UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the Quarterly Period Ended | |
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 |
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
(Address of principal executive offices)
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol |
| Name of each exchange on which registered |
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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.
☑ | Accelerated filer ☐ | |
Non-accelerated filer | ☐ | Smaller reporting company |
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
The number of shares of Common Stock, $0.01 par value, of the registrant outstanding at May 1, 2020 was
PART I.
Item 1. Financial Statements.
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions, Except Share and Par Value Amounts)
March 31, | December 31, | |||||
| 2020 |
| 2019 | |||
(Unaudited) | ||||||
ASSETS | ||||||
Current assets: |
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Cash and cash equivalents | $ | | $ | | ||
Accounts receivable, net of allowance for doubtful accounts of $ |
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Other receivables, net of allowance for doubtful accounts of $ |
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Parts and supplies |
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Other assets |
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Total current assets |
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Property and equipment, net of accumulated depreciation and amortization of $ |
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Goodwill |
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Other intangible assets, net |
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Restricted trust and escrow accounts |
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Investments in unconsolidated entities |
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Other assets |
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Total assets | $ | | $ | | ||
LIABILITIES AND EQUITY | ||||||
Current liabilities: |
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Accounts payable | $ | | $ | | ||
Accrued liabilities |
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Deferred revenues |
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Current portion of long-term debt |
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Total current liabilities |
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Long-term debt, less current portion |
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Deferred income taxes |
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Landfill and environmental remediation liabilities |
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Other liabilities |
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Total liabilities |
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Commitments and contingencies |
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Equity: |
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Waste Management, Inc. stockholders’ equity: |
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Common stock, $ |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive income (loss) |
| ( |
| ( | ||
Treasury stock at cost, |
| ( |
| ( | ||
Total Waste Management, Inc. stockholders’ equity |
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Noncontrolling interests |
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Total equity |
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Total liabilities and equity | $ | | $ | |
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 | ||||||
March 31, | ||||||
| 2020 |
| 2019 | |||
Operating revenues | $ | | $ | | ||
Costs and expenses: |
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Operating |
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Selling, general and administrative |
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Depreciation and amortization |
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Restructuring |
| — |
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Income from operations |
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Other income (expense): |
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Interest expense, net |
| ( |
| ( | ||
Equity in net losses of unconsolidated entities |
| ( |
| ( | ||
Other, net |
| — |
| ( | ||
| ( |
| ( | |||
Income before income taxes |
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Income tax expense |
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Consolidated net income |
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Less: Net loss attributable to noncontrolling interests |
| — |
| — | ||
Net income attributable to Waste Management, Inc. | $ | | $ | | ||
Basic earnings per common share | $ | | $ | | ||
Diluted earnings per common share | $ | | $ | |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Millions)
(Unaudited)
Three Months Ended | |||||
March 31, | |||||
2020 |
| 2019 | |||
Consolidated net income | $ | | $ | | |
Other comprehensive income (loss), net of tax: |
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Derivative instruments, net |
| |
| | |
Available-for-sale securities, net |
| ( |
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Foreign currency translation adjustments |
| ( |
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Post-retirement benefit obligation, net |
| — |
| ( | |
Other comprehensive income (loss), net of tax |
| ( |
| | |
Comprehensive income |
| |
| | |
Less: Comprehensive loss attributable to noncontrolling interests |
| — |
| — | |
Comprehensive income attributable to Waste Management, Inc. | $ | | $ | |
See Notes to Condensed Consolidated Financial Statements.
3
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
Three Months Ended | ||||||
March 31, | ||||||
| 2020 |
| 2019 | |||
Cash flows from operating activities: |
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Consolidated net income |
| $ | | $ | | |
Adjustments to reconcile consolidated net income to net cash provided by operating activities: |
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Depreciation and amortization |
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Deferred income tax expense (benefit) |
| ( |
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Interest accretion on landfill liabilities |
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Provision for bad debts |
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Equity-based compensation expense |
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Net gain on disposal of assets |
| ( |
| ( | ||
Loss from divestitures, asset impairments and other, net |
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Equity in net losses of unconsolidated entities, net of dividends |
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Change in operating assets and liabilities, net of effects of acquisitions and divestitures: |
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Receivables |
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Other current assets |
| ( |
| ( | ||
Other assets |
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| ( | ||
Accounts payable and accrued liabilities |
| ( |
| ( | ||
Deferred revenues and other liabilities |
| ( |
| ( | ||
Net cash provided by operating activities |
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Cash flows from investing activities: |
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Acquisitions of businesses, net of cash acquired |
| ( |
| ( | ||
Capital expenditures |
| ( |
| ( | ||
Proceeds from divestitures of businesses and other assets (net of cash divested) |
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Other, net |
| ( |
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Net cash used in investing activities |
| ( |
| ( | ||
Cash flows from financing activities: |
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New borrowings |
| — |
| — | ||
Debt repayments |
| ( |
| ( | ||
Net commercial paper borrowings |
| — |
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Common stock repurchase program |
| ( |
| ( | ||
Cash dividends |
| ( |
| ( | ||
Exercise of common stock options |
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Tax payments associated with equity-based compensation transactions |
| ( |
| ( | ||
Other, net |
| ( |
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Net cash provided by (used in) financing activities |
| ( |
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Effect of exchange rate changes on cash, cash equivalents and restricted cash and cash equivalents |
| ( |
| — | ||
Increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents |
| ( |
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Cash, cash equivalents and restricted cash and cash equivalents at beginning of period |
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Cash, cash equivalents and restricted cash and cash equivalents at end of period |
| $ | | $ | | |
Reconciliation of cash, cash equivalents and restricted cash and cash equivalents at end of period: | ||||||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash and cash equivalents included in other current assets | | | ||||
Restricted cash and cash equivalents included in restricted trust and escrow accounts | | | ||||
Cash, cash equivalents and restricted cash and cash equivalents at end of period |
| $ | | $ | |
See Notes to Condensed Consolidated Financial Statements.
4
WASTE MANAGEMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS 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 | ||||||||
2020 | |||||||||||||||||||||||||
Balance, December 31, 2019 | $ | | | $ | | $ | | $ | | $ | ( |
| ( | $ | ( | $ | | ||||||||
Adoption of new accounting standard | ( | — | — | — | ( | — | — | — | — | ||||||||||||||||
Consolidated net income |
| | — |
| — |
| — |
| |
| — |
| — |
| — |
| — | ||||||||
Other comprehensive income (loss), net of tax |
| ( | — |
| — |
| — |
| — |
| ( |
| — |
| — |
| — | ||||||||
Cash dividends declared of $ |
| ( | — |
| — |
| — |
| ( |
| — |
| — |
| — |
| — | ||||||||
Equity-based compensation transactions, net |
| | — |
| — |
| ( |
| |
| — |
| |
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| — | ||||||||
Common stock repurchase program |
| ( | — |
| — |
| — |
| — |
| — |
| ( |
| ( |
| — | ||||||||
Other, net |
| — | — |
| — |
| — |
| — |
| — |
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| — |
| — | ||||||||
Balance, March 31, 2020 | $ | | | $ | | $ | | $ | | $ | ( |
| ( | $ | ( | $ | | ||||||||
2019 | |||||||||||||||||||||||||
Balance, December 31, 2018 | $ | | | $ | | $ | | $ | | $ | ( |
| ( | $ | ( | $ | | ||||||||
Consolidated net income |
| | — |
| — |
| — |
| |
| — |
| — |
| — |
| — | ||||||||
Other comprehensive income (loss), net of tax |
| | — |
| — |
| — |
| — |
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| — |
| — |
| — | ||||||||
Cash dividends declared of $ |
| ( | — |
| — |
| — |
| ( |
| — |
| — |
| — |
| — | ||||||||
Equity-based compensation transactions, net |
| | — |
| — |
| ( |
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| — |
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| — | ||||||||
Common stock repurchase program |
| ( | — |
| — |
| — |
| — |
| — |
| ( |
| ( |
| — | ||||||||
Other, net |
| | — |
| — |
| — |
| — |
| — |
| |
| — |
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Balance, March 31, 2019 | $ | | | $ | | $ | | $ | | $ | ( |
| ( | $ | ( | $ | |
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 provide collection, transfer, disposal, and recycling and resource recovery services. Through our subsidiaries, we are also a leading developer, operator and owner of landfill gas-to-energy facilities in the United States (“U.S.”).
We evaluate, oversee and manage the financial performance of our Solid Waste business subsidiaries through our
The Condensed Consolidated Financial Statements as of March 31, 2020 and for the three months ended March 31, 2020 and 2019 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, 2019.
In preparing our financial statements, we make numerous estimates and assumptions that affect the accounting for and recognition and disclosure of assets, liabilities, equity, revenues and expenses. We must make these estimates and assumptions because certain information that we use is dependent on future events, cannot be calculated with precision from available data or simply cannot be calculated. In some cases, these estimates are difficult to determine, and we must exercise significant judgment. In preparing our financial statements, the most difficult, subjective and complex estimates and the assumptions that present the greatest amount of uncertainty relate to our accounting for landfills, environmental remediation liabilities, long-lived asset impairments and reserves associated with our insured and self-insured claims. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our financial statements.
Revenue Recognition
We generally recognize revenue as services are performed or products are delivered. For example, revenue typically is recognized as waste is collected, tons are received at our landfills or transfer stations, or recycling commodities are collected or delivered as product. We bill for certain services prior to performance. Such services include, among others, certain commercial and residential contracts and equipment rentals. These advance billings are included in deferred revenues and recognized as revenue in the period service is provided. Substantially all our deferred revenues during the reported periods are realized as revenues within
6
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Contract Acquisition Costs
Our incremental direct costs of obtaining a contract, which consist primarily of sales incentives, are generally deferred and amortized to selling, general and administrative expense over the estimated life of the relevant customer relationship, ranging from
As of March 31, 2020 and December 31, 2019, we had $
Leases
Amounts for our operating lease right-of-use assets are recorded in long-term other assets in our Condensed Consolidated Balance Sheets. The current and long-term portion of our operating lease liabilities are reflected in accrued liabilities and other long-term liabilities, respectively, in our Condensed Consolidated Balance Sheets. Amounts for our financing leases are recorded in property and equipment, net of accumulated depreciation, and current or long-term debt in our Condensed Consolidated Balance Sheets, as appropriate.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, investments held within our restricted trust and escrow accounts, and accounts receivable. We make efforts to control our exposure to credit risk associated with these instruments by (i) placing our assets and other financial interests with a diverse group of credit-worthy financial institutions; (ii) holding high-quality financial instruments while limiting investments in any one instrument and (iii) maintaining strict policies over credit extension that include credit evaluations, credit limits and monitoring procedures, although generally we do not have collateral requirements for credit extensions. We also control our exposure associated with trade receivables by discontinuing service, to the extent allowable, to non-paying customers. However, our overall credit risk associated with trade receivables is limited due to the large number and diversity of customers we serve.
Adoption of New Accounting Standards
Financial Instruments-Credit Losses — In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13 associated with the measurement of credit losses on financial instruments. On January 1, 2020, we adopted this ASU using the modified retrospective transition method. The amended guidance replaced the previous incurred loss impairment methodology of recognizing credit losses when a loss is probable, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to assess credit loss estimates. This expected loss model generally results in earlier recognition of an allowance for losses. We recognized a net $
Our receivables, which are recorded when billed, when services are performed or when cash is advanced, are claims against third parties that will generally be settled in cash. The carrying value of our receivables, net of the allowance for doubtful accounts, represents the estimated net realizable value. Past-due receivable balances are written off when our internal collection efforts have been unsuccessful. Also, we recognize interest income on long-term interest-bearing notes
7
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
receivable as the interest accrues under the terms of the notes. We no longer accrue interest once the notes are deemed uncollectible.
For trade receivables the Company relies upon, among other factors, historical loss trends, the age of outstanding receivables, and existing as well as expected economic conditions. Due to the adoption of ASU 2016-13, we recognized a $
In January 2020, the World Health Organization declared a novel strain of coronavirus (“COVID-19”) a Public Health Emergency of International Concern and subsequently declared COVID-19 a global pandemic in March 2020. Our reserves established as of March 31, 2020 include consideration of the expected impact from the COVID-19 pandemic. As of March 31, 2020, we had $
The following table reflects the activity in our allowance for doubtful accounts of trade receivables for the quarters ended March 31 (in millions):
| 2020 |
| 2019 | |||
Balance as of January 1 | $ | | $ | | ||
Adoption of new accounting standard |
| ( |
| — | ||
Additions charged to expense |
| |
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Accounts written-off, net of recoveries |
| ( |
| ( | ||
Acquisitions, divestitures and other, net |
| ( |
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Balance as of March 31 | $ | | $ | |
For other receivables as well as loans and other instruments, the Company relies primarily on credit ratings and their associated default rates based on the maturity of the instrument. All receivables, as well as other instruments, are adjusted for our expectation of future conditions and trends. Due to the adoption of ASU 2016-13, we recognized a $
Implementation Costs Incurred in a Cloud Computing Arrangement — In August 2018, the FASB issued ASU 2018-15 associated with a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Costs for implementation activities in the application development stage are capitalized as prepayments depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages are expensed as the activities are performed. The Company adopted this amended guidance on January 1, 2020 prospectively, and it did not have a material impact on our consolidated financial statements.
Reclassifications
When necessary, reclassifications have been made to our prior period financial information to conform to the current year presentation and are not material to our consolidated financial statements.
8
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2. Landfill and Environmental Remediation Liabilities
Liabilities for landfill and environmental remediation costs are presented in the table below (in millions):
March 31, 2020 | December 31, 2019 | |||||||||||||||||
Environmental | Environmental | |||||||||||||||||
| Landfill |
| Remediation |
| Total |
| Landfill |
| Remediation |
| Total | |||||||
Current (in accrued liabilities) |
| $ | | $ | | $ | | $ | | $ | | $ | | |||||
Long-term |
| |
| |
| |
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| |
| |
| | |||||
| $ | | $ | | $ | | $ | | $ | | $ | |
The changes to landfill and environmental remediation liabilities for the three months ended March 31, 2020 are reflected in the table below (in millions):
Environmental | ||||||
| Landfill |
| Remediation | |||
December 31, 2019 | $ | | $ | | ||
Obligations incurred and capitalized |
| |
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| — | |
Obligations settled |
| ( |
|
| ( | |
Interest accretion |
| |
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| | |
Revisions in estimates and interest rate assumptions (a) |
| |
|
| | |
Acquisitions, divestitures and other adjustments |
| ( |
|
| — | |
March 31, 2020 | $ | | $ | |
(a) | The amount reported for our environmental remediation liabilities includes an increase of $ |
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 and Interest Rate Derivatives
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 March 31, 2020:
March 31, | December 31, | |||||
| 2020 |
| 2019 | |||
Senior notes, maturing through 2049, interest rates ranging from | $ | | $ | | ||
Canadian senior notes, C$ |
| |
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Tax-exempt bonds, maturing through 2048, fixed and variable interest rates ranging from |
| |
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Financing leases and other, maturing through 2071, weighted average interest rate of |
| |
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Debt issuance costs, discounts and other |
| ( |
| ( | ||
| |
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Current portion of long-term debt |
| |
| | ||
$ | | $ | |
9
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Debt Classification
As of March 31, 2020, we had approximately $
As of March 31, 2020, we also have $
Access to and Utilization of Credit Facilities and Commercial Paper Program
$3.5 Billion Revolving Credit Facility — Our $3.5 billion revolving credit facility provides us with credit capacity to be used for cash borrowings, to support letters of credit and to support our commercial paper program. The rates we pay for outstanding U.S. or Canadian loans are generally based on LIBOR or CDOR, respectively, plus a spread depending on the Company’s debt rating assigned by Moody’s Investors Service and Standard and Poor’s. As of March 31, 2020, we had
Commercial Paper Program — We have a commercial paper program that enables us to borrow funds for up to
Other Letter of Credit Facilities — As of March 31, 2020, we had utilized $
Debt Borrowings and Repayments
Senior Notes — In May 2019, WM issued $
10
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
any reason, we will be required to redeem all of such outstanding notes equal to
Canadian Senior Notes — The $
Financing Leases and Other — The decrease during the three months ended March 31, 2020 is due to $
Interest Rate Derivatives
In the first quarter of 2020, we entered into a treasury rate lock with a total notional value of $
4. Income Taxes
Our effective income tax rate was
Equity-Based Compensation — During the three months ended March 31, 2020 and 2019, we recognized a reduction in our income tax expense of $
Investments Qualifying for Federal Tax Credits — We have significant financial interests in entities established to invest in and manage low-income housing properties. 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 qualify for federal tax credits that we expect to realize through 2030 under Section 42 or Section 45D of the Internal Revenue Code.
We also hold a residual financial interest in an entity that owns a refined coal facility that qualified for federal tax credits under Section 45 of the Internal Revenue Code through 2019. The entity sold the majority of its assets in 2020. The sale resulted in a $
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 months ended March 31, 2020 and 2019, we recognized $
11
WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Tax Implications of Impairment — We recognized a $
Recent Legislation — On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act contains numerous income tax provisions, none of which directly affected our income tax expense in the first quarter of 2020 or are expected to have a material impact on our income tax expense in future reporting periods. The Company is evaluating the impact of the Act and currently expects to benefit from the deferral of certain payroll taxes through the end of calendar year 2020.
5. Earnings Per Share
Basic and diluted earnings per share for the three months ended March 31 were computed using the following common share data (shares in millions):
| 2020 |
| 2019 | |
Number of common shares outstanding at end of period |
| |
| |
Effect of using weighted average common shares outstanding |
| |
| ( |
Weighted average basic common shares outstanding |
| |
| |
Dilutive effect of equity-based compensation awards and other contingently issuable shares |
| |
| |
Weighted average diluted common shares outstanding |
| |
| |
Potentially issuable shares |
| |
| |
Number of anti-dilutive potentially issuable shares excluded from diluted common shares outstanding |
| |
| |
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 $
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 as a result of COVID-19 or other economic factors. In an ongoing effort to mitigate risks of future cost increases and reductions in available capacity, we continue to evaluate various options to access cost-effective sources of financial assurance.
Insurance — We carry insurance coverage for protection of our assets and operations from certain risks including general liability, automobile liability, workers’ compensation, real and personal property, directors’ and officers’ liability, pollution legal liability and other coverages we believe are customary to the industry. Our exposure to loss for insurance claims is generally limited to the per incident deductible under the related insurance policy. Our exposure could increase if our insurers are unable to meet their commitments on a timely basis.
We have retained a significant portion of the risks related to our health and welfare, general liability, automobile liability and workers’ compensation claims programs. “General liability” refers to the self-insured portion of specific third-party claims made against us that may be covered under our commercial General Liability Insurance Policy. For our self-insured portions, the exposure for unpaid claims and associated expenses, including incurred but not reported losses, is
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
based on an actuarial valuation or internal estimates. The accruals for these liabilities could be revised if future occurrences or loss development significantly differ from such valuations and estimates. We use a wholly-owned insurance captive to insure the deductibles for our general liability, automobile liability and workers’ compensation claims programs.
We do not expect the impact of any known casualty, property, environmental or other contingency to have a material impact on our financial condition, results of operations or cash flows.
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 additional information.
As of March 31, 2020, we have guaranteed the obligations and certain performance requirements of third parties in connection with both consolidated and unconsolidated entities, including guarantees to cover certain market value losses for certain properties adjacent to or near
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 $
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 March 31, 2020, we have been notified by the government that we are a PRP in connection with
The majority of proceedings involving NPL sites that we do not own are based on allegations that certain of our subsidiaries (or their predecessors) transported hazardous substances to the sites, often prior to our acquisition of these subsidiaries. CERCLA generally provides for liability for those parties owning, operating, transporting to or disposing at the sites. Proceedings arising under Superfund typically involve numerous waste generators and other waste transportation and disposal companies and seek to allocate or recover costs associated with site investigation and remediation, which costs could be substantial and could have a material adverse effect on our consolidated financial statements. At some of the sites at which we have been identified as a PRP, our liability is well defined as a consequence of a governmental decision and an agreement among liable parties as to the share each will pay for implementing that remedy. At other sites, where no remedy has been selected or the liable parties have been unable to agree on an appropriate allocation, our future costs are uncertain.
On October 11, 2017, the EPA issued its Record of Decision (“ROD”) with respect to the previously proposed remediation plan for the San Jacinto waste pits in Harris County, Texas. McGinnes Industrial Maintenance Corporation (“MIMC”), an indirect wholly-owned subsidiary of WM, operated some of the waste pits from 1965 to 1966 and has been named as a site PRP. In 1998, WM acquired the stock of the parent entity of MIMC. MIMC has been working with the EPA and other named PRPs as the process of addressing the site proceeds. On April 9, 2018, MIMC and International Paper Company entered into an Administrative Order on Consent agreement with the EPA to develop a remedial design for the EPA’s proposed remedy for the site. Allocation of responsibility among the PRPs for the proposed remedy has not been established. As of March 31, 2020 and December 31, 2019, the recorded liability for MIMC’s estimated potential share of the EPA’s proposed remedy and related costs was $
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 $
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.
On November 25, 2019, the Georgia Department of Natural Resources, Environmental Protection Division, issued an NOV to Waste Management of Metro Atlanta, Inc., an indirect wholly-owned subsidiary of WM. The NOV alleges violations of Georgia environmental statutes and the related permits for Pine Bluff Landfill resulting from
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
slope stability concerns at the landfill that are being remediated. The parties are exchanging information and working to resolve the NOV.
From time to time, we are also named as defendants in personal injury and property damage lawsuits, including purported class actions, on the basis of having owned, operated or transported waste to a disposal facility that is alleged to have contaminated the environment or, in certain cases, on the basis of having conducted environmental remediation activities at sites. Some of the lawsuits may seek to have us pay the costs of monitoring of allegedly affected sites and health care examinations of allegedly affected persons for a substantial period of time even where no actual damage is proven. While we believe we have meritorious defenses to these lawsuits, the ultimate resolution is often substantially 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 U.S. 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
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, liability 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 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 2017 through 2020 tax years and expect these audits to be completed within the next
7. Segment and Related Information
We evaluate, oversee and manage the financial performance of our Solid Waste business subsidiaries through our
In the fourth quarter of 2019, as part of our annual review process, we analyzed the Areas’ income from operations margins for purposes of segment reporting and realigned our Solid Waste tiers to reflect recent changes in their relative economic characteristics and prospects. These changes are the results of various factors including acquisitions, divestitures, business mix and the economic climate of various geographies. As a result, we reclassified Western Canada from Tier 1 to Tier 2 and Northern California from Tier 3 to Tier 2. Reclassifications have been made to our prior period condensed consolidated financial information to conform to the current year presentation.
Tier 1 is comprised of our operations across the Southern U.S., with the exception of Southern California and the Florida area, and also includes the New England states and the tri-state area of Michigan, Indiana and Ohio. Tier 2 includes California, Canada, Wisconsin and Minnesota. Tier 3 encompasses all the remaining operations including the Pacific Northwest, the Mid-Atlantic region of the U.S., the Florida area, Illinois and Missouri.
The operating segments not evaluated and overseen through the
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Summarized financial information concerning our reportable segments for the three months ended March 31 is shown in the following table (in millions):
Gross | Intercompany | Net | Income | |||||||||
Operating | Operating | Operating | from | |||||||||
| Revenues |
| Revenues(c) |
| Revenues |
| Operations(d) | |||||
2020 |
|
|
|
|
|
|
|
| ||||
Solid Waste: |
|
|
|
|
|
|
|
| ||||
Tier 1 | $ | | $ | ( | $ | | $ | | ||||
Tier 2 |
| |
| ( |
| |
| | ||||
Tier 3 |
| |
| ( |
| |
| | ||||
Solid Waste |
| |
| ( |
| |
| | ||||
Other (a) |
| |
| ( |
| |
| ( | ||||
| ( | | | |||||||||
Corporate and Other (b) |
| — |
| — |
| — |
| ( | ||||
Total | $ | | $ | ( | $ | | $ | | ||||
2019 |
|
|
|
|
|
|
|
| ||||
Solid Waste: |
|
|
|
|
|
|
|
| ||||
Tier 1 | $ | | $ | ( | $ | | $ | | ||||
Tier 2 |
| |
| ( |
| |
| | ||||
Tier 3 |
| |
| ( |
| |
| | ||||
Solid Waste |
| |
| ( |
| |
| | ||||
Other (a) |
| |
| ( |
| |
| ( | ||||
| |
| ( |
| |
| | |||||
Corporate and Other (b) |
| — |
| — |
| — |
| ( | ||||
Total | $ | | $ | ( | $ | | $ | |
(a) | “Other” includes (i) our Strategic Business Solutions (“WMSBS”) organization; (ii) those elements of our landfill gas-to-energy operations and third-party subcontract and administration revenues managed by our Energy and Environmental Services (“EES”) and WM Renewable Energy organizations that are not included in the operations of our reportable segments; (iii) our recycling brokerage services and (iv) certain other expanded service offerings and solutions. In addition, our “Other” segment reflects the results of non-operating entities that provide financial assurance and self-insurance support for our Solid Waste business, net of intercompany activity. |
(b) | Corporate operating results reflect certain costs incurred for various support services that are not allocated to our reportable segments. These support services include, among other things, treasury, legal, information technology, tax, insurance, centralized service center processes, other administrative functions and the maintenance of our closed landfills. Income from operations for “Corporate and Other” also includes costs associated with our long-term incentive program and any administrative expenses or revisions to our estimated obligations associated with divested operations. |
(c) | Intercompany operating revenues reflect each segment’s total intercompany sales, including intercompany sales within a segment and between segments. Transactions within and between segments are generally made on a basis intended to reflect the market value of the service. |
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WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(d) | Income from operations provided by our Solid Waste business is generally indicative of the margins provided by our collection, landfill, transfer and recycling lines of business. From time to time, the operating results of our reportable segments are significantly affected by certain transactions or events that management believes are not indicative or representative of our results. In 2020, we revised allocations between our segments including (i) the discontinuation of certain allocations from Corporate and Other to Solid Waste and (ii) allocating certain insurance costs from Other to Solid Waste. Reclassifications have been made to our prior period information for comparability purposes. Current quarter operating results were negatively impacted by revenue declines in March 2020 as a result of the COVID-19 pandemic. These declines were not material to the reported periods. |
The mix of operating revenues from our major lines of business for the three months ended March 31 are as follows (in millions):
| 2020 |
| 2019 | |||
Commercial | $ | | $ | | ||
Residential |
| |
| | ||
Industrial |
| |
| | ||
Other collection |
| |
| | ||
Total collection |
| |
| | ||
Landfill |
| |
| | ||
Transfer |
| |
| | ||
Recycling |
| |
| | ||
Other (a) |
| |
| | ||
Intercompany (b) |
| ( |
| ( | ||
Total | $ | | $ | |
(a) | The “Other” line of business includes (i) our WMSBS organization; (ii) our landfill gas-to-energy operations; (iii) certain services within our EES organization, including our construction and remediation services and our services associated with the disposal of fly ash and (iv) certain other expanded service offerings and solutions. In addition, our “Other” line of business reflects the results of non-operating entities that provide financial assurance and self-insurance support for our Solid Waste business, net of intercompany activity. Activity related to collection, landfill, transfer and recycling within “Other” has been reclassified to the appropriate line of business for purposes of the presentation in this table. |
(b) | Intercompany revenues between lines of business are eliminated in the Condensed Consolidated Financial Statements included within this report. |
Fluctuations in our operating results may be caused by many factors, including period-to-period changes in the relative contribution of revenue by each line of business, changes in commodity prices and general economic conditions. Current quarter operating results were negatively impacted by COVID-19, as volumes declined beginning in March 2020 in our landfill, industrial and commercial collection businesses due to steps taken by national and local governments to slow the spread of the virus, including travel bans, prohibitions on group events and gatherings, shutdowns of certain businesses, curfews, shelter-in-place orders and recommendations to practice social distancing.
In addition, our revenues and income from operations typically reflect seasonal patterns. Our operating revenues tend to be somewhat higher in summer months, primarily due to the higher construction and demolition waste volumes. The volumes of industrial and residential waste in certain regions where we operate also tend to increase during the summer months. Our second and third quarter revenues and results of operations typically reflect these seasonal trends.
Service disruptions caused by severe storms, extended periods of inclement weather or climate extremes resulting from climate change can significantly affect the operating results of the Areas affected. On the other hand, certain destructive weather and climate conditions, such as wildfires in the Western U.S. and hurricanes that most often impact
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WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
our operations in the Southern and Eastern U.S. during the second half of the year, can increase our revenues in the Areas affected. While weather-related and other event driven special projects can boost revenues through additional work for a limited time, as a result of significant start-up costs and other factors, such revenue can generate earnings at comparatively lower margins.
8. Acquisitions
Pending Acquisition
On April 14, 2019, we entered into an Agreement and Plan of Merger to acquire all outstanding shares of Advanced Disposal for $
Acquisition
Petro Waste Environmental LP (“Petro Waste”) — On March 8, 2019, Waste Management Energy Services Holdings, LLC, an indirect wholly-owned subsidiary of WM, acquired Petro Waste. The acquired business provides comprehensive oilfield environmental services and solid waste disposal facilities in the Permian Basin and the Eagle Ford Shale. The acquisition has expanded our offerings and enhanced the quality of solid waste disposal services for oil and gas exploration and production operations in Texas. Our purchase price was primarily allocated to
9. Asset Impairments
Equity in Net Losses of Unconsolidated Entities
During the first quarter of 2020, we recorded an impairment charge of $
Other, Net
During the first quarter of 2019, we recognized a $
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WASTE MANAGEMENT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
10. Accumulated Other Comprehensive Income (Loss)
The changes in the balances of each component of accumulated other comprehensive income (loss), net of tax, which is included as a component of Waste Management, Inc. stockholders’ equity, are as follows (in millions, with amounts in parentheses representing decreases to accumulated other comprehensive income):
Foreign | Post- | ||||||||||||||
Available- | Currency | Retirement | |||||||||||||
Derivative | for-Sale | Translation | Benefit | ||||||||||||
| Instruments |
| Securities |
| Adjustments |
| Obligations |
| Total | ||||||
Balance, December 31, 2019 | $ | ( | $ | | $ | ( | $ | ( | $ | ( | |||||
Other comprehensive income (loss) before reclassifications, net of tax expense (benefit) of $( |
| — |
| ( |