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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND 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, SUITE 4000
HOUSTON, TEXAS 77002
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (713) 512-6200
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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Common Stock, $.01 par value New York Stock Exchange
4% Convertible Subordinated Debentures due
2002
Securities registered pursuant to Section 12(g) of the Act:
5.75% Convertible Subordinated Notes due 2005
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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant at March 17, 1999, was approximately $27,437,506,000. The
aggregate market value was computed by using the closing price of the common
stock as of that date on the New York Stock Exchange. (For purposes of
calculating this amount only, all directors and executive officers of the
registrant have been treated as affiliates.)
The number of shares of Common Stock, $.01 par value, of the registrant
outstanding at March 17, 1999, was 601,810,986 (excluding 7,892,612 shares held
in the Waste Management, Inc. Employee Stock Benefit Trust).
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT INCORPORATED AS TO
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Proxy Statement for the
1999 Annual Meeting of Stockholders Part III
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 26
Item 3. Legal Proceedings........................................... 26
Item 4. Submission of Matters to a Vote of Security Holders......... 30
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 33
Item 6. Selected Financial Data..................................... 34
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 35
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 49
Item 8. Financial Statements and Supplementary Data................. 51
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 101
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 101
Item 11. Executive Compensation...................................... 101
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 101
Item 13. Certain Relationships and Related Transactions.............. 101
PART IV
Item 14. Financial Statement Schedules, Exhibits, and Reports on Form
8-K......................................................... 102
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PART I
ITEM 1. BUSINESS.
GENERAL
Waste Management, Inc. ("Waste Management" or the "Company") is a global
leader in providing integrated waste management services. The Company's
principal operations are providing waste management services in North America
(primarily the United States, Canada and Puerto Rico). The waste management
services provided consist of collection, transfer, recycling and resource
recovery services, as well as disposal services, including landfill disposal of
hazardous wastes. In addition, the Company is a leading operator and owner of
waste-to-energy and waste-fuel powered independent power facilities in the
United States. Other North American operations include additional hazardous
waste management services, as well as low-level and other radioactive waste
services. Outside of North America, the Company operates throughout Europe, the
Pacific Rim, South America and other select international markets. Included in
the Company's international operations are the collection and transportation of
solid, hazardous and medical wastes, and the collection, treatment and disposal
of recyclable materials. The Company also operates solid and hazardous waste
landfills, municipal and hazardous waste incinerators, water and wastewater
treatment facilities, hazardous waste treatment facilities and constructs
treatment or disposal facilities for third parties internationally. The
Company's diversified customer base, which was in excess of 30 million customers
as of December 31, 1998, includes commercial, industrial, municipal and
residential customers, other waste management companies, governmental entities
and independent power markets, with no single customer accounting for more than
5% of the Company's operating revenues during 1998. The Company employed
approximately 68,000 people as of December 31, 1998.
The terms "Waste Management" and the "Company" refer to Waste Management,
Inc., a Delaware corporation incorporated on April 28, 1995, and includes its
predecessors, subsidiaries, and affiliates, unless the context requires
otherwise. Waste Management's executive offices are located at 1001 Fannin
Street, Suite 4000, Houston, Texas 77002, and its telephone number is (713)
512-6200. The Company's common stock is listed on the New York Stock Exchange
under the trading symbol "WMI."
INDUSTRY OVERVIEW
The solid waste management industry in North America has historically been
highly fragmented, with a multitude of local private operators and municipal
operators servicing relatively centralized areas. The industry has been
undergoing a period of significant consolidation which continues today. However,
there remain a large number of private operators and municipalities that
continue to account for a significant portion of the North American solid waste
business.
As consolidation in the North American solid waste industry has continued,
many smaller companies face strategic difficulties including economies of scale
and higher costs of capital.
Increases in significant economies of scale, efficient operations and more
readily available capital caused by consolidation have also affected
municipalities, many of which have sold or leased their transfer and disposal
facilities as well as contracted its collection services with private concerns.
Another important factor in the consolidation of the North American solid
waste management industry is government regulation and enforcement, which has
increased the cost of collection and disposal activities throughout North
America. The most significant new legislation was in 1991 when the U.S.
Environmental Protection Agency ("EPA") adopted new regulations pursuant to
Subtitle D of the Resource Conservation and Recovery Act ("RCRA"), governing the
disposal of nonhazardous municipal solid waste. These regulations led to a
variety of requirements applicable to landfill disposal sites, including the
construction of liners and the installation of leachate collection systems,
groundwater monitoring systems, and methane gas recovery systems. The
regulations also required enhanced control systems to monitor more closely the
waste streams being disposed at the landfills, post-closure monitoring of sites
as well as financial assurances that landfill operators will comply with the
stringent regulations. These regulations significantly increased the costs
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of compliance and landfill operations, leading to many closures, especially by
small operators. Additionally, the increased costs associated with constructing
new landfills caused disposal fees to increase. The higher costs associated with
the regulations caused many in the industry to seek consolidation. Larger solid
waste management companies are better able to absorb the increased costs of
constructing new landfills and, because of the economies of scale that are
necessary under the regulations, most new landfills are larger by historical
standards, serving geographic regions rather than small localities.
Many larger solid waste companies have pursued acquisitions to complement
existing businesses or otherwise improve their cost structure and flexibility.
The Company believes waste management companies active in various segments of
the industry will continue to seek vertical integration to enable them to become
more cost-effective and competitive. However, there still exists a large number
of small local and regional companies, municipalities and other governmental
authorities that provide waste services. Many of the smaller companies are able
to effectively compete on the basis of local name recognition as well as cost
structure. Additionally, municipalities and counties can sometimes offer
services at lower direct costs to the customer through the use of tax revenues
and tax-exempt financings. See "Competition."
STRATEGY
Key components of the Company's strategy are:
Growth
Internal Growth
- Increasing revenues through the expansion of existing operations. The
Company continually strives to grow its existing operations by pursuing
new waste volumes and properly pricing its services.
External Growth
- Increasing revenues and enhancing profitability through acquisitions. The
Company continually seeks to expand its services through the acquisition
of additional solid waste management businesses and operations that can
be effectively integrated with the Company's existing operations. These
acquisitions typically involve adding collection operations, transfer
stations, or landfills that are complementary to existing operations and
that permit the Company to implement operating efficiencies and increase
asset utilization.
- Expanding into new markets through acquisitions. The Company also
continues to pursue acquisitions in new markets where the Company
believes it can strengthen its overall competitive position as an
important provider of integrated waste management services. Additionally,
acquisitions are pursued where opportunities exist to apply its operating
and management expertise to enhance the performance of operations
acquired.
- Benefiting from the privatization of solid waste services provided by
municipalities. Municipalities currently provide a large percentage of
the solid waste management services. Due to the capital and regulatory
requirement demands, as well as the economics of the solid waste
industry, certain portions of these services have been privatized each
year. The Company pursues privatization opportunities where it believes
solid waste services can be provided at a profitable level.
Operational Efficiencies
- Increasing productivity and operating efficiencies. The Company seeks to
increase productivity, achieve administrative and operating efficiencies
and improve profitability in existing operations and acquired businesses,
with the objective of becoming the low-cost operator in each of its
markets. Measures taken by the Company in this area include consolidating
and implementing uniform administrative and management systems,
restructuring and consolidating collection routes, improving equipment
utilization, and increasing employee productivity through incentive
compensation and training programs. The Company believes that its ability
to serve markets as a low-cost operator is
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fundamental to achieving sustainable internal growth and to realizing the
benefits of its acquisition activity.
- Focusing on core businesses. The Company intends to focus on its core
businesses, providing waste services including collection, transfer,
disposal (landfill and waste-to-energy), recycling and other
complementary services. The Company has marketed for sale certain
business lines that include services not easily integrated in order to
focus on those businesses that strengthen its overall competitive
position.
- Internalization. The Company strives to strengthen its position in its
existing markets by expanding the scope of services through the
integration of its collection, transfer station, and disposal operations.
Internalization is the disposal of waste collected by the Company at a
facility owned or operated by the Company. Waste that can be internalized
generally has greater profitability than waste that is disposed of at a
third party facility. The utilization of internal disposal capacity is an
integral component of the Company's ability to achieve its financial
goals and objectives.
- Decentralized management. Because the Company believes the solid waste
industry is a local and regional business, the Company is organized based
upon a decentralized management and a streamlined corporate structure.
The Company believes this approach enhances its ability to manage the
local aspects of daily operations and service its customers more
effectively.
Financial Flexibility and Strength
- Preserving the financial foundation. The Company monitors the financial
demands of its existing operations, acquisition activities, and capital
expenditures program in an attempt to maintain its financial flexibility
and strength and its ability to capitalize on future opportunities. In
managing its financial resources, the Company utilizes commercial banks,
equity and debt offerings, and issues equity instruments in certain
acquisitions. The Company believes that its ability to continue as an
industry consolidator is directly related to its ability to maintain its
financial flexibility and strength.
- Maximizing cash flows from operations. The industry in which the Company
operates typically experiences significant positive cash flows from
properly managed operations. The Company believes that it can be the
low-cost service provider and strives to maximize cash flows from its
operations in all markets. The Company expects to use these cash flows,
in part, to continue its growth and believes it can do so without
compromising its financial condition.
The Company's business is subject to extensive foreign, federal, state, and
local regulation and legislative initiatives. Further, in some locations, its
business is subject to environmental regulation, mandatory recycling laws,
prohibitions on the deposit of certain types of waste in landfills, and
restrictions on the flow of solid waste. Because of continuing public awareness
and influence regarding the collection, transfer, and disposal of waste and the
preservation of the environment, and uncertainty with respect to the enactment
and enforcement of future laws and regulations, the Company cannot always
accurately predict the impact that any future regulations or laws may have on
its operations. See "-- Regulation" and "-- Legal Proceedings."
ACQUISITION AND DIVESTITURE ACTIVITY IN 1998
On July 16, 1998, the Company, then known as USA Waste Services, Inc.,
completed a merger with Waste Management, Inc., at which time Waste Management,
Inc. was renamed Waste Management Holdings, Inc. ("WM Holdings") (the "WM
Holdings Merger"). Under the terms of the WM Holdings Merger, the Company issued
0.725 of a share of its common stock for each outstanding share of WM Holdings
common stock. The WM Holdings Merger increased the Company's outstanding shares
of common stock by approximately 354,000,000 shares, and the Company assumed WM
Holdings' stock options equivalent to approximately 16,000,000 underlying shares
of the Company's common stock. Any unvested WM Holdings options issued prior to
March 10, 1998 vested upon consummation of the WM Holdings Merger due to change
of control provisions in the related plans. WM Holdings was previously the
largest publicly traded solid waste company in the U.S., providing integrated
solid waste management and hazardous waste management services in North America
and comprehensive waste management and related services, including solid and
hazardous waste management services, internationally. WM Holdings was also a
leading
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developer of facilities for, and provider of services to, the waste-to-energy
and waste-fuel powered independent power markets. On the effective date of the
WM Holdings Merger, the Company changed its name to "Waste Management, Inc."
On December 31, 1998, the Company consummated a merger with Eastern
Environmental Services, Inc. ("Eastern") pursuant to which the Company issued
approximately 24,460,000 shares of its common stock in exchange for all of the
outstanding shares of Eastern (the "Eastern Merger").
On November 30, 1998, the Company acquired the 49% interest of the United
Kingdom operations that were previously owned by Wessex Water Plc for
approximately $342,000,000.
On November 3, 1998, the Company completed the acquisition of the publicly
owned shares of Waste Management International plc, an indirect majority-owned
subsidiary ("WMI plc"). Pursuant to the acquisition, holders of the
approximately 75 million ordinary shares not already owned by the Company
(including those represented by American Depositary Receipts) received
approximately $5.72 for each share held, for a total of approximately
$443,000,000. The Company liquidated WMI plc after the acquisition in an effort
to simplify the corporate structure and provide enhanced tax planning
opportunities. The Company's international operations are now conducted through
Waste Management International BV, a Netherlands corporation ("WM
International").
On June 18, 1998, the Company acquired the solid waste businesses of
American Waste Systems, Inc. ("American Waste") for approximately $150,000,000
in cash. The businesses acquired include three landfills and one collection
operation located in Ohio.
On May 6, 1998, the Company consummated a merger with TransAmerican Waste
Industries, Inc. ("TransAmerican"), pursuant to which the Company issued
approximately 1,975,000 shares of its common stock in exchange for all
outstanding shares of TransAmerican. The businesses acquired include five
collection operations, nine landfills and two transfer stations located
throughout the southern U.S.
On March 31, 1998, the Company acquired all of the outstanding shares of
Wheelabrator Technologies Inc. ("WTI") which it did not already own for
$876,200,000 in cash.
On January 14, 1998, the Company acquired the solid waste divisions of City
Management Holdings Trust ("City Management") for approximately $810,000,000
consisting of cash, and assumed debt. The businesses acquired are primarily
located in Michigan and include collection operations, landfills, and transfer
stations.
In addition to the aforementioned acquisitions, the Company paid an
aggregate of $1,453,880,000 in cash, common stock, and liabilities assumed to
acquire solid waste assets and businesses.
In connection with the WM Holdings Merger and the Eastern Merger, the
Company entered into agreements with the Antitrust Division of the Department of
Justice and several states. Under the terms of the agreements, the Company is
required to divest of future airspace rights and certain waste disposal,
transfer and commercial collection assets. Included in the required divestitures
are landfills in Ohio, Colorado, Michigan, Texas, California, Kentucky, Florida,
New York and Pennsylvania; commercial waste hauling assets in Ohio,
Pennsylvania, Colorado, Michigan, Texas, Kentucky, Oregon, Arizona and Florida;
and certain commercial collection routes in Pennsylvania, New Jersey, New York,
Virginia and Florida.
Additionally, in September 1998, the Company completed the sale of Rust
Environmental & Infrastructure, Inc. ("REI"). The Company sold the environmental
and infrastructure, engineering, and consulting firm for approximately
$68,000,000, subject to certain post-closing adjustments, in furtherance of the
Company's previous decision to sell or otherwise discontinue certain lines of
business of its subsidiary, Rust International, Inc.
RECENT DEVELOPMENTS
In March 1999, the Company entered into an agreement with a subsidiary of
the French conglomerate Vivendi SA to form a non-landfill hazardous waste and
industrial cleaning business joint venture. Under the agreement, the Company
will transfer certain assets of the non-core industrial cleaning and hazardous
waste
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businesses to the joint venture, but will retain its hazardous waste landfill
operations and national and regional account customers.
OPERATIONS
General
The following table reflects the Company's operating revenues for each of
the three years ended December 31, 1998 for each of the Company's principal
lines of business. Additional information regarding the results of operations
for the Company's business lines is included in Note 13 to the Company's
consolidated financial statements included elsewhere herein (in millions).
YEARS ENDED DECEMBER 31,
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1998 1997 1996
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North American Solid Waste:
Collection................................ $ 6,963.5 $ 6,071.2 $ 5,257.5
Disposal.................................. 3,179.4 2,811.9 2,580.2
Transfer.................................. 1,054.3 814.5 709.1
Recycling and other....................... 669.6 720.0 683.5
Intercompany.............................. (1,646.3) (1,172.7) (1,132.4)
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10,220.5 9,244.9 8,097.9
WM International............................ 1,533.6 1,790.0 1,913.8
Non-solid waste............................. 949.4 937.6 986.9
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Operating revenue........................... $12,703.5 $11,972.5 $10,998.6
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North American Solid Waste Management
Management of the Company's North American solid waste management
operations is primarily achieved through an alignment that currently includes
five geographic areas. Each area is directed by a senior Company officer who is
responsible for oversight of the area's sales and marketing, administration and
finance, operations, and maintenance functions and who typically has a small
staff that works interactively with the corporate office to provide regulatory
compliance and reporting, legal, engineering, internal and external development,
and strategic planning services. Areas are organized into regions which are
managed by a vice-president of the Company. Regions are further organized into
divisions and districts which are led by local managers. Geographically, an area
encompasses several states or provinces and may have up to eight regions, each
of which is responsible for the oversight of several markets. The division or
district manager is responsible for the day-to-day oversight of that local
operation, with direct responsibility for customer satisfaction, employee
motivation, labor and equipment productivity, internal growth, financial
budgets, and profit and loss activity.
Collection. The Company provides different types of solid waste collection
services depending on the customer serviced. Commercial and industrial
collection services are generally performed under one to three-year service
agreements, and fees are determined by such factors as collection frequency,
type of collection equipment furnished by the Company, type and volume or weight
of the waste collected, the distance to the disposal facility, labor cost, and
cost of disposal. Most residential solid waste collection services are performed
under contracts with, or franchises granted by, municipalities or regional
authorities that have granted the Company exclusive rights to service all or a
portion of the homes in their respective jurisdictions. Such contracts or
franchises usually range in duration from one to five years, however, in certain
cases, they have significantly longer terms. Some municipalities have requested
bids on their residential collection contracts based on the volume of waste
collected. Residential collection fees are either paid by the municipalities
from their tax revenues or service charges or are paid directly by the residents
receiving the service.
As part of its services, the Company provides steel containers to most of
its commercial and industrial customers to store solid waste. These containers,
ranging in size from one to 45 cubic yards, are designed to be lifted
mechanically and either emptied into a collection vehicle's compaction hopper or
directly into a disposal
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site in the case of industrial customers. The use of containers enables the
Company to service most of its commercial and industrial customers with
collection vehicles operated by a single employee.
The Company often obtains waste collection accounts through acquisitions.
Once a collection operation is acquired, the Company implements programs
designed to improve equipment utilization, employee productivity, operating
efficiencies, and overall profitability. The Company also solicits commercial
and industrial customers in areas surrounding acquired residential collection
markets as a means of further improving operating efficiencies and increasing
solid waste collection volumes.
The cost of transporting solid waste to a disposal location effectively
constrains where collection operations can be located. In addition, the Company
believes that it is generally preferable for its collection operations to
utilize disposal facilities owned or operated by affiliated parties so that
access can be assured on reasonable terms. The Company's collection operations
internalized approximately 58.5% of disposal costs paid to disposal facilities
for 1998 as compared to 55.7% for 1997. In the remaining markets, waste is
collected and delivered to a municipal, county or privately-owned unaffiliated
landfill or transfer station.
Disposal. Landfills are the primary depository for solid waste. A solid
waste landfill site must have geological and hydrogeological properties and
design features which limit the possibility of water pollution, directly or by
leaching. Solid waste landfill operations, which include carefully planned
excavation, continuous spreading, compacting and covering of solid waste, are
designed to maintain sanitary conditions, insure optimum utilization of the
airspace and prepare the site for ultimate use for other purposes. Solid waste
landfill operations are required to be conducted in accordance with the terms of
permits obtained from various regulatory authorities, which typically
incorporate the requirements of Subtitle D of RCRA or applicable state
requirements, whichever are stricter. These requirements address such matters as
daily volume limitations, placement of daily, interim and final site cover
materials on waste disposed at the site, construction and operation of methane
gas and leachate management systems, periodic groundwater monitoring activity
and final closure requirements and post-closure monitoring and maintenance
activities.
Solid waste landfill customers are charged disposal charges, known as
"tipping fees", based on market factors and the type and volume or weight of
solid waste deposited and the type and size of vehicles used in the conveyance
of solid waste. The ownership or lease of a solid waste landfill enables the
Company to dispose of waste without payment of tipping fees to unaffiliated
parties. The Company's solid waste landfills are also used by unaffiliated waste
collection companies and government agencies. Excluding solid waste landfills
required to be sold as a result of 1998 governmental consent decrees related to
the WM Holdings Merger and the Eastern Merger, the average landfill volume of
the Company's North American sites for the year ended December 31, 1998, was
approximately 414,000 tons per day, and the average remaining life of landfills
owned or operated was approximately 20 years based on remaining permitted
capacity and current average daily disposal volumes.
Suitable solid waste landfill facilities and permission to expand existing
facilities may be difficult to obtain in some areas because of land scarcity,
local resident opposition and governmental regulation. As its existing
facilities become filled in such areas, the Company's solid waste disposal
operations are and will continue to be materially dependent on its ability to
purchase, lease or otherwise obtain operating rights for additional sites or
expansion of existing sites and to obtain the necessary permits from regulatory
authorities to construct and operate them. In addition, there can be no
assurance that additional sites can be obtained or that existing facilities can
continue to be expanded or operated.
The Company develops, operates, and owns waste-to-energy facilities in the
U.S. The Company's waste-to-energy projects use boiler and grate technology and
are capable of processing up to 23,750 tons of solid waste per day. The heat
from this combustion process is converted into high-pressure steam, which
typically is used to generate electricity for sale to public utility companies
under long-term contracts.
The Company also operates secure hazardous waste land disposal facilities.
All of the Company's five secure hazardous waste land disposal facilities in the
U.S. have been issued permits under RCRA. See "Regulation -- RCRA." In general,
the Company's hazardous waste land disposal facilities have received the
necessary permits and approvals to accept hazardous wastes, although some of
such sites may accept only
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certain hazardous wastes. Only hazardous waste in a stable, solid form which
meets applicable regulatory requirements may be buried in the Company's secure
disposal cells. These land disposal facilities are sited, constructed and
operated in a manner designed to provide long-term containment of such waste.
Hazardous wastes may be treated prior to disposal. Physical treatment methods
include distillation, evaporation and separation, all of which effectively
result in the separation or removal of solid materials from liquids. Chemical
treatment methods include chemical oxidation and reduction, chemical
precipitation of heavy metals, hydrolysis and neutralization of acid and
alkaline wastes and essentially involve the transformation of wastes into inert
materials through one or more chemical reaction processes. At two of its
locations, the Company isolates treated hazardous wastes in liquid form by
injection into deep wells. Deep well technology involves drilling wells in
suitable rock formations far below the base of fresh water to a point that is
separated by other substantial geological confining layers. See "Non-Solid Waste
Services -- Chemical Waste Management Services."
To develop a new disposal facility, the Company must expend significant
time and capital resources without any certainty that the necessary permits will
ultimately be issued for such facility or that the Company will be able to
achieve and maintain the desired disposal volume at such facility. If the
inability to obtain and retain necessary permits, the failure of a facility to
achieve the desired disposal volume or other factors cause the Company to
abandon development efforts for a facility, the capitalized development costs of
the facility are charged to expense.
Transfer Stations. A transfer station is a facility located near
residential and commercial collection routes where solid waste is received from
collection vehicles and then transferred to and compacted in large,
specially-constructed trailers for transportation to disposal facilities. This
consolidation reduces costs by improving the utilization of collection personnel
and equipment. Fees are generally based on such factors as the type and volume
or weight of the waste transferred and the transportation distance to disposal
sites. Transfer stations can also be used to facilitate internalizing disposal
costs by giving Company collection operations more cost-effective access to
disposal facilities owned or operated by the Company.
Recycling. The Company provides recycling services in the U.S. and Canada
through its Recycle America(R), Recycle Canada(R) and other programs. Recycling
involves the removal of reusable materials from the waste stream for processing
and sale or other disposition for use in various applications. Participating
commercial and industrial operations use containers to separate recyclable
paper, glass, plastic and metal wastes for collection, processing and sale by
the Company. Fees are determined by such considerations as competition,
frequency of collection, type and volume or weight of the recyclable materials,
degree of processing required, distance the recyclable materials must be
transported and value of the recyclable materials.
As part of its residential solid waste collection services, the Company
engages in curbside collection of recyclable materials from residences in the
U.S. and Canada. Curbside recycling services generally involve the collection of
recyclable paper, glass, plastic and metal waste materials, which may be
separated by residents into different waste containers or commingled with other
recyclable materials. The recyclable materials are then typically deposited at a
local materials recovery facility ("MRF") where they are sorted and processed
for sale.
The prices received by the Company for recyclable materials fluctuate
substantially from quarter to quarter and year to year depending upon domestic
and foreign demand for such materials, the quality of such materials, prices for
new materials and other factors. In some instances, the Company enters into
agreements with customers or the local governments of municipalities in which it
provides recycling services whereby the customers or the governments share in
the gains and losses resulting from fluctuation in prices of recyclable
commodities. These agreements can reduce both the Company's gains and losses
from such fluctuations.
The Company operates over 150 MRFs for the receipt and processing of
recyclable materials. Such processing consists of separating recyclable
materials according to type, and baling or otherwise preparing the separated
materials for sale.
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Energy Recovery. At 65 Company-owned or Company-operated solid waste
landfill facilities, the Company is engaged in methane gas recovery operations.
These operations involve the installation of a gas collection system into a
solid waste landfill facility. Through the gas collection system, gas generated
by decomposing solid waste is collected and transported to a gas-processing
facility at the landfill site. Through physical processes methane gas is
separated from contaminants. The processed methane gas is then generally either
sold directly to industrial users or to an affiliate of the Company which uses
it as a fuel to power electricity generators. Electricity generated by these
facilities is sold, usually to public utilities under long-term sales contracts,
often under terms or conditions which are subject to approval by regulatory
authorities.
Portable Sanitation Services. The Company also provides portable sanitation
services to municipalities and commercial customers. The portable sanitation
services, which are primarily marketed under the Port-O-Let(R) trade name, are
used at numerous special events and public gatherings.
International Waste Management and Related Services
The Company is a leading provider of waste management and related services
internationally, primarily through WM International, which conducts essentially
all of the waste management operations of the Company located outside North
America. WM International's business may broadly be characterized into two areas
of activity, collection services and treatment and disposal services. The bulk
of the Company's international operations and revenues are derived from the
acquisition from 1990 to 1995 of numerous companies and interests in Europe.
Excluding the minority interest buyout of Wessex Water Plc's holdings in the
United Kingdom, WM International has engaged in only a few small acquisitions
since 1995 and has divested of certain operations which do not fit within its
long-term strategy. The Company intends to continue to evaluate its
international operations and may attempt to grow through acquisitions in certain
markets. In addition, the Company may, over time, exit certain markets if it
determines that financial performance in those markets is not acceptable.
While WM International has considerable experience in mobilizing for and
managing foreign projects, its operations continue to be subject generally to
such risks as currency fluctuations and exchange controls, the need to recruit
and retain suitable local labor forces and to control and coordinate operations
in different jurisdictions, changes in foreign laws or governmental policies or
attitudes concerning their enforcement, political changes, local economic
conditions and international tensions. In addition, price adjustment provisions
based on certain formulas or indices may not accurately reflect the actual
impact of inflation on the cost of performance.
Collection. Collection services include collection and transportation of
solid, hazardous and medical wastes and recyclable material from residential,
commercial and industrial customers. The residential solid waste collection
process, as well as the commercial and industrial solid and hazardous waste
collection process, is similar to that utilized by the Company in its North
American operations. Business is obtained through public bids or tenders,
negotiated contracts, and, in the case of commercial and industrial customers,
direct contracts.
Residential solid waste collection is typically performed by WM
International pursuant to municipal contracts. The scope, specifications,
services provided and duration of such contracts vary substantially, with some
contracts encompassing landfill disposal of collected waste, street sweeping and
other related municipal services. Pricing for municipal contracts is generally
based on volume of waste, number and frequency of collection pick-ups, and
disposal arrangements. Longer-term contracts typically have formulas for
periodic price increases or adjustments. WM International also provides curbside
recycling services similar to those provided by the Company's North American
operations.
WM International's commercial and industrial solid and hazardous waste
collection services are generally contracted for by individual establishments.
In addition to solid waste collection customers, WM International provides
services to small quantity waste generators, as well as larger petrochemical,
pharmaceutical and other industrial customers, including collection of
hazardous, chemical or medical wastes or residues. Contract
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terms and prices vary substantially among jurisdictions and types of customer.
WM International also provides commercial and industrial recycling services.
Treatment and Disposal. Treatment and disposal services include processing
of recyclable materials, operation of both solid and hazardous waste landfills,
operation of municipal and hazardous waste incinerators, operation of water and
wastewater treatment facilities, operation of hazardous waste treatment
facilities and construction of treatment or disposal facilities for third
parties. Treatment and disposal services are provided under contracts which may
be obtained through public bid or tender or direct negotiation, and are also
provided directly to other waste service companies.
Once collected, solid waste processed in a MRF may be sold, utilized or
disposed of in various applications. Unprocessed solid wastes, or the portion of
the waste stream remaining after recovery of recyclable materials, require
disposal, which may be accomplished through incineration (in which the energy
value may be recovered in a waste-to-energy facility) or through disposal in a
solid waste landfill. The relative use of landfills versus incinerators differs
from country to country and will depend on many factors, including the
availability of land, geological and hydrogeological conditions, the
availability and cost of technology and capital, and the regulatory environment.
The main determinants of the disposal method are the disposal costs at local
landfills, as incineration is generally more expensive, community preferences
and regulatory provisions.
At present, in most countries in which WM International operates,
landfilling is the predominant disposal method employed. WM International owns
or operates solid waste landfills in Australia, Brazil, Denmark, Germany, Hong
Kong, Italy, New Zealand, Sweden and the United Kingdom. Landfill disposal
agreements may be separate contracts or an integrated portion of collection or
treatment contracts. WM International operates five small, conventional
municipal solid and other waste incineration facilities. Prior to January 1998,
WM International also operated a waste-to-energy incinerator in Hamm, Germany.
In light of the current overcapacity in the German waste-to-energy market and
the pending renegotiation of WM International's disposal contracts with the
local communities, WM International entered into an agreement in April 1997 to
sell the facility. The transaction was completed in January 1998.
WM International owns or operates hazardous waste treatment facilities in
Brazil, Brunei, Finland, Germany, Hong Kong, Indonesia, the Netherlands, Sweden
and the United Kingdom.
Other. Industrial premises, office, street and parking lot cleaning
services are also performed by WM International, along with portable sanitation
services for occasions such as outdoor concerts and special events.
Non-Solid Waste Services
Hazardous Waste Management Services. In addition to the disposal facilities
discussed above, the hazardous wastes handled by the Company include industrial
by-products and residues that have been identified as "hazardous" pursuant to
RCRA, as well as other materials contaminated with a wide variety of chemical
substances.
Hazardous waste may be collected from customers and transported by the
Company or contractors retained by the Company or delivered by customers to
their facilities. Hazardous waste is transported primarily in specially
constructed tankers and semi-trailers, including stainless steel and rubber or
epoxy-lined tankers and vacuum trucks, or in containers or drums on trailers
designed to comply with applicable regulations and specifications of the U.S.
Department of Transportation ("DOT") relating to the transportation of hazardous
materials. The Company also operates several facilities at which waste collected
from or delivered by customers may be analyzed and consolidated prior to further
shipment.
In the U.S., most hazardous wastes generated by industrial processes are
handled "on-site" at the generators' facilities. Since the mid-1970's, public
awareness of the harmful effects of unregulated disposal of hazardous wastes on
the environment and health has led to extensive and evolving federal, state and
local regulation of hazardous waste management activities. The major federal
statutes regulating the management of hazardous wastes or substances include
RCRA, the Toxic Substances Control Act ("TSCA") and the Comprehensive
Environmental Response, Compensation and Liabilities Act of 1980, as amended
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("CERCLA" or "Superfund"), all primarily administered by the EPA. The hazardous
waste management business is heavily dependent upon the extent to which
regulations promulgated under these or similar state statutes and their
enforcement over time effectively require wastes to be specially handled or
managed and disposed of in facilities of the type owned and operated by the
Company. See "Regulation -- Hazardous Waste," "-- RCRA" and "-- Superfund." The
hazardous waste services industry currently has substantial excess capacity
caused by a number of factors, including a decline in environmental remediation
projects generating hazardous waste for off-site treatment and disposal,
continuing efforts by hazardous waste generators to reduce volume and to manage
the wastes on-site, and the uncertain regulatory environment regarding hazardous
waste management and remediation requirements. These factors have led to reduced
demand and increased pressure on pricing for hazardous waste management
services; conditions which the Company expects to continue for the foreseeable
future.
Low-Level and Other Radioactive Waste Services. Radioactive wastes with
varying degrees of radioactivity are generated by nuclear reactors and by
medical, industrial, research and governmental users of radioactive material.
Radioactive wastes are generally classified as either high-level or low-level.
High-level radioactive waste, such as spent nuclear fuel and waste generated
during the reprocessing of spent fuel from nuclear reactors, contains
substantial quantities of long-lived radionuclides and is the ultimate
responsibility of the federal government. Low-level radioactive waste, which
decays more quickly than high-level waste, largely consists of dry compressible
wastes (such as contaminated gloves, paper, tools and clothing), resins and
filters which have removed radioactive contaminants from nuclear reactor cooling
water, and solidified wastes from power plants which have become contaminated
with radioactive substances and irradiated hardware.
The Company's Chem-Nuclear Systems LLC subsidiary ("Chem-Nuclear") provides
comprehensive low-level radioactive waste management services in the U.S.,
consisting of disposal, processing and various other special services. To a
lesser extent, it provides services with respect to radioactive waste that has
become mixed with regulated hazardous waste. Its Barnwell, South Carolina
facility, which has been in operation since 1971, is one of three licensed
commercial low-level radioactive waste disposal facilities in the U.S. A trust
has been established and funded to pay the estimated cost of decommissioning the
Barnwell facility. A second fund, for the extended care of the facility, is
funded by a surcharge on each cubic foot of waste received. Chem-Nuclear may be
liable for additional costs if the extra charges collected to restore and
maintain the facility are insufficient to cover the cost of restoring or
maintaining the site after its closure. The Company does not expect this to have
a material adverse impact on future operating results.
Under state legislation enacted in 1995, the Barnwell site is authorized to
operate until its current permitted disposal capacity is fully utilized.
However, that legislation was attached to a state appropriations bill that
included a provision for a state tax of $235 to be imposed on every cubic foot
of waste disposed of at the Barnwell facility. As a result of decreased disposal
volume and a shortfall in anticipated tax revenue, in June 1997, the State of
South Carolina enacted new legislation requiring that Chem-Nuclear guarantee
certain portions of anticipated tax revenues from the facility. Such reduced
disposal volume and the requirement that Chem-Nuclear fund such tax payments
have caused Chem-Nuclear to review its alternatives with respect to the Barnwell
facility. If Chem-Nuclear determines to close the Barnwell site, there could be
a material adverse affect on the Company's consolidated financial statements.
Chem-Nuclear also processes low-level radioactive waste at its customers'
plants to enable such waste to be shipped in dry rather than liquid form to meet
the requirements for receipt at disposal facilities and to reduce the volume of
waste that must be transported. Processing operations include solidification,
demineralization, dewatering and filtration. Other services offered by
Chem-Nuclear include providing electro-chemical, abrasive and chemical removal
of radioactive contamination, providing management services for spent nuclear
fuel storage pools and storing and incinerating liquid radioactive organic
wastes.
Through its Waste Management Federal Services, Inc. subsidiary, the Company
provides hazardous, radioactive and mixed waste program and facilities
management services, primarily to the U.S. Department of Energy and other
federal government agencies. Such services include waste treatment, storage,
characterization and disposal, and privatization services.
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Independent Power Projects. The Company also operates and, in some cases,
owns independent power projects which either cogenerate electricity and thermal
energy or generate electricity alone for sale to customers, including utilities
and private customers.
COMPETITION
The waste industry is still highly competitive despite the recent
consolidation in the industry. See "Industry Overview." The Company encounters
intense competition, primarily in the pricing and rendering of services, from
various sources in all phases of its operations. The industry is comprised of a
number of companies of various sizes, numerous municipalities and other regional
or multi-governmental authorities, and large commercial and industrial companies
handling their own waste collection or disposal operations. Local governmental
entities are at times able to offer lower direct charges to the customer for the
same service by subsidizing the cost of such services through the use of tax
revenues and tax-exempt financing. Generally, however, municipalities do not
provide significant commercial and industrial collection or waste disposal.
Operating costs, disposal costs, and collection fees vary widely throughout
the geographic areas in which the Company operates. The prices that the Company
charges are determined locally, and typically vary by the volume or weight, type
of waste collected, treatment requirements, risks involved in the handling or
disposing of waste, frequency of collections, distance to final disposal sites,
labor costs and amount and type of equipment furnished to the customer.
Long-term solid waste collection contracts typically contain a formula,
generally based on published price indices, for automatic adjustment of fees.
The Company competes for landfill business on the basis of tipping fees,
geographical location, and quality of operations. The Company's ability to
obtain landfill volume may be limited by the fact that some major collection
companies also own or operate landfills to which they internalize their waste.
The Company competes for collection accounts primarily based on price and the
quality of its services. Intense competition is encountered for both quality of
service and pricing. From time to time, competitors may reduce the price of
their services and accept lower profit margins in an effort to expand or
maintain market share or to successfully obtain competitively bid contracts.
The Company provides residential collection services under a number of
municipal contracts. Such contracts are subject to periodic competitive bidding,
and there is no assurance that the Company will be the successful bidder and
will be able to retain such contracts. If the Company is unable to replace any
contract lost through the competitive bidding process with a comparable contract
within a reasonable time period, the earnings of the Company could be adversely
affected.
Increased public environmental awareness and certain mandated state
regulations have resulted in increased recycling, composting and waste reduction
efforts in many different areas of North America. Such efforts tend to reduce
the amount of solid waste directed to landfills and waste-to-energy facilities.
Although the Company believes that landfills and waste-to-energy facilities will
continue to be the primary depository for solid waste well into the future,
there can be no assurance that recycling, composting, and waste reduction
efforts will not affect future disposal volumes. The effect, if any, on such
volumes could also vary between different geographic regions as well as within
individual market areas in each region.
The Company also encounters intense competition in pricing and rendering of
services in its portable sanitation service business, from numerous large and
small competitors. In addition, the Company's program and facilities management
business encounters intense competition, primarily in pricing, quality and
reliability of services, from various sources in all aspects of its business.
In its hazardous waste management operations, the Company encounters
competition from a number of sources, including several national or regional
firms specializing primarily in hazardous waste management, local waste
management concerns and, to a much greater extent, generators of hazardous
wastes which seek to reduce the volume of or otherwise process and dispose of
such wastes themselves. The basis of competition is primarily technical
expertise and the price, quality and reliability of service.
Similarly, WM International encounters intense competition from local
companies and governmental entities in particular countries, as well as from
major international companies. Pricing, quality of service and
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type of equipment utilized are the primary methods of competition for collection
services, and proximity of suitable treatment or disposal facilities, technical
expertise, price, quality and reliability of services are the primary methods of
competition for treatment and disposal services.
EMPLOYEES
At December 31, 1998, the Company had approximately 68,000 full-time
employees, of which approximately 8,900 were employed in clerical,
administrative, and sales positions, 2,700 in management, and the balance in
collection, disposal, transfer station and other operations. Approximately
19,000 of the Company's employees are covered by collective bargaining
agreements. The Company has not experienced a significant work stoppage, and
management considers its employee relations to be good.
INSURANCE AND FINANCIAL ASSURANCE OBLIGATIONS
The Company carries a broad range of insurance coverages, which management
considers prudent for the protection of the Company's assets and operations.
Some of these coverages are subject to varying retentions of risk by the
Company. At December 31, 1998, the casualty coverages included $2,000,000
primary commercial general liability and $1,000,000 primary automobile liability
(including coverage for pollution exposures arising out of trucking operations)
supported by $400,000,000 in umbrella insurance protection. The property policy
provides insurance coverages for all of the Company's real and personal
property, including California earthquake perils. The Company also carries
$200,000,000 in aircraft liability protection.
The Company maintains workers' compensation insurance in accordance with
laws of the various states and countries in which it has employees. The Company
also currently has an environmental impairment liability ("EIL") insurance
policy for certain of its landfills, transfer stations, and recycling facilities
that provides coverage for property damages and/or bodily injuries to third
parties caused by off-site pollution emanating from such landfills, transfer
stations, or recycling facilities. This policy provides $10,000,000 of coverage
per loss with a $20,000,000 aggregate limit.
Through the date of the WM Holdings Merger, certain of WM Holdings' auto,
general liability and workers compensation risks were self insured up to
$5,000,000 per accident. See Note 17 to the consolidated financial statements of
the Company included elsewhere herein.
To date, the Company has not experienced any difficulty in obtaining
insurance. However, if the Company in the future is unable to obtain adequate
insurance, or decides to operate without insurance, a partially or completely
uninsured claim against the Company, if successful and of sufficient magnitude,
could have a material adverse effect upon the Company's financial condition,
results of operations or cash flows. Additionally, continued availability of
casualty and EIL insurance with sufficient limits at acceptable terms is an
important aspect of obtaining revenue-producing waste service contracts. The
Company believes these are appropriate levels for its operations and that such
levels meet applicable requirements of the various states and countries in which
it operates.
Municipal and governmental waste management contracts typically require
performance bonds or bank letters of credit to secure performance. In addition,
the Company is required to provide financial assurance for closure and
post-closure obligations with respect to its landfills. The Company has not
experienced difficulty in obtaining performance bonds or letters of credit for
its current operations. As of December 31, 1998, the Company had provided
letters of credit of approximately $2,089,100,000 and surety bonds of
approximately $521,807,000 to municipalities and other customers and other
regulatory authorities supporting tax-exempt bonds, performance of landfill
final closure and post-closure requirements, insurance contracts, and other
contracts. Continued availability of surety bonds and letters of credit in
sufficient amounts at acceptable rates is an important aspect of obtaining
additional municipal collection contracts and obtaining or retaining disposal
site operating permits.
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REGULATION
General -- Potential Adverse Effect of Government Regulations
The Company's principal business activities are subject to extensive and
evolving federal, state, local and foreign environmental, health, safety, and
transportation laws and regulations. These regulations are administered by the
EPA in the U.S., various other federal, state, and local environmental, zoning,
health, and safety agencies in the U.S. and elsewhere, including the European
Environmental Agency in Europe and various other national agencies outside of
Europe. Many of these agencies periodically examine the Company's operations to
monitor compliance with such laws and regulations.
Generally, the regulatory process requires the Company, and other companies
in the industry, to obtain and retain numerous governmental permits to conduct
various aspects of its operations, any of which may be subject to revocation,
modification or denial. Particularly, the development, expansion, and operation
of landfills and transfer stations are subject to extensive regulations
governing siting, design, operations, monitoring, site maintenance, corrective
action, financial assurance, and final closure and post-closure obligations. In
order to construct, expand, and operate a landfill or transfer station, the
Company must obtain and maintain one or more construction or operating permits
and licenses and, in certain instances, applicable zoning approvals. Obtaining
the necessary permits and approvals in connection with the acquisition,
development, or expansion of a landfill or transfer station is difficult,
time-consuming (often taking two to three years or more), and expensive, and is
frequently opposed by local citizen as well as environmental groups. Once
obtained, operating permits are subject to modification and revocation by the
issuing agency. Compliance with current and future regulatory requirements may
require the Company, as well as others in the waste management industry, from
time to time, to make significant capital and operating expenditures.
For collection operations, regulation takes such forms as licensing
collection vehicles, health and safety requirements, vehicular weight
limitations, and, in certain localities, limitations on weight, area, time, and
frequency of collection.
Federal, state, local and foreign governments have, from time to time,
proposed or adopted other types of laws, regulations, or initiatives with
respect to the environmental services industry, including laws, regulations, and
initiatives to ban or restrict the international, interstate, or intrastate
shipment of wastes, impose higher taxes on out-of-state waste shipments than on
in-state shipments, limit the types of wastes that may be disposed of at
existing landfills, mandate waste minimization initiatives, require recycling
and yard waste composting, reclassify certain categories of nonhazardous waste
as hazardous, and regulate disposal facilities as public utilities. Congress has
from, time to time, considered legislation that would enable or facilitate such
bans, restrictions, taxes, and regulations, many of which could adversely affect
the demand for the Company's services. Similar types of laws, regulations, and
initiatives have also, from time to time, been proposed or adjusted in other
jurisdictions in which the Company operates. The effect of these and similar
laws could be a reduction of the volume of waste that would otherwise be
disposed of in the Company's landfills. The Company makes a continuing effort to
anticipate regulatory, political, and legal developments that might affect its
operations, but it is not always able to do so. The Company cannot predict the
extent to which any legislation or regulation that may be enacted, amended,
repealed, reinterpreted, or enforced in the future may affect its operations.
Such actions could adversely affect the Company's operations or impact the
Company's financial condition or earnings for one or more fiscal quarters or
years.
In 1997, the EPA began requiring federal, state, or local permitting
authorities receiving money from the EPA to consider the discriminatory effects
that may result from permit issuances. The EPA will now entertain challenges to
any such permits on the grounds that the permitted activities, alone or in
conjunction with other permitted activities, subject minority communities to
disparate exposure to pollution. The lack of specific standards in the EPA's
guidance creates significant uncertainty about the effects any such challenges
could have on the Company's ability to obtain or renew necessary permits.
The demand for certain of the services provided by the Company,
particularly its hazardous waste management services, is dependent in part on
the existence and enforcement of federal, state and foreign laws and regulations
which govern the discharge of hazardous substances into the environment and on
the funding
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of agencies and programs under such laws and regulations. Such businesses will
be adversely affected to the extent that such laws or regulations are amended or
repealed, with the effect of reducing the regulation of, or liability for, such
activity, that the enforcement of such laws and regulations is lessened or that
funding of agencies and programs under such laws and regulations is delayed or
reduced. In particular, the EPA continues to consider proposals under RCRA to
redefine the term "hazardous waste" for regulatory purposes. Under some such
proposals, wastes containing minimal concentrations of hazardous substances
would no longer be subject to the stringent record-keeping, handling, treatment
and disposal rules applied to hazardous wastes under RCRA. Other EPA proposals
would cause certain wastes which presently must be managed in facilities
approved under TSCA to be eligible for disposal in facilities not approved under
TSCA. These proposals would, if adopted, reduce the volume of wastes for which
the Company's hazardous waste management services are needed.
In addition to environmental laws and regulations, federal government
contractors, including the Company, are subject to extensive regulation under
the U.S. Federal Acquisition Regulation and numerous statutes which deal with
the accuracy of cost and pricing information furnished to the U.S. government,
the allowability of costs charged to the U.S. government, the conditions under
which contracts may be modified or terminated, and other similar matters.
Various aspects of the Company's operations are subject to audit by agencies of
the U.S. government in connection with its performance of work under such
contracts as well as its submission of bids or proposals to the U.S. government.
Failure to comply with contract provisions or other applicable requirements may
result in termination of the contract, the imposition of civil and criminal
penalties against the Company, or the suspension or debarment of all or a part
of the Company from U.S. government work, which could have a material adverse
impact upon the Company's financial condition or earnings for one or more fiscal
quarters or years. Among the reasons for debarment are violations of various
statutes, including those related to employment practices, the protection of the
environment, the accuracy of records and the recording of costs. Other
governmental authorities have similar suspension and debarment laws or
regulations or regulations which are applicable to their respective
jurisdictions.
Governmental authorities have the power to enforce compliance with
regulations and permit conditions and to obtain injunctions or impose fines in
case of violations. During the ordinary course of its operations, the Company
may, from time to time, receive citations or notices from such authorities that
a facility is not in full compliance with applicable environmental or health and
safety regulations. Upon receipt of such citations or notices, the Company will
work with the authorities to address their concerns. Failure to correct the
problems to the satisfaction of the authorities could lead to monetary
penalties, curtailed operations, jail terms, facility closure, or an inability
to obtain permits for additional sites.
As a result of changing government and public attitudes in the area of
environmental regulation and enforcement, management anticipates that
continually changing requirements in health, safety, and environmental
protection laws will require the Company and others engaged in the waste
management industry to continually modify or replace various facilities and
alter methods of operation at costs that may be substantial. The Company's
significant expenditures incurred in the operation of its disposal facilities
relating to complying with the requirements of laws concerning the environment.
These expenditures relate to facility upgrades, corrective actions, and facility
final closure and post-closure care. The majority of these expenditures are made
in the normal course of the Company's business and neither materially adversely
affect the Company's earnings nor place the Company at any competitive
disadvantage. Although the Company, to its knowledge, is currently in compliance
in all material respects with all applicable federal, state, and local laws,
permits, regulations, and orders affecting its operations where noncompliance
would result in a material adverse effect on the Company's financial condition,
results of operations or cash flows, there is no assurance that the Company will
not have to expend substantial amounts for such actions in the future.
The Company expects to grow in part by acquiring existing landfills,
transfer stations, and collection operations. Although the Company conducts due
diligence investigations of the past waste management practices of the
businesses that it acquires, it can have no assurance that, through its
investigation, it will identify all potential environmental problems or risks.
As a result, the Company may have acquired, or may in the future acquire,
landfills or other properties or businesses that have unknown environmental
problems and related liabilities. The Company will be subject to similar risks
and uncertainties in connection with the
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acquisition of closed facilities that had been previously operated by businesses
acquired by the Company. The Company seeks to mitigate the foregoing risks by
obtaining environmental representations and indemnities from the sellers of the
businesses that it acquires. However, there can be no assurance that the Company
will be able to rely on any such indemnities if an environmental liability
exists.
Solid Waste
Operating permits are generally required at the state and local level for
landfills, transfer stations and collection vehicles. Operating permits need to
be renewed periodically and may be subject to revocation, modification, denial
or non-renewal for various reasons, including failure of the Company to satisfy
regulatory concerns. With respect to solid waste collection, regulation takes
such forms as licensing of collection vehicles, truck safety requirements,
vehicular weight limitations and, in certain localities, limitations on rates,
area, time and frequency of collection. With respect to solid waste disposal,
regulation covers various matters, including landfill location and design,
groundwater monitoring, gas control, liquid runoff and rodent, pest, litter and
traffic control. Zoning and land use requirements and limitations are
encountered in the solid waste collection, transfer, recycling and energy
recovery and disposal phases of the Company's business. In almost all cases the
Company is required to obtain conditional use permits or zoning law changes in
order to develop transfer station, resource recovery or disposal facilities. In
addition, the Company's disposal facilities are subject to water and air
pollution laws and regulations. Noise pollution laws and regulations may also
affect the Company's operations. Governmental authorities have the power to
enforce compliance with these various laws and regulations and violators are
subject to injunctions, fines and revocation of permits. Private individuals may
also have the right to sue to enforce compliance. Safety standards under the
Occupational Safety and Health Act ("OSHA") are also applicable to the Company's
solid waste and related services operations.
The EPA and various states acting pursuant to EPA-delegated authority have
promulgated rules pursuant to RCRA which serve as minimum requirements for land
disposal of municipal wastes. The rules establish more stringent requirements
than previously applied to the siting, construction, operations, final closure
and post-closure monitoring and maintenance of all but the smallest municipal
waste landfill facilities. The Company does not believe that continued
compliance with the more stringent minimum requirements will have a material
adverse effect on the Company's operations. See also "RCRA" and "Superfund"
below for additional regulatory information.
In March 1996, the EPA issued regulations that require large, municipal
solid waste landfills to install and monitor systems to collect and control
landfill gas. The regulations apply to landfills that are designed to
accommodate 2.5 million cubic meters or more of municipal solid waste and that
accepted waste for disposal after November 8, 1987, regardless of whether the
site is active or closed. The date by which each affected landfill must have
such a gas collection and control system depends on whether the landfill began
operation before or after May 30, 1991. In the U.S., landfills constructed,
reconstructed, modified or first accepting waste after May 30, 1991, generally
must have had systems in place by late 1998. Older landfills are generally
regulated by states and will be required to have landfill gas systems in place
within approximately 30 months of EPA's approval of the state program. Many
state solid waste regulations already require collection and control systems.
Compliance with the new regulations is not expected to have a material adverse
effect on the Company.
Hazardous Waste
The Company is required to obtain federal, state, local and foreign
governmental permits for its hazardous waste treatment, storage and disposal
facilities. Such permits are difficult to obtain, and in most instances,
extensive geological studies, tests and public hearings are required before
permits may be issued. The Company's hazardous waste treatment, storage and
disposal facilities are also subject to siting, zoning and land use
restrictions, as well as to regulations (including certain requirements pursuant
to federal statutes) which may govern operating procedures and water and air
pollution, among other matters. In particular, the Company's operations in the
U.S. are subject to the Safe Drinking Water Act (which regulates deep well
injection), TSCA (pursuant to which the EPA has promulgated regulations
concerning the disposal of
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polychlorinated biphenyls ("PCBs")), the Clean Water Act (which regulates the
discharge of pollutants into surface waters and sewers by municipal, industrial
and other sources) and the Clean Air Act (which regulates emissions into the air
of certain potentially harmful substances). In transportation operations, the
Company is subject to the jurisdiction of the Interstate Commerce Commission and
regulated by the DOT and by regulatory agencies in each state. Employee safety
and health standards under OSHA are also applicable.
All of the Company's hazardous waste treatment, storage or disposal
facilities in the U.S. have been issued permits under RCRA. The regulations
governing issuance of permits contain detailed standards for hazardous waste
facilities on matters such as construction, waste analysis, security,
inspections, training, preparedness and prevention, emergency procedures,
reporting and recordkeeping, final closure and post-closure monitoring and
maintenance. Once issued, a final permit has a maximum fixed term of ten years,
and such permits for land disposal facilities are required to be reviewed five
years from the date of issuance. The issuing agency (either the EPA or an
authorized state) may review or modify a permit at any time during its term.
The Company believes that it maintains each of its operating treatment,
storage or disposal facilities in substantial compliance with the applicable
requirements promulgated pursuant to RCRA. It is possible, however, that the
issuance or renewal of a permit could be made conditional upon the initiation or
completion of modifications or corrective actions at facilities, which might
involve substantial additional capital expenditures. Although the Company
anticipates the reauthorization of each permit at the end of its term if the
facility's operations are in compliance with applicable requirements, there can
be no assurance that such will be the case.
The radioactive waste services of Chem-Nuclear are also subject to
extensive governmental regulation. Due to the extensive geological and
hydrogeological testing and environmental data required, and the complex
political environment, it is difficult to obtain permits for radioactive waste
disposal facilities. Various phases of Chem-Nuclear's low-level radioactive
waste management services are regulated by various state agencies, the U.S.
Nuclear Regulatory Commission (the "NRC") and the DOT. Regulations applicable to
Chem-Nuclear's operations include those dealing with packaging, handling,
labeling and routing of radioactive materials, and prescribe detailed safety and
equipment standards and requirements for training, quality control and
insurance, among other matters. Employee safety and health standards under OSHA
are also applicable.
Waste-to-Energy and Related Services
The Company provides waste-to-energy and related services through its
wholly-owned subsidiary WTI, which is now managed as part of the North American
solid waste management service operations. WTI's business activities are subject
to environmental regulation under federal, state and local laws and regulations.
These regulations include the Clean Air Act, the Clean Water Act and RCRA. The
Company believes that this business is conducted in material compliance with
applicable laws and regulations. There can be no assurance, however, that such
requirements will not change to the extent that it would materially affect the
Company's consolidated financial statements. The Company believes that the air
pollution control systems at certain waste-to-energy facilities owned or leased
for use in these operations most likely will be required to be modified to
comply with more stringent air pollution control standards adopted by the EPA in
December 1995 for large municipal waste combusters. The compliance dates will
vary by facility, but all affected facilities most likely will be required to be
in compliance with the standards by the end of the year 2000. Currently
available technologies are adequate to meet the new standards. Although the
total expenditures required for such modifications are approximately
$200,000,000, they are not expected to have a material adverse effect on the
Company's liquidity or results of operations because provisions in the impacted
facilities' long-term waste supply agreements generally allow the Company to
recover from customers the majority of incremental capital and operating costs.
The customer's share of capital and financing costs is typically recovered over
the remaining life of the waste supply agreements, and pro rata operating costs
are recovered in the period incurred. There can be no assurance, however, the
Company will be able to recover, for each project, all such increased costs from
its customers. Moreover, it is possible that future developments, such as
increasingly strict requirements of environmental laws, and enforcement policies
thereunder, could affect the manner in
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which the Company operates its waste-to-energy projects and conducts its
business, including the handling, processing or disposal of the wastes,
by-products and residues generated thereby.
Also, in May 1994, the U.S. Supreme Court ruled that state and local
governments may not constitutionally restrict the free movement of waste in
interstate commerce through the use of flow control laws. Such laws typically
involve a local government specifying a jurisdictional disposal site for all
solid waste generated within its borders. Since the ruling, several decisions of
state or federal courts have invalidated regulatory flow control schemes in a
number of jurisdictions. Other judicial decisions have upheld non-regulatory
means by which municipalities may effectively control the flow of municipal
solid waste. In addition, federal legislation has been proposed, but not yet
enacted, to effectively grandfather existing flow control mandates. There can be
no assurance that such alternatives to regulatory flow control will in every
case be found lawful or that such legislation will be enacted into law. However,
the Supreme Court's 1994 ruling and subsequent court decisions have not to date
had a material adverse effect on any of the Company's waste-to-energy
operations. In the event that such legislation is not adopted, the Company
believes that affected municipalities will endeavor to implement alternative
lawful means to continue controlling the flow of waste. In view of the uncertain
state of the law at this time, however, the Company is unable to predict whether
such efforts would be successful or what impact, if any, this matter might have
on the Company's waste-to-energy facilities.
The Company's Gloucester County, New Jersey waste-to-energy facility
historically relied on a disposal franchise for substantially all of its supply
of municipal solid waste. On May 1, 1997, the Third Circuit Court of Appeals
(the "Third Circuit") permanently enjoined the State of New Jersey from
enforcing its franchise system as a form of unconditional solid waste flow
control, but stayed the injunction for so long as any appeals were pending. On
November 10, 1997, the U.S. Supreme Court announced its decision not to review
the Third Circuit decision, thereby ending the stay and, effectively, the
facility's disposal franchise. In response, the Gloucester facility lowered its
prices. In early 1999, the Company entered into an agreement pursuant to which
the Company will operate the Gloucester facility and provide disposal services
under a new service agreement for the next ten years. As part of the agreement,
Gloucester County has agreed to cooperate in a refinancing of the existing
project debt. The refinancing, which is expected to close in the second quarter
of 1999, will settle all disputes and release the existing letters of credit. As
a result of the agreement and refinancing, the Company expects the Gloucester
project to operate profitably, albeit at reduced levels, in the absence of
regulatory control.
The Company's energy facilities in the U.S. are also subject to the
provisions of various energy-related laws and regulations, including the Public
Utility Regulatory Policies Act of 1978 ("PURPA"). The ability of the Company's
waste-to-energy and small power production facilities to sell power to electric
utilities on advantageous terms and conditions and to avoid burdensome public
utility regulation has historically depended, in part, upon the applicability of
certain provisions of PURPA, which generally exempts the Company from state and
federal regulatory control over electricity prices charged by, and the finances
of, the Company and its energy-producing subsidiaries. As state legislatures and
the U.S. Congress have accelerated their consideration of the manner in which
economic efficiencies can be gained by deregulating the electric generation
industry, utilities and others have taken the position that power sales
agreements entered into pursuant to PURPA which provide for rates in excess of
current market rates should be voidable as "stranded assets." The Company's
power production facilities are qualifying facilities under PURPA and depend on
the sanctity of their power sales agreements for their economic viability.
Although a repeal or modification of PURPA is possible within the next two
years, the Company believes that federal law offers strong protection to the
PURPA contracts and recent state and federal agency and court decisions have
unanimously upheld the inviolate nature of these contracts. In addition, state
legislative actions to date have not attempted to abrogate these contracts.
While there is some risk that future utility restructurings, court decisions
and/or legislative or administrative action in this area could have an adverse
effect on the business of the Company, in light of recent developments, the
Company currently believes such risk is remote. In addition, the passage of the
Energy Policy Act of 1992 created an alternative ownership mechanism by which
the Company's future independent power projects would be able to participate in
the electricity generation industry without the burdens of traditional public
utility regulation. For those reasons, the operations of existing
waste-to-energy
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and other small power production facilities business are not currently expected
to be materially and adversely affected if the various benefits of PURPA are
repealed or substantially reduced on a prospective basis. However, the Company
can give no assurances that future utility restructurings, court decisions or
legislative or administrative action in this area will not have a material
adverse impact on its consolidated financial statements.
RCRA
Pursuant to RCRA, the EPA has established and administers a comprehensive,
"cradle-to-grave" system for the management of a wide range of industrial
by-products and residues identified as "hazardous" wastes. States that have
adopted hazardous waste management programs with standards at least as stringent
as those promulgated by the EPA may be authorized by the EPA to administer their
programs in lieu of RCRA.
Under RCRA and federal transportation laws, a transporter must deliver
hazardous waste in accordance with a manifest prepared by the generator of the
waste and only to a treatment, storage or disposal facility having a RCRA permit
or interim status under RCRA. Every facility that treats or disposes of
hazardous wastes must obtain a RCRA permit from the EPA or an authorized state
and must comply with certain operating standards. The RCRA permitting process
involves applying for interim status and also for a final permit. Under RCRA and
the implementing regulations, facilities which have obtained interim status are
allowed to continue operating by complying with certain minimum standards
pending issuance of a permit.
RCRA also imposes restrictions on land disposal of certain hazardous wastes
and prescribes standards for hazardous waste land disposal facilities. Under
RCRA, land disposal of certain types of untreated hazardous wastes has been
banned except where the EPA has determined that land disposal of such wastes and
treatment residuals should be permitted. The disposal of liquids in hazardous
waste land disposal facilities is also prohibited.
The EPA, from time to time, considers fundamental changes to its
regulations under RCRA that could facilitate exemptions from hazardous waste
management requirements, including policies and regulations that could implement
the following changes: redefine the criteria for determining whether wastes are
hazardous; prescribe treatment levels which, if achieved, could render wastes
nonhazardous; encourage further recycling and waste immunization; reduce
treatment requirements for certain wastes to encourage alternatives to
incineration; establish new operating standards for combustion technologies; and
indirectly encourage on-site remediation. To the extent such changes are
adopted, they can be expected to adversely affect the demand for the Company's
hazardous waste management services. In this regard, the EPA has recently
proposed regulations which would have the effect of reducing the volume of waste
classified as hazardous for RCRA regulatory purposes.
In addition to the foregoing provisions, RCRA regulations require the
Company to demonstrate financial responsibility for possible bodily injury and
property damage to third parties caused by both sudden and nonsudden accidental
occurrences. See "-- Insurance and Financial Insurance Obligations." Also, RCRA
regulations require the Company to provide financial assurance that funds will
be available when needed for closure and post-closure care at its waste
treatment, storage and disposal facilities, the costs of which could be
substantial. Such regulations allow the financial assurance requirements to be
satisfied by various means, including letters of credit, surety bonds, trust
funds, a financial (net worth) test and a guarantee by a parent corporation.
Under RCRA regulations, a company must pay the closure costs for a waste
treatment, storage or disposal facility owned by it upon the closure of the
facility and thereafter pay post-closure care costs. If such a facility is
closed prior to its originally anticipated time, it is unlikely that sufficient
funds or reserves will have been accrued over the life of the facility to
provide for such costs, and the owner of the facility could suffer a material
adverse impact as a result. Consequently, it may be difficult to close such
facilities to reduce operating costs at times when, as is currently the case in
the hazardous waste services industry, excess treatment, storage or disposal
capacity exists.
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Superfund
Among other things, Superfund generally provides for the remediation of
sites from which there has been a release or threatened release of a hazardous
substance into the environment. Superfund imposes joint and several liability
for the costs of remediation and for damages to natural resources upon the
present and former owners or operators of facilities or sites from which there
is a release or threatened release of hazardous substances. Waste generators and
waste transporters are also strictly liable. Under the authority of CERCLA,
detailed requirements apply to the manner and degree of remediation of
facilities and sites where hazardous substances have been or are threatened to
be released into the environment.
Liability under CERCLA is not dependent upon the intentional disposal of
"hazardous wastes," as defined under RCRA. It can be founded upon a release or
threatened release, even as a result of lawful, unintentional, and non-negligent
action, of any one of more than 700 "hazardous substances," including very small
quantities of such substances. CERCLA requires the EPA to establish a National
Priorities List ("NPL") of sites at which hazardous substances have been or are
threatened to be released and which require investigation or remediation. The
EPA's primary way of determining whether a site is to be included on the NPL is
the Hazard Ranking System, which evaluates the relative potential for a release
of hazardous substances to pose a threat to human health or the environment
pursuant to a scoring system based on factors grouped into three categories: (1)
likelihood of release, (2) hazardous substance characteristics, and (3)
receptors. As of February 1999, the EPA had proposed or identified approximately
10,000 sites for preliminary assessment. These sites are compiled on the
Comprehensive Environmental Response, Compensation, and Liability Information
System ("CERCLIS") list. The identification of a site on the CERCLIS list
indicates only that the site has been brought to the attention of the EPA and
will undergo an assessment of environmental conditions thereon, but it does not
necessarily mean that an actual health or environmental threat currently exists
or has ever existed.
More than 23% of the sites on the NPL are solid waste landfills. Thus, even
if the Company's landfills have never received "hazardous wastes" as such, one
or more hazardous substances may have come to be located at its landfills.
Because of the extremely broad definition of "hazardous substances," the same is
true of other industrial properties with which the Company or its predecessors
has been, or with which the Company may become, associated as an owner or
operator. Consequently, if there is a release or threatened release of such
substances into the environment from a site currently or previously owned or
operated by the Company, the Company could be liable under CERCLA for the cost
of removing such hazardous substances at the site, remediation of contaminated
soil or groundwater, and for damages to natural resources, even if those
substances were deposited at the Company's facilities before the Company
acquired or operated them. Given the limited amount of EIL insurance maintained
by the Company as compared to the substantial cost of a CERCLA cleanup, a
finding of such liability could have a material adverse impact on the Company's
business and financial condition. See "-- Insurance and Financial Assurance
Obligations."
Under CERCLA, the Company may not be liable for the remediation of a
disposal site that was never owned or operated by the Company ("third party
site") containing hazardous substances transported to such site by the Company
if the site was selected by the generator of the hazardous substance. However,
the Company would be responsible for any hazardous substances during actual
transportation. Also, the Company could be liable under CERCLA for environmental
contamination caused by the release of hazardous substances transported by the
Company where the Company selected the disposal site. CERCLA imposes liability
for certain environmental response measures upon transporters who selected the
disposal site at which a release or threatened release of hazardous substances
occurs. It therefore is common in the solid waste transport business to receive
information requests from the EPA about transporting activities to disposal
sites. The Company has received information requests regarding transporting
activities to its own disposal sites as well as third party sites. The
environmental agencies or other potentially responsible parties could assert
that the Company is liable for environmental response measures arising out of
disposal at a third party site that was selected by the Company, a waste
transporter acquired by the Company, or a waste transporter with whom the
Company contracted.
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Several bills have been introduced in the U.S. Congress to reauthorize and
substantially amend CERCLA. In addition to possible changes in the statute's
funding mechanisms and provisions for allocating cleanup responsibility,
Congress may also fundamentally alter the statute's provisions governing the
selection of appropriate site remedial action. In this regard, new approaches to
cleanup, removal, treatment, and remediation of hazardous substance releases may
be adopted which rely on nationally or site-specific risk based standards. These
types of policy changes could significantly affect the stringency and extent of
site remediation, the types of remediation techniques employed, and the types of
waste management facilities that may be used for the treatment and disposal of
hazardous substances. Congress may additionally consider revision of the
liability imposed by CERCLA on current owners of property for contamination
caused prior to a party's acquisition of a site. This consideration could
potentially reduce responsibility for remediation obligations under CERCLA that
the Company could otherwise incur.
International Waste Management and Related Services
The Company's international operations, which are conducted through WM
International, are subject to the general business, liability, land-use planning
and other environmental laws and regulations of the countries where the services
are performed and, in Europe, to European Union ("EU") regulations and
directives. The degree of local enforcement of applicable laws and regulations
varies substantially between, and even within, the various countries in which WM
International operates. In addition to the statutes and regulations imposed by
national, state or provincial, and municipal or other local authorities, many of
the countries in which WM International operates are members of the EU. The EU
has issued and continues to issue environmental directives and regulations
covering a broad range of environmental matters and has created a European
Environmental Agency responsible for monitoring and collating member state
environmental data. The Single European Act, passed in 1987, established three
fundamental principles to guide the development of future EU environmental law:
(i) the need for preventative action; (ii) the correction of environmental
problems at the source; and (iii) the polluter's liability for environmental
damage.
The Treaty on European Union, signed in December 1991, came into force in
November 1993. Revised in Amsterdam in June 1997, the Treaty now regards
"sustainable development" as a key component of EU policy-making and requires
that environmental protection be integrated into the definition and application
of all EU laws.
The impact of current and future EU legislation will vary from country to
country according to the degree to which existing national requirements already
meet or fall short of the new EU standards and, in some jurisdictions, may
require extensive public and private sector investment and the development and
provision of the necessary technology, expertise, administrative procedures and
regulatory structures. These extensive laws and regulations are continually
evolving in response to technological advances and heightened public and
political concern.
Outside Europe, continuing industrialization, population expansion and
urbanization have caused increased levels of pollution with all of the resultant
social and economic implications. The desire to sustain economic growth and
address historical pollution problems is being accompanied by investments in
environmental infrastructure and the introduction of regulatory standards to
further control industrial activities.
The Company believes that WM International's business is conducted in
material compliance with applicable laws and regulations and does not anticipate
that maintaining such compliance will adversely affect the Company's
consolidated financial statements or operations. There can be no assurance,
however, that such requirements will not change so as to require significant
additional expenditures or operating costs.
State and Local Regulation
The states in which the Company operates have their own laws and
regulations that may be more strict than comparable federal laws and regulations
governing hazardous and nonhazardous solid waste disposal, water and air
pollution, releases and cleanup of hazardous substances and liability for such
matters. The states also have adopted regulations governing the siting, design,
operation, maintenance, final closure, and post-closure maintenance of landfills
and transfer stations. The Company's facilities and operations are likely to be
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subject to many, if not all, of these types of requirements. In addition, the
Company's collection and landfill operations may be affected by the trend in
many states toward requiring the development of waste reduction and recycling
programs. For example, several states have enacted laws that require counties to
adopt comprehensive plans to reduce, through waste planning, composting,
recycling, or other programs, the volume of solid waste deposited in landfills.
Additionally, the disposal of yard waste in solid waste landfills has been
banned in several states. Legislative and regulatory measures to mandate or
encourage waste reduction at the source and waste recycling have also been
considered from time to time by the U.S. Congress and the EPA.
Various states have enacted, or are considering enacting, laws that
restrict the disposal within the state of hazardous and nonhazardous solid waste
generated outside the state. While laws that overtly discriminate against
out-of-state waste have been found to be unconstitutional, some laws that are
less overtly discriminatory have been upheld in court. Additionally, certain
state and local governments have enacted "flow control" regulations, which
attempt to require that all waste generated within the state or local
jurisdiction be deposited at specific disposal sites. In May 1994, the U.S.
Supreme Court ruled that a flow control ordinance was unconstitutional.
Recently, lower courts have refused to overturn locally enacted ordinances which
effectively circumvent the Supreme Court's ruling. Whether these laws will
survive the appellate process is uncertain. From time to time, the U.S. Congress
has considered legislation authorizing states to adopt regulations,
restrictions, or taxes on the importation of extraterritorial waste, and
granting states and local governments authority to enact partial flow control
legislation. To date, such congressional efforts have been unsuccessful. The
U.S. Congress' adoption of such legislation allowing for restrictions on
importation of extraterritorial waste or certain types of flow control, or the
adoption of legislation affecting interstate transportation of waste at the
federal or state level, could adversely affect the Company's solid waste
management services, including collection, transfer, disposal, and recycling
operations, and in particular the Company's ability to expand landfill
operations acquired in certain areas.
Many states and local jurisdictions in which the Company operates have
enacted "fitness" laws that allow agencies having jurisdiction over waste
services contracts or permits to deny or revoke such contracts or permits on the
basis of an applicant's (or permit holder's) compliance history. These laws
authorize the agencies to make determinations of an applicant's fitness to be
awarded a contract or to operate and to deny or revoke a contract or permit
because of unfitness absent a showing that the applicant has been rehabilitated
through the adoption of various operating policies and procedures put in place
to assure future compliance with applicable laws and regulations.
FACTORS INFLUENCING FUTURE RESULTS AND ACCURACY OF FORWARD-LOOKING STATEMENTS
In the normal course of its business, the Company, in an effort to help
keep its stockholders and the public informed about the Company's operations,
may from time to time issue or make certain statements, either in writing or
orally, that are or contain forward-looking statements, as that term is defined
in the U.S. federal securities laws. Generally, these statements relate to
business plans or strategies, projected or anticipated benefits or other
consequences of such plans or strategies, projected or anticipated benefits from
acquisitions made by or to be made by the Company, or projections involving
anticipated revenues, earnings, or other aspects of operating results. The words
"may," "expect," "believe," "anticipate," "project," "estimate," their opposites
and similar expressions are intended to identify forward-looking statements. The
Company cautions readers that such statements are not guarantees of future
performance or events and are subject to a number of factors that may tend to
influence the accuracy of the statements and the projections upon which the
statements are based, including but not limited to those discussed below. As
noted elsewhere in this report, all phases of the Company's operations are
subject to a number of uncertainties, risks, and other influences, many of which
are outside the control of the Company, and any one of which, or a combination
of which, could materially affect the Company's consolidated financial
statements and operations and whether forward-looking statements made by the
Company ultimately prove to be accurate.
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The following discussion outlines certain factors that could affect the
Company's consolidated financial statements for 1999 and beyond and cause them
to differ materially from those that may be set forth in forward-looking
statements made by or on behalf of the Company:
Potential Difficulties in Continuing to Expand and Manage Growth
The Company has experienced rapid growth, primarily through acquisitions.
The Company's future financial results and prospects depend in large part on its
ability to successfully manage and improve the operating efficiencies and
productivity of these acquired operations. In particular, whether the
anticipated benefits of acquired operations are ultimately achieved will depend
on a number of factors, including the ability of the Company to achieve
administrative cost savings, rationalization of collection routes, insurance and
bonding cost reductions, general economies of scale, and the ability of the
Company, generally, to capitalize on its asset base and strategic position.
Moreover, the ability of the Company to continue to grow will depend on a number
of factors, including competition from other waste management companies,
availability of attractive acquisition opportunities and the ability to mitigate
anti-trust concerns related to acquisitions in several markets, availability of
working capital, ability to maintain margins on existing or acquired operations,
and the management of costs in a changing regulatory environment. There can be
no assurance that the Company will be able to continue to expand and
successfully manage its growth or that the pace of its growth will not adversely
affect its existing or acquired operations.
Potential Risks of Acquisition Strategy
The Company regularly pursues opportunities to expand through the
acquisition of additional waste management businesses and operations that can be
effectively integrated with the Company's existing operations. In addition, the
Company regularly pursues mergers and acquisition transactions, some of which
are significant, in new markets where the Company believes that it can
successfully become a provider of integrated waste management services. As one
of the leading industry consolidators, the Company could announce transactions
with either publicly or privately owned businesses at any time.
The Company's acquisition strategy involves certain potential risks. These
include the risk that the Company may not accurately assess all of the
pre-existing liabilities of acquired companies and that the Company may
encounter unexpected difficulties in successfully integrating the operations of
acquired companies with the Company's existing operations. Although the Company
generally has been successful in implementing its acquisition strategy, there
can be no assurance that attractive acquisition opportunities will continue to
be available to the Company, that the Company will have access to the capital
required to finance potential acquisitions on satisfactory terms, or that any
businesses acquired will prove profitable. Future acquisitions may result in the
incurrence of additional indebtedness or the issuance of additional equity
securities.
International Operations
Operations in foreign countries generally are subject to a number of risks
inherent in any business operating in foreign countries, including political,
social, economic instability, and inflation, general strikes, nationalization of
assets, currency restrictions and exchange rate fluctuations, nullification,
modification or renegotiation of contracts, and governmental regulation, all of
which are beyond the control of the Company. No prediction can be made as to how
existing or future foreign governmental regulations in any jurisdiction may
affect the Company in particular or the waste management industry in general.
Capital Requirements
The Company expects to generate sufficient cash flow from its operations in
1999 to cover its anticipated cash needs for capital expenditures and
acquisitions. If the Company's cash flow from operations during 1999 is less
than currently expected, or if the Company's capital requirements increase,
either due to strategic decisions or otherwise, the Company may elect to incur
future indebtedness or issue equity securities to cover any additional capital
needs. However, there can be no assurance that the Company will be successful in
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obtaining additional capital on acceptable terms through such debt incurrences
or issuances of additional equity securities. Additionally, there can be no
assurances that the Company will be successful in renewing its existing credit
facility, which must be renewed annually, or that any such renewal will be on
terms acceptable to the Company. Any failure by the Company to successfully
renew its existing credit facility, or to obtain other financing sources could
have a material adverse effect on the Company's consolidated financial
statements. See Note 5 to the consolidated financial statements included
elsewhere herein.
The Company has historically used variable rate debt under revolving bank
credit arrangements as one method of financing its rapid growth. Although recent
financings by the Company have reduced the amount of variable rate debt as a
percentage of total indebtedness outstanding, the Company intends to continue to
use variable rate debt as a financing alternative. To the extent that variable
interest rates tend to fluctuate as general interest rates change, an increase
in interest rates could have a material adverse effect on the Company's earnings
in the future.
Effect of Competition on Profitability
The waste management industry is highly competitive. In North America, the
industry consists of several large national waste management companies, and
numerous local and regional companies of varying sizes and financial resources.
The Company competes with numerous waste management companies, and with counties
and municipalities that maintain their own waste collection and disposal
operations. These counties and municipalities may have financial competitive
advantages because tax revenues and tax-exempt financing are available to them.
In addition, competitors may reduce their prices to expand sales volume or to
win competitively bid municipal contracts. Profitability may decline because of
the national emphasis on recycling, composting, and other waste reduction
programs that could reduce the volume of solid waste collected or deposited in
disposal facilities.
Although the Company is a leading provider of waste management and related
services outside of North America, the Company does not believe that any
non-governmental entity accounts for a material portion of the very
decentralized, highly fragmented international market. In some markets, however,
the Company competes with substantial companies which hold significant market
shares, particularly in Finland, Germany, the Netherlands, Sweden and the United
Kingdom. The international waste management and related services industry is
highly competitive and certain aspects require substantial human and capital
resources. The Company encounters intense competition from governmental,
quasi-governmental and private sources in all aspects of its international
operations.
Some competitors of the Company in its international operations may have
greater financial resources and may have greater technical resources with
respect to specific matters. Particularly with respect to larger contracts, such
as for city-cleaning services, contracts or bids with respect to the
construction or development of water and wastewater facilities, or permitting
and development of a new treatment facility, waste-to-energy facility,
incinerator or landfill, the Company may be required to commit substantial
resources over a long period of time during the proposal phase without any
assurance of successfully obtaining the contract.
Capitalized Expenditures
In accordance with generally accepted accounting principles, the Company
capitalizes certain expenditures and advances relating to acquisitions, pending
acquisitions, and disposal site development and expansion projects. The Company
expenses indirect acquisition costs, such as executive salaries, general
corporate overhead, public affairs and other corporate services, as incurred.
The Company's policy is to charge against earnings any unamortized capitalized
expenditures and advances relating to any facility or operation that is
permanently shut down, any pending acquisition that is not consummated, and any
disposal site development or expansion project that is not completed. The charge
against earnings is reduced by any portion of the capitalized expenditure and
advances that the Company estimates will be recoverable, through sale or
otherwise. In future periods, the Company may be required to incur a charge
against earnings in accordance with such policy. Depending on the magnitude of
any such charge, it could have a material adverse effect on the Company's
consolidated financial statements.
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Restrictions and Costs Associated with Government Regulation
The Company's operations are substantially affected by stringent government
regulations at the federal, state and local level in the U.S. and in other
countries. These laws, rules, orders and interpretations govern environmental
protection, health and safety, land use, zoning, and other matters. They may
impose restrictions on operations that could adversely affect the Company's
results of operations and financial condition, such as limitations on the
expansion of waste disposal, transfer or processing facilities, limitations or
bans on disposal of out-of-state waste or certain categories of waste, or
mandates regarding the disposal of solid waste. In order to develop, expand or
operate a landfill or other waste management facility, the Company must obtain
and maintain in effect various facility permits and other governmental
approvals, including those relating to zoning, environmental protection and land
use. These permits and approvals are difficult, time consuming and costly to
obtain, in part because of possible opposition by governmental officials or
citizens. In addition, these permits and approvals may contain conditions that
limit operations and the Company's ability to change the facility.
There can be no assurance that the Company will be successful in obtaining
and maintaining in effect permits and approvals required for the successful
operation and growth of its business, including permits and approvals for the
development of additional disposal capacity needed to replace existing capacity
that is exhausted. The siting, design, operation and closure of landfills are
also subject to extensive regulations. These regulations could also require the
Company to undertake investigatory or remedial activities, to curtail operations
or to close a landfill temporarily or permanently. Future changes in these
regulations may require the Company to modify, supplement, or replace equipment
or facilities at costs which could be substantial.
In the U.S., court decisions have ruled that state and local governments
may not use regulatory flow control laws constitutionally to restrict the free
movement of waste in interstate commerce. The Company cannot predict what
impact, if any, these decisions will have on its disposal facilities.
Potential Environmental Liability and Insurance
The Company could be liable if its disposal facilities and collection
operations cause environmental damage to the Company's properties or to nearby
landowners, particularly as a result of the contamination of drinking water
sources or soil, including damage resulting from conditions existing prior to
the acquisition of such assets or operations. Also, the Company could be liable
for any off-site environmental contamination caused by hazardous substances, the
transportation, disposal or treatment of which was arranged for by the Company
or predecessor owners where the Company is liable as a successor to such prior
owners. Any substantial liability for environmental damage could materially
adversely affect the operating results and financial condition of the Company.
In the ordinary course of its business, the Company may become involved in
a variety of legal and administrative proceedings relating to land use and
environmental laws and regulations. These may include proceedings by foreign,
federal, state or local agencies seeking to impose civil or criminal penalties
on the Company for violations of such laws and regulations, or to impose
liability on the Company under applicable statutes, or to revoke or deny renewal
of a permit; actions brought by citizens groups, adjacent landowners or
governmental agencies opposing the issuance of a permit or approval to the
Company or alleging violations of the permits pursuant to which the Company
operates or laws or regulations to which the Company is subject; and actions
seeking to impose liability on the Company for any environmental damage at its
owned or operat