The following discussion should be read in conjunction with the "Selected Financial Data" included in Item 6 of this Annual Report on Form 10-K, our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.
We make statements in this Annual Report on Form 10-K that are forward-looking in nature. These include:
Statements regarding our landfills, including capacity, duration, special
? projects, demand for and pricing of recyclables, landfill alternatives and
related capital expenditures;
? Discussion of competition, loss of contracts, price increases and additional
exclusive arrangements;
Forecasts of cash flows necessary for operations and free cash flow to reduce
? leverage as well as our ability to draw on our credit facility and access the
capital markets to refinance or expand;
? Statements regarding oil prices and fuel price expectations;
? Reviews of regulatory developments and potential changes in environmental,
health, safety and tax laws and regulations; and
Other statements on a variety of topics such as the COVID-19 pandemic, credit
? risk of customers, seasonality, labor/pension costs and labor union activity,
operational and safety risks, acquisitions, litigation results, goodwill
impairments, insurance costs and cybersecurity threats.
These statements can be ?identified by the use of forward-looking terminology such as "believes," "expects," "intends," "may," "might," "will," ??"could," "should" or "anticipates," or the negative thereof or comparable terminology, or by discussions of strategy. Our ?business and operations are subject to a variety of risks and uncertainties and, consequently, actual results may differ ?materially from those projected by any forward-looking statements. Factors that could cause actual results to differ ?from those projected include, but are not limited to, those listed under the heading "ITEM 1A. Risk Factors" and elsewhere in this Annual Report on Form 10-?K. There may be additional risks of which we are not presently aware or that we currently believe are immaterial that ?could have an adverse impact on our business. We make no commitment to revise or update any forward-looking ?statements to reflect events or circu?mstances that may change, unless required under applicable securities laws.
Industry Overview
The solid waste industry is local and highly competitive in nature, requiring substantial labor and capital resources. The participants compete for collection accounts primarily on the basis of price and, to a lesser extent, the quality of service, and compete for landfill business on the basis of tipping fees, geographic location and quality of operations. The solid waste industry has been consolidating and continues to consolidate as a result of a number of factors, including the increasing costs and complexity associated with waste management operations and regulatory compliance. Many small independent operators and municipalities lack the capital resources, management, operating skills and technical expertise necessary to operate effectively in such an environment. The consolidation trend has caused solid waste companies to operate larger landfills that have complementary collection routes that can use company-owned disposal capacity. Controlling the point of transfer from haulers to landfills has become increasingly important as landfills continue to close and disposal capacity moves farther from the collection markets it serves. 47
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Generally, the most profitable operators within the solid waste industry are those companies that are vertically integrated or enter into long-term collection contracts. A vertically integrated operator will benefit from: (1) the internalization of waste, which is bringing waste to a company-owned landfill; (2) the ability to charge third-party haulers tipping fees either at landfills or at transfer stations; and (3) the efficiencies gained by being able to aggregate and process waste at a transfer station prior to landfilling. The demand for our E&P waste services depends on the continued demand for, and production of, oil and natural gas. Crude oil and natural gas prices historically have been volatile. Macroeconomic and geopolitical conditions, including a significant decline in oil prices driven by both surplus production and supply, as well as the decrease in demand caused by factors including the COVID-19 pandemic, have resulted in decreased levels of oil and natural gas exploration and production activity and a corresponding decrease in demand for our E&P waste services. ThroughJune 30, 2020 , we maintained a separate E&P segment, which was combined with our Southern segment onJuly 1, 2020 . During the year endedDecember 31, 2020 , our total E&P revenue declined 44%, compared to the prior year period, on rig count declines of 56% in certain basins. The most impacted basins included theWilliston Basin inNorth Dakota , theEagle Ford Basin inTexas and thePowder River Basin inWyoming , all of which had relatively high costs associated with drilling, making them less attractive than other basins, including thePermian Basin inTexas andNew Mexico . Additionally, across the industry there is uncertainty regarding future demand for oil and related services, as noted by several energy companies, many of whom are customers of our E&P operations. These companies have written down the values of their oil and gas assets in anticipation of the potential for the decarbonization of their energy product mix given an increased global focus on reducing greenhouse gases and addressing climate change. Such uncertainty regarding global demand has had a significant impact on the investment and operating plans of our E&P waste customers in the basins where we operate. Based on these events and the outlook for future drilling activity and resulting demand for our E&P waste services not showing significant improvement, we concluded that the carrying value of property and equipment at four E&P landfills exceeded their estimated fair value, resulting in an impairment charge of$417.4 million being recorded during the year endedDecember 31, 2020 . See the section Impairments of Property and Equipment and Finite-Lived Intangible Assets in Note 3, "Summary of Significant Accounting Policies," of our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for a further discussion of this impairment charge.
Executive Overview
We are an integrated solid waste services company that provides non-hazardous waste collection, transfer and disposal services, along with recycling and resource recovery, in mostly exclusive and secondary markets across 43 states in theU.S. and six provinces inCanada .Waste Connections also provides non-hazardous oilfield waste treatment, recovery and disposal services in several basins across theU.S. , as well as intermodal services for the movement of cargo and solid waste containers in thePacific Northwest . We generally seek to avoid highly competitive, large urban markets and instead target markets where we can attain high market share either through exclusive contracts, vertical integration or asset positioning. In markets where waste collection services are provided under exclusive arrangements, or where waste disposal is municipally owned or funded or available at multiple municipal sources, we believe that controlling the waste stream by providing collection services under exclusive arrangements is often more important to our growth and profitability than owning or operating landfills. We also target niche markets, like E&P waste treatment and disposal services.
THE COVID-19 PANDEMIC'S IMPACT ON OUR RESULTS OF OPERATIONS
During the first quarter of 2020, COVID-19 emerged across
The COVID-19 pandemic has had adverse impacts on our business sinceMarch 2020 , when we experienced decreasing revenues associated with declines primarily in commercial collection, transfer station and landfill volumes as a result of COVID-19-related economic disruptions. In addition, and to a lesser extent, solid waste roll off revenue was impacted in some markets, and year-over-year reductions in E&P revenue, resulting primarily from the drop in the value of crude oil, were driven by both surplus production and supply, as well as the decrease in demand caused by factors including the COVID-19 pandemic. In late February, we formed a task force to commence preparedness in the event the 48
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scope of the COVID-19 outbreak expanded. Protecting the health, safety and welfare of our employees was and remains our first priority, which led to our introduction of various health and safety protocols in early March, including the distribution of safety and preparedness updates, revised policies on employee time off, leaves of absence and short-term disability, modifications to our operations to minimize community spread of COVID-19, and enhanced resources to enable remote working, communications and digital connectivity to help non-frontline employees work from home more efficiently. In recognition of the Company's status as an essential services provider, and to reduce employee concerns regarding income, healthcare and family obligations, we implemented supplemental pay and bonuses for frontline employees representing 80% of our workforce, emergency wages for employees out of work due to COVID-19 and extended benefits coverage in markets where reductions in customer activity have impacted employee hours. In addition, we expanded ourEmployee Relief Fund and initiated the Waste Connections Scholarship Program to help employee children achieve their vocational, technical and university education goals. During 2020, the aggregate impact of these actions was an increase to our cost of operations of over$35 million , primarily due to supplemental pay for our frontline employees. We also implemented a number of measures to reduce our operating costs and preserve cash, which included hiring limitations, wage freezes for all managers and region and corporate personnel, restrictions on travel, group meetings and other discretionary spending, and the suspension of the Company's 401(k) match effectiveJune 1, 2020 . In addition, we deferred qualifiedU.S. payroll and other tax payments as permitted by the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, which theU.S. government enacted onMarch 27, 2020 . In total in 2020, we deferred$44.6 million in payroll taxes in conjunction with the CARES Act, of which 50% is due byDecember 31, 2021 and 50% is due byDecember 31, 2022 . To the extent available, we also utilized similar programs being offered by the federal and provincial governments inCanada and received CAD$2.6 million in federal wage subsidies pursuant to the Canadian Emergency Wage Subsidy. During the second quarter of 2020, our business was impacted by the COVID-19 pandemic due to a reduction in revenue primarily in solid waste commercial collection, roll off activity and solid waste transfer and disposal resulting from a slowdown in activity associated with shelter-in-place or other closure restrictions or requirements imposed in response to the COVID-19 pandemic. Commercial collection activity slowed down in certain markets due to service reductions or suspensions by customers whose business activity was curtailed by such measures, with third party transfer and disposal volumes and roll off activity typically following similar patterns, and some of the declines in E&P waste activity may also be related to the COVID-19 pandemic. The impacts to solid waste activity that we experienced during the second quarter varied by geography, the size and customer mix in each market, and the timing and extent of shutdown requirements and reopening policies across markets. In some markets, the impacts abated during the second quarter, as reopenings resulted in increased service requirements by commercial customers and higher landfill volumes and roll off activity; in other cases, where reopenings were delayed or more limited, the improvements were less pronounced. Through the second quarter of 2020, about 53% of solid waste commercial customers and 42% of associated revenue in competitive markets we track that had suspended or reduced service due to the COVID-19 pandemic, had since reached out for either a resumption of service or an increase in frequency. Volumes in all of our solid waste regions exceeded our initial expectations, resulting in solid waste revenue down 5.3% on a same store basis in the quarter, about 0.7 percentage points better than the expectations we provided in May. Moreover, excluding the most impacted markets in the Northeast andCanada , where closures were widespread and volumes were most impacted, solid waste revenues were down only 1.3% year over year on a same store basis. During the third quarter of 2020, our business continued to be impacted by the COVID-19 pandemic, albeit to a lesser extent than in the prior period in many markets. The impacts to solid waste activity from the COVID-19 pandemic that we experienced during the third quarter reflected the pace of reopening activity and varied by geography, the size and customer mix in each market. In some markets, impacts began to abate in the second quarter, when a portion of the lost volumes returned; in other cases, the impacts of the pandemic abated more during the third quarter, when reopenings resulted in increased service requirements by commercial customers and higher landfill volumes and roll off activity. In markets where reopenings continue to be delayed or where additional restrictions have been imposed, the improvements were less pronounced. Through the third quarter, about 68% of solid waste commercial customers and 57% of associated revenue in competitive markets we track that had suspended or reduced service due to the COVID-19 pandemic, had since reached out for either a resumption of service or an increase in frequency, an increase from 53% and
42%, respectively, through 49 Table of Contents the second quarter. As a result, solid waste collection, transfer and disposal revenue was down 2.0% year over year on a same store basis in the third quarter, but was an improvement of 3.3 percentage points from second quarter 2020 revenue, which was down 5.3% year over year. During the fourth quarter of 2020, the impacts to our business related to the COVID-19 pandemic continued to moderate as compared to prior periods, in spite of the reinstatement of shutdowns and other restrictions on activity in many markets. Throughout the pandemic, revenue in solid waste commercial collection and solid waste transfer and disposal has largely reflected the extent to which the slowdown in activity associated with shelter-in-place or other closure restrictions or requirements in effect since the first quarter of 2020 has persisted. The recovery in more impacted markets, particularly those where reopenings continue to be delayed or where additional restrictions have been imposed, were generally less pronounced. The impacts to solid waste activity from the COVID-19 pandemic that we experienced during the fourth quarter largely continued to reflect the pace of reopening activity and varied by geography, the size and customer mix in each market. In some markets, improving trends in commercial service requirements, landfill tons and roll off activity that we had seen in prior quarters continued; in others, commercial volume recovery remained steady or declined modestly. Recovery in solid waste commercial activity remained essentially in line with the prior quarter, with 65% of customers and 56% of revenue in competitive markets we track that had previously suspended or reduced service due to the COVID-19 pandemic, that had since reached out for either a resumption of service or an increase in frequency. Year over year landfill tons and roll off pulls both improved sequentially in the fourth quarter, with same store municipal solid waste tons up 2% year over year after being down 3% year over year in the third quarter. All regions showed improving volumes, led by our mostly exclusive marketWestern Region , where volumes improved sequentially by 3.7 percentage points. As a result, solid waste collection, transfer and disposal revenue was up 0.7% year over year on a same store basis in the fourth quarter, an improvement of 2.7 percentage points from the third quarter, which was down 2.0% year over year. The impact of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows in future periods will depend largely on future developments, including the duration and spread of the outbreak in theU.S. andCanada , its severity, the actions to contain the novel coronavirus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.
2020 Financial Performance
The functional currency of the Company, as the parent corporate entity, and its operating subsidiaries inthe United States is theU.S. dollar. The functional currency of the Company's Canadian operations is the Canadian dollar. The reporting currency of the Company is theU.S. dollar. The Company's consolidated Canadian dollar financial position is translated toU.S. dollars by applying the foreign currency exchange rate in effect at the consolidated balance sheet date. The Company's consolidated Canadian dollar results of operations and cash flows are translated toU.S. dollars by applying the average foreign currency exchange rate in effect during the reporting period. The resulting translation adjustments are included in other comprehensive income or loss. Gains and losses from foreign currency transactions are included in earnings for the period.
Operating Results
Revenues in 2020 increased 1.1% to$5.446 billion from$5.389 billion in 2019. Acquisitions closed during, or subsequent to, the prior year, net of divestitures, accounted for$197.2 million in incremental revenues in 2020. Excluding the impact of such acquisitions, revenues decreased 2.6% due principally to E&P waste revenue decreasing to$144.0 million from$256.0 million in 2019, with the remainder due predominantly to lower internal growth in solid waste, in both cases primarily as a result of the COVID-19 pandemic. Solid waste internal growth was negative 0.4%, due to lower volumes and lower fuel, materials and environmental surcharges more than offsetting price increases and higher recycled commodity values. Pricing growth was 4.3%, with core pricing up 4.5%, partially offset by materials and environmental surcharges of negative 0.2%. Volumes decreased by 4.8% on decreases in landfill and hauling volumes primarily due to the impact of the COVID-19 pandemic. Increases in the value of recycled commodities resulted in a 0.1% increase to internal solid
waste growth. 50 Table of Contents Net income attributable toWaste Connections decreased 63.9% to$204.7 million in 2020, from$566.8 million in 2019. In 2020, adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, a non-GAAP financial measure (refer to page 76 of this Annual Report on Form 10-K for a definition and reconciliation to Net income attributable toWaste Connections ), decreased 0.7% to$1.662 billion , from$1.674 billion in 2019. As a percentage of revenue, adjusted EBITDA decreased from 31.1% in 2019, to 30.5% in 2020. This 0.6% decrease was due to the decline in E&P waste revenue, which was partially offset by the expansion of adjusted EBITDA margin in solid waste. Adjusted net income attributable toWaste Connections , a non-GAAP financial measure (refer to page 77 of this Annual Report on Form 10-K for a definition and reconciliation to Net income attributable toWaste Connections ), in 2020 decreased 3.3% to$695.8 million from$719.6 million in 2019.
Adjusted Free Cash Flow
Net cash provided by operating activities decreased 8.6% to$1.409 billion in 2020, from$1.541 billion in 2019. Capital expenditures for property and equipment decreased from$634.4 million in 2019 to$597.1 million in 2020, a decrease of$37.3 million , or 5.9%, while capital expenditures for undeveloped landfill properties increased from$31.7 million in 2019 to$67.5 million in 2020, an increase of$35.8 million , or 112.9%. Adjusted free cash flow, a non-GAAP financial measure (refer to page 75 of this Annual Report on Form 10-K for a definition and reconciliation to Net cash provided by operating activities), decreased by$74.9 million to$841.9 million in 2020, from$916.8 million in 2019. Adjusted free cash flow as a percentage of revenues was 15.5% in 2020, as compared to 17.0% in 2019.
Return of Capital and Distributions to Shareholders
In 2020, we distributed$305.6 million to shareholders through a combination of cash dividends and share repurchases. We paid cash dividends of$199.9 million to shareholders through cash dividends declared by our Board of Directors, which also increased the quarterly cash dividend by 10.8%, from$0.185 to$0.205 per common share inOctober 2020 . Cash dividends increased$24.8 million , or 14.2%, from$175.1 million in 2019 due to a 15.6% increase in the quarterly cash dividend declared by our Board of Directors inOctober 2019 , followed by the additional increase inOctober 2020 . Our Board of Directors intends to review the quarterly dividend during the fourth quarter of each year, with a long-term objective of increasing the amount of the dividend. In 2020, we also repurchased 1,271,977 common shares at an aggregate cost of$105.7 million . We expect the amount of capital we return to shareholders through share repurchases to vary depending on our financial condition and results of operations, capital structure, the amount of cash we deploy on acquisitions, expectations regarding the timing and size of acquisitions, the market price of our common shares, and overall market conditions. We cannot assure you as to the amounts or timing of future share repurchases or dividends. We have the ability under our Credit Agreement and master note purchase agreements to repurchase our common shares and pay dividends provided that we maintain specified financial ratios.
Capital Position
We target a leverage ratio, as defined in our Credit Agreement, of approximately 2.5x - 3.0x total debt to EBITDA. Higher debt in 2020, along with a small reduction in EBITDA, resulted in an increase in our leverage ratio from 2.41x atDecember 31, 2019 to 2.68x atDecember 31, 2020 . Cash balances increased from$326.7 million atDecember 31, 2019 to$617.3 million atDecember 31, 2020 , and we had$1.239 billion of remaining borrowing capacity under our Credit Agreement, which matures inMarch 2023 .
Critical Accounting Estimates and Assumptions
The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the consolidated financial statements. As described by theSEC , critical accounting estimates and assumptions are those that may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that have a material impact on the financial condition or operating performance of a company. Such critical accounting estimates and assumptions are applicable to our reportable segments. Based on this definition, we believe the following are our critical accounting estimates. 51
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Insurance liabilities. We maintain insurance policies for automobile, general, employer's, environmental, cyber, employment practices and directors' and officers' liability as well as for employee group health insurance, property insurance and workers' compensation. We carry umbrella policies for certain types of claims to provide excess coverage over the underlying policies and per incident deductibles or self-insured retentions. Our insurance accruals are based on claims filed and estimates of claims incurred but not reported and are developed by our management with assistance from our third-party actuary and third-party claims administrator. The insurance accruals are influenced by our past claims experience factors and by published industry development factors. If we experience insurance claims or costs above or below our historically evaluated levels, our estimates could be materially affected. The frequency and amount of claims or incidents could vary significantly over time, which could materially affect our self-insurance liabilities. Additionally, the actual costs to settle the self-insurance liabilities could materially differ from the original estimates and cause us to incur additional costs in future periods associated with prior year claims. Income taxes. Deferred income tax assets and liabilities are determined based on differences between the financial reporting and income tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. If our judgment and estimates concerning assumptions made in calculating our expected future income tax rates are incorrect, our deferred income tax assets and liabilities would change. Based on our deferred income tax liability balance atDecember 31, 2020 , each 0.1 percentage point change to our expected future income tax rates would change our deferred income tax liability balance and income tax expense by approximately$3.0 million . Accounting for landfills. We recognize landfill depletion expense as airspace of a landfill is consumed. Our landfill depletion rates are based on the remaining disposal capacity at our landfills, considering both permitted and probable expansion airspace. We calculate the net present value of our final capping, closure and post-closure commitments by estimating the total obligation in current dollars, inflating the obligation based upon the expected date of the expenditure and discounting the inflated total to its present value using a credit-adjusted risk-free rate. Any changes in expectations that result in an upward revision to the estimated undiscounted cash flows are treated as a new liability and are inflated and discounted at rates reflecting current market conditions. Any changes in expectations that result in a downward revision (or no revision) to the estimated undiscounted cash flows result in a liability that is inflated and discounted at rates reflecting the market conditions at the time the cash flows were originally estimated. This policy results in our final capping, closure and post-closure liabilities being recorded in "layers." The resulting final capping, closure and post-closure obligations are recorded on the consolidated balance sheet along with an offsetting addition to site costs, which is amortized to depletion expense as the remaining landfill airspace is consumed. Interest is accreted on the recorded liability using the corresponding discount rate. The accounting methods discussed below require us to make certain estimates and assumptions. Changes to these estimates and assumptions could have a material effect on our financial condition and results of operations. Any changes to our estimates are applied prospectively. Landfill development costs. Landfill development costs include the costs of acquisition, construction associated with excavation, liners, site berms, groundwater monitoring wells, gas recovery systems and leachate collection systems. We estimate the total costs associated with developing each landfill site to its final capacity. Total landfill costs include the development costs associated with expansion airspace. Expansion airspace is described below. Landfill development costs depend on future events and thus actual costs could vary significantly from our estimates. Material differences between estimated and actual development costs may affect our cash flows by increasing our capital expenditures and thus affect our results of operations by increasing our landfill depletion expense. Final capping, closure and post-closure obligations. We accrue for estimated final capping, closure and post-closure maintenance obligations at the landfills we own, and the landfills that we operate, but do not own, under life-of-site agreements. We could have additional material financial obligations relating to final capping, closure and post-closure costs at other disposal facilities that we currently own or operate or that we may own or operate in the future. Our discount rate assumption for purposes of computing 2020 and 2019 "layers" for final capping, closure and post-closure obligations was 4.75% for both years, which reflects our long-term credit adjusted risk free rate. Our inflation rate assumption was 2.5% for the years endedDecember 31, 2020 and 2019. Significant reductions in our estimates of the remaining lives of our landfills or significant increases in our estimates of the landfill final capping, closure and post-closure maintenance costs could have a material adverse effect on our financial condition and results of operations. Additionally, changes in 52
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regulatory or legislative requirements could increase our costs related to our landfills, resulting in a material adverse effect on our financial condition and results of operations. We own two landfills for which the prior owner is obligated to reimburse us for certain costs we incur for final capping, closure and post-closure activities on the portion of the landfills utilized by the prior owner. We accrue the prior owner's portion of the final capping, closure and post-closure obligation within the balance sheet classification of Other long-term liabilities, and a corresponding receivable from the prior owner in long-term Other assets. Disposal capacity. Our internal and third-party engineers perform surveys at least annually to estimate the remaining disposal capacity at our landfills. Our landfill depletion rates are based on the remaining disposal capacity, considering both permitted and probable expansion airspace, at the landfills that we own and at landfills that we operate, but do not own, under life-of-site agreements. Our landfill depletion rate is based on the term of the operating agreement at our operated landfill that has capitalized expenditures. Expansion airspace consists of additional disposal capacity being pursued through means of an expansion that has not yet been permitted. Expansion airspace that meets the following criteria is included in our estimate of total landfill airspace:
whether the land where the expansion is being sought is contiguous to the
1) current disposal site, and we either own the expansion property or have rights
to it under an option, purchase, operating or other similar agreement;
2) whether total development costs, final capping costs, and closure/post-closure
costs have been determined;
whether internal personnel have performed a financial analysis of the proposed
3) expansion site and have determined that it has a positive financial and
operational impact;
4) whether internal personnel or external consultants are actively working to
obtain the necessary approvals to obtain the landfill expansion permit; and
whether we consider it probable that we will achieve the expansion (for a
pursued expansion to be considered probable, there must be no significant
5) known technical, legal, community, business or political restrictions or
similar issues existing that we believe are more likely than not to impair the
success of the expansion).
We may be unsuccessful in obtaining permits for expansion disposal capacity at our landfills. In such cases, we will charge the previously capitalized development costs to expense. This will adversely affect our operating results and cash flows and could result in greater landfill depletion expense being recognized on a prospective basis. We periodically evaluate our landfill sites for potential impairment indicators. Our judgments regarding the existence of impairment indicators are based on regulatory factors, market conditions and operational performance of our landfills. Future events could cause us to conclude that impairment indicators exist and that our landfill carrying costs are impaired. Any resulting impairment loss could have a material adverse effect on our financial condition and results of operations.Goodwill and indefinite-lived intangible assets testing.Goodwill and indefinite-lived intangible assets are tested for impairment on at least an annual basis in the fourth quarter of the year. In addition, we evaluate our reporting units for impairment if events or circumstances change between annual tests indicating a possible impairment. Examples of such events or circumstances include, but are not limited to, the following: ? a significant adverse change in legal factors or in the business climate;
? an adverse action or assessment by a regulator;
? a more likely than not expectation that a segment or a significant portion thereof will be sold;
? the testing for recoverability of a significant asset group within a segment; or
? current period or expected future operating cash flow losses.
As part of our goodwill impairment test, we estimate the fair value of each of our reporting units using discounted cash flow analyses. AtDecember 31, 2019 and 2018, our reporting units consisted of our five geographic solid waste operating segments and our E&P segment. As ofJuly 1, 2020 , we combined all operations of our E&P segment into the Southern segment, based on our determination that the two operating segments met the aggregation criteria, and eliminated the E&P segment. We compare the fair value of each reporting unit with the carrying value of the net assets assigned to the reporting unit. If the fair value of a reporting unit is greater than the carrying value of the net assets, including goodwill, assigned to the reporting unit, then no impairment results. If the fair value is less than its carrying value, an impairment 53
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charge is recorded for the amount by which the carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. In testing indefinite-lived intangible assets for impairment, we compare the estimated fair value of each indefinite-lived intangible asset to its carrying value. If the fair value of the indefinite-lived intangible asset is less than its carrying value, an impairment charge would be recorded to earnings in our Consolidated Statements of Net Income. Discounted cash flow analyses require significant assumptions and estimates about the future operations of each reporting unit and the future discrete cash flows related to each indefinite-lived intangible asset. Significant judgments inherent in these analyses include the determination of appropriate discount rates, the amount and timing of expected future cash flows, growth rates and income tax rates. In assessing the reasonableness of our determined fair values of our reporting units, we evaluate our results against our current market capitalization. For our impairment testing of our operating segments for the year endedDecember 31, 2020 , we determined that the indicated fair value of our reporting units exceeded their carrying value by approximately 150% on average and, therefore, we did not record an impairment charge. The detailed results of our 2020, 2019 and 2018 impairment tests are described in Note 3 of our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. Business Combination Accounting. We recognize, separately from goodwill, the identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values. We measure and recognize goodwill as of the acquisition date as the excess of: (a) the aggregate of the fair value of consideration transferred, the fair value of any noncontrolling interest in the acquiree (if any) and the acquisition date fair value of our previously held equity interest in the acquiree (if any), over (b) the fair value of net assets acquired and liabilities assumed. At the acquisition date, we measure the fair values of all assets acquired and liabilities assumed that arise from contractual contingencies. We measure the fair values of all noncontractual contingencies if, as of the acquisition date, it is more likely than not that the contingency will give rise to an asset or liability.
General
Our revenues consist mainly of fees we charge customers for collection, transfer, recycling and disposal of non-hazardous solid waste and treatment, recovery and disposal of non-hazardous E&P waste.
Our solid waste collection business involves the collection of waste from residential, commercial and industrial customers for transport to transfer stations, or directly to landfills or recycling centers. Solid waste collection services include both recurring and temporary customer relationships. The services are performed under service agreements, municipal contracts or franchise agreements with governmental entities. Our existing franchise agreements and most of our existing municipal contracts give us the exclusive right to provide specified waste services in the specified territory during the contract term. These exclusive arrangements are awarded, at least initially, on a competitive bid basis and subsequently on a bid or negotiated basis. The standard customer service agreements generally range from one to three years in duration, although some exclusive franchises are for significantly longer periods. Residential collection services are also provided on a subscription basis with individual households. The fees received for collection services are based primarily on the market, collection frequency and level of service, route density, type and volume, or weight of the waste collected, type of equipment and containers furnished, the distance to the disposal or processing facility, the cost of disposal or processing, and prices charged by competitors for similar services. The terms of our contracts sometimes limit our ability to pass on price increases. Long-term solid waste collection contracts often contain a formula, generally based on a published price index, that automatically adjusts fees to cover increases in some, but not all, operating costs, or that limit increases to less than 100% of the increase in the applicable price index. Revenue at landfills is primarily generated by charging tipping fees on a per ton and/or per yard basis to third parties based on the volume disposed and
the nature of the waste. 54 Table of Contents
Revenue at transfer stations is primarily generated by charging tipping or disposal fees on a per ton and/or per yard basis. The fees charged to third parties are based primarily on the market, type and volume or weight of the waste accepted, the distance to the disposal facility and the cost of disposal.
Many of our landfill and transfer station customers have entered into one to ten year disposal contracts with us, most of which provide for annual indexed price increases. Our revenues from E&P waste services are primarily generated through the treatment, recovery and disposal of non-hazardous exploration and production waste from vertical and horizontal drilling, hydraulic fracturing, production and clean-up activity, as well as other services. Our revenues from recycling services result from the sale of recycled commodities, which are generated by offering residential, commercial, industrial and municipal customers recycling services for a variety of recyclable materials, including compost, cardboard, mixed paper, plastic containers, glass bottles and ferrous and aluminum metals. We own and operate recycling operations and market collected recyclable materials to third parties for processing before resale. In some instances, we utilize a third party to market recycled materials. In certain instances, we issue recycling rebates to municipal or commercial customers, which can be based on the price we receive upon the sale of recycled commodities, a fixed contractual rate or other measures. We also receive rebates when we dispose of recycled commodities at third-party facilities. Other revenues consist primarily of the sale of methane gas generated from our MSW landfills and revenues from intermodal services. Intermodal revenue is primarily generated through providing intermodal services for the rail haul movement of cargo and solid waste containers in thePacific Northwest through a network of intermodal facilities. The fees received for intermodal services are based on negotiated rates and vary depending on volume commitments by the shipper and destination. No single contract or customer accounted for more than 10% of our total revenues at the consolidated or reportable segment level during the periods presented. The following table disaggregates our revenue by service line for the periods indicated (dollars in thousands ofU.S. dollars). Years Ended December 31, 2020 2019 2018 Commercial$ 1,610,313 $ 1,593,217 $ 1,452,831 Residential 1,528,217 1,380,763 1,189,148 Industrial and construction roll off 833,148 841,173 768,687 Total collection 3,971,678 3,815,153 3,410,666 Landfill 1,146,732 1,132,935 1,063,243 Transfer 777,754 771,316 670,129 Recycling 86,389 64,245 92,634 E&P 159,438 271,887 256,262 Intermodal and other 118,396 121,137 139,896 Intercompany (814,397) (787,994) (709,889) Total$ 5,445,990 $ 5,388,679 $ 4,922,941 Cost of operations includes labor and benefits, tipping fees paid to third-party disposal facilities, vehicle and equipment maintenance, workers' compensation, vehicle and equipment insurance, insurance and employee group health claims expense, third-party transportation expense, fuel, the cost of materials we purchase for recycling, district and state taxes and host community fees and royalties. Our significant costs of operations in 2020 were labor, including the discretionary costs added for frontline employee support, as well as employee benefits, third-party disposal and transportation, vehicle, equipment and property maintenance, taxes and fees, insurance and fuel. We use a number of programs to reduce overall cost of operations, including increasing the use of automated routes to reduce labor and workers' compensation exposure, utilizing comprehensive maintenance and health and safety programs, and increasing the use of transfer stations to further enhance internalization rates. We carry insurance for automobile liability, general liability, employer's liability, environmental liability, cyber liability, employment practices liability and directors' and 55 Table of Contents officers' liability as well as for employee group health claims, property and workers' compensation. If we experience insurance claims or costs above or below our historically evaluated levels, our estimates could be materially affected. Selling, general and administrative, or SG&A, expense includes management, sales force, clerical and administrative employee compensation and benefits, legal, accounting and other professional services, acquisition expenses, bad debt expense and lease cost for our administrative offices. Depreciation expense includes depreciation of equipment and fixed assets over their estimated useful lives using the straight-line method. Depletion expense includes depletion of landfill site costs and total future development costs as remaining airspace of the landfill is consumed. Remaining airspace at our landfills includes both permitted and probable expansion airspace. Amortization expense includes the amortization of finite-lived intangible assets, consisting primarily of long-term franchise agreements and contracts, customer lists and non-competition agreements, over their estimated useful lives using the straight-line method.Goodwill and indefinite-lived intangible assets, consisting primarily of certain perpetual rights to provide solid waste collection and transportation services in specified territories, are not amortized. We capitalize some third-party expenditures related to development projects, such as legal and engineering. We expense all third-party and indirect acquisition costs, including third-party legal and engineering expenses, executive and corporate overhead, public relations and other corporate services, as we incur them. We charge against net income any unamortized capitalized expenditures and advances (net of any portion that we believe we may recover, through sale or otherwise) that may become impaired, such as those that relate to any operation that is permanently shut down and any landfill development project that we believe will not be completed. We routinely evaluate all capitalized costs, and expense those related to projects that we believe are not likely to succeed. For example, if we are unsuccessful in our attempts to obtain or defend permits that we are seeking or have been awarded to operate or expand a landfill, we will no longer generate anticipated income from the landfill and we will be required to expense in a future period up to the carrying value of the landfill or expansion project, less the recoverable value of the property and other amounts recovered.
Presentation of Results of Operations, Segment Reporting, and Liquidity and Capital Resources
The following discussion and analysis of our Results of Operations, Segment Reporting, and Liquidity and Capital Resources includes a comparison for the year endedDecember 31, 2020 to the year endedDecember 31, 2019 . A similar discussion and analysis that compares the year endedDecember 31, 2019 to the year endedDecember 31, 2018 can be found in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . 56 Table of Contents Results of Operations The following table sets forth items in our Consolidated Statements of Net Income in thousands ofU.S. dollars and as a percentage of revenues for the periods indicated: Years Ended December 31, 2020 % of Revenues 2019 % of Revenues Revenues$ 5,445,990 100.0 %$ 5,388,679 100.0 % Cost of operations 3,276,808 60.2 3,198,757 59.4
Selling, general and administrative 537,632 9.9
546,278 10.1 Depreciation 621,102 11.4 618,396 11.5 Amortization of intangibles 131,302 2.4 125,522 2.3
Impairments and other operating items 466,718 8.5
61,948 1.2 Operating income 412,428 7.6 837,778 15.5 Interest expense (162,375) (3.0) (147,368) (2.7) Interest income 5,253 0.1 9,777 0.2 Other income (expense), net (1,392) 0.0 5,704 0.1 Income tax provision (49,922) (0.9) (139,210) (2.6) Net income 203,992 3.8 566,681 10.5 Net loss attributable to noncontrolling interests 685 0.0 160 0.0 Net income attributable to Waste Connections$ 204,677 3.8 %$ 566,841 10.5 %
Years Ended
Revenues. Total revenues increased$57.3 million , or 1.1%, to$5.446 billion for the year endedDecember 31, 2020 , from$5.389 billion for the year endedDecember 31, 2019 . During the year endedDecember 31, 2020 , incremental revenue from acquisitions closed during, or subsequent to, the year endedDecember 31, 2019 , increased revenues by approximately$212.8 million . Operations that were divested in 2020, and the full year impact of operations that were divested in 2019, decreased revenues by approximately$15.6 million for the year endedDecember 31, 2020 .
During the year ended
During the year endedDecember 31, 2020 , volume decreases in our existing business decreased solid waste revenues by$238.8 million , due primarily to the economic disruptions resulting from the COVID-19 pandemic that began inMarch 2020 and continued throughout 2020. The decreases during the year endedDecember 31, 2020 resulting from the COVID-19 pandemic were partially offset by increased residential municipal solid waste and recycling collection services, increased landfill municipal solid waste and special waste volumes in certain markets and the impact of one additional business day in 2020 resulting fromleap year . E&P revenues at facilities owned during the year endedDecember 31, 2020 and 2019 decreased$112.1 million . Decreases in the demand for crude oil as a result of economic disruptions from the COVID-19 pandemic resulted in a drop in the value of crude oil, decreases in drilling and production activity levels and decreases in overall demand for our E&P waste services. Drilling and production activity was also adversely impacted by the drop in the value of crude oil due to the increased supply of oil resulting fromSaudi Arabia andRussia abandoning production quotas and increasing production levels, which was exacerbated by the impact of the COVID-19 pandemic. A decrease in the average Canadian dollar toU.S. dollar currency exchange rate resulted in a decrease in revenues of$7.1 million for the year endedDecember 31, 2020 . The average Canadian dollar toU.S. dollar exchange rates on our Canadian revenues were 0.7472 and 0.7537 in the years endedDecember 31, 2020 and 2019, respectively. 57 Table of Contents Revenues from sales of recyclable commodities at facilities owned during the years endedDecember 31, 2020 and 2019 increased$4.3 million due primarily to higher prices for old corrugated cardboard and higher volumes collected from residential recycling customers, partially offset by decreased collected commercial recycling volumes caused by economic disruptions resulting from the COVID-19 pandemic and decreased prices for plastic and aluminum. Other revenues decreased by$2.2 million during the year endedDecember 31, 2020 , due primarily to a$6.6 million decrease in intermodal revenues resulting from a reduction in intermodal cargo volumes and a$0.2 million decrease in other non core revenue sources, partially offset by a$4.6 million increase resulting from higher prices for renewable energy credits associated with the generation of landfill gas at ourCanada segment. Cost of Operations. Total cost of operations increased$78.0 million , or 2.4%, to$3.277 billion for the year endedDecember 31, 2020 , from$3.199 billion for the year endedDecember 31, 2019 . The increase was primarily the result of$134.6 million of additional operating costs from acquisitions closed during, or subsequent to, the year endedDecember 31, 2019 , partially offset by a decrease in operating costs at our existing operations of$35.3 million , assuming foreign currency parity, a decrease in operating costs of$17.6 million at operations divested during, or subsequent to, the year endedDecember 31, 2019 and a decrease of$3.7 million resulting from a decrease in the average foreign currency exchange rate in effect during the comparable reporting periods. The decrease in operating costs at our existing operations for the year endedDecember 31, 2020 of$35.3 million , assuming foreign currency parity, included the following decreases totaling$74.4 million due to solid waste, intermodal and E&P volume losses resulting from the impact of the COVID-19 pandemic: a decrease in third-party disposal expenses of$23.1 million , a decrease in third-party trucking and transportation expenses of$15.2 million , a decrease in direct labor expenses at our Eastern segment and E&P operations of$11.1 million due to headcount reductions, a decrease in intermodal rail expenses of$6.1 million ; a decrease in subcontracted E&P operating expenses of$5.7 million , a decrease in equipment and facility maintenance and repair expenses of$5.5 million at our E&P operations, a decrease in expenses for processing recyclable commodities of$5.3 million due to a decrease in commercial recycling volumes collected and a decrease in revenue-based royalties paid by our E&P operations of$2.4 million . The remaining increase in operating costs at our existing operations of$39.1 million for the year endedDecember 31, 2020 consisted of an increase in truck, container, equipment and facility maintenance and repair expenses at our solid waste operations of$17.7 million due to cost increases and a higher quantity of large repairs, an increase in labor expenses totaling$15.7 million at the solid waste operations of our Southern segment and our Western, Central andCanada segments due primarily to annual pay increases and the impact of an additional working day during the year endedDecember 31, 2020 , an increase in other cash incentive compensation to non-management personnel of$13.8 million to recognize the services they are providing during the COVID-19 pandemic, an increase of$11.4 million resulting from the payment of supplemental bonuses to non-management employees to provide financial assistance associated with the impact of the COVID-19 pandemic, an increase in expenses for auto and workers' compensation claims of$9.4 million due primarily to increases in our deductibles for auto claims, higher claims severity in the current year period and adjustments recorded in the prior year period to decrease projected losses on outstanding claims originally recorded prior to 2019, an increase in compressed natural gas expense of$4.6 million due primarily to 2020 expenses being net of one year of tax credits for purchases occurring in 2020 whereas 2019 expenses were net of two years of tax credits for purchases occurring in 2019 and 2018, an increase in landfill gas system operating supplies and maintenance expenses at our solid waste operations of$3.5 million , an increase in recurring taxes on revenues of$3.4 million due primarily to increased revenues in ourWestern Region , an increase in leachate expense of$3.1 million due to higher per gallon disposal costs, an increase in leachate gallons disposed of due to storms causing higher precipitation in certain markets where our landfills are located, increased leachate in landfill cells constructed in 2020 and an increase in the percentage of leachate generated that required processing and disposal at third-party locations, an increase in property tax expenses of$2.0 million due primarily to reassessed values of certain landfills and property acquired in recent acquisitions and$0.9 million of other net expense increases, partially offset by a decrease in fuel expense of$24.0 million due to a decrease in the price of diesel fuel and declines in the volume of fuel used in our operations, a decrease in employee medical benefits expenses of$9.1 million due to a reduction in medical visits, a decrease in 401(k) matching expenses of$8.4 million as we suspended our 401(k) match as ofJune 1, 2020 and a decrease in taxes on revenues of$4.9 million from the reversal of recorded liabilities for certain fees and exactions atChiquita Canyon landfill due to our successful challenge of increases assessed in prior periods. 58
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Cost of operations as a percentage of revenues increased 0.8 percentage points to 60.2% for the year endedDecember 31, 2020 , from 59.4% for the year endedDecember 31, 2019 . The increase as a percentage of revenues consisted of a 0.5 percentage point increase from higher labor expenses, a 0.5 percentage point increase resulting from the payment of supplemental bonuses to non-management employees to provide financial assistance associated with the impact of the COVID-19 pandemic and other cash incentive compensation paid to non-management personnel, a 0.4 percentage point increase from higher maintenance and repair expenses, a 0.2 percentage point increase from an increase in expenses for auto and workers' compensation claims, a 0.2 percentage point increase from the net impact of cost of operations expenses from acquisitions closed during, or subsequent to, the year endedDecember 31, 2019 and a 0.2 percentage point increase from all other net changes, partially offset by a 0.4 percentage point decrease from lower diesel fuel expenses, a 0.3 percentage point decrease from lower trucking and transportation expenses, a 0.3 percentage point decrease from lower disposal expenses and a 0.2 percentage point decrease from lower 401(k) match expenses. SG&A. SG&A expenses decreased$8.7 million , or 1.6%, to$537.6 million for the year endedDecember 31, 2020 , from$546.3 million for the year endedDecember 31, 2019 . The decrease was comprised of a decline of$20.7 million in SG&A expenses at our existing operations, assuming foreign currency parity, a decrease in SG&A expenses of$0.7 million at operations divested during, or subsequent to, the year endedDecember 31, 2019 and a decline of$0.7 million resulting from a decrease in the average foreign currency exchange rate in effect during the comparable reporting periods, partially offset by$13.4 million of additional SG&A expenses from operating locations at acquisitions closed during, or subsequent to, the year endedDecember 31, 2019 . The decrease in SG&A expenses at our existing operations, assuming foreign currency parity, of$20.7 million for the year endedDecember 31, 2020 , was comprised of a collective decrease in travel, meeting, training and community activity expenses of$22.4 million from shelter at home and other restrictions on our employees due to the COVID-19 pandemic resulting in the cancellation of non-essential off-site activities, a decrease in 401(k) matching expenses of$2.9 million due to our suspension of our 401(k) match as ofJune 1, 2020 , a decrease in professional fees of$2.9 million due primarily to work on legal matters being postponed from temporary court closures and a decrease in third party tax consulting expenses, a decrease in office supplies and office utilities of$2.8 million due to office closures resulting from shelter at home restrictions, a decrease in direct acquisition expenses of$2.5 million due to changes in acquisition activity, a decrease in employee medical benefits expenses of$2.1 million due to a reduction in medical visits, a decrease in deferred compensation expenses of$1.6 million as a result of decreases in the market value of investments to which employee deferred compensation liability balances are tracked, a decrease in share-based compensation expenses of$1.5 million due primarily to decreased share price volatility and fewer outstanding shares in the current period for equity awards accounted for as liabilities that were granted to employees of Progressive Waste prior toJune 1, 2016 which are subject to valuation adjustments each period based on changes in fair value and$1.7 million of other net expense decreases, partially offset by an increase in accrued recurring cash incentive compensation expense to our management of$6.0 million , an increase of$4.0 million in equity-based compensation expenses associated with fair value adjustments to Company common shares held in our deferred compensation plan by certain key executives as a result of the shares being exchanged for other investment options, an increase in payroll expenses of$3.5 million as a result of annual pay increases, additional paid time off benefits and the impact of an additional working day during the year endedDecember 31, 2020 , an increase in expenses for uncollectible accounts receivable of$3.3 million due to customers experiencing financial difficulties resulting from the economic impact of the COVID-19 pandemic, an increase in software licenses and subscriptions expenses of$1.7 million due primarily to the addition of new sales and customer service applications and an increase of$1.2 million resulting from the payment of supplemental bonuses to non-management employees to provide financial assistance associated with the impact of the COVID-19 pandemic. SG&A expenses as a percentage of revenues decreased 0.2 percentage points to 9.9% for the year endedDecember 31, 2020 , from 10.1% for the year endedDecember 31, 2019 . The decrease as a percentage of revenues consisted of a 0.4 percentage point decrease from a reduction in travel, meeting, training and community activity expenses, partially offset by a 0.2 percentage point increase associated with administrative salaries and wages. Depreciation. Depreciation expense increased$2.7 million , or 0.4%, to$621.1 million for the year endedDecember 31, 2020 , from$618.4 million for the year endedDecember 31, 2019 . The increase was comprised of an increase in depreciation and depletion expense of$20.8 million from acquisitions closed during, or subsequent to, the year endedDecember 31, 2019 and an increase in depreciation expense at our existing operations of$10.2 million due primarily to 59 Table of Contents
the impact of additions to our fleet and equipment purchased to support our existing operations exceeding certain equipment acquired from the Progressive Waste acquisition becoming fully depreciated inJune 2019 andJune 2020 , partially offset by a decrease in depletion expense of$26.7 million at our existing landfills due primarily to economic disruptions resulting from the COVID-19 pandemic causing a decrease in E&P and municipal solid waste, a decrease in depreciation and depletion expense of$0.8 million from operations divested during, or subsequent to, the year endedDecember 31, 2019 and a decrease of$0.8 million resulting from a decrease in the average foreign currency exchange rate in effect during the comparable reporting periods. Depreciation expense as a percentage of revenues decreased 0.1 percentage points to 11.4% for the year endedDecember 31, 2020 , from 11.5% for the year endedDecember 31, 2019 . The decrease as a percentage of revenues consisted of a 0.4 percentage point decrease from depletion expense due to declines in E&P and municipal solid waste landfill volumes, partially offset by a 0.3 percentage point increase from depreciation expense attributable to a decrease in our revenues due to economic disruptions resulting from the COVID-19 pandemic. Amortization of Intangibles. Amortization of intangibles expense increased$5.8 million , or 4.6%, to$131.3 million for the year endedDecember 31, 2020 , from$125.5 million for the year endedDecember 31, 2019 . The increase was the result of$17.8 million from intangible assets acquired in acquisitions closed during, or subsequent to, the year endedDecember 31, 2019 , partially offset by a decrease of$11.1 million from certain intangible assets becoming fully amortized subsequent toDecember 31, 2019 , a decrease of$0.7 million from operations divested during, or subsequent to, the year endedDecember 31, 2019 and a decrease of$0.2 million resulting from a decrease in the average foreign currency exchange rate in effect during the comparable reporting periods. Amortization expense as a percentage of revenues increased 0.1 percentage points to 2.4% for the year endedDecember 31, 2020 , from 2.3% for the year endedDecember 31, 2019 . The increase as a percentage of revenues was due primarily to the impact of amortization expense from intangible assets acquired in acquisitions closed during, or subsequent to, the year endedDecember 31, 2019 . Impairments and Other Operating Items. Impairments and other operating items increased$404.8 million , to net losses totaling$466.7 million for the year endedDecember 31, 2020 , from net losses totaling$61.9 million for the year endedDecember 31, 2019 . Macroeconomic and geopolitical conditions, including a significant decline in oil prices driven by both surplus production and supply, as well as the decrease in demand caused by factors including the COVID-19 pandemic, resulted in decreased levels of oil and natural gas exploration and production activity and a corresponding decrease in demand for our E&P waste services. During the year endedDecember 31, 2020 , our E&P revenue declined$112.1 million on rig count declines of 56% in certain basins. The most impacted basins include theWilliston Basin inNorth Dakota , theEagle Ford Basin inTexas and thePowder River Basin inWyoming , all of which have relatively high costs associated with drilling, making them less attractive than other basins, including thePermian Basin inTexas andNew Mexico . Additionally, across the industry there is uncertainty regarding future demand for oil and related services, as noted by several energy companies, many of whom are customers of our E&P operations. These companies have written down the values of their oil and gas assets in anticipation of the potential for the decarbonization of their energy product mix given an increased global focus on reducing greenhouse gases and addressing climate change. Such uncertainty regarding global demand has had a significant impact on the investment and operating plans of our E&P waste customers in the basins where we operate. Based on these events, we concluded during the second quarter of 2020 that a triggering event occurred which required us to perform an impairment test of the property and equipment and intangible assets of our E&P operations as ofJune 30, 2020 . As a result of the impairment test, we determined that the carrying value of four landfills in our E&P operations exceeded their estimated fair value, resulting in recording an impairment charge of$417.4 million to property and equipment during the year endedDecember 31, 2020 . The remaining net losses of$49.3 million recorded during the year endedDecember 31, 2020 consisted of$18.4 million to adjust the carrying value of contingent consideration liabilities,$13.3 million of charges to adjust the carrying values of certain long-lived assets acquired in the Progressive Waste acquisition,$6.9 million of losses on property and equipment that were disposed of through sales or as a result of being damaged in operations,$6.1 million of charges to 60 Table of Contents terminate or write off the carrying cost of certain contracts that were not, or are not expected to be, renewed prior to their original estimated termination date,$3.6 million of losses on the disposal of certain non-strategic operating locations and$1.0 million of other net charges. The net losses of$61.9 million recorded during the year endedDecember 31, 2019 consisted of$25.8 million of charges in our Eastern segment associated with the write-down of an operating permit and equipment at a non-strategic materials recovery facility that was disposed of by sale onJanuary 2, 2020 ,$15.4 million of charges to terminate or write off the carrying cost of certain contracts that were not, or are not expected to be, renewed prior to their original estimated termination date,$8.5 million of losses on property and equipment at our existing operations that were disposed of through sales or as a result of being damaged in operations,$8.0 million resulting from the abandonment of a landfill development project at our E&P segment,$2.0 million of expenses associated with the settlement of various litigation claims, a$1.5 million expense charge to increase the fair value of amounts payable under liability-classified contingent consideration arrangements from acquisitions closed in periods prior to 2019 and$0.7 million of other net losses. Operating Income. Operating income decreased$425.4 million , or 50.8%, to$412.4 million for the year endedDecember 31, 2020 , from$837.8 million for the year endedDecember 31, 2019 . The decrease was due primarily to declines in our existing solid waste and E&P volumes resulting from the impact of the COVID-19 pandemic, additional discretionary costs primarily for frontline support and the impairment charge attributable to four of our E&P landfills, partially offset by price increases and cost containment efforts implemented at our solid waste operations and operating income generated from acquisitions. Operating income as a percentage of revenues decreased 7.9 percentage points to 7.6% for the year endedDecember 31, 2020 , from 15.5% for the year endedDecember 31, 2019 . The decrease as a percentage of revenues was comprised of a 7.3 percentage point increase in impairments and other operating items, a 0.8 percentage point increase in cost of operations and a 0.1 percentage point increase in amortization expense, partially offset by a 0.2 percentage point decrease in SG&A expense and a 0.1 percentage point decrease in depreciation expense. Interest Expense. Interest expense increased$15.0 million , or 10.2%, to$162.4 million for the year endedDecember 31, 2020 , from$147.4 million for the year endedDecember 31, 2019 . The increase was primarily attributable to an increase of$14.7 million from theJanuary 2020 issuance of our 2030 Senior Notes (as defined below), an increase of$12.2 million from theMarch 2020 issuance of our 2050 Senior Notes (as defined below), an increase of$5.1 million from full year impact of theApril 2019 issuance of our 2029 Senior Notes (as defined below), an increase of$3.4 million from higher net interest rates on borrowings outstanding under our Credit Agreement due primarily to a$150 million interest rate swap agreement commencing inFebruary 2020 at a higher interest rate than two interest rate swap agreements totaling$175 million which expired inFebruary 2020 and$1.2 million of other net increases, partially offset by a decrease of$13.9 million due to a reduction in the average borrowings outstanding under our Credit Agreement and a decrease of$7.7 million from full year impact of the repayment of$175 million of our 2019 Senior Notes (as defined below).
Interest Income. Interest income decreased
Other Income (Expense), Net. Other income (expense), net decreased$7.1 million , to an expense total of$1.4 million for the year endedDecember 31, 2020 , from an income total of$5.7 million for the year endedDecember 31, 2019 . The decrease was due primarily to an increase in foreign currency transaction losses of$4.5 million attributable to the impact of an increase in the Canadian dollar toU.S. dollar exchange rate during latter half of 2020 impacting our cash accounts held inU.S. dollars by our Canadian entities and$2.6 million of adjustments to increase certain accrued liabilities acquired in acquisitions closed prior to 2019. Income Tax Provision. Income taxes decreased$89.3 million , or 64.1%, to$49.9 million for the year endedDecember 31, 2020 , from$139.2 million for the year endedDecember 31, 2019 . Our effective tax rate was 19.7% for the years endedDecember 31, 2020 and 2019. 61
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The income tax provision for the year endedDecember 31, 2020 included a$27.4 million expense associated with certain 2019 inter-entity payments no longer being deductible for tax purposes due to the finalization of tax regulations onApril 7, 2020 under Internal Revenue Code section 267A and a$4.1 million expense related to an increase in our deferred income tax liabilities resulting from the impairment of certain assets within our E&P operations, which impacted the geographical apportionment of our state income taxes. Additionally, the income tax benefit for the year endedDecember 31, 2020 included a benefit of$5.4 million from share-based payment awards being recognized in the income statement when settled, as well as a portion of our internal financing being taxed at effective rates substantially lower than theU.S. federal statutory rate. The income tax provision for the year endedDecember 31, 2019 included a$3.8 million expense primarily associated with a reduction in deferred income tax assets related to compensation of executive officers no longer deemed deductible for tax purposes. Additionally, the income tax provision for the year endedDecember 31, 2019 included a benefit of$5.5 million from share-based payment awards being recognized in the income statement when settled. Our effective tax rate is dependent upon the proportion of pre-tax income among the jurisdictions where we do business. As such, our effective tax rate will be subject to some variability depending upon the proportional contribution of pre-tax income across jurisdictions in any period.
Segment Reporting
Our Chief Operating Decision Maker evaluates operating segment profitability and determines resource allocations based on several factors, of which the primary financial measure is segment EBITDA. We define segment EBITDA as earnings before interest, taxes, depreciation, amortization, impairments and other operating items and other income (expense). Segment EBITDA is not a measure of operating income, operating performance or liquidity under GAAP and may not be comparable to similarly titled measures reported by other companies. Our management uses segment EBITDA in the evaluation of segment operating performance as it is a profit measure that is generally within the control of the operating segments. Prior to the third quarter of 2020, we managed our operations through five geographic solid waste operating segments and our E&P segment, which were also our reportable segments. In the third quarter of 2020, our Chief Operating Decision Maker determined that the E&P and Southern operating segments met all of the aggregation criteria and eliminated our E&P segment by combining all operations of the E&P segment into the Southern segment. After giving effect to this combination, our reportable segments consist of our five geographic operating segments and no longer include a separate E&P segment. Each operating segment is responsible for managing several vertically integrated operations, which are comprised of districts. In the first quarter of 2019, we moved two districts from our Eastern segment to our Central segment because their location was closer in proximity to operations in our Central segment. The segment information presented herein reflects the realignment of these districts.
Segment results for the 2019 and 2018 periods reflected in this report have been reclassified to reflect the realignment of our reportable segments for comparison with the same period in 2020.
AtDecember 31, 2020 , under the current orientation, our Southern segment services customers located inAlabama ,Arkansas ,Florida ,Georgia ,Louisiana ,Mississippi ,New Mexico ,North Dakota , southernOklahoma , westernTennessee ,Texas ,Wyoming and along theGulf of Mexico ; our Eastern segment services customers located inDelaware , northernIllinois ,Kentucky ,Maryland ,Massachusetts ,New Jersey , NewYork, North Carolina ,Pennsylvania ,Rhode Island ,South Carolina , easternTennessee ,Vermont ,Virginia andWisconsin ; our Western segment services customers located inAlaska ,California ,Idaho ,Montana ,Nevada ,Oregon ,Washington and westernWyoming ; our Central segment services customers located inArizona ,Colorado , southernIllinois ,Iowa ,Kansas ,Minnesota ,Missouri ,Nebraska ,New Mexico ,Oklahoma ,South Dakota , westernTexas ,Utah and easternWyoming ; and ourCanada segment services customers located in the state ofMichigan and in the provinces ofAlberta ,British Columbia ,Manitoba ,Ontario ,Québec andSaskatchewan . 62
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Revenues, net of intercompany eliminations, for our reportable segments are
shown in the following table in thousands of
Years Ended December 31, 2020 % of Revenues 2019 % of Revenues Southern$ 1,369,580 25.2 %$ 1,449,000 26.9 % Eastern 1,335,865 24.5 1,268,964 23.5 Western 1,149,762 21.1 1,098,849 20.4 Central 880,323 16.2 838,584 15.6 Canada 710,460 13.0 733,282 13.6$ 5,445,990 100.0 %$ 5,388,679 100.0 % Segment EBITDA for our reportable segments is shown in the following table in thousands ofU.S. dollars and as a percentage of segment revenues for the periods indicated: Years Ended December 31, 2020 % of Revenues 2019 % of Revenues Southern$ 369,445 27.0 %$ 441,425 26.1 % Western 364,790 31.7 % 338,563 34.8 % Eastern 343,446 25.7 % 330,578 30.8 % Central 313,033 35.6 % 292,111 30.5 % Canada 256,119 36.0 % 256,405 35.0 % Corporate(a) (15,283) - (15,438) -$ 1,631,550 30.0 %$ 1,643,644 30.5 % The majority of Corporate expenses are allocated to the five operating
segments. Direct acquisition expenses and share-based compensation expenses
(a) associated with Progressive Waste share-based grants outstanding at
2016 that were continued by the Company are not allocated to the five
operating segments and comprise the net EBITDA of our Corporate segment for
the periods presented.
A reconciliation of segment EBITDA to Income before income tax provision is included in Note 16 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
Significant changes in revenue and segment EBITDA for our reportable segments for the year endedDecember 31, 2020 , compared to the year endedDecember 31, 2019 , are discussed below. Segment Revenue
Revenue in our Southern segment decreased$79.4 million , or 5.5%, to$1.370 billion for the year endedDecember 31, 2020 , from$1.449 billion for the year endedDecember 31, 2019 . The components of the decrease consisted of a decline in revenue at our E&P operations of$109.0 million , partially offset by an increase in revenue at our solid waste operations of$29.6 million . The$109.0 million decrease in revenue at our E&P operations was attributable to decreases in the demand for crude oil as a result of economic disruptions from the COVID-19 pandemic resulting in a drop in the value of crude oil, decreases in drilling and production activity levels and decreases in overall demand for our E&P waste services. Drilling and production activity during the year endedDecember 31, 2020 were also adversely impacted by the drop in the value of crude oil due to the increased supply of oil resulting fromSaudi Arabia andRussia abandoning production quotas and increasing production levels, which was exacerbated by the impact of the COVID-19 pandemic. The components of the$29.6 million increase in revenue at our solid waste operations consisted of net price increases of$54.3 million and net revenue growth from acquisitions closed during, or subsequent to, the year endedDecember 31, 2019 of$12.5 million , partially offset by solid waste volume decreases of$36.0 million attributable primarily to COVID-19-related economic disruptions driving declines in commercial collection, roll off collection and municipal solid waste landfill volumes that exceeded increases in landfill special waste volumes, net revenue reductions from divestitures closed subsequent toDecember 31, 2019 of$0.6 million and other revenue decreases of$0.6 million . 63
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Revenue in our Eastern segment increased$66.9 million , or 5.3%, to$1.336 billion for the year endedDecember 31, 2020 , from$1.269 billion for the year endedDecember 31, 2019 . The components of the increase consisted of net revenue growth from acquisitions closed during, or subsequent to, the year endedDecember 31, 2019 , of$141.1 million and net price increases of$57.6 million , partially offset by solid waste volume decreases of$116.0 million attributable primarily to COVID-19-related economic disruptions driving declines in commercial collection, roll off collection, transfer station and landfill volumes, net revenue reductions from divestitures closed subsequent toDecember 31, 2019 of$13.7 million and other revenue decreases of$2.1 million . Revenue in our Western segment increased$51.0 million , or 4.6%, to$1.150 billion for the year endedDecember 31, 2020 , from$1.099 billion for the year endedDecember 31, 2019 . The components of the increase consisted of net price increases of$30.6 million , net revenue growth from acquisitions closed during, or subsequent to, the year endedDecember 31, 2019 , of$16.5 million , solid waste volume increases of$9.2 million attributable to increased residential collection, transfer station and landfill municipal solid waste volumes and an increase in revenues from sales of recyclable commodities of$2.1 million due primarily to higher prices for old corrugated cardboard and higher volumes collected from residential recycling customers, partially offset by intermodal revenue decreases of$6.6 million due to a reduction in intermodal cargo volumes and other revenue decreases of$0.8 million . Revenue in our Central segment increased$41.7 million , or 5.0%, to$880.3 million for the year endedDecember 31, 2020 , from$838.6 million for the year endedDecember 31, 2019 . The components of the increase consisted of revenue growth from acquisitions closed during, or subsequent to, the year endedDecember 31, 2019 , of$41.9 million and net price increases of$38.3 million , partially offset by solid waste volume decreases of$37.1 million due to the impact of COVID-19-related economic disruptions driving decreases in commercial collection, roll off collection, transfer station and landfill volumes, net revenue reductions from divestitures closed subsequent toDecember 31, 2019 of$1.3 million and other revenue decreases of$0.1 million . Revenue in ourCanada segment decreased$22.8 million , or 3.1%, to$710.5 million for the year endedDecember 31, 2020 , from$733.3 million for the year endedDecember 31, 2019 . The components of the decrease consisted of solid waste volume decreases of$58.8 million due to the net impact of COVID-19-related economic disruptions driving decreases in commercial collection, roll off collection, transfer station and landfill volumes and a decrease of$7.1 million resulting from a lower average foreign currency exchange rate in effect during the comparable reporting periods, partially offset by net price increases of$35.2 million , an increase of$4.6 million resulting from higher prices for renewable energy credits associated with the generation of landfill gas, an increase in revenues from sales of recyclable commodities of$2.0 million due primarily to higher prices for old corrugated cardboard and higher volumes collected from residential recycling customers, net revenue growth from acquisitions closed during, or subsequent to, the year endedDecember 31, 2019 of$0.8 million and other revenue increases of$0.5 million .
Segment EBITDA
Segment EBITDA in our Southern segment decreased$72.0 million , or 16.3%, to$369.4 million for the year endedDecember 31, 2020 , from$441.4 million for the year endedDecember 31, 2019 . The decrease was due to a decline in E&P revenues of$109.0 million , an increase in truck, container, equipment and facility maintenance and repair expenses at our solid waste operations of$9.9 million due to cost increases and a higher quantity of large repairs, a net$8.3 million increase in cost of operations and SG&A expenses attributable to acquired operations, an increase in labor expenses at our solid waste operations of$6.9 million due primarily to employee pay rate increases, an increase in expenses for auto and workers' compensation claims of$6.4 million at our solid waste operations due primarily to increases in our deductibles for auto claims, higher claims severity in the current year period and adjustments recorded in the prior year period to decrease projected losses on outstanding claims originally recorded prior to 2019, an increase of$3.6 million resulting from the payment of supplemental bonuses to non-management employees at our solid waste operations to provide financial assistance associated with the impact of the COVID-19 pandemic, an increase in subcontracted hauling services of$3.2 million due to outsourcing the servicing of certain non-strategic contracts and commercial collection customers to third party haulers, an increase in third party trucking and transportation expenses of$2.9 million at our solid waste operations due to increased landfill special waste volumes requiring transportation services to our disposal sites, an increase in leachate expense of$2.1 million due to higher per gallon disposal costs and an increase in leachate gallons disposed due to storms causing higher precipitation in certain markets where our landfills are located, an increase in 64
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expenses for uncollectible accounts receivable at our E&P operations of$2.1 million due to customers experiencing financial difficulties resulting from the economic impact of the COVID-19 pandemic, an increase in corporate overhead expense allocations to our solid waste operations of$1.8 million due to an increase in the overhead allocation rate resulting from an increase in corporate expenses qualifying for allocation and an increase in compressed natural gas expense of$1.4 million due primarily to 2020 expenses being net of one year of tax credits for purchases occurring in 2020 whereas 2019 expenses were net of two years of tax credits for purchases occurring in 2019 and 2018, partially offset by an increase in revenues at our solid waste operations of$29.6 million , a decrease in third party disposal expenses at our solid waste operations of$8.8 million due primarily to declines in commercial and roll off collection volumes, a decrease in 401(k) matching expenses at our solid waste operations of$4.2 million as we suspended our 401(k) match as ofJune 1, 2020 , a decrease in employee medical benefits expenses at our solid waste operations of$3.2 million due to a reduction in medical visits, a collective decrease in travel, meeting, training, and community activity expenses at our solid waste operations of$2.9 million due to shelter at home and other restrictions on our employees due to the COVID-19 pandemic resulting in the cancellation of non-essential off-site activities, a decrease in fuel expense at our solid waste operations of$2.0 million due to a decrease in the price of diesel fuel and declines in the volume of fuel used in our operations, a net$0.8 million decrease in all other expenses at our solid waste operations and the following expense decreases at our E&P operations which were directly attributable to the decline in E&P volumes and corresponding decline in E&P revenues: a decrease in labor expenses of$6.4 million , a decrease in operating activities outsourced to third-parties of$5.7 million , a decrease in equipment and property repair and maintenance expenses of$5.5 million , a decrease in third-party trucking and transportation services of$4.2 million , a decrease in fuel expense of$2.8 million , a decrease in royalty expenses paid on revenues of$2.4 million , a decrease in landfill operating supplies of$1.6 million , a decrease in travel, meetings and training expenses of$1.6 million , a decrease in equipment rental expenses of$0.8 million , a decrease in cell processing expenses of$0.8 million and$2.3 million of other net expense decreases. Segment EBITDA in our Western segment increased$26.2 million , or 7.7%, to$364.8 million for the year endedDecember 31, 2020 , from$338.6 million for the year endedDecember 31, 2019 . The increase was due primarily to an increase in revenues of$51.0 million , a decrease in intermodal rail expenses of$6.0 million due to a reduction in cargo volume, a decrease in taxes on revenues of$4.9 million from the reversal of recorded liabilities for certain fees and exactions atChiquita Canyon landfill due to our successful challenge of increases assessed in prior periods, a decrease in fuel expense of$3.3 million due to a decrease in the price of diesel fuel, a collective decrease in travel, meeting, training, and community activity expenses of$3.2 million due to shelter at home and other restrictions on our employees due to the COVID-19 pandemic resulting in the cancellation of non-essential off-site activities and a decrease in 401(k) matching expenses of$2.5 million as we suspended our 401(k) match as ofJune 1, 2020 , partially offset by a net$12.1 million increase in cost of operations and SG&A expenses attributable to acquired operations, an increase in labor expenses of$7.2 million due primarily to employee pay rate increases, an additional calendar and business day in the current year period due toleap year , as well as emergency wages and other COVID-19-related employee costs, an increase in recurring taxes on revenues of$5.2 million attributable to price-led increases in residential collection and landfill municipal solid waste revenues, an increase in third party disposal expenses of$3.9 million due primarily to disposal rate increases and higher residential collection tonnage, an increase in corporate overhead expense allocations of$2.5 million due to an increase in the overhead allocation rate resulting from an increase in corporate expenses qualifying for allocation, an increase of$2.3 million resulting from the payment of supplemental bonuses to non-management employees to provide financial assistance associated with the impact of the COVID-19 pandemic, an increase in landfill site maintenance expenses of$1.9 million due primarily to increased daily cover costs, an increase in third-party trucking and transportation expenses of$1.8 million due primarily to higher transfer station volumes and landfill special waste volumes in certain markets that require transportation services to our disposal sites and increased rates charged by third parties to provide trucking and transportation services, an increase in leachate expense of$1.5 million due to higher per gallon disposal costs, increased leachate in landfill cells constructed in 2020 and an increase in the percentage of leachate generated that required processing and disposal at third-party locations, an increase in compressed natural gas expense of$1.3 million due primarily to 2020 expenses being net of one year of tax credits for purchases occurring in 2020 whereas 2019 expenses were net of two years of tax credits for purchases occurring in 2019 and 2018, an increase in expenses for auto and workers' compensation claims of$1.0 million due primarily to non-recurring adjustments recorded in the prior year period to decrease projected losses on outstanding claims originally recorded prior to 2019, an increase in expenses for uncollectible accounts receivable of$0.9 million due to customers experiencing financial difficulties resulting from the economic impact of the COVID-19 pandemic, an increase in truck, container, equipment and facility maintenance and repair expenses of$0.6 million due to cost increases and other expense increases of$2.5 million . 65
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Segment EBITDA in our Eastern segment increased$12.8 million , or 3.9%, to$343.4 million for the year endedDecember 31, 2020 , from$330.6 million for the year endedDecember 31, 2019 . The increase was due primarily to an increase in revenues of$80.6 million from organic growth and acquisitions,$32.6 million of collective decreases in third-party disposal expenses, third-party trucking expenses, labor expenses, expenses for processing recyclable commodities and taxes on revenues attributable to declines in solid waste and commercial recycling volumes resulting primarily from economic disruptions caused by the COVID-19 pandemic, a decrease in fuel expense of$7.6 million due to a decrease in the price of diesel fuel and declines in the volume of fuel used in our operations, a decrease in employee medical benefits expenses of$4.5 million due to a reduction in medical visits, a collective decrease in travel, meeting, training, and community activity expenses of$3.1 million due to shelter at home and other restrictions on our employees due to the COVID-19 pandemic resulting in the cancellation of non-essential off-site activities, an increase to EBITDA of$2.8 million from the impact of operations disposed of during the year endedDecember 31, 2020 , a decrease in 401(k) matching expenses of$2.4 million as we suspended our 401(k) match as ofJune 1, 2020 and other expense decreases of$0.7 million , partially offset by a net$103.0 million increase in cost of operations and SG&A expenses attributable to acquired operations, an increase in corporate overhead expense allocations of$5.8 million due to an increase in the overhead allocation rate resulting from an increase in corporate expenses qualifying for allocation, an increase in truck, container, equipment and facility maintenance and repair expenses of$2.7 million due to cost increases and a higher quantity of large repairs, an increase of$2.7 million resulting from the payment of supplemental bonuses to non-management employees to provide financial assistance associated with the impact of the COVID-19 pandemic, an increase in landfill gas system operating supplies and maintenance expenses of$2.3 million , an increase in expenses for uncollectible accounts receivable of$2.3 million due to customers experiencing financial difficulties resulting from the economic impact of the COVID-19 pandemic, an increase in compressed natural gas expense of$1.6 million due primarily to 2020 expenses being net of one year of tax credits for purchases occurring in 2020 whereas 2019 expenses were net of two years of tax credits for purchases occurring in 2019 and 2018 and an increase in subcontracted hauling services of$1.1 million due to outsourcing the servicing of certain non-strategic collection customers to third party haulers. Segment EBITDA in our Central segment increased$20.9 million , or 7.2%, to$313.0 million for the year endedDecember 31, 2020 , from$292.1 million for the year endedDecember 31, 2019 . The increase was due primarily to an increase in revenues of$43.0 million from organic growth and acquisitions,$6.2 million of collective decreases in third-party disposal expenses and third-party trucking expenses attributable to declines in solid waste volumes resulting from economic disruptions caused by the COVID-19 pandemic, a decrease in expenses for uncollectible accounts receivable of$2.4 million due primarily to the current period collection of certain accounts deemed uncollectible in prior periods, a decrease in fuel expense of$2.4 million due to a decrease in the price of diesel fuel, a decrease in 401(k) matching expenses of$2.4 million as we suspended our 401(k) match as ofJune 1, 2020 , a decrease in employee medical benefits expenses of$2.1 million due to a reduction in medical visits, a collective decrease in travel, meeting, training, and community activity expenses of$1.5 million due to shelter at home and other restrictions on our employees due to the COVID-19 pandemic resulting in the cancellation of non-essential off-site activities and other expense decreases of$1.6 million , partially offset by a net$24.6 million increase in cost of operations and SG&A expenses attributable to acquired operations, an increase in labor expenses of$7.5 million due primarily to employee pay rate increases, an additional calendar and business day in the current year period due toleap year , as well as emergency wages and other COVID-19-related employee costs exceeding decreases in hours worked attributable to solid waste volume reductions resulting from COVID-19-related economic disruptions, an increase in truck, container, equipment and facility maintenance and repair expenses of$3.0 million due to cost increases and a higher quantity of large repairs, an increase of$2.3 million resulting from the payment of supplemental bonuses to non-management employees to provide financial assistance associated with the impact of the COVID-19 pandemic, an increase in corporate overhead expense allocations of$2.2 million due to an increase in the overhead allocation rate resulting from an increase in corporate expenses qualifying for allocation and an increase in expenses for auto and workers' compensation claims of$1.1 million due primarily to non-recurring adjustments recorded in the prior year period to decrease projected losses on outstanding claims. Segment EBITDA in ourCanada segment decreased$0.3 million , or 0.1%, to$256.1 million for the year endedDecember 31, 2020 , from$256.4 million for the year endedDecember 31, 2019 . The decrease was comprised of a decrease of$2.5 million from a decrease in the average foreign currency exchange rate in effect during the comparable reporting periods, partially offset by an increase of$2.2 million assuming foreign currency parity during the comparable reporting periods. The$2.2 million increase, which assumes foreign currency parity, was due primarily to collective decreases totaling$8.9 million in third-party disposal expenses and third-party trucking expenses attributable to declines 66 Table of Contents
in solid waste volumes resulting primarily from economic disruptions caused by the COVID-19 pandemic, a decrease in fuel expense of$6.0 million due to declines in the market price of diesel fuel, a decrease in subcontracted hauling services at our solid waste operations of$4.7 million due primarily to declines in commercial customers requiring less outsourcing of certain collection activities to third party collection companies and the impact of reversing expenses accrued in a prior period and incurring less expenses in the current period associated with estimated equipment charge overages related to an outsourced collection contract, a decrease in labor expenses of$2.4 million due to the receipt of government subsidies reimbursing us for certain payroll expenditures remitted to our employees during the COVID-19 pandemic and a collective decrease in travel, meeting, training, and community activity expenses of$1.5 million due to shelter at home and other restrictions on our employees due to the COVID-19 pandemic resulting in the cancellation of non-essential off-site activities, partially offset by a decrease in revenues of$15.7 million , an increase in truck, container, equipment and facility maintenance and repair expenses of$1.7 million due to parts and service rate increases and variability impacting the timing of major repairs, additional expenses of$1.3 million resulting from the payment of supplemental bonuses to non-management employees to provide financial assistance associated with the impact of the COVID-19 pandemic, an increase in landfill gas system operating supplies and maintenance expenses of$1.0 million , an increase in labor expenses of$1.0 million due primarily to employee pay rate increases exceeding the impact of headcount reductions and an increase in corporate overhead expense allocations of$0.6 million due to an increase in the overhead allocation rate resulting from an increase in corporate expenses qualifying for allocation. Segment EBITDA at Corporate increased$0.1 million , to a loss of$15.3 million for the year endedDecember 31, 2020 , from a loss of$15.4 million for the year endedDecember 31, 2019 . The increase was due to an increase in corporate overhead allocated through charges to our segments of$13.1 million due to an increase in expenses qualifying for allocation, a collective decrease in travel, meeting, training, office supplies and community activity expenses of$7.6 million due to shelter at home and other restrictions on our employees due to the COVID-19 pandemic resulting in the cancellation of non-essential off-site activities, a decrease in professional fees of$2.5 million due primarily to work on legal matters being postponed resulting from temporary court closures and a decrease in third party tax consulting expenses, a decrease in direct acquisition expenses of$2.5 million due to changes in acquisition activity, a decrease in deferred compensation expenses of$1.6 million as a result of decreases in the market value of investments to which employee deferred compensation liability balances are tracked and a decrease in share-based compensation expenses of$1.5 million due primarily to decreased share price volatility and fewer outstanding shares in the current period for equity awards accounted for as liabilities that were granted to employees of Progressive Waste prior toJune 1, 2016 which are subject to valuation adjustments each period based on changes in fair value, partially offset by an increase in accrued cash incentive compensation expense to our management and non-management employees of$19.4 million , an increase of$4.0 million in equity-based compensation expenses associated with fair value adjustments to Company common shares held in our deferred compensation plan by certain key executives as a result of the shares being exchanged for other investment options, an increase in software licenses and subscriptions expenses of$1.7 million due primarily to the addition of new sales and customer service applications, an increase in payroll and payroll related expenses of$1.5 million due to annual pay increases and increased employee termination pay and$2.1 million of other net expense increases.
Liquidity and Capital Resources
The following table sets forth certain cash flow information for the years ended
2020 2019 Net cash provided by operating activities$ 1,408,521 $ 1,540,547 Net cash used in investing activities (1,046,043) (1,426,006) Net cash used in financing activities
(78,224) (95,894) Effect of exchange rate changes on cash, cash equivalents and restricted cash
6,914 608
Net increase in cash, cash equivalents and restricted cash 291,168
19,255
Cash, cash equivalents and restricted cash at beginning of year
423,221 403,966
Cash, cash equivalents and restricted cash at end of year
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Operating Activities Cash Flows
For the year endedDecember 31, 2020 , net cash provided by operating activities was$1.409 billion . For the year endedDecember 31, 2019 , net cash provided by operating activities was$1.541 billion . The$132.0 million decrease was due primarily to the following:
Accounts payable and accrued liabilities - Our decrease in net cash provided
by operating activities was unfavorably impacted by
accounts payable and accrued liabilities. Although certain operating expenses
declined as a result of solid waste and E&P volume losses due to economic
disruptions resulting from the COVID-19 pandemic, our operating cash flows
were adversely impacted from the timing of vendor payments and payroll cycles
as well as the payment of higher outstanding liabilities existing prior to the
1) recent economic downturn. This decrease was partially offset by an increase in
accrued payroll tax liabilities of
of qualifying
Act, of which a minimum of 50% will be remitted in 2021 and the remainder
remitted in 2022, an increase in liabilities for cash incentive compensation
of
senior note obligations. Deferred income taxes - Our decrease in net cash provided by operating
activities was unfavorably impacted by
taxes as changes in deferred income taxes resulted in a decrease to operating
cash flows of
2) an increase to operating cash flows of
taxes were unfavorably impacted by the impairment of certain property and
equipment at our E&P operations. During the year ended
deferred income taxes were favorably impacted by accelerated tax depreciation
from vehicles, equipment and containers acquired in business combinations. Prepaid expenses - Our decrease in net cash provided by operating activities
3) was unfavorably impacted by
to an increase in prepaid income taxes, prepaid insurance and prepaid vendor
payments. Increase in earnings - Our decrease in net cash provided by operating
activities was favorably impacted by
income, excluding depreciation, amortization of intangibles, share-based
compensation, adjustments to and payments of contingent consideration recorded
4) in earnings and loss on disposal of assets and impairments, due primarily to
price increases and cost containment efforts implemented in our solid waste
markets and earnings from acquisitions closed during, or subsequent to, the
year ended
operations, as well as solid waste volume losses resulting from the COVID-19
pandemic. Accounts receivable - Our decrease in net cash provided by operating
activities was favorably impacted by
as changes in accounts receivable, net of acquisitions, resulted in an
increase to operating cash flows of
31, 2020, compared to a decrease to operating cash flows of
the year ended
price increases of
5) waste business and E&P business of
respectively. The net decrease in revenues resulting from volume losses in
excess of price increases during the year ended
to a decrease in accounts receivable at
ended
and a total of
business and E&P business. The increase in revenues resulting from price
increases and volume increases during the year ended
contributed to an increase in accounts receivable at
As ofDecember 31, 2020 , we had a working capital surplus of$379.6 million , including cash and equivalents of$617.3 million . Our working capital surplus increased$256.2 million from a working capital surplus of$123.4 million atDecember 31, 2019 , including cash and equivalents of$326.7 million , due primarily to the impact of increased cash balances, increased prepaid expenses and decreased accounts payable being partially offset by higher accrued liabilities, short-term contingent consideration liabilities, higer deferred revenue and a reduction in accounts receivable. To date, we have experienced no loss or lack of access to our cash and equivalents; however, we can provide no assurances that access to our cash and equivalents will not be impacted by adverse conditions in the financial markets. Our strategy in managing our working capital is generally to apply the cash generated from our operations that remains after satisfying our working 68
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capital and capital expenditure requirements, along with share repurchase and dividend programs, to reduce the unhedged portion of our indebtedness under our Credit Agreement and to minimize our cash balances.
Investing Activities Cash Flows
Net cash used in investing activities decreased$380.0 million to$1.046 billion for the year endedDecember 31, 2020 , from$1.426 billion for the year endedDecember 31, 2019 . The significant components of the decrease included the following:
1) A decrease in cash paid for acquisitions of
2) A decrease in cash paid for investments in noncontrolling interests of
million;
A decrease in capital expenditures at operations owned in the comparable
3) periods of
collection operations and equipment for our disposal operations exceeding
capital expenditures for landfill sites; and
4) An increase from higher proceeds from the sale of divested operations and
property and equipment of
An increase in capital expenditures at operations acquired subsequent to
5)
equipment and landfill site costs; and
An increase in capital expenditures for undeveloped landfill property of
million attributable to expenditures during the year ended
6) for expansion land at certain existing landfill facilities exceeding
expenditures during the year ended
greenfield landfill site in our Southern segment that will be developed into
an operating location in the future.
Financing Activities Cash Flows
Net cash used in financing activities decreased
A decrease from the net change in long-term borrowings of
(long-term borrowings increased
1) 31, 2020 and increased
due primarily to maintaining a portion of the proceeds from our 2050 Senior
Notes in cash;
An increase in payments to repurchase our common shares of
2) we resumed our share repurchase activity during the year ended
2020; less
An increase in cash dividends paid of
3) increase in our average quarterly dividend rate for the year ended December
31, 2020 to$0.190 per share, from$0.166 per share for the year endedDecember 31, 2019 ;
An increase in contingent consideration payments of
4) to payments during the year ended
settlement of certain legal matters at an acquired solid waste collection
company;
An increase in tax withholdings related to net share settlements of
5) equity-based compensation of
equity-based compensation awards vesting; and
An increase in debt issuance costs of
6) during the year ended
Senior Notes exceeding costs incurred during the year ended
for our 2029 Senior Notes.
Our business is capital intensive. Our capital requirements include acquisitions and capital expenditures for landfill cell construction, landfill development, landfill closure activities and intermodal facility construction in the future. OnJuly 23, 2020 , our Board of Directors approved, subject to receipt of regulatory approvals, the annual renewal of our normal course issuer bid, or the NCIB, to purchase up to 13,144,773 of our common shares during the period ofAugust 10, 2020 toAugust 9, 2021 or until such earlier time as the NCIB is completed or terminated at our option. Shareholders may obtain a copy of our TSX Form 12 - Notice of Intention to Make a Normal Course Issuer Bid, without charge, by request directed to our Executive Vice President and Chief Financial Officer at (832) 442-2200. The timing 69
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and amounts of any repurchases pursuant to the NCIB will depend on many factors, including our capital structure, the market price of our common shares and overall market conditions. All common shares purchased under the NCIB will be immediately cancelled following their repurchase. Information regarding our NCIB plan can be found under the "Shareholders' Equity" section in Note 13 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10K and is incorporated herein by reference. The Board of Directors of the Company authorized the initiation of a quarterly cash dividend inOctober 2010 and has increased it on an annual basis. InOctober 2020 , our Board of Directors authorized an increase to our regular quarterly cash dividend of$0.02 , from$0.185 to$0.205 per share. Cash dividends of$199.9 million and$175.1 million were paid during the years endedDecember 31, 2020 and 2019, respectively. We cannot assure you as to the amounts or timing of future dividends.
We made
In addition, we made$67.5 million in capital expenditures for undeveloped landfill property during the year endedDecember 31, 2020 and may opportunistically make other capital expenditures for undeveloped landfill property in 2021. We intend to fund our planned 2021 capital expenditures principally through cash on hand, internally generated funds and borrowings under our Credit Agreement. In addition, we may make substantial additional capital expenditures in acquiring land and solid waste and E&P waste businesses. If we acquire additional landfill disposal facilities, we may also have to make significant expenditures to bring them into compliance with applicable regulatory requirements, obtain permits or expand our available disposal capacity. We cannot currently determine the amount of these expenditures because they will depend on the number, nature, condition and permitted status of any acquired landfill disposal facilities. We believe that our cash and equivalents, Credit Agreement and the funds we expect to generate from operations will provide adequate cash to fund our working capital and other cash needs for the foreseeable future. However, disruptions in the capital and credit markets could adversely affect our ability to draw on our Credit Agreement or raise other capital. Our access to funds under the Credit Agreement is dependent on the ability of the banks that are parties to the agreement to meet their funding commitments. Those banks may not be able to meet their funding commitments if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests within a short period of time. We have a revolving credit and term loan agreement (the "Credit Agreement") withBank of America, N.A ., acting through itsCanada Branch, as global agent, the swing line lender and letter of credit issuer,Bank of America, N.A ., as theU.S. Agent and a letter of credit issuer, the lenders (the "Lenders") and any other financial institutions from time to time party thereto. There are no subsidiary guarantors under the Credit Agreement. The Credit Agreement has a scheduled maturity date ofMarch 21, 2023 . As ofDecember 31, 2020 ,$650.0 million under the term loan and$203.9 million under the revolving credit facility were outstanding under the Credit Agreement, exclusive of outstanding standby letters of credit of$119.6 million . We also have issued$6.6 million of letters of credit atDecember 31, 2020 under facilities other than the Credit Agreement. OnJune 1, 2016 , we entered into a Master Note Purchase Agreement (as supplemented by the First Supplement dated as ofFebruary 13, 2017 (the "2016 First Supplement") and as amended, restated, amended and restated, assumed, supplemented or modified from time to time, the "2016 NPA") with certain accredited institutional investors. OnApril 20, 2017 , pursuant to the 2016 NPA, and the 2016 First Supplement, we issued and sold to certain accredited institutional investors$400.0 million aggregate principal amount of senior unsecured notes consisting of$150.0 million aggregate principal amount, which will mature onApril 20, 2024 , with an annual interest rate of 3.24% (the "2024 Senior Notes") and$250.0 million aggregate principal amount, which will mature onApril 20, 2027 , with an annual interest rate of 3.49% (the "2027 Senior Notes" and collectively with the 2024 Senior Notes, the "2017A Senior Notes") in a private placement.
On
The 2016 NPA First Amendment, among other things, provided for certain amendments to the 2016 NPA to facilitate (i) certain conforming changes to align certain provisions of the 2016 NPA, the 2008 NPA (as defined below) and the
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Credit Agreement and (ii) the release of all subsidiary guarantors in relation to obligations under the 2016 NPA and the 2016 NPA Notes (as defined below) (the "2016 Release"). Pursuant to the terms and conditions of the 2016 NPA, we have outstanding senior unsecured notes (the "2016 NPA Notes") atDecember 31, 2019 consisting of (i)$150.0 million of 2.39% senior notes dueJune 1, 2021 (the "New 2021 Senior Notes"), (ii)$200.0 million of 2.75% senior notes dueJune 1, 2023 (the "2023 Senior Notes"), (iii)$400.0 million of 3.03% senior notes dueJune 1, 2026 (the "2026 Senior Notes") and (iv)$400.0 million of the 2017A Senior Notes. The New 2021 Senior Notes, the 2023 Senior Notes, the 2026 Senior Notes and the 2017A Senior Notes bear interest at fixed rates with interest payable in arrears semi-annually, and on the respective maturity dates, until the principal thereunder becomes due and payable. InJuly 2008 , the Company, certain subsidiaries of the Company (together with the Company, the "Obligors") and certain accredited institutional investors entered into that certain Master Note Purchase Agreement, datedJuly 15, 2008 (as amended, restated, assumed, supplemented or otherwise modified from time to time, the "2008 NPA"). OnMarch 21, 2018 , we entered into that certain Amendment No. 7 to the 2008 NPA (the "2008 NPA Seventh Amendment"), with each of the holders party thereto, which amended the 2008 NPA. The 2008 NPA Seventh Amendment, among other things, provides certain amendments to the 2008 NPA to facilitate (i) certain conforming changes to align the provisions of the 2008 NPA, the 2016 NPA and the Credit Agreement and (ii) the release of all subsidiary guarantors in relation to obligations under the 2008 NPA and the 2008 NPA Notes (the "2008 Release"). Pursuant to the terms and conditions of the 2008 NPA, we have outstanding senior unsecured notes (the "2008 NPA Notes") atDecember 31, 2019 consisting of (i)$100.0 million of 4.64% senior notes due 2021 (the "2021 Senior Notes"), (ii)$125.0 million of 3.09% senior notes due 2022 (the "2022 Senior Notes") and (iii)$375.0 million of 3.41% senior notes due 2025 (the "2025 Senior Notes"). We repaid at maturity our$50.0 million of 4.00% senior notes dueApril 2018 (the "2018 Senior Notes") inApril 2018 . We also repaid at maturity our$175.0 million of 5.25% senior notes due 2019 (the "2019 Senior Notes") inNovember 2019 . The 2021 Senior Notes, the 2022 Senior Notes and the 2025 Senior Notes bear interest at fixed rates with interest payable in arrears semi-annually, and on the respective maturity dates, until the principal thereunder becomes due and payable. OnNovember 16, 2018 , we completed an underwritten public offering of$500.0 million aggregate principal amount of our 4.25% Senior Notes due 2028 (the "2028 Senior Notes"). The 2028 Senior Notes were issued under the Indenture, dated as ofNovember 16, 2018 (the "Base Indenture"), by and between the Company andU.S. Bank National Association , as trustee (the "Trustee"), as supplemented by the First Supplemental Indenture, dated as ofNovember 16, 2018 . We will pay interest on the 2028 Senior Notes semi-annually, commencing onJune 1, 2019 , and the 2028 Senior Notes will mature onDecember 1, 2028 . The 2028 Senior Notes are our senior unsecured obligations, ranking equally in right of payment with our other existing and future unsubordinated debt and senior to any of our future subordinated debt. The 2028 Senior Notes are not guaranteed by any of our subsidiaries. OnApril 16, 2019 , we completed an underwritten public offering of$500.0 million aggregate principal amount of our 3.50% Senior Notes due 2029 (the "2029 Senior Notes"). The 2029 Senior Notes were issued under the Base Indenture, as supplemented by the Second Supplemental Indenture, dated as ofApril 16, 2019 . We will pay interest on the 2029 Senior Notes semi-annually in arrears and the 2029 Senior Notes will mature onMay 1, 2029 . The 2029 Senior Notes are our senior unsecured obligations, ranking equally in right of payment with our other existing and future unsubordinated debt and senior to any of our future subordinated debt. The 2029 Senior Notes are not guaranteed by any of our
subsidiaries. 71 Table of Contents
OnJanuary 23, 2020 , we completed an underwritten public offering of$600.0 million aggregate principal amount of 2.60% Senior Notes due 2030 (the "2030 Senior Notes"). The 2030 Senior Notes were issued under the Base Indenture, as supplemented by the Third Supplemental Indenture, dated as ofJanuary 23, 2020 . We will pay interest on the 2030 Senior Notes semi-annually in arrears and the 2030 Senior Notes will mature onFebruary 1, 2030 . The 2030 Senior Notes are our senior unsecured obligations, ranking equally in right of payment with our other existing and future unsubordinated debt and senior to any of our future subordinated debt. The 2030 Senior Notes are not guaranteed by any of our subsidiaries. OnMarch 13, 2020 , we completed an underwritten public offering of$500.0 million aggregate principal amount of 3.05% Senior Notes due 2050 (the "2050 Senior Notes"). The 2050 Senior Notes were issued under the Base Indenture, as supplemented by the Fourth Supplemental Indenture, dated as ofMarch 13, 2020 . We will pay interest on the 2050 Senior Notes semi-annually in arrears and the 2050 Senior Notes will mature onApril 1, 2050 . The 2050 Senior Notes are our senior unsecured obligations, ranking equally in right of payment with our other existing and future unsubordinated debt and senior to any of our future subordinated debt. The 2050 Senior Notes are not guaranteed by any of our subsidiaries.
See Note 10 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further details on the debt agreements.
Contractual Obligations
As of
Payments Due by Period (amounts in
thousands of
Less Than 1 to 3 Over 5 Recorded Obligations Total 1 Year Years 3 to 5 Years Years Long-term debt$ 4,743,635 $ 8,268 $ 1,437,815 $ 534,373 $ 2,763,179 Cash interest payments$ 1,242,346 $ 159,967 $ 280,106 $ 210,455 $ 591,818 Contingent consideration$ 91,833 $ 43,297 $ 9,847 $ 3,224 $ 35,465 Operating leases$ 210,905 $ 36,581 $ 65,029 $ 40,435 $ 68,860 Final capping, closure and post-closure$ 1,527,709 $ 19,976 $
66,201
Long-term debt payments include:
credit facility under our Credit Agreement. Advances are available under the
Credit Agreement in
fluctuating rates (See Note 10). At
1) outstanding borrowings drawn under the revolving credit facility were in
LIBOR rate loans, bearing interest at a total rate of 1.35% on such date. At
revolving credit facility were in Canadian-based bankers' acceptances, bearing
interest at a total rate of 1.66% on such date.
under our Credit Agreement. Outstanding amounts on the term loan can be either
2) base rate loans or LIBOR loans. At
under the term loan were in LIBOR loans which bear interest at the LIBOR rate
plus the applicable margin (for a total rate of 1.35% on such date).
Notes. The 2021 Senior Notes bear interest at a rate of 4.64%. We have
3) recorded this obligation in the payments due in 1 to 3 years category in the
table above as we have the intent and ability to redeem the 2021 Senior Notes
onApril 1, 2021 using borrowings under our Credit Agreement. 72 Table of Contents
Notes. The New 2021 Senior Notes bear interest at a rate of 2.39%. We have
4) recorded this obligation in the payments due in 1 to 3 years category in the
table above as we have the intent and ability to redeem the New 2021 Senior
Notes onJune 1, 2021 using borrowings under our Credit Agreement.
5)
Notes. The 2022 Senior Notes bear interest at a rate of 3.09%.
6)
Notes. The 2023 Senior Notes bear interest at a rate of 2.75%.
7)
Notes. The 2024 Senior Notes bear interest at a rate of 3.24%.
8)
Notes. The 2025 Senior Notes bear interest at a rate of 3.41%.
9)
Notes. The 2026 Senior Notes bear interest at a rate of 3.03%.
10)
Notes. The 2027 Senior Notes bear interest at a rate of 3.49%.
11)
Notes. The 2028 Senior Notes bear interest at a rate of 4.25%.
12)
Notes. The 2029 Senior Notes bear interest at a rate of 3.50%.
13)
Notes. The 2030 Senior Notes bear interest at a rate of 2.60%.
14)
Notes. The 2050 Senior Notes bear interest at a rate of 3.05%.
15) and other third parties. Our notes payable to sellers and other third parties
bear interest at rates between 2.42% and 10.35% at
have maturity dates ranging from 2021 to 2036.
16) financing leases bear interest at a rate of 1.89% at
have a lease expiration date of 2026.
The following assumptions were made in calculating cash interest payments:
We calculated cash interest payments on the Credit Agreement using the LIBOR
rate plus the applicable LIBOR margin, the base rate plus the applicable base
1) rate margin, the Canadian Dollar Offered Rate plus the applicable acceptance
fee and the Canadian prime rate plus the applicable prime rate margin at
in
We calculated cash interest payments on our interest rate swaps using the
2) stated interest rate in the swap agreement less the LIBOR rate through the
earlier expiration of the term of the swaps or the term of the credit facility. 73 Table of Contents Contingent consideration payments include$71.7 million recorded as liabilities in our consolidated financial statements atDecember 31, 2020 , and$20.1 million of future interest accretion on the recorded obligations. We are party to operating lease agreements and finance leases as discussed in Note 8 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. These lease agreements are established in the ordinary course of our business and are designed to provide us with access to facilities and equipment at competitive, market-driven prices. The estimated final capping, closure and post-closure expenditures presented above are in current dollars. Amount of
Commitment Expiration Per Period
(amounts in thousands of U.S. dollars) Less Than 1 to 3 3 to 5 Over 5 Unrecorded Obligations(1) Total 1 Year Years Years Years
Unconditional purchase obligations$ 132,047 $ 92,029
We are party to unconditional purchase obligations as discussed in Note 12 to
the consolidated financial statements included in Item 8 of this Annual
Report on Form 10-K. These purchase obligations are established in the
ordinary course of our business and are designed to provide us with access to
products at competitive, market-driven prices. At
(1) unconditional purchase obligations consisted of multiple fixed-price fuel
purchase contracts under which we have 52.5 million gallons remaining to be
purchased for a total of
expire on or before
affected our financial position, results of operations or liquidity during
the year ended
impact on our future financial position, results of operations or liquidity.
We have obtained standby letters of credit as discussed in Note 10 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K and financial surety bonds as discussed in Note 12 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. These standby letters of credit and financial surety bonds are generally obtained to support our financial assurance needs and landfill and E&P operations. These arrangements have not materially affected our financial position, results of operations or liquidity during the year endedDecember 31, 2020 , nor are they expected to have a material impact on our future financial position, results of operations or liquidity.
From time to time, we evaluate our existing operations and their strategic importance to us. If we determine that a given operating unit does not have future strategic importance, we may sell or otherwise dispose of those operations. Although we believe our reporting units would not be impaired by such dispositions, we could incur losses on them.
New Accounting Pronouncements
See Note 2 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for a description of the new accounting standards that are applicable to us. 74 Table of Contents Non-GAAP Financial Measures Adjusted Free Cash Flow We present adjusted free cash flow, a non-GAAP financial measure, supplementally because it is widely used by investors as a valuation and liquidity measure in the solid waste industry. Management uses adjusted free cash flow as one of the principal measures to evaluate and monitor the ongoing financial performance of our operations. We define adjusted free cash flow as net cash provided by operating activities, plus or minus change in book overdraft, plus proceeds from disposal of assets, less capital expenditures for property and equipment and distributions to noncontrolling interests. We further adjust this calculation to exclude the effects of items management believes impact the ability to assess the operating performance of our business. This measure is not a substitute for, and should be used in conjunction with, GAAP liquidity or financial measures. Other companies may calculate adjusted free cash flow differently. Our adjusted free cash flow for the years endedDecember 31, 2020 , 2019 and 2018, are calculated as follows (amounts in thousands ofU.S. dollars): Years Ended December 31, 2020 2019 2018 Net cash provided by operating activities$ 1,408,521 $ 1,540,547 $ 1,411,235 Plus (less): Change in book overdraft 1,096 (2,564) (839) Plus: Proceeds from disposal of assets 19,084 3,566 5,385 Less: Capital expenditures for property and equipment (597,053) (634,406) (546,145) Less: Distributions to noncontrolling interests - (570) (103) Adjustments: Payment of contingent consideration recorded in earnings (a) 10,371 - 11 Cash received for divestitures (b) (10,673) (2,376) (2,030) Transaction-related expenses (c) 9,803 12,335 8,607 Integration-related and other expenses (d) - - 2,760 Pre-existing Progressive Waste share-based grants (e) 5,770 4,810 5,772 Tax effect (f) (5,021) (4,565) (4,752) Adjusted free cash flow$ 841,898 $ 916,777 $ 879,901
Reflects the addback of acquisition-related payments for contingent
(a) consideration that were recorded as expenses in earnings and as a component
of cash flows from operating activities as the amounts paid exceeded the fair
value of the contingent consideration recorded at the acquisition date.
(b)Reflects the elimination of cash received in conjunction with the divestiture of certain operations.
(c)Reflects the addback of acquisition-related transaction costs.
(d) Reflects the addback of integration-related items, including rebranding
costs, associated with the Progressive Waste acquisition.
(e)Reflects the cash settlement of pre-existing Progressive Waste share-based awards during the period.
(f)The aggregate tax effect of footnotes (a) through (e) is calculated based on the applied tax rates for the respective periods.
75 Table of Contents Adjusted EBITDA We present adjusted EBITDA, a non-GAAP financial measure, supplementally because it is widely used by investors as a performance and valuation measure in the solid waste industry. Management uses adjusted EBITDA as one of the principal measures to evaluate and monitor the ongoing financial performance of our operations. We define adjusted EBITDA as net income attributable toWaste Connections , minus net loss attributable to noncontrolling interests, plus income tax provision, plus interest expense, less interest income, plus depreciation and amortization expense, plus closure and post-closure accretion expense, plus or minus any loss or gain on impairments and other operating items, plus other expense, less other income. We further adjust this calculation to exclude the effects of other items management believes impact the ability to assess the operating performance of our business. This measure is not a substitute for, and should be used in conjunction with, GAAP financial measures. Other companies may calculate adjusted EBITDA differently. Our adjusted EBITDA for the years endedDecember 31, 2020 , 2019 and 2018, are calculated as follows (amounts in thousands ofU.S. dollars): Years Ended December 31, 2020 2019 2018 Net income attributable to Waste Connections$ 204,677 $ 566,841 $ 546,871 Plus (less): Net income (loss) attributable to noncontrolling interests (685) (160) 283 Plus: Income tax provision 49,922 139,210 159,986 Plus: Interest expense 162,375 147,368 132,104 Less: Interest income (5,253) (9,777) (7,170) Plus: Depreciation and amortization 752,404 743,918 680,487 Plus: Closure and post-closure accretion 15,095 14,471 12,997 Plus: Impairments and other operating items 466,718 61,948 20,118 Plus (less): Other expense (income), net 1,392 (5,704) 170
Adjustments:
Plus: Transaction-related expenses (a) 9,803 12,335 8,607 Plus: Fair value changes to equity awards (b) 5,536 3,104 9,205 Plus: Integration-related and other expenses (c) -
- 2,760 Adjusted EBITDA$ 1,661,984 $ 1,673,554 $ 1,566,418
(a)Reflects the addback of acquisition-related transaction costs.
(b)Reflects fair value accounting changes associated with certain equity awards.
(c) Reflects the addback of integration-related items, including rebranding
costs, associated with the Progressive Waste acquisition. 76 Table of Contents
Adjusted Net Income Attributable to
We present adjusted net income attributable toWaste Connections and adjusted net income per diluted share attributable toWaste Connections , both non-GAAP financial measures, supplementally because they are widely used by investors as a valuation measure in the solid waste industry. Management uses adjusted net income attributable toWaste Connections and adjusted net income per diluted share attributable toWaste Connections as one of the principal measures to evaluate and monitor the ongoing financial performance of our operations. We provide adjusted net income attributable toWaste Connections to exclude the effects of items management believes impact the comparability of operating results between periods. Adjusted net income attributable toWaste Connections has limitations due to the fact that it excludes items that have an impact on our financial condition and results of operations. Adjusted net income attributable toWaste Connections and adjusted net income per diluted share attributable toWaste Connections are not a substitute for, and should be used in conjunction with, GAAP financial measures. Other companies may calculate these non-GAAP financial measures differently. Our adjusted net income attributable toWaste Connections and adjusted net income per diluted share attributable toWaste Connections for the years endedDecember 31, 2020 , 2019 and 2018, are calculated as follows (amounts in thousands ofU.S. dollars,
except per share amounts): Years Ended December 31, 2020 2019 2018 Reported net income attributable to Waste Connections$ 204,677 $ 566,841 $ 546,871 Adjustments: Amortization of intangibles (a) 131,302 125,522 107,779 Impairments and other operating items (b) 466,718 61,948 20,118 Transaction-related expenses (c) 9,803 12,335 8,607 Fair value changes to equity awards (d) 5,536 3,104 9,205 Integration-related and other expenses (e) -
- 2,760 Tax effect (f) (153,758) (50,189) (37,165) Tax items (g) 31,508
- 9,093
Adjusted net income attributable to
Diluted earnings per common share attributable toWaste Connections' common shareholders: Reported net income$ 0.78 $ 2.14 $ 2.07 Adjusted net income$ 2.64 $ 2.72 $ 2.52
(a) Reflects the elimination of the non-cash amortization of acquisition-related
intangible assets.
(b) Reflects the addback of impairments and other operating items.
(c) Reflects the addback of acquisition-related transaction costs.
(d) Reflects fair value accounting changes associated with certain equity awards.
(e) Reflects the addback of integration-related items, including rebranding
costs, associated with the Progressive Waste acquisition.
(f) The aggregate tax effect of the adjustments in footnotes (a) through (e) is
calculated based on the applied tax rates for the respective periods.
In 2020, reflects the impact of a portion of our 2019 inter-entity payments
no longer being deductible for tax purposes due to the finalization of tax
regulations on
(g) increase in deferred tax liabilities resulting from the E&P impairment. In
2018, primarily reflects refinements to the estimates, as provided by Staff
Accounting Bulletin No. 118, of the impact of a portion of our
no longer permanently reinvested in conjunction with the Tax Act.
Inflation
Other than volatility in fuel prices, third party brokerage and labor costs in certain markets, inflation has not materially affected our operations in recent years. Consistent with industry practice, many of our contracts allow us to pass through certain costs to our customers, including increases in landfill tipping fees and, in some cases, fuel costs. To the extent that there are decreases in fuel costs, in some cases, a portion of these reductions are passed through to customers in the form 77
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of lower fuel and material surcharges. Therefore, we believe that we should be able to increase prices to offset many cost increases that result from inflation in the ordinary course of business. However, competitive pressures or delays in the timing of rate increases under our contracts, particularly amid the economic impact of the COVID-19 pandemic, may require us to absorb at least part of these cost increases, especially if cost increases exceed the average rate of inflation. Management's estimates associated with inflation have an impact on our accounting for landfill liabilities.
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