving or divesting certain non-strategic or
underperforming operations, with the remaining amounts generally related to the
sale of fixed assets.
Other, Net - Our spending within other, net was
activities for the year ended
(i) changes in our investments portfolio associated with a wholly-owned
insurance captive from restricted cash and cash equivalents to
available-for-sale securities and (ii) an initial cash payment for low-income
housing investments, which is discussed further in Note 9 to the Consolidated
? Financial Statements. These items were partially offset by cash proceeds from
the redemption of our preferred stock received in conjunction with the 2014
sale of our
Consolidated Financial Statements. The increase in 2018 was primarily due to
changes in our investments portfolio associated with our wholly-owned insurance
captive from restricted cash and cash equivalents to available-for-sale
securities. See Note 17 to the Consolidated Financial Statements for additional
information.
51
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Net Cash Provided by (Used in) Financing Activities - The most significant items affecting the comparison of our financing cash flows for the periods presented are summarized below:
Debt Borrowings (Repayments) - The following summarizes our cash borrowings and
? repayments of debt (excluding our commercial paper program discussed below) for
the years endedDecember 31 (in millions): 2019 2018 2017
Borrowings:
Revolving credit facility (a) $ -$ 119 $
302
Canadian term loan and revolving credit facility - 8
9
Senior notes 3,971 - 745
Canadian senior notes 373 - -
Tax-exempt bonds 339 185 299
Other debt - 47 124
$ 4,683 $ 359 $ 1,479
Repayments:
Revolving credit facility (a) $ (11) $ (108) $ (728) Canadian term loan and revolving credit facility - (117)
(146)
Senior notes (257) - (590)
Tax-exempt bonds (204) (167) (251)
Other debt (61) (107) (192)
$ (533) $ (499) $ (1,907) Net cash borrowings (repayments)$ 4,150 $ (140) $
(428)
(a) Our revolving credit facility was amended and restated in
Refer to Note 7 to the Consolidated Financial Statements for additional information related to our debt borrowings and repayments.
Premiums Paid on Early Extinguishment of Debt - During the year ended December
? 31, 2019, we paid premiums of
notes. See Note 7 to the Consolidated Financial Statements for further discussion of this debt transaction. Commercial Paper Program - During 2019, we had net cash repayments of
(net of the related discounts on issuance) during 2018 and 2017, respectively,
? under our commercial paper program. We repaid the outstanding balance with
proceeds from the
were primarily to support acquisitions, new business opportunities and for
general corporate purposes. Common Stock Repurchase Program - For the periods presented, all share
repurchases have been made in accordance with financial plans approved by our
Board of Directors. We repurchased
? 2019, 2018 and 2017, respectively. As a result of the pending acquisition of
Advanced Disposal discussed in Pending Acquisition below, we limited our 2019
share repurchases to an amount sufficient to offset dilution impacts from our
stock-based compensation plans. See Note 14 to the Consolidated Financial
Statements for additional information.
InDecember 2019 , we publicly confirmed that the Company has$1.32 billion remaining on its existing Board of Directors' authorization to repurchase shares of the Company's common stock. Any future share repurchases will be made at the discretion of management and will depend on factors similar to those considered by the Board of Directors in making dividend declarations.
? Cash Dividends - For the periods presented, all dividends have been declared by
our Board of Directors.
We paid aggregate cash dividends of$876 million ,$802 million and$750 million during 2019, 2018 and 2017, respectively. The increase in dividend payments is due to our quarterly per share dividend increasing from$0.425 52
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in 2017 to$0.465 in 2018 and to$0.5125 in 2019 and has been offset, in part, by a reduction in our common stock outstanding as a result of our common stock repurchase program. InDecember 2019 , we announced that our Board of Directors expects to increase the quarterly dividend from$0.5125 to$0.545 per share for dividends declared in 2020. However, all future dividend declarations are at the discretion of the Board of Directors and depend on various factors, including our net earnings, financial condition, cash required for future business plans, growth and acquisitions and other factors the Board of Directors may deem relevant.
Proceeds from the Exercise of Common Stock Options - The exercise of common
stock options generated financing cash inflows of
?
changes are generally due to the number of stock options exercised and the
exercise price of those options.
Free Cash Flow
We are presenting free cash flow, which is a non-GAAP measure of liquidity, in our disclosures because we use this measure in the evaluation and management of our business. We define free cash flow as net cash provided by operating activities, less capital expenditures, plus proceeds from divestitures of businesses and other assets (net of cash divested). We believe it is indicative of our ability to pay our quarterly dividends, repurchase common stock, fund acquisitions and other investments and, in the absence of refinancings, to repay our debt obligations. Free cash flow is not intended to replace net cash provided by operating activities, which is the most comparable GAAP measure. We believe free cash flow gives investors useful insight into how we view our liquidity, but the use of free cash flow as a liquidity measure has material limitations because it excludes certain expenditures that are required or that we have committed to, such as declared dividend payments and debt service requirements. Our calculation of free cash flow and reconciliation to net cash provided by operating activities is shown in the table below for the years endedDecember 31 (in millions), and may not be calculated the same as similarly-titled measures presented by other companies: 2019 2018 2017 Net cash provided by operating activities$ 3,874 $ 3,570 $ 3,180 Capital expenditures (1,818)
(1,694) (1,509) Proceeds from divestitures of businesses and other assets (net of cash divested)
49 208 99
Free cash flow $ 2,105 $ 2,084 $ 1,770
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Summary of Contractual Obligations
The following table summarizes our contractual obligations as of
2020 2021 2022 2023 2024 Thereafter Total
Recorded Obligations:
Expected environmental liabilities:
(a)
Final capping, closure and
post-closure $ 138 $ 161 $ 114 $ 96 $ 133 $ 2,587 $ 3,229
Environmental remediation 27 33 44 34 22 72 232
Non-cancelable operating lease
obligations 63 58 57 51 40 359 628
228 252 215 181 195 3,018 4,089
Debt payments (b) (c) (d) 823 629 660 646 1,220 9,701 13,679
Unrecorded Obligations: (e)
Interest on debt (f) 472 439 425 399 371 3,446 5,552
Estimated unconditional purchase
obligations (g) 156 143 65 57 47 379 847
Anticipated liquidity impact as of
December 31, 2019 $ 1,679 $ 1,463 $ 1,365 $ 1,283 Environmental liabilities include final capping, closure, post-closure and
environmental remediation costs recorded in our Consolidated Balance Sheet as
(a) of
recorded environmental liabilities for final capping, closure and
post-closure will increase as we continue to place additional tons within the
permitted airspace at our landfills.
(b) These amounts represent the scheduled principal payments related to our
long-term debt and financing leases, excluding interest.
Our debt obligations as of December 31, 2019 include $669 million oftax-exempt bonds with term interest rate periods that expire within the next
12 months. If the remarketings of our bonds are unsuccessful, then the bonds
can be put to us, requiring immediate repayment. We have classified the (c) anticipated cash flows for these contractual obligations based on the
scheduled maturity of the borrowings for purposes of this disclosure. For
additional information regarding the classification of these borrowings in
our Consolidated Balance Sheet as of
the Consolidated Financial Statements.
Our recorded debt obligations include non-cash adjustments associated with (d) debt issuance costs, discounts, premiums and fair value adjustments
attributable to terminated interest rate derivatives. These amounts have been
excluded as they will not impact our liquidity in future periods.
Our unrecorded obligations represent operating lease obligations and purchase
commitments from which we expect to realize an economic benefit in future (e) periods and interest payable on our debt. We have also made certain
guarantees, as discussed in Note 11 to the Consolidated Financial Statements,
that we do not expect to materially affect our current or future financial
position, results of operations or liquidity.
Interest on our fixed-rate debt was calculated based on contractual rates and (f) interest on our variable-rate debt was calculated based on interest rates as
of
interest related to our debt obligations.
Our unconditional purchase obligations are for various contractualobligations that we generally incur in the ordinary course of our business.
Certain of our obligations are quantity driven. For contracts that require us
to purchase minimum quantities of goods or services, we have estimated our (g) future minimum obligations based on the current market values of the
underlying products or services or contractually stated amounts. Accordingly,
the amounts reported in the table are subject to change and actual cash flow
obligations in the near future may be different. See Note 11 to the
Consolidated Financial Statements for discussion of the nature and terms of
our unconditional purchase obligations.
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Pending Acquisition
On April 14, 2019 , we entered into an Agreement and Plan of Merger (the "Merger
Agreement") to acquire all outstanding shares of Advanced Disposal for $33.15
per share in cash, representing a total enterprise value of $4.9 billion when
including approximately $1.9 billion of Advanced Disposal's net debt. Advanced
Disposal's solid waste network includes 95 collection operations, 73 transfer
stations, 41 owned or operated landfills and 22 owned or operated recycling
facilities. On June 28, 2019 , Advanced Disposal announced that 85.9% of the
outstanding shares of its common stock entitled to vote were voted in favor of
the proposal to adopt the Merger Agreement at a special meeting of stockholders
held that day. We anticipate that we will obtain antitrust regulatory approval
by the end of March 2020 and close the Advanced Disposal transaction soon
thereafter.
Critical Accounting Estimates and Assumptions
In preparing our financial statements, we make numerous estimates and assumptions that affect the accounting for and recognition and disclosure of assets, liabilities, equity, revenues and expenses. We must make these estimates and assumptions because certain information that we use is dependent on future events, cannot be calculated with precision from available data or simply cannot be calculated. In some cases, these estimates are difficult to determine, and we must exercise significant judgment. In preparing our financial statements, the most difficult, subjective and complex estimates and the assumptions that present the greatest amount of uncertainty relate to our accounting for landfills, environmental remediation liabilities, long-lived asset impairments and reserves associated with our insured and self-insured claims. Each of these items is discussed in additional detail below and in Note 3 to the Consolidated Financial Statements. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our financial statements.
Landfills
Accounting for landfills requires that significant estimates and assumptions be made regarding (i) the cost to construct and develop each landfill asset; (ii) the estimated fair value of final capping, closure and post-closure asset retirement obligations, which must consider both the expected cost and timing of these activities; (iii) the determination of each landfill's remaining permitted and expansion airspace and (iv) the airspace associated with each final capping event. Landfill Costs - We estimate the total cost to develop each of our landfill sites to its remaining permitted and expansion airspace. This estimate includes such costs as landfill liner material and installation, excavation for airspace, landfill leachate collection systems, landfill gas collection systems, environmental monitoring equipment for groundwater and landfill gas, directly related engineering, capitalized interest, on-site road construction and other capital infrastructure costs. Additionally, landfill development includes all land purchases for the landfill footprint and required landfill buffer property. The projection of these landfill costs is dependent, in part, on future events. The remaining amortizable basis of each landfill includes costs to develop a site to its remaining permitted and expansion airspace and includes amounts previously expended and capitalized, net of accumulated airspace amortization, and projections of future purchase and development costs. Final Capping Costs - We estimate the cost for each final capping event based on the area to be capped and the capping materials and activities required. The estimates also consider when these costs are anticipated to be paid and factor in inflation and discount rates. Our engineering personnel allocate landfill final capping costs to specific final capping events. The landfill airspace associated with each final capping event is then quantified and the final capping costs for each event are amortized over the related airspace associated with the event as waste is disposed of at the landfill. We review these costs annually, or more often if significant facts change. Changes in estimates, such as timing or cost of construction, for final capping events immediately impact the required liability and the corresponding asset. When the change in estimate relates to a fully consumed asset, the adjustment to the asset must be amortized immediately through expense. When the change in estimate relates to a final capping event that has not been fully consumed, the adjustment to the asset is recognized in income prospectively as a component of landfill airspace amortization.
Closure and Post-Closure Costs - We base our estimates for closure and post-closure costs on our interpretations of permit and regulatory requirements for closure and post-closure monitoring and maintenance. The estimates for landfill
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closure and post-closure costs also consider when the costs are anticipated to
be paid and factor in inflation and discount rates. The possibility of changing
legal and regulatory requirements and the forward-looking nature of these types
of costs make any estimation or assumption less certain. Changes in estimates
for closure and post-closure events immediately impact the required liability
and the corresponding asset. When the change in estimate relates to a fully
consumed asset, the adjustment to the asset must be amortized immediately
through expense. When the change in estimate relates to a landfill asset that
has not been fully consumed, the adjustment to the asset is recognized in income
prospectively as a component of landfill airspace amortization.
Remaining Permitted Airspace - Our engineers, in consultation with third-party
engineering consultants and surveyors, are responsible for determining remaining
permitted airspace at our landfills. The remaining permitted airspace is
determined by an annual survey, which is used to compare the existing landfill
topography to the expected final landfill topography.
Expansion Airspace - We also include currently unpermitted expansion airspace in
our estimate of remaining permitted and expansion airspace in certain
circumstances. First, to include airspace associated with an expansion effort,
we must generally expect the initial expansion permit application to be
submitted within one year and the final expansion permit to be received within
five years. Second, we must believe that obtaining the expansion permit is
likely, considering the following criteria:
? Personnel are actively working on the expansion of an existing landfill,
including efforts to obtain land use and local, state or provincial approvals;
? We have a legal right to use or obtain land to be included in the expansion
plan;
There are no significant known technical, legal, community, business, or
? political restrictions or similar issues that could negatively affect the
success of such expansion; and
? Financial analysis has been completed based on conceptual design, and the
results demonstrate that the expansion meets Company criteria for investment.
For unpermitted airspace to be initially included in our estimate of remaining
permitted and expansion airspace, the expansion effort must meet all the
criteria listed above. These criteria are evaluated by our field-based
engineers, accountants, managers and others to identify potential obstacles to
obtaining the permits. Once the unpermitted airspace is included, our policy
provides that airspace may continue to be included in remaining permitted and
expansion airspace even if certain of these criteria are no longer met as long
as we continue to believe we will ultimately obtain the permit, based on the
facts and circumstances of a specific landfill. In these circumstances,
continued inclusion must be approved through a landfill-specific review process
that includes approval by our Chief Financial Officer on a quarterly basis.
When we include the expansion airspace in our calculations of remaining
permitted and expansion airspace, we also include the projected costs for
development, as well as the projected asset retirement costs related to final
capping, closure and post-closure of the expansion in the amortization basis of
the landfill.
Once the remaining permitted and expansion airspace is determined in cubic
yards, an airspace utilization factor ("AUF") is established to calculate the
remaining permitted and expansion capacity in tons. The AUF is established using
the measured density obtained from previous annual surveys and is then adjusted
to account for future settlement. The amount of settlement that is forecasted
will take into account several site-specific factors including current and
projected mix of waste type, initial and projected waste density, estimated
number of years of life remaining, depth of underlying waste, anticipated access
to moisture through precipitation or recirculation of landfill leachate and
operating practices. In addition, the initial selection of the AUF is subject to
a subsequent multi-level review by our engineering group and the AUF used is
reviewed on a periodic basis and revised as necessary. Our historical experience
generally indicates that the impact of settlement at a landfill is greater later
in the life of the landfill when the waste placed at the landfill approaches its
highest point under the permit requirements.
After determining the costs and remaining permitted and expansion capacity at
each of our landfills, we determine the per ton rates that will be expensed as
waste is received and deposited at the landfill by dividing the costs by the
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corresponding number of tons. We calculate per ton amortization rates for each
landfill for assets associated with each final capping event, for assets related
to closure and post-closure activities and for all other costs capitalized or to
be capitalized in the future. These rates per ton are updated annually, or more
often, as significant facts change.
It is possible that actual results, including the amount of costs incurred, the
timing of final capping, closure and post-closure activities, our airspace
utilization or the success of our expansion efforts could ultimately turn out to
be significantly different from our estimates and assumptions. To the extent
that such estimates, or related assumptions, prove to be significantly different
than actual results, lower profitability may be experienced due to higher
amortization rates or higher expenses; or higher profitability may result if the
opposite occurs. Most significantly, if it is determined that expansion capacity
should no longer be considered in calculating the recoverability of a landfill
asset, we may be required to recognize an asset impairment or incur
significantly higher amortization expense. If at any time management makes the
decision to abandon the expansion effort, the capitalized costs related to the
expansion effort are expensed immediately.
Environmental Remediation Liabilities
A significant portion of our operating costs and capital expenditures could be characterized as costs of environmental protection. The nature of our operations, particularly with respect to the construction, operation and maintenance of our landfills subjects us to an array of laws and regulations relating to the protection of the environment. Under current laws and regulations, we may have liabilities for environmental damage caused by operations, or for damage caused by conditions that existed before we acquired a site. These liabilities include PRP investigations, settlements, and certain legal and consultant fees, as well as costs directly associated with site investigation and clean up, such as materials, external contractor costs and incremental internal costs directly related to the remedy. We provide for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. We routinely review and evaluate sites that require remediation and determine our estimated cost for the likely remedy based on a number of estimates and assumptions. Where it is probable that a liability has been incurred, we estimate costs required to remediate sites based on site-specific facts and circumstances. We routinely review and evaluate sites that require remediation, considering whether we were an owner, operator, transporter, or generator at the site, the amount and type of waste hauled to the site and the number of years we were associated with the site. Next, we review the same type of information with respect to other named and unnamed PRPs. Estimates of the costs for the likely remedy are then either developed using our internal resources or by third-party environmental engineers or other service providers. Internally developed estimates are based on:
? Management's judgment and experience in remediating our own and unrelated
parties' sites;
? Information available from regulatory agencies as to costs of remediation;
? The number, financial resources and relative degree of responsibility of other
PRPs who may be liable for remediation of a specific site; and
? The typical allocation of costs among PRPs, unless the actual allocation has
been determined.
Long-Lived Asset Impairments
We assess our long-lived assets for impairment as required under the applicable
accounting standards. If necessary, impairments are recorded in (gain) loss from
divestitures, asset impairments and unusual items, net in our Consolidated
Statement of Operations.
Property and Equipment, Including Landfills and Definite-Lived Intangible
Assets - We monitor the carrying value of our long-lived assets for potential
impairment on an ongoing basis and test the recoverability of such assets
generally using significant unobservable ("Level 3") inputs whenever events or
changes in circumstances indicate that their carrying amounts may not be
recoverable. These events or changes in circumstances, including management
decisions pertaining to such assets, are referred to as impairment indicators.
If an impairment indicator occurs, we perform a test of recoverability by
comparing the carrying value of the asset or asset group to its undiscounted
expected future cash flows.
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If cash flows cannot be separately and independently identified for a single
asset, we will determine whether an impairment has occurred for the group of
assets for which we can identify the projected cash flows. If the carrying
values are in excess of undiscounted expected future cash flows, we measure any
impairment by comparing the fair value of the asset or asset group to its
carrying value and the difference is recorded in the period that the impairment
indicator occurs. Fair value is generally determined by considering
(i) internally developed discounted projected cash flow analysis of the asset or
asset group; (ii) actual third-party valuations and/or (iii) information
available regarding the current market for similar assets. Estimating future
cash flows requires significant judgment and projections may vary from the cash
flows eventually realized, which could impact our ability to accurately assess
whether an asset has been impaired.
The assessment of impairment indicators and the recoverability of our
capitalized costs associated with landfills and related expansion projects
require significant judgment due to the unique nature of the waste industry, the
highly regulated permitting process and the sensitive estimates involved. During
the review of a landfill expansion application, a regulator may initially deny
the expansion application although the expansion permit is ultimately granted.
In addition, management may periodically divert waste from one landfill to
another to conserve remaining permitted landfill airspace, or a landfill may be
required to cease accepting waste, prior to receipt of the expansion permit.
However, such events occur in the ordinary course of business in the waste
industry and do not necessarily result in impairment of our landfill assets
because, after consideration of all facts, such events may not affect our belief
that we will ultimately obtain the expansion permit. As a result, our tests of
recoverability, which generally make use of a probability-weighted cash flow
estimation approach, may indicate that no impairment loss should be recorded.
Indefinite-Lived Intangible Assets, Including Goodwill - At least annually, and
more frequently if warranted, we assess the indefinite-lived intangible assets
including the goodwill of our reporting units for impairment using Level 3
inputs.
We first performed a qualitative assessment to determine if it was more likely
than not that the fair value of a reporting unit was less than its carrying
value. If the assessment indicated a possible impairment, we completed a
quantitative review, comparing the estimated fair value of a reporting unit to
its carrying amount, including goodwill. An impairment charge was recognized if
the asset's estimated fair value was less than its carrying amount. Fair value
is typically estimated using an income approach. However, when appropriate, we
may also use a market approach. The income approach is based on the long-term
projected future cash flows of the reporting units. We discount the estimated
cash flows to present value using a weighted average cost of capital that
considers factors such as market assumptions, the timing of the cash flows and
the risks inherent in those cash flows. We believe that this approach is
appropriate because it provides a fair value estimate based upon the reporting
units' expected long-term performance considering the economic and market
conditions that generally affect our business. The market approach estimates
fair value by measuring the aggregate market value of publicly-traded companies
with similar characteristics to our business as a multiple of their reported
earnings. We then apply that multiple to the reporting units' earnings to
estimate their fair values. We believe that this approach may also be
appropriate in certain circumstances because it provides a fair value estimate
using valuation inputs from entities with operations and economic
characteristics comparable to our reporting units.
Fair value is computed using several factors, including projected future
operating results, economic projections, anticipated future cash flows,
comparable marketplace data and the cost of capital. There are inherent
uncertainties related to these factors and to our judgment in applying them in
our analysis. However, we believe our methodology for estimating the fair value
of our reporting units is reasonable.
See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Gain) Loss from Divestitures, Asset Impairments and Unusual Items, Net and Note 6 to the Consolidated Financial Statements for information related to goodwill impairments recognized during the reported periods.
Insured and Self-Insured Claims
We have retained a significant portion of the risks related to our health and
welfare, general liability, automobile liability and workers' compensation
claims programs. The exposure for unpaid claims and associated expenses,
including incurred but not reported losses, are based on an actuarial valuations
and internal estimates. The accruals for these liabilities
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could be revised if future occurrences or loss developments significantly differ from our assumptions used. Estimated recoveries associated with our insured claims are recorded as assets when we believe that the receipt of such amounts is probable. We use a wholly-owned insurance captive to insure the deductibles for our general liability, automobile liability and workers' compensation claims programs. We continue to maintain conventional insurance policies with third-party insurers. In addition to certain business and operating benefits of having a wholly-owned insurance captive, we expect to receive certain cash flow benefits related to the timing of tax deductions related to these claims. WM will pay an annual premium to the insurance captive, typically in the first quarter of the year, for the estimated losses based on the external actuarial analysis. These premiums are held in a restricted escrow account to be used solely for paying insurance claims, resulting in a transfer of risk from WM to the insurance captive and are allocated between current and long-term assets in our Consolidated Balance Sheets depending on timing on the use of funds.
Off-Balance Sheet Arrangements
We have financial interests in unconsolidated variable interest entities as discussed in Note 19 to the Consolidated Financial Statements. Additionally, we are party to guarantee arrangements with unconsolidated entities as discussed in the Guarantees section of Note 11 to the Consolidated Financial Statements. These arrangements have not materially affected our financial position, results of operations or liquidity during the year endedDecember 31, 2019 , nor are they expected to have a material impact on our future financial position, results of operations or liquidity. Inflation
While inflationary increases in costs can affect our income from operations margins, we believe that inflation generally has not had, and in the near future is not expected to have, any material adverse effect on our results of operations. However, as ofDecember 31, 2019 , approximately 30% of our collection revenues are generated under long-term agreements with price adjustments based on various indices intended to measure inflation. Additionally, management's estimates associated with inflation have had, and will continue to have, an impact on our accounting for landfill and environmental remediation liabilities.
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