wm_Current_Folio_10Q

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

 

 

 

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

 

 

 

For the Quarterly Period Ended September 30, 2017

 

 

or

 

 

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

 

 

 

For the transition period from              to

 

 

Commission file number 1-12154

 

Waste Management, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

73-1309529

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

1001 Fannin Street

Houston, Texas 77002

(Address of principal executive offices)

 

(713) 512-6200

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes   No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   No 

 

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

 

 

 

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

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

 

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

 

The number of shares of Common Stock, $0.01 par value, of the registrant outstanding at October 19, 2017 was 434,216,159 (excluding treasury shares of 196,066,302).

 

 

 


 

PART I.

Item 1.    Financial Statements.

WASTE MANAGEMENT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Millions, Except Share and Par Value Amounts)

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2017

    

2016

 

 

(Unaudited)

 

 

 

ASSETS

 

 

  

 

 

  

Current assets:

 

 

 

 

 

  

Cash and cash equivalents

 

$

35

 

$

32

Accounts receivable, net of allowance for doubtful accounts of $26 and $24, respectively

 

 

1,790

 

 

1,700

Other receivables

 

 

212

 

 

432

Parts and supplies

 

 

99

 

 

90

Other assets

 

 

164

 

 

122

Total current assets

 

 

2,300

 

 

2,376

Property and equipment, net of accumulated depreciation and amortization of $17,826 and $17,152, respectively

 

 

11,136

 

 

10,950

Goodwill

 

 

6,267

 

 

6,215

Other intangible assets, net

 

 

561

 

 

591

Investments in unconsolidated entities

 

 

287

 

 

320

Other assets

 

 

398

 

 

407

Total assets

 

$

20,949

 

$

20,859

LIABILITIES AND EQUITY

 

 

  

 

 

  

Current liabilities:

 

 

  

 

 

  

Accounts payable

 

$

789

 

$

799

Accrued liabilities

 

 

1,136

 

 

1,085

Deferred revenues

 

 

484

 

 

493

Current portion of long-term debt

 

 

850

 

 

417

Total current liabilities

 

 

3,259

 

 

2,794

Long-term debt, less current portion

 

 

8,495

 

 

8,893

Deferred income taxes

 

 

1,452

 

 

1,482

Landfill and environmental remediation liabilities

 

 

1,727

 

 

1,675

Other liabilities

 

 

716

 

 

695

Total liabilities

 

 

15,649

 

 

15,539

Commitments and contingencies

 

 

  

 

 

  

Equity:

 

 

  

 

 

  

Waste Management, Inc. stockholders’ equity:

 

 

  

 

 

  

Common stock, $0.01 par value; 1,500,000,000 shares authorized; 630,282,461 shares issued

 

 

 6

 

 

 6

Additional paid-in capital

 

 

4,806

 

 

4,850

Retained earnings

 

 

7,871

 

 

7,388

Accumulated other comprehensive income (loss)

 

 

14

 

 

(80)

Treasury stock at cost, 196,076,817 and 190,966,584 shares, respectively

 

 

(7,419)

 

 

(6,867)

Total Waste Management, Inc. stockholders’ equity

 

 

5,278

 

 

5,297

Noncontrolling interests

 

 

22

 

 

23

Total equity

 

 

5,300

 

 

5,320

Total liabilities and equity

 

$

20,949

 

$

20,859

 

See notes to Condensed Consolidated Financial Statements.

2


 

WASTE MANAGEMENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In Millions, Except per Share Amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2017

    

2016

    

2017

    

2016

Operating revenues

 

$

3,716

 

$

3,548

 

$

10,833

 

$

10,149

Costs and expenses:

 

 

  

 

 

 

 

 

  

 

 

 

Operating

 

 

2,302

 

 

2,216

 

 

6,758

 

 

6,339

Selling, general and administrative

 

 

356

 

 

330

 

 

1,099

 

 

1,032

Depreciation and amortization

 

 

350

 

 

336

 

 

1,034

 

 

988

Restructuring

 

 

(2)

 

 

 

 

 —

 

 

 4

Expense from divestitures, asset impairments and unusual items, net

 

 

 9

 

 

106

 

 

10

 

 

107

 

 

 

3,015

 

 

2,988

 

 

8,901

 

 

8,470

Income from operations

 

 

701

 

 

560

 

 

1,932

 

 

1,679

Other income (expense):

 

 

  

 

 

 

 

 

  

 

 

 

Interest expense, net

 

 

(90)

 

 

(94)

 

 

(272)

 

 

(282)

Equity in net losses of unconsolidated entities

 

 

(8)

 

 

(9)

 

 

(53)

 

 

(32)

Other, net

 

 

 —

 

 

 

 

 —

 

 

(53)

 

 

 

(98)

 

 

(103)

 

 

(325)

 

 

(367)

Income before income taxes

 

 

603

 

 

457

 

 

1,607

 

 

1,312

Income tax expense

 

 

215

 

 

153

 

 

561

 

 

466

Consolidated net income

 

 

388

 

 

304

 

 

1,046

 

 

846

Less: Net income (loss) attributable to noncontrolling interests

 

 

 2

 

 

 2

 

 

 —

 

 

(1)

Net income attributable to Waste Management, Inc.

 

$

386

 

$

302

 

$

1,046

 

$

847

Basic earnings per common share

 

$

0.88

 

$

0.68

 

$

2.37

 

$

1.91

Diluted earnings per common share

 

$

0.87

 

$

0.68

 

$

2.36

 

$

1.89

Cash dividends declared per common share

 

$

0.425

 

$

0.41

 

$

1.275

 

$

1.23

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2017

    

2016

    

2017

    

2016

Consolidated net income

 

$

388

 

$

304

 

$

1,046

 

$

846

Other comprehensive income (loss), net of tax:

 

 

  

 

 

  

 

 

  

 

 

  

Derivative instruments, net

 

 

 2

 

 

 2

 

 

 6

 

 

11

Available-for-sale securities, net

 

 

 —

 

 

 —

 

 

 2

 

 

 2

Foreign currency translation adjustments

 

 

46

 

 

(16)

 

 

86

 

 

51

Post-retirement benefit obligation, net

 

 

(1)

 

 

 —

 

 

 —

 

 

 —

Other comprehensive income (loss), net of tax

 

 

47

 

 

(14)

 

 

94

 

 

64

Comprehensive income

 

 

435

 

 

290

 

 

1,140

 

 

910

Less: Comprehensive income (loss) attributable to noncontrolling interests

 

 

 2

 

 

 2

 

 

 —

 

 

(1)

Comprehensive income attributable to Waste Management, Inc.

 

$

433

 

$

288

 

$

1,140

 

$

911

 

See notes to Condensed Consolidated Financial Statements.

3


 

WASTE MANAGEMENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30, 

 

    

2017

    

2016

Cash flows from operating activities:

 

 

  

 

 

  

Consolidated net income

 

$

1,046

 

$

846

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

 

 

  

 

 

  

Depreciation and amortization

 

 

1,034

 

 

988

Deferred income tax expense (benefit)

 

 

(46)

 

 

20

Interest accretion on landfill liabilities

 

 

68

 

 

67

Interest accretion on and discount rate adjustments to environmental remediation liabilities and recovery assets

 

 

 2

 

 

 8

Provision for bad debts

 

 

31

 

 

27

Equity-based compensation expense

 

 

74

 

 

67

Net gain from disposal of assets

 

 

(7)

 

 

(18)

Expense from divestitures, asset impairments and other, net

 

 

38

 

 

106

Equity in net losses of unconsolidated entities, net of dividends

 

 

25

 

 

32

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

 

 

  

 

 

  

Receivables

 

 

112

 

 

32

Other current assets

 

 

(25)

 

 

(21)

Other assets

 

 

 —

 

 

76

Accounts payable and accrued liabilities

 

 

105

 

 

73

Deferred revenues and other liabilities

 

 

(67)

 

 

(51)

Net cash provided by operating activities

 

 

2,390

 

 

2,252

Cash flows from investing activities:

 

 

  

 

 

  

Acquisitions of businesses, net of cash acquired

 

 

(80)

 

 

(600)

Capital expenditures

 

 

(981)

 

 

(962)

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

 

 

19

 

 

32

Other, net

 

 

58

 

 

(20)

Net cash used in investing activities

 

 

(984)

 

 

(1,550)

Cash flows from financing activities:

 

 

  

 

 

  

New borrowings

 

 

122

 

 

2,536

Debt repayments

 

 

(749)

 

 

(2,210)

Net commercial paper borrowings

 

 

501

 

 

 —

Common stock repurchase program

 

 

(750)

 

 

(500)

Cash dividends

 

 

(566)

 

 

(546)

Exercise of common stock options

 

 

92

 

 

57

Tax payments associated with equity-based compensation transactions

 

 

(47)

 

 

(30)

Other, net

 

 

(7)

 

 

(18)

Net cash used in financing activities

 

 

(1,404)

 

 

(711)

Effect of exchange rate changes on cash and cash equivalents

 

 

 1

 

 

 —

Increase (decrease) in cash and cash equivalents

 

 

 3

 

 

(9)

Cash and cash equivalents at beginning of period

 

 

32

 

 

39

Cash and cash equivalents at end of period

 

$

35

 

$

30

 

See notes to Condensed Consolidated Financial Statements.

4


 

WASTE MANAGEMENT, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(In Millions, Except Shares in Thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Waste Management, Inc. Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

Paid-In

 

Retained

 

Comprehensive

 

Treasury Stock

 

Noncontrolling

 

    

Total

    

Shares

    

Amounts

    

Capital

    

Earnings

    

Income (Loss)

    

Shares

    

Amounts

    

Interests

Balance, December 31, 2016

 

$

5,320

 

630,282

 

$

 6

 

$

4,850

 

$

7,388

 

$

(80)

 

(190,967)

 

$

(6,867)

 

$

23

Consolidated net income

 

 

1,046

 

 —

 

 

 —

 

 

 —

 

 

1,046

 

 

 —

 

 —

 

 

 —

 

 

 —

Other comprehensive income (loss), net of tax

 

 

94

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

94

 

 —

 

 

 —

 

 

 —

Cash dividends

 

 

(566)

 

 —

 

 

 —

 

 

 —

 

 

(566)

 

 

 —

 

 —

 

 

 —

 

 

 —

Equity-based compensation transactions, net

 

 

157

 

 —

 

 

 —

 

 

11

 

 

 3

 

 

 —

 

3,974

 

 

143

 

 

 —

Common stock repurchase program

 

 

(750)

 

 —

 

 

 —

 

 

(55)

 

 

 —

 

 

 —

 

(9,082)

 

 

(695)

 

 

 —

Other, net

 

 

(1)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

(2)

 

 

 —

 

 

(1)

Balance, September 30, 2017

 

$

5,300

 

630,282

 

$

 6

 

$

4,806

 

$

7,871

 

$

14

 

(196,077)

 

$

(7,419)

 

$

22

 

See notes to Condensed Consolidated Financial Statements.

 

 

5


 

WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.    Basis of Presentation

The financial statements presented in this report represent the consolidation of Waste Management, Inc., a Delaware corporation; its wholly-owned and majority-owned subsidiaries; and certain variable interest entities for which Waste Management, Inc. or its subsidiaries are the primary beneficiaries as described in Note 13. Waste Management, Inc. is a holding company and all operations are conducted by its subsidiaries. When the terms “the Company,” “we,” “us” or “our” are used in this document, those terms refer to Waste Management, Inc., its consolidated subsidiaries and consolidated variable interest entities. When we use the term “WM,” we are referring only to Waste Management, Inc., the parent holding company.

We are North America’s leading provider of comprehensive waste management environmental services. We partner with our residential, commercial, industrial and municipal customers and the communities we serve to manage and reduce waste at each stage from collection to disposal, while recovering valuable resources and creating clean, renewable energy. Our “Solid Waste” business is operated and managed locally by our subsidiaries that focus on distinct geographic areas and provides collection, transfer, disposal, and recycling and resource recovery services. Through our subsidiaries, we are also a leading developer, operator and owner of landfill gas-to-energy facilities in the United States.

We evaluate, oversee and manage the financial performance of our Solid Waste business subsidiaries through our 17 Areas. We also provide additional services that are not managed through our Solid Waste business, which are presented in this report as “Other.” Additional information related to our segments is included in Note 7.

The Condensed Consolidated Financial Statements as of September 30, 2017 and for the three and nine months ended September 30, 2017 and 2016 are unaudited. In the opinion of management, these financial statements include all adjustments, which, unless otherwise disclosed, are of a normal recurring nature, necessary for a fair presentation of the financial position, results of operations, comprehensive income, cash flows, and changes in equity for the periods presented. The results for interim periods are not necessarily indicative of results for the entire year. The financial statements presented herein should be read in conjunction with the financial statements included in our Annual Report on Form 10‑K for the year ended December 31, 2016.

In preparing our financial statements, we make numerous estimates and assumptions that affect the accounting for and recognition and disclosure of assets, liabilities, equity, revenues and expenses. We must make these estimates and assumptions because certain information that we use is dependent on future events, cannot be calculated with precision from available data or simply cannot be calculated. In some cases, these estimates are difficult to determine, and we must exercise significant judgment. In preparing our financial statements, the most difficult, subjective and complex estimates and the assumptions that present the greatest amount of uncertainty relate to our accounting for landfills, environmental remediation liabilities, long-lived asset impairments and reserves associated with our insured and self-insured claims. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our financial statements.

Adoption of New Accounting Standards

Equity-Based Compensation — In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016‑09 associated with equity-based compensation as part of its simplification initiative to reduce the cost and complexity of compliance with U.S. Generally Accepted Accounting Principles (“GAAP”), while maintaining or improving the usefulness of the information provided. This amended guidance was effective for the Company on January 1, 2017 and required the following changes to the presentation of our financial statements:

·

Excess tax benefits or deficiencies for share-based payments are now recorded as a discrete item in the period shares vest or stock options are exercised as an adjustment to income tax expense or benefit rather than additional

6


 

WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

paid-in capital. This change was applied prospectively as of January 1, 2017. The Company did not have any excess tax benefits that were not previously recognized as of January 1, 2017. See Note 4 for discussion of the current year impact;

·

As of January 1, 2017, the calculation of diluted weighted average shares outstanding was changed prospectively to no longer include excess tax benefits as assumed proceeds. This change did not have a material impact on our current year diluted earnings per share;

·

Cash flows related to excess tax benefits or deficiencies are included in net cash provided by operating activities rather than as a financing activity. The Company adopted this change retrospectively, which resulted in an increase to net cash provided by operating activities and a corresponding increase to net cash used in financing activities of $27 million for the nine months ended September 30, 2016;

·

Cash paid to taxing authorities when withholding shares from an employee’s vesting or exercise of equity-based compensation awards for tax-withholding purposes is now considered a repurchase of the Company’s equity instruments and is classified as net cash used in financing activities rather than as an operating activity. The Company adopted this change retrospectively, which resulted in an increase to net cash provided by operating activities and a corresponding increase to net cash used in financing activities of $18 million for the nine months ended September 30, 2016; and

·

The Company has elected to continue to estimate forfeitures rather than account for forfeitures as they occur.

Goodwill Impairment Testing — In January 2017, the FASB issued ASU 2017‑04 which simplifies the goodwill impairment test by eliminating Step 2 of the quantitative assessment and should reduce the cost and complexity of evaluating goodwill for impairment. Under the amended guidance, when a quantitative assessment is required, an entity will perform a goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge will be measured as the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of recorded goodwill. This amended guidance, effective for the Company on January 1, 2020, permits early adoption. The Company’s early adoption on January 1, 2017 did not have an impact on our consolidated financial statements.

Reclassifications

When necessary, reclassifications have been made to our prior period financial information to conform to the current year presentation.

2.    Landfill and Environmental Remediation Liabilities

Liabilities for landfill and environmental remediation costs are presented in the table below (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

December 31, 2016

 

 

 

 

 

Environmental

 

 

 

 

 

 

 

Environmental

 

 

 

 

    

Landfill

    

Remediation

    

Total

    

Landfill

    

Remediation

    

Total

Current (in accrued liabilities)

 

$

140

 

$

23

 

$

163

 

$

119

 

$

28

 

$

147

Long-term

 

 

1,500

 

 

227

 

 

1,727

  

 

1,457

 

 

218

 

 

1,675

 

 

$

1,640

 

$

250

 

$

1,890

 

$

1,576

 

$

246

 

$

1,822

 

7


 

WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The changes to landfill and environmental remediation liabilities for the nine months ended September 30, 2017 are reflected in the table below (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

Environmental

 

    

Landfill

    

Remediation

December 31, 2016

 

$

1,576

 

$

246

Obligations incurred and capitalized

 

 

51

  

 

 —

Obligations settled

 

 

(74)

  

 

(14)

Interest accretion

 

 

68

  

 

 2

Revisions in estimates and interest rate assumptions (a)

 

 

14

  

 

16

Acquisitions, divestitures and other adjustments

 

 

 5

  

 

 —

September 30, 2017

 

$

1,640

 

$

250


(a)

Includes a $9 million charge to adjust our subsidiary’s estimated potential share of an environmental remediation liability and related costs for a closed site in Harris County, Texas, as further discussed in Note 6.

At several of our landfills, we provide financial assurance by depositing cash into restricted trust funds or escrow accounts for purposes of settling final capping, closure, post-closure and environmental remediation obligations. Generally, these trust funds are established to comply with statutory requirements and operating agreements. See Note 13 for additional information related to these trusts.

3.    Debt

The following table summarizes the major components of debt as of each balance sheet date (in millions) and provides the maturities and interest rate ranges of each major category as of September 30, 2017:

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2017

    

2016

$2.25 billion revolving credit facility, maturing July 2020 (weighted average interest rate of 1.9% as of December 31, 2016)

 

$

 —

 

$

426

Commercial paper program (weighted average interest rate of 1.4% as of September 30, 2017)

 

 

502

 

 

 —

Other letter of credit facilities, maturing through December 2018

 

 

 —

 

 

 —

Canadian term loan and revolving credit facility, maturing March 2019 (weighted average effective interest rate of 2.5% as of September 30, 2017 and 2.1% as of December 31, 2016)

 

 

143

 

 

239

Senior notes maturing through 2045, interest rates ranging from 2.4% to 7.75% (weighted average interest rate of 4.6% as of September 30, 2017 and December 31, 2016)

 

 

6,033

 

 

6,033

Tax-exempt bonds, maturing through 2045, fixed and variable interest rates ranging from 1.0% to 5.7% (weighted average interest rate of 1.9% as of September 30, 2017 and 1.8% as of December 31, 2016)

 

 

2,339

 

 

2,304

Capital leases and other, maturing through 2055, interest rates up to 12%

 

 

328

 

 

308

 

 

 

9,345

 

 

9,310

Current portion of long-term debt

 

 

850

 

 

417

 

 

$

8,495

 

$

8,893

 

Debt Classification

As of September 30, 2017, we had $1,821 million of debt maturing within the next 12 months, including (i) $590 million of 6.1% senior notes that mature in March 2018; (ii) $551 million of tax-exempt bonds with term interest

8


 

WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

rate periods that expire within the next 12 months, which is prior to their scheduled maturities; (iii) $502 million of short-term borrowings under our commercial paper program and (iv) $178 million of other debt with scheduled maturities within the next 12 months, including $119 million of tax-exempt bonds. As of September 30, 2017, we have classified $971 million of debt as long-term because we have the intent and ability to refinance these borrowings on a long-term basis as supported by the forecasted available capacity under our long-term U.S. revolving credit facility (“$2.25 billion revolving credit facility”), as discussed below. The remaining $850 million is classified as current obligations.

As of September 30, 2017, we also have $471 million of variable-rate tax-exempt bonds that are supported by letters of credit. The interest rates on our variable-rate tax-exempt bonds are generally reset on either a daily or weekly basis through a remarketing process. All recent tax-exempt bond remarketings have successfully placed Company bonds with investors at market-driven rates and we currently expect future remarketings to be successful. However, if the remarketing agent is unable to remarket our bonds, the remarketing agent can put the bonds to us. In the event of a failed remarketing, we have the intent and ability to refinance these bonds on a long-term basis as supported by the forecasted available capacity under our $2.25 billion revolving credit facility, as discussed below. Accordingly, we have also classified these borrowings as long-term in our Condensed Consolidated Balance Sheet as of September 30, 2017.

Access to and Utilization of Credit Facilities and Commercial Paper Program

$2.25 Billion Revolving Credit Facility — Our $2.25 billion revolving credit facility maturing in July 2020 provides us with credit capacity to be used for either cash borrowings or to support letters of credit or commercial paper. The rates we pay for outstanding loans are generally based on LIBOR plus a spread depending on the Company’s debt rating assigned by Moody’s Investors Service and Standard and Poor’s. As of September 30, 2017, we had no outstanding borrowings under this facility. We had $777 million of letters of credit issued and $502 million of outstanding borrowings under our commercial paper program, both supported by this facility, leaving unused and available credit capacity of $971 million as of September 30, 2017.

Commercial Paper Program — In August 2016, we entered into a $1.5 billion commercial paper program that enables us to borrow funds for up to 397 days at competitive interest rates. The commercial paper program is fully supported by our $2.25 billion revolving credit facility.

Canadian Term Loan and Revolving Credit Facility — We have a Canadian credit agreement (which includes a term loan and revolving credit facility) that matures in March 2019. This agreement provides the Company (i) C$50 million of revolving credit capacity, which can be used for borrowings or letters of credit, and (ii) C$460 million of non-revolving term credit that is prepayable without penalty and principal amounts repaid may not be reborrowed. As of September 30, 2017, we had no borrowings or letters of credit outstanding under the Canadian revolving credit facility.

Other Letter of Credit Facilities — As of September 30, 2017, we had utilized $508 million of other letter of credit facilities, which are both committed and uncommitted, with terms maturing through December 2018.

Debt Borrowings and Repayments

$2.25 Billion Revolving Credit Facility — During the nine months ended September 30, 2017, we had net repayments of $426 million under our $2.25 billion revolving credit facility, all of which was replaced with net borrowings under our commercial paper program.

Commercial Paper Program — During the nine months ended September 30, 2017, we had net borrowings of $501 million (net of the related discount on issuance) for general corporate purposes.

9


 

WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Canadian Term Loan — During the nine months ended September 30, 2017, we repaid C$142 million, or $108 million, of net advances under our Canadian term loan with available cash. The remaining change in the carrying value of outstanding borrowings under our Canadian term loan is due to foreign currency translation.

Tax-Exempt Bonds — During the nine months ended September 30, 2017, we repaid $40 million of our tax-exempt bonds with available cash at their scheduled maturities. We issued $75 million of tax-exempt bonds in August 2017. The proceeds from the issuance of these bonds were deposited directly into a trust fund and may only be used for the specific purpose for which the money was raised, which is generally to finance expenditures for landfill and solid waste disposal facility construction and development. Accordingly, the restricted funds provided by these financing activities have not been included in new borrowings in our Condensed Consolidated Statement of Cash Flows.

Capital Leases and Other — During the nine months ended September 30, 2017, we had net repayments of $53 million of other debt paid with available cash. We also entered into $73 million in new capital leases during the nine months ended September 30, 2017 to support new business opportunities.

Cross-Currency Swaps

In March 2016, our Canadian subsidiaries repaid C$370 million of intercompany debt to WM Holdings with proceeds from our Canadian term loan. Concurrent with the repayment of the intercompany debt, we terminated the related cross-currency swaps and received $67 million in cash. The cash received from our termination of these swaps was classified as a change in other current assets and other assets within net cash provided by operating activities in the Condensed Consolidated Statement of Cash Flows. In addition, we recognized $8 million of expense associated with the termination of these swaps during the first quarter of 2016, which was included in other, net in the Condensed Consolidated Statement of Operations.

4.    Income Taxes

Our effective income tax rate for the three and nine months ended September 30, 2017 was 35.7% and 34.9%, respectively, compared with 33.7% and 35.5%, respectively, for the comparable prior year periods. We evaluate our effective income tax rate at each interim period and adjust it as facts and circumstances warrant. The difference between federal income taxes computed at the federal statutory rate and reported income taxes for the three months ended September 30, 2017 was primarily due to the unfavorable impact of state and local income taxes offset, in part, by the favorable impact of federal tax credits and adjustments to our accruals and related deferred taxes due to the filing of our 2016 income tax returns. The difference between federal income taxes computed at the federal statutory rate and reported income taxes for the nine months ended September 30, 2017 was primarily due to the favorable impact of federal tax credits, excess tax benefits related to equity-based compensation and adjustments to our accruals and related deferred taxes due to the filing of our 2016 income tax returns offset, in part, by the unfavorable impact of state and local income taxes and nondeductible impairments.

The difference between federal income taxes computed at the federal statutory rate and reported income taxes for the three months ended September 30, 2016 was primarily due to the favorable impact of federal tax credits and adjustments to our accruals and related deferred taxes due to the filing of our 2015 income tax returns offset, in part, by the unfavorable impact of state and local income taxes and nondeductible impairments and capital losses. The difference between federal income taxes computed at the federal statutory rate and reported income taxes for the nine months ended September 30, 2016 was primarily due to the unfavorable impact of state and local income taxes and nondeductible impairments and capital losses offset, in part, by the favorable impact of federal tax credits, adjustments to our accruals and related deferred taxes due to the filing of our 2015 income tax returns, and tax audit settlements.

10


 

WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Equity-Based Compensation — During the three and nine months ended September 30, 2017, we recognized a reduction in our income tax expense of $1 million and $35 million, respectively, for excess tax benefits related to the vesting or exercise of equity-based compensation awards. See Note 1 for discussion of our adoption of ASU 2016‑09.

Investments Qualifying for Federal Tax Credits — We have significant financial interests in entities established to invest in and manage low-income housing properties and a refined coal facility. We support the operations of these entities in exchange for a pro-rata share of the tax credits they generate. The low-income housing investments and the coal facility’s refinement processes qualify for federal tax credits that we expect to realize through 2020 under Section 42 and through 2019 under Section 45, respectively, of the Internal Revenue Code.

We account for our investments in these entities using the equity method of accounting, recognizing our share of each entity’s results of operations and other reductions in the value of our investments in equity in net losses of unconsolidated entities, within our Condensed Consolidated Statements of Operations. During the three and nine months ended September 30, 2017, we recognized $6 million and $21 million of net losses and a reduction in our income tax expense of $14 million and $39 million, respectively, primarily because of tax credits realized from these investments. During the three and nine months ended September 30, 2016, we recognized $7 million and $22 million of net losses and a reduction in our income tax expense of $15 million and $40 million, respectively, primarily because of tax credits realized from these investments. Interest expense associated with our investment in low-income housing properties was not material for the periods presented. See Note 13 for additional information related to these unconsolidated variable interest entities.

5.    Earnings Per Share

Basic and diluted earnings per share were computed using the following common share data (shares in millions):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2017

    

2016

    

2017

    

2016

Number of common shares outstanding at end of period

 

434.2

 

442.0

 

434.2

 

442.0

Effect of using weighted average common shares outstanding

 

3.6

 

0.9

 

6.1

 

2.3

Weighted average basic common shares outstanding

 

437.8

 

442.9

 

440.3

 

444.3

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

 

3.0

 

2.8

 

3.0

 

2.8

Weighted average diluted common shares outstanding

 

440.8

 

445.7

 

443.3

 

447.1

Potentially issuable shares

 

8.2

 

9.2

 

8.2

 

9.2

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

 

1.9

 

0.5

 

2.3

 

0.5


(a)

As of January 1, 2017, we adopted ASU 2016‑09 prospectively and no longer include excess tax benefits as assumed proceeds. See Note 1 for further discussion.

6.    Commitments and Contingencies

Financial Instruments — We have obtained letters of credit, surety bonds and insurance policies and have established trust funds and issued financial guarantees to support tax-exempt bonds, contracts, performance of landfill final capping, closure and post-closure requirements, environmental remediation and other obligations. Letters of credit generally are supported by our $2.25 billion revolving credit facility and other credit facilities established for that purpose. These facilities are discussed further in Note 3. Surety bonds and insurance policies are supported by (i) a diverse group of third-party surety and insurance companies; (ii) an entity in which we have a noncontrolling financial interest or (iii) wholly-owned insurance companies, the sole business of which is to issue surety bonds and/or insurance policies on our behalf.

11


 

WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Management does not expect that any claims against or draws on these instruments would have a material adverse effect on our financial condition, results of operations or cash flows. We have not experienced any unmanageable difficulty in obtaining the required financial assurance instruments for our current operations. In an ongoing effort to mitigate risks of future cost increases and reductions in available capacity, we continue to evaluate various options to access cost-effective sources of financial assurance.

Insurance — We carry insurance coverage for protection of our assets and operations from certain risks including general liability, automobile liability, real and personal property, workers’ compensation, directors’ and officers’ liability, pollution legal liability and other coverages we believe are customary to the industry. Our exposure to loss for insurance claims is generally limited to the per incident deductible under the related insurance policy. Our exposure could increase if our insurers are unable to meet their commitments on a timely basis.

We have retained a significant portion of the risks related to our general liability, automobile liability and workers’ compensation claims programs. “General liability” refers to the self-insured portion of specific third-party claims made against us that may be covered under our commercial General Liability Insurance Policy. For our self-insured retentions, the exposure for unpaid claims and associated expenses, including incurred but not reported losses, is based on an actuarial valuation or internal estimates. The accruals for these liabilities could be revised if future occurrences or loss development significantly differ from such valuations and estimates. We do not expect the impact of any known casualty, property, environmental or other contingency to have a material impact on our financial condition, results of operations or cash flows.

Guarantees — In the ordinary course of our business, WM and WM Holdings enter into guarantee agreements associated with their subsidiaries’ operations. Additionally, WM and WM Holdings have each guaranteed all of the senior debt of the other entity. No additional liabilities have been recorded for these intercompany guarantees because all of the underlying obligations are reflected in our Condensed Consolidated Balance Sheets. See Note 14 for further discussion.

We have also guaranteed the obligations and certain performance requirements of, and provided indemnification to, third parties as of September 30, 2017 in connection with both consolidated and unconsolidated entities, including agreements guaranteeing certain market value losses for approximately 850 homeowners’ properties adjacent to or near 22 of our landfills. Our indemnification obligations generally arise from divestitures and provide that we will be responsible for liabilities associated with our operations for events that occurred prior to the sale of the operations. Additionally, under certain of our acquisition agreements, we have provided for additional consideration to be paid to the sellers if established financial targets or other market conditions are achieved post-closing and we have recognized liabilities for these contingent obligations based on an estimate of the fair value of these contingencies at the time of acquisition. We do not currently believe that contingent obligations to provide indemnification or pay additional post-closing consideration in connection with our divestitures or acquisitions will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

In December 2014, we sold our Wheelabrator business, which provides waste-to-energy services and manages waste-to-energy facilities and independent power production plants. Before the divestiture of our Wheelabrator business, WM had guaranteed certain operational and financial performance obligations of Wheelabrator and its subsidiaries in the ordinary course of business. In conjunction with the divestiture, certain WM guarantees of Wheelabrator obligations were terminated, but others continued and are now guarantees of third-party obligations. When possible, Wheelabrator seeks to have the applicable third-party beneficiaries release WM from these guarantees, but until such efforts are successful or the underlying financial commitments are restructured, WM has agreed to retain the guarantees and, in exchange, receive a credit support fee or other financial assurances guaranteed by a third-party financial institution to protect WM in the event of non-compliance by Wheelabrator. The most significant of these guarantees specifically define WM’s maximum financial obligation over the course of the relevant agreements. As of September 30, 2017 and December 31, 2016, WM’s maximum future payments under these guarantees was $96 million. WM’s exposure under certain of the performance guarantees is variable and a maximum exposure is not defined. We have recorded the fair value of the operational and

12


 

WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

financial performance guarantees, some of which could extend through 2038 if not terminated, in our Condensed Consolidated Balance Sheets. The estimated fair value of WM’s potential obligation associated with guarantees of Wheelabrator’s obligations (net of credit support fee or indemnification asset) decreased from $11 million as of December 31, 2016 to $3 million as of September 30, 2017 primarily due to the release of certain performance guarantees by third-party beneficiaries. We currently do not expect the financial impact of such operational and financial performance guarantees to materially exceed the recorded fair value.

Environmental Matters — A significant portion of our operating costs and capital expenditures could be characterized as costs of environmental protection. The nature of our operations, particularly with respect to the construction, operation and maintenance of our landfills, subjects us to an array of laws and regulations relating to the protection of the environment. Under current laws and regulations, we may have liabilities for environmental damage caused by our operations, or for damage caused by conditions that existed before we acquired a site. In addition to remediation activity required by state or local authorities, such liabilities include potentially responsible party (“PRP”) investigations. The costs associated with these liabilities can include settlements, certain legal and consultant fees, as well as incremental internal and external costs directly associated with site investigation and clean-up.

Estimating our degree of responsibility for remediation is inherently difficult. We recognize and accrue for an estimated remediation liability when we determine that such liability is both probable and reasonably estimable. Determining the method and ultimate cost of remediation requires that a number of assumptions be made. There can sometimes be a range of reasonable estimates of the costs associated with the likely site remediation alternatives identified in the environmental impact investigation. In these cases, we use the amount within the range that is our best estimate. If no amount within a range appears to be a better estimate than any other, we use the amount that is the low end of such range. If we used the high ends of such ranges, our aggregate potential liability would be approximately $140 million higher than the $250 million recorded in the Condensed Consolidated Balance Sheet as of September 30, 2017. Our ultimate responsibility may differ materially from current estimates. It is possible that technological, regulatory or enforcement developments, the results of environmental studies, the inability to identify other PRPs, the inability of other PRPs to contribute to the settlements of such liabilities, or other factors could require us to record additional liabilities. Our ongoing review of our remediation liabilities, in light of relevant internal and external facts and circumstances, could result in revisions to our accruals that could cause upward or downward adjustments to our balance sheet and income from operations. These adjustments could be material in any given period.

As of September 30, 2017, we have been notified by the government that we are a PRP in connection with 75 locations listed on the Environmental Protection Agency’s (“EPA’s”) Superfund National Priorities List (“NPL”). Of the 75 sites at which claims have been made against us, 15 are sites we own. Each of the NPL sites we own was initially developed by others as a landfill disposal facility. At each of these facilities, we are working in conjunction with the government to evaluate or remediate identified site problems, and we have either agreed with other legally liable parties on an arrangement for sharing the costs of remediation or are working toward a cost-sharing agreement. We generally expect to receive any amounts due from other participating parties at or near the time that we make the remedial expenditures. The other 60 NPL sites, which we do not own, are at various procedural stages under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, known as CERCLA or Superfund.

The majority of proceedings involving NPL sites that we do not own are based on allegations that certain of our subsidiaries (or their predecessors) transported hazardous substances to the sites, often prior to our acquisition of these subsidiaries. CERCLA generally provides for liability for those parties owning, operating, transporting to or disposing at the sites. Proceedings arising under Superfund typically involve numerous waste generators and other waste transportation and disposal companies and seek to allocate or recover costs associated with site investigation and remediation, which costs could be substantial and could have a material adverse effect on our consolidated financial statements. At some of the sites at which we have been identified as a PRP, our liability is well defined as a consequence of a governmental decision and an agreement among liable parties as to the share each will pay for implementing that remedy. At other sites,

13


 

WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

where no remedy has been selected or the liable parties have been unable to agree on an appropriate allocation, our future costs are uncertain.

On October 11, 2017, the EPA issued its Record of Decision (“ROD”) with respect to the previously proposed remediation plan for the San Jacinto waste pits in Harris County, Texas. McGinnes Industrial Maintenance Corporation (“MIMC”), an indirect wholly-owned subsidiary of WM, has been named as a PRP. MIMC operated the waste pits from 1965 to 1966. In 1998, WM acquired the stock of the parent entity of MIMC. MIMC has been working with the EPA and other named PRPs as the process of addressing the site proceeds. During 2016, MIMC’s environmental remediation liability reserves were increased by $44 million to record its estimated potential share of the EPA’s proposed remedy and related costs and MIMC filed comments, detailing its disagreement with the proposed remedy. MIMC remains in disagreement with the remedy set forth in the ROD, and continues to recommend a solution that better protects the environment and public health. Due to the increased estimated cost of the remedy set forth in the ROD, MIMC’s environmental remediation liability reserves have been further increased by $9 million during the current quarter to record its estimated potential share and related costs. MIMC’s ultimate liability could be materially different from current estimates. Allocation of responsibility among the PRPs for the proposed remedy has not been established, and MIMC will continue to engage the EPA regarding the remediation plan selected in the ROD. As of September 30, 2017 and December 31, 2016, our recorded liability for MIMC’s estimated potential share of the EPA’s proposed remedy and related costs was $54 million and $46 million, respectively.

Item 103 of the SEC’s Regulation S-K requires disclosure of certain environmental matters when a governmental authority is a party to the proceedings, or such proceedings are known to be contemplated, unless we reasonably believe that the matter will result in no monetary sanctions, or in monetary sanctions, exclusive of interest and costs, of less than $100,000. The following matters are disclosed in accordance with that requirement. We do not currently believe that the eventual outcome of any such matters, individually or in the aggregate, could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

On January 10, 2017, the Pennsylvania Department of Environmental Protection (“DEP”) solid waste program advised us that it intends to seek civil penalties against the Grows North and Tullytown Landfills (“Grows/Tullytown”), located in southeast Pennsylvania and owned by indirect wholly-owned subsidiaries of WM, related to operational issues, including litter and leachate discharges. Additionally, we received notice on March 15, 2017 that the DEP clean water program also intends to seek civil penalties related to similar underlying events and operational issues at Grows/Tullytown. On September 19, 2017, we received an updated assessment proposal from the DEP for these matters. Our internal review of these matters is in process.

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

Waste Management of Hawaii, Inc. (“WMHI”), an indirect wholly-owned subsidiary of WM, may face civil claims from the Hawaii Department of Health and/or the EPA based on stormwater discharges at the Waimanalo Gulch Sanitary Landfill, which WMHI operates for the city and county of Honolulu, following two major rainstorms in December 2010 and January 2011 and alleged violations of stormwater permit requirements prior to and after the storms.

From time to time, we are also named as defendants in personal injury and property damage lawsuits, including purported class actions, on the basis of having owned, operated or transported waste to a disposal facility that is alleged to have contaminated the environment or, in certain cases, on the basis of having conducted environmental remediation activities at sites. Some of the lawsuits may seek to have us pay the costs of monitoring of allegedly affected sites and health care examinations of allegedly affected persons for a substantial period of time even where no actual damage is

14


 

WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

proven. While we believe we have meritorious defenses to these lawsuits, the ultimate resolution is often substantially uncertain due to the difficulty of determining the cause, extent and impact of alleged contamination (which may have occurred over a long period of time), the potential for successive groups of complainants to emerge, the diversity of the individual plaintiffs’ circumstances, and the potential contribution or indemnification obligations of co-defendants or other third parties, among other factors. Additionally, we often enter into agreements with landowners imposing obligations on us to meet certain regulatory or contractual conditions upon site closure or upon termination of the agreements. Compliance with these agreements inherently involves subjective determinations and may result in disputes, including litigation.

Litigation — As a large company with operations across the United States and Canada, we are subject to various proceedings, lawsuits, disputes and claims arising in the ordinary course of our business. Many of these actions raise complex factual and legal issues and are subject to uncertainties. Actions that have been filed against us, and that may be filed against us in the future, include personal injury, property damage, commercial, customer, and employment-related claims, including purported state and national class action lawsuits related to: alleged environmental contamination, including releases of hazardous material and odors; sales and marketing practices, customer service agreements and prices and fees; and federal and state wage and hour and other laws. The plaintiffs in some actions seek unspecified damages or injunctive relief, or both. These actions are in various procedural stages, and some are covered, in part, by insurance. We currently do not believe that the eventual outcome of any such actions will have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

WM’s charter and bylaws provide that WM shall indemnify against all liabilities and expenses, and upon request shall advance expenses to any person, who is subject to a pending or threatened proceeding because such person is or was a director or officer of the Company. Such indemnification is required to the maximum extent permitted under Delaware law. Accordingly, the director or officer must execute an undertaking to reimburse the Company for any fees advanced if it is later determined that the director or officer was not permitted to have such fees advanced under Delaware law. Additionally, the Company has direct contractual obligations to provide indemnification to each of the members of WM’s Board of Directors and each of WM’s executive officers. The Company may incur substantial expenses in connection with the fulfillment of its advancement of costs and indemnification obligations in connection with actions or proceedings that may be brought against its former or current officers, directors and employees.

Multiemployer Defined Benefit Pension Plans — About 20% of our workforce is covered by collective bargaining agreements with various local unions across the United States and Canada. As a result of some of these agreements, certain of our subsidiaries are participating employers in a number of trustee-managed multiemployer defined benefit pension plans (“Multiemployer Pension Plans”) for the covered employees. In connection with our ongoing renegotiation of various collective bargaining agreements, we may discuss and negotiate for the complete or partial withdrawal from one or more of these Multiemployer Pension Plans. A complete or partial withdrawal from a Multiemployer Pension Plan may also occur if employees covered by a collective bargaining agreement vote to decertify a union from continuing to represent them. Any other circumstance resulting in a decline in Company contributions to a Multiemployer Pension Plan through a reduction in the labor force, whether through attrition over time or through a business event (such as the discontinuation or nonrenewal of a customer contract, the decertification of a union, or relocation, reduction or discontinuance of certain operations) may also trigger a complete or partial withdrawal from one or more of these pension plans.

During the third quarter of 2017, we recognized an $11 million charge in operating expenses for the withdrawal from an underfunded Multiemployer Pension Plan. We do not believe that any future liability relating to our past or current participation in, or withdrawals from, the Multiemployer Pension Plans to which we contribute will have a material adverse effect on our business, financial condition or liquidity. However, liabilities for future withdrawals could have a material adverse effect on our results of operations or cash flows for a particular reporting period, depending on the number of employees withdrawn and the financial condition of the Multiemployer Pension Plan(s) at the time of such withdrawal(s).

Tax Matters — We participate in the IRS’s Compliance Assurance Process, which means we work with the IRS throughout the year towards resolving any material issues prior to the filing of our annual tax return. Any unresolved issues

15


 

WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

as of the tax return filing date are subject to routine examination procedures. We are currently in the examination phase of IRS audits for the 2014 through 2017 tax years and expect these audits to be completed within the next 27 months. We are also currently undergoing audits by various state and local jurisdictions for tax years that date back to 2009, with the exception of affirmative claims in a limited number of jurisdictions that date back to 2000. We maintain a liability for uncertain tax positions, the balance of which management believes is adequate. Results of audit assessments by taxing authorities are not currently expected to have a material adverse effect on our financial condition, results of operations or cash flows.

7.    Segment and Related Information

We evaluate, oversee and manage the financial performance of our Solid Waste business subsidiaries through our 17 Areas. The 17 Areas constitute our operating segments and none of the Areas individually meet the quantitative criteria to be a separate reportable segment. We have evaluated the aggregation criteria and concluded that, based on the similarities between our Areas, including the fact that our Solid Waste business is homogenous across geographies with the same services offered across the Areas, aggregation of our Areas is appropriate for purposes of presenting our reportable segments. Accordingly, we have aggregated our 17 Areas into three tiers that we believe have similar economic characteristics and future prospects based in large part on a review of the Areas’ income from operations margins. The economic variations experienced by our Areas are attributable to a variety of factors, including regulatory environment of the Area; economic environment of the Area, including level of commercial and industrial activity; population density; service offering mix and disposal logistics, with no one factor being singularly determinative of an Area’s current or future economic performance.

Tier 1 is comprised of our operations across the Southern United States, with the exception of Southern California and the Florida peninsula, and also includes the New England states, the tri-state area of Michigan, Indiana and Ohio, and Western Canada. Tier 2 includes Southern California, Eastern Canada, Wisconsin, Minnesota and a portion of the lower Mid-Atlantic region of the United States. Tier 3 encompasses all the remaining operations including the Pacific Northwest and Northern California, the majority of the Mid-Atlantic region of the United States, the Florida peninsula, Illinois and Missouri.

The operating segments not evaluated and overseen through the 17 Areas are presented herein as “Other” as these operating segments do not meet the criteria to be aggregated with other operating segments and do not meet the quantitative criteria to be separately reported.

16


 

WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Summarized financial information concerning our reportable segments is shown in the following table (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Intercompany

 

Net

 

Income

 

 

Operating

 

Operating

 

Operating

 

from

 

    

Revenues

    

Revenues

    

Revenues

    

Operations

Three Months Ended September 30:

 

 

  

 

 

  

 

 

  

 

 

  

2017

 

 

  

 

 

  

 

 

  

 

 

  

Solid Waste:

 

 

  

 

 

  

 

 

  

 

 

  

Tier 1

 

$

1,432

 

$

(258)

 

$

1,174

 

$

398

Tier 2

 

 

924

 

 

(171)

 

 

753

 

 

180

Tier 3

 

 

1,447

 

 

(256)

 

 

1,191

 

 

275

Solid Waste

 

 

3,803

 

 

(685)

 

 

3,118

 

 

853

Other

 

 

662

 

 

(64)

 

 

598

 

 

(16)

 

 

 

4,465

 

 

(749)

 

 

3,716

 

 

837

Corporate and Other

 

 

 —

 

 

 —

 

 

 —

 

 

(136)

Total

 

$

4,465

 

$

(749)

 

$

3,716

 

$

701

 

 

 

 

 

 

 

 

 

 

 

 

 

2016

 

 

  

 

 

  

 

 

  

 

 

  

Solid Waste:

 

 

  

 

 

  

 

 

  

 

 

  

Tier 1

 

$

1,364

 

$

(238)

 

$

1,126

 

$

369

Tier 2

 

 

885

 

 

(162)

 

 

723

 

 

121

Tier 3

 

 

1,382

 

 

(241)

 

 

1,141

 

 

238

Solid Waste

 

 

3,631

 

 

(641)

 

 

2,990

 

 

728

Other

 

 

608

 

 

(50)

 

 

558

 

 

(30)

 

 

 

4,239

 

 

(691)

 

 

3,548

 

 

698

Corporate and Other

 

 

 —

 

 

 —

 

 

 —

 

 

(138)

Total

 

$

4,239

 

$

(691)

 

$

3,548

 

$

560

 

 

17


 

WASTE MANAGEMENT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross

 

Intercompany

 

Net

 

Income

 

 

Operating

 

Operating

 

Operating

 

from

 

    

Revenues

    

Revenues

    

Revenues

    

Operations

Nine Months Ended September 30:

 

 

  

 

 

  

 

 

  

 

 

  

2017

 

 

  

 

 

  

 

 

  

 

 

  

Solid Waste:

 

 

  

 

 

  

 

 

  

 

 

  

Tier 1

 

$

4,189

 

$

(754)

 

$

3,435

 

$

1,159

Tier 2

 

 

2,682

 

 

(493)

 

 

2,189

 

 

527

Tier 3

 

 

4,200