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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File No. 0-28652
WASTE CONNECTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3283464
(State or other jurisdiction (I.R.S. Employer Identification)
of incorporation or organization)
620 Coolidge Drive
Suite 350
Folsom, California 95630
(Address of principal executive offices) (Zip Code)
(916) 608-8200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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 Regulation 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. [ ]
Aggregate market value of voting stock held by non-affiliates of registrant as
of February 28, 2002: $830,449,033
Number of shares of Common Stock outstanding as of February 28, 2002: 27,443,806
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2002 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
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WASTE CONNECTIONS, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
ITEM NO. PAGE
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PART I
1. BUSINESS 1
2. PROPERTIES 16
3. LEGAL PROCEEDINGS 16
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 17
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 19
6. SELECTED FINANCIAL DATA 19
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 21
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK 29
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 30
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 30
PART III 57
PART IV
14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS
ON FORM 8-K 57
SIGNATURES 58
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS 59
EXHIBIT INDEX 60
PART I
Forward Looking Statements
Certain information contained in this Annual Report on Form 10-K,
including, without limitation, information appearing under Item 1, "Business,"
and Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," includes statements that are forward-looking in nature
These statements can be identified by the use of forward-looking terminology
such as "believes", "expects", "may", "will", "should" or "anticipates" or the
negative thereof or comparable terminology, or by discussions of strategy. Our
business and operations are subject to a variety of risks and uncertainties and,
consequently, actual results may materially differ from those projected by any
forward-looking statements in this Annual Report on Form 10-K. Factors that
could cause actual results to differ from those projected include, but are not
limited to, the following: (1) competition or unfavorable industry or economic
conditions could lead to a decrease in demand for our services and/or to a
decline in prices we realized for our services, (2) we depend in part on
acquisitions for growth; may be required to pay higher prices for acquisitions,
and we may experience difficulty in integrating and deriving synergies from
acquisitions, (3) we may not always have access to the additional capital that
we require to execute our growth strategy or our cost of capital may increase,
(4) governmental regulations may require increased capital expenditures or
otherwise affect our business, (5) businesses that we acquire may have
undiscovered liabilities, (6) we depend on large, long-term collection
contracts, and (7) key members of senior management may depart and may be
difficult or impossible to replace. These risks and uncertainties, as well as
others, are discussed in greater detail in our other filings with the Securities
and Exchange Commission. We make no commitment to revise or update any
forward-looking statements in order to reflect events or circumstances after the
date any such statement is made.
ITEM 1. BUSINESS
General
Waste Connections is a regional, integrated solid waste services company
that provides solid waste collection, transfer, disposal and recycling services
in secondary markets located primarily in the Western U.S. We currently own and
operate 74 collection operations, 26 transfer stations, 17 Subtitle D landfills
and 18 recycling facilities and operate, but do not own, an additional nine
transfer stations and nine Subtitle D landfills. As of December 31, 2001, we
served more than 800,000 commercial, industrial and residential customers in 18
states: California, Colorado, Iowa, Kansas, Kentucky, Minnesota, Mississippi,
Montana, Nebraska, New Mexico, Oklahoma, Oregon, South Dakota, Tennessee, Texas,
Utah, Washington, and Wyoming. Approximately 50% of our revenues are derived
from exclusive markets, the majority of which are from exclusive arrangements,
including franchise agreements, long-term municipal contracts and governmental
certificates.
Acquisitions have been and are expected to continue to be an important
component of our growth strategy. We have primarily targeted secondary markets
of the Western U.S. because we believe that: (1) there is less competition in
these markets from larger, better-capitalized solid waste services companies;
(2) these markets have strong projected economic and population growth rates;
(3) a large number of independent solid waste services companies suitable for
acquisition by us are located in these markets; and (4) there is greater
opportunity to enter into exclusive arrangements in these markets. In addition,
our senior management team has extensive experience in acquiring, integrating
and operating solid waste services businesses.
We have developed a two-pronged strategy tailored to the competitive and
regulatory factors that affect our markets. In the markets where waste
collection services are performed under exclusive arrangements, we generally
focus on controlling the solid waste stream by providing collection services
under such arrangements. In markets where we believe that competitive and
regulatory factors make owning landfills advantageous, we generally focus on
providing integrated services, from collection through disposal of solid waste
in landfills that we own or operate.
Unless otherwise noted, all descriptions of our business in this Annual
Report on Form 10-K are as of December 31, 2001.
Industry Background
We estimate that the U.S. solid waste services industry generated revenues
of approximately $40 billion in 2001. The solid waste services industry has
undergone significant consolidation and integration since 1990. We believe that,
particularly in the Western U.S., the following factors have primarily caused
the consolidation and integration of the waste services industry:
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- - Increased Impact of Regulations. Stringent industry regulations, such as
the Subtitle D regulations, have caused operating and capital costs to rise
and have accelerated consolidation and acquisition activities in the solid
waste collection and disposal industry. Many smaller industry participants
have found these costs difficult to bear and have decided to either close
their operations or sell them to larger operators. In addition, Subtitle D
requires more stringent engineering of solid waste landfills, and mandates
liner systems, leachate collection, treatment and monitoring systems and
gas collection and monitoring systems. These ongoing costs are combined
with increased financial reserve requirements for solid waste landfill
operators relating to closure and post-closure monitoring. As a result, the
number of solid waste landfills is declining while the average size is
increasing.
- - Increased Integration of Collection and Disposal Operations. In certain
markets, competitive pressures are forcing operators to become more
efficient by establishing an integrated network of solid waste collection
operations and transfer stations, through which they secure solid waste
streams for disposal. Operators have adopted a variety of disposal
strategies, including owning landfills, establishing strategic
relationships to secure access to landfills and to capture significant
waste stream volumes to gain leverage in negotiating lower landfill fees,
and securing long-term, most-favored-pricing contracts with high capacity
landfills.
- - Pursuit of Economies of Scale. Larger operators achieve economies of scale
by vertically integrating their operations or by spreading their facility,
asset and management infrastructure over larger volumes. Larger solid waste
collection and disposal companies have become more cost-effective and
competitive by controlling a larger waste stream and by gaining access to
significant financial resources to make acquisitions.
- - Regulatory Framework in the Western U.S. In the Western U.S., waste
collection services are provided largely under three types of contractual
arrangements: certificates or permits, franchise agreements and municipal
contracts. Certificates or permits, such as governmental certificates
awarded to waste collection service providers in unincorporated areas and
electing municipalities of Washington by the Washington Utilities and
Transportation Commission (the "WUTC"), typically grant the certificate
holder the exclusive and perpetual right to provide specific residential,
commercial and industrial waste services in a territory at specified rates.
See "G certificates" below. Franchise agreements typically provide an
exclusive service period of five to ten years or longer and specify the
service territory, a broad range of services to be provided, and rates for
the services. They also often give the service provider a right of first
refusal to extend the term of the agreement. Municipal contracts typically
provide a shorter service period and a more limited scope of services than
franchise agreements and generally require competitive bidding at the end
of the contract term. Unless customers within the areas covered by certain
governmental certificates, franchise agreements and municipal contracts
elect not to receive any waste collection services, they are required to
pay collection fees to the company providing these services in their area.
These exclusive rights and contractual arrangements create barriers to
entry that can be overcome primarily through acquisitions of companies with
such exclusive rights or contractual arrangements.
Despite the ongoing consolidation, the solid waste services industry
remains regional in nature and fragmented. Based on published industry sources,
approximately 20% of the total revenues of the U.S. solid waste industry is
accounted for by more than 5,000 private, predominantly small, collection and
disposal businesses. We expect the current consolidation trends in the solid
waste industry to continue, because many independent landfill and collection
operators lack the capital resources, management skills and technical expertise
necessary to comply with stringent environmental and other governmental
regulations and to compete with larger, more efficient, integrated operators. In
addition, many independent operators may wish to sell their businesses to
achieve liquidity in their personal finances or as part of their estate
planning. We believe that the fragmented nature of the industry offers
significant consolidation and growth opportunities, especially in secondary
markets of the Western U.S., for companies with disciplined acquisition
programs, decentralized operating strategies and access to financial resources.
Strategy
Our objective is to build a leading integrated solid waste services company
in secondary markets located primarily in the Western U.S. We have developed a
two-pronged strategy tailored to the competitive and regulatory factors that
affect our markets.
First, in markets where waste collection services are provided under
exclusive arrangements, or where waste disposal is municipally funded or
available from multiple municipal sources, we believe that controlling the waste
stream by providing collection services under exclusive arrangements is often
more important to our growth and profitability than owning or operating
landfills. In addition, regulations in some Western U.S. markets dictate the
disposal facility to be used. The large size of many western states increases
the cost of interstate and long haul disposal, heightening the effects of
regulations that direct waste disposal, which may make it more difficult for a
landfill to obtain the disposal volume necessary to operate profitably. In
markets with these characteristics, we believe that landfill ownership or
vertical integration is not critical to our success.
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Second, in markets where we believe that owning landfills is a strategic
element to a collection operation because of competitive and regulatory factors,
we generally focus on providing integrated services, from collection through
disposal of solid waste in landfills that we own or operate.
GROWTH STRATEGY
- - Internal Growth. To generate continued internal growth, we will focus on
increasing market penetration in our current and adjacent markets,
soliciting new commercial, industrial, and residential customers in markets
where such customers may elect whether or not to receive waste collection
services, marketing upgraded or additional services (such as compaction or
automated collection) to existing customers and, where appropriate, raising
prices. Where possible, we intend to leverage our franchise-based platforms
to expand our customer base beyond our exclusive market territories. As
customers are added in existing markets, our revenue per routed truck
increases, which generally increases our collection efficiencies and
profitability. In markets in which we have exclusive contracts, franchises
and certificates, we expect internal volume growth generally to track
population and business growth.
- - Transfer stations are also an important part of our internal growth
strategy. They extend our direct-haul reach and link disparate collection
operations with disposal capacity that we own, operate or contract. We
currently own and/or operate 35 transfer stations. By operating transfer
stations, we also engage in direct communications with municipalities and
private operators that deliver waste to our transfer stations. This
positions us to gain additional business in our markets if a municipality
privatizes any solid waste operations it owns or rebids existing contracts,
and it increases our opportunities to acquire other private collection
operations that use the transfer stations.
- - Exclusive Arrangements. We derive a significant portion of our revenues
from arrangements, including franchise agreements, municipal contracts and
governmental certificates, under which we are the exclusive service
provider in a specified market. We intend to devote significant resources
to securing additional franchise agreements and municipal contracts through
competitive bidding and additional governmental certificates by acquiring
other companies. In bidding for franchises and municipal contracts and
evaluating acquisition candidates holding governmental certificates, our
management team draws on its experience in the waste industry and its
knowledge of local service areas in existing and target markets. Our
district managers maintain relationships with local governmental officials
within their service areas, and sales representatives may be assigned to
cover specific municipalities. These personnel focus on maintaining,
renewing and renegotiating existing franchise agreements and municipal
contracts and on securing additional agreements and contracts.
- - Expansion Through Acquisitions. We intend to expand the scope of our
operations by continuing to acquire solid waste operations in new markets
and in existing or adjacent markets that are combined with or "tucked in"
to existing operations. We focus our acquisition efforts on markets which
we believe provide significant growth opportunities for a well-capitalized
market entrant and where we can create economic and operational barriers to
entry by new competitors. We believe that our experienced management,
decentralized operating strategy, financial strength, size and public
company status make us an attractive buyer to certain solid waste
collection and disposal acquisition candidates. We have developed an
acquisition discipline based on a set of financial, geographic and
management criteria to evaluate opportunities. Once closed an acquisition
is closed, we seek to integrate it and to minimize disruption to the
ongoing operations of both Waste Connections and the acquired business.
We intend to expand into new geographic regions through acquisitions. We
use an initial acquisition in a new market as an operating base. Then we
seek to strengthen the acquired operation's presence in that market by
providing additional services, adding new customers and making "tuck-in"
acquisitions. We next seek to broaden our regional presence by adding
additional operations in markets adjacent to the new location.
We believe that many new market "tuck-in" acquisition opportunities exist
within our current and targeted market areas. For example, we have
identified more than 510 independent entities that provide collection and
disposal services in the states where we currently operate. We believe that
throughout the Western U.S., many independent entities are suitable for
acquisition by Waste Connections and provide opportunities to increase our
market share and route density.
OPERATING STRATEGY
- - Decentralized Operations. We manage our operations on a decentralized
basis. This places decision-making authority close to the customer,
enabling us to identify customers' needs quickly and to address those needs
in a cost-effective manner. We believe that
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decentralization provides a low-overhead, highly efficient operational
structure that allows us to expand into geographically contiguous markets
and operate in relatively small communities that larger competitors may not
find attractive. We believe that this structure gives us a strategic
competitive advantage, given the relatively rural nature of much of the
Western U.S., and makes us an attractive buyer to many potential
acquisition candidates.
- - We currently deliver our services from approximately 92 operating locations
which are grouped into three regions, Pacific Northwest, Western and
Central, and one division, Eastern. We reorganized our business into three
regions in May 2000, balancing them on the basis of their respective
geographic characteristics, interstate waste flow, revenue base, employee
base, regulatory structure and acquisition opportunities. Each region has a
Regional Vice President, reporting directly to the corporate management,
who is responsible for operations in that region and who supervises a
regional controller and regional business development staff. We entered the
areas comprising our Eastern division in September 2001. Currently, all
operations within this division report directly to our corporate office.
- - Our regions and division serve a total of 23 market areas, divided into 92
districts. Our district managers have autonomous service and
decision-making authority for their districts and are responsible for
maintaining service quality, promoting safety in the operations,
implementing marketing programs, and overseeing day-to-day operations,
including contract administration. District managers also help identify
acquisition candidates and are responsible for integrating them into our
operations and obtaining the permits and other governmental approvals
required for us to operate the acquired businesses.
- - Operating Enhancements. We develop company-wide operating standards, which
are tailored for each of our markets based on industry standards and local
conditions. Using these standards, we track collection and disposal routing
efficiency and equipment utilization. We also implement cost controls and
employee training and safety procedures, and establish a sales and
marketing plan for each market. We have installed a wide area network,
implemented advanced management information systems and financial controls,
and consolidated accounting, insurance and employee benefit functions,
customer service, productivity reporting and dispatching systems. While
regional management operates with a high degree of autonomy, our senior
officers monitor regional and district operations and require adherence to
our accounting, purchasing, marketing and internal control policies,
particularly with respect to financial matters. Our executive officers
regularly review the performance of district managers and operations. We
believe that by establishing operating standards, closely monitoring
performance and streamlining certain administrative functions, we can
improve the profitability of existing operations.
To improve an acquired business' operational productivity, administrative
efficiency and profitability, we apply the same operating standards,
information systems and financial controls to the acquired business that
our existing operations employ. Moreover, if we can internalize the waste
stream of acquired operations, we can further increase operating
efficiencies and improve capital utilization. Where not restricted by
exclusive agreements, contracts, permits or certificates, we also solicit
new commercial, industrial and residential customers in areas within and
surrounding the markets served by acquired collection operations, to
further improve operating efficiencies and increase the volume of solid
waste collected by the acquired operations.
SERVICES
COMMERCIAL, INDUSTRIAL AND RESIDENTIAL WASTE SERVICES
We serve more than 800,000 commercial, industrial and residential
customers. Our services are generally provided under one of the following: a)
governmental certificates, b) exclusive franchise agreements, c) exclusive
municipal contracts, d) commercial and industrial service agreements, e)
residential subscriptions and f) residential contracts.
Governmental certificates, exclusive franchise agreements and exclusive
municipal contracts grant us rights to provide services within specified areas
at established rates. Governmental certificates are generally perpetual in
duration. We currently have in excess of 500 municipal contracts and franchise
agreements which vary in both size and duration. Generally franchise agreements
with counties tend to be larger and of longer duration than municipal contracts.
Some of these contracts have already expired and Waste Connections is continuing
to provide service while new agreements are being negotiated. We do not expect
that any contracts in negotiation or likely to terminate within 2002 would have
a material adverse affect on our revenues or cash flows.
We provide commercial and industrial services, other than those we perform
under governmental certificates, franchise agreements or municipal contracts,
under agreements ranging from one to five years. We determine fees under these
agreements by such factors as collection frequency, level of service, route
density, the type, volume and weight of the waste collected, type of equipment
and
4
containers furnished, the distance to the disposal or processing facility, the
cost of disposal or processing and prices charged in our markets for similar
service. Collection of larger volumes associated with commercial and industrial
waste streams generally helps improve our operating efficiencies, and
consolidation of these volumes allows us to negotiate more favorable disposal
prices. Our commercial and industrial customers use portable containers for
storage, enabling us to service many customers with fewer collection vehicles.
Commercial and industrial collection vehicles normally require one operator. We
provide one to eight cubic yard containers to commercial customers, 10 to 50
cubic yard containers to industrial customers, and 30 to 96 gallon carts to
residential customers. For an additional fee, we install stationary compactors
that compact waste prior to collection on the premises of a substantial number
of large volume customers.
We provide residential waste services under contracts with homeowners'
associations, apartment owners or mobile home park operators, or on a
subscription basis with individual households. We set base residential fees on a
contract basis primarily on route density, the frequency and level of service,
the distance to the disposal or processing facility, weight and type of waste
collected, type of equipment and containers furnished, the cost of disposal or
processing and prices charged in that market for similar services. Collection
fees are paid either by the municipalities from tax revenues or directly by the
residents receiving the services.
TRANSFER STATION SERVICES
We have an active program to acquire, develop, own and operate transfer
stations in markets proximate to our operations. Currently, we own and operate
transfer stations in California, Colorado, Kansas, Mississippi, Nebraska,
Oklahoma, Oregon, Tennessee and Washington. In addition, we operate, but do not
own, transfer stations in California, Nebraska, Oregon and Washington. These
transfer stations receive, compact, and transfer solid waste to be transported
by larger vehicles to landfills. We believe that the transfer stations benefit
us by:
- concentrating the waste stream from a wider area, which increases the
volume of disposal at landfills that we operate and gives us greater
leverage in negotiating for more favorable disposal rates at other
landfills;
- improving utilization of collection personnel and equipment; and
- building relationships with municipalities and private operators that
deliver waste, which can lead to additional growth opportunities.
LANDFILLS
We seek to identify solid waste landfill acquisition candidates to achieve
vertical integration in markets where the economic and regulatory environment
makes such acquisitions attractive. We believe that in some markets, acquiring
landfills provides opportunities to vertically integrate our collection,
transfer and disposal operations while improving operating margins. We evaluate
landfill candidates by determining, among other things, the amount of waste that
could be diverted to the landfill in question, whether access to the landfill is
economically feasible from our existing market areas either directly or through
transfer stations, the expected life of the landfill, the potential for
expanding the landfill, and current disposal costs compared to the cost of
acquiring the landfill. Where the acquisition of a landfill is not attractive,
we pursue long term disposal contracts with facilities, which are typically
municipally controlled.
Currently, we own and operate landfills in Colorado, Kansas, Minnesota,
Mississippi, Nebraska, New Mexico, Oklahoma, Oregon, Tennessee and Washington.
In addition, we operate, but do not own, landfills in California, Colorado,
Nebraska, New Mexico and Tennessee. All landfills that we own or operate are
Subtitle D landfills.
We monitor the available permitted in-place disposal capacity of our
landfills on an ongoing basis and evaluate whether to seek to expand this
capacity. In making this evaluation, we consider various factors, including the
volume of waste projected to be disposed of at the landfill, the size of the
unpermitted acreage included in the landfill, the likelihood that we will be
able to obtain the necessary approvals and permits required for the expansion
and the costs that would be involved in developing the additional capacity. We
also regularly consider whether it is advisable, in light of changing market
conditions and/or regulatory requirements, to seek to expand or change the
permitted waste streams or to seek other permit modifications.
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RECYCLING SERVICES
We offer municipal, commercial, industrial and residential customers
recycling services for a variety of recyclable materials, including cardboard,
office paper, plastic containers, glass bottles and ferrous and aluminum metals.
We own and operate 18 recycling processing facilities and sell other collected
recyclable materials to third parties for processing before resale. We often
share the profits from our resale of recycled materials with other parties to
our recycling contracts. For example, certain of our municipal recycling
contracts in Washington, negotiated before we acquired those businesses, specify
certain benchmark resale prices for recycled commodities. To the extent the
prices we actually receive for the processed recycled commodities collected
under the contract exceed the prices specified in the contract, we share the
excess with the municipality, after recovering any previous shortfalls resulting
from actual market prices falling below the prices specified in the contract. To
reduce our exposure to commodity price risk with respect to recycled materials,
we have adopted a pricing strategy of charging collection and processing fees
for recycling volume collected from third parties. We believe that recycling
will continue to be an important component of local and state solid waste
management plans due to the public's increasing environmental awareness and
expanding regulations that mandate or encourage recycling.
G CERTIFICATES
A substantial portion of our Washington collection business is performed
under governmental certificates (referred to as "G certificates") awarded by the
WUTC. G certificates apply only to unincorporated areas of Washington and
municipalities that have elected to have their solid waste collection overseen
by the WUTC. G certificates generally grant the holder the exclusive and
perpetual right to provide certain solid waste collection and transportation
services in a specified territory. The WUTC has repeatedly determined that, in
enacting the statute authorizing G certificates, the Washington Legislature
intended to favor grants of exclusive, rather than overlapping, service rights
for conventional solid waste services. Accordingly, most G certificates
currently grant exclusive solid waste collection and transportation rights for
conventional solid waste services in their specified territories.
SALES AND MARKETING
In many of our existing markets, we provide waste collection, transfer and
disposal services to municipalities and governmental authorities under exclusive
franchise agreements, municipal contracts and G certificates; service providers
do not contract directly with individual customers. In addition, because we have
grown to date primarily through acquisitions, we have generally assumed existing
franchise agreements, municipal contracts and G certificates from the acquired
companies, rather than obtaining new contracts. For these reasons, our sales and
marketing efforts to date have been narrowly focused. We have added sales and
marketing personnel as necessary to solicit new customers in markets where we
are not the exclusive provider of solid waste services, expand our presence into
areas adjacent to or contiguous with our existing markets, and market additional
services to existing customers.
COMPETITION
The solid waste services industry is highly competitive and fragmented and
requires substantial labor and capital resources. The industry presently
includes three large national waste companies: Allied Waste Industries, Inc.,
Republic Services, Inc., and Waste Management, Inc. Casella Waste Systems, Inc.,
and Waste Industries, Inc. are other public companies with a regional focus and
annual revenues in excess of $100 million. Certain of the markets in which we
compete or will likely compete are served by one or more large, national solid
waste companies, as well as by numerous privately held regional and local solid
waste companies of varying sizes and resources, some of which have accumulated
substantial goodwill in their markets. We also compete with operators of
alternative disposal facilities, including incinerators, and with counties,
municipalities, and solid waste districts that maintain their own waste
collection and disposal operations. Public sector operations may have financial
advantages over Waste Connections, because of their access to user fees and
similar charges, tax revenues and tax-exempt financing.
We compete for collection, transfer and disposal volume based primarily on
the price and quality of our services. From time to time, competitors may reduce
the price of their services in an effort to expand their market shares or
service areas or to win competitively bid municipal contracts. These practices
may cause us to reduce the price of our services or, if we elect not to do so,
to lose business. We provide a substantial portion of our residential,
commercial and industrial collection services under exclusive franchise and
municipal contracts and certificates, some of which are subject to periodic
competitive bidding. We provide the balance of our services under subscription
agreements with individual households and one to five year service contracts
with commercial and industrial customers.
6
The solid waste collection and disposal industry is currently undergoing
significant consolidation, and we encounter competition in our efforts to
acquire landfills, transfer and collection operations. Intense competition
exists not only for collection, transfer and disposal volume, but also for
acquisition candidates. We generally compete for acquisition candidates with
publicly owned regional and large national waste management companies.
Competition in the disposal industry may also be affected by the increasing
national emphasis on recycling and other waste reduction programs, which may
reduce the volume of waste deposited in landfills. Accordingly, it may become
uneconomical for us to make further acquisitions or we may be unable to locate
or acquire suitable acquisition candidates at price levels and on terms and
conditions that we consider appropriate, particularly in markets we do not
already serve.
REGULATION
INTRODUCTION
Our landfill operations and non-landfill operations, including waste
transportation, transfer stations, vehicle maintenance shops and fueling
facilities, are all subject to extensive and evolving federal, state and local
environmental laws and regulations, the enforcement of which has become
increasingly stringent in recent years. The environmental regulations that
affect us are administered by the EPA and other federal, state and local
environmental, zoning, health and safety agencies. The WUTC regulates the
portion of our collection business in Washington performed under G certificates,
which generally grant us perpetual and exclusive collection rights in certain
areas. We are currently in substantial compliance with applicable federal, state
and local environmental laws, permits, orders and regulations. We do not
currently anticipate any material environmental costs necessary to bring our
operations into compliance (although there can be no assurance in this regard).
We anticipate that regulation, legislation and regulatory enforcement actions
related to the solid waste services industry will continue to increase. We
attempt to anticipate future regulatory requirements and to plan in advance as
necessary to comply with them.
The principal federal, state and local statutes and regulations that apply
to our operations are described below. All of the federal statutes described
below contain provisions that authorize, under certain circumstances, lawsuits
by private citizens to enforce the provisions of the statutes. In addition to a
penalty award by the United States, some of those statutes authorize an award of
attorneys' fees to parties that successfully bring such an action. Enforcement
actions under these statutes may include both civil and criminal penalties, as
well as injunctive relief in some instances.
THE RESOURCE CONSERVATION AND RECOVERY ACT OF 1976 ("RCRA")
RCRA regulates the generation, treatment, storage, handling, transportation
and disposal of solid waste and requires states to develop programs to ensure
the safe disposal of solid waste. RCRA divides solid waste into two groups,
hazardous and nonhazardous. Wastes are generally classified as hazardous if they
either (i) are specifically included on a list of hazardous wastes, or (ii)
exhibit certain characteristics defined as hazardous. Household wastes are
specifically designated as nonhazardous. Wastes classified as hazardous under
RCRA are subject to much stricter regulation than wastes classified as
nonhazardous, and businesses that deal with hazardous waste are subject to
regulatory obligations in addition to those imposed on handlers of nonhazardous
waste. From the date of inception through December 31, 2001, we did not, to our
knowledge, transport hazardous wastes under circumstances that would subject us
to hazardous waste regulations under RCRA. Some of our ancillary operations
(e.g., vehicle maintenance operations) may generate hazardous wastes. We manage
these wastes in substantial compliance with applicable laws.
In October 1991, the EPA adopted the Subtitle D Regulations governing solid
waste landfills. The Subtitle D Regulations, which generally became effective in
October 1993, include location restrictions, facility design standards,
operating criteria, closure and post-closure requirements, financial assurance
requirements, groundwater monitoring requirements, groundwater remediation
standards and corrective action requirements. In addition, the Subtitle D
Regulations require that new landfill sites meet more stringent liner design
criteria (typically, composite soil and synthetic liners or two or more
synthetic liners) intended to keep leachate out of groundwater and have
extensive collection systems to carry away leachate for treatment prior to
disposal. Groundwater monitoring wells must also be installed at virtually all
landfills to monitor groundwater quality and, indirectly, the effectiveness of
the leachate collection system. The Subtitle D Regulations also require, where
certain regulatory thresholds are exceeded, that facility owners or operators
control emissions of methane gas generated at landfills in a manner intended to
protect human health and the environment. Each state is required to revise its
landfill regulations to meet these requirements or such requirements will be
automatically imposed by the EPA on landfill owners and operators in that state.
Each state is also required to adopt and implement a permit program or other
appropriate system to ensure that landfills in the state comply with the
Subtitle D Regulations. Various states in which we operate or in which we may
operate in the future have adopted regulations or programs as stringent as, or
more stringent than, the Subtitle D Regulations.
7
RCRA also regulates underground storage of petroleum and other regulated
materials. RCRA requires registration, compliance with technical standards for
tanks, release detection and reporting, and corrective action, among other
things. Certain of Waste Connections' facilities and operations are subject to
these requirements.
THE FEDERAL WATER POLLUTION CONTROL ACT OF 1972, AS AMENDED (THE "CLEAN WATER
ACT")
The Clean Water Act regulates the discharge of pollutants from a variety of
sources, including solid waste disposal sites and transfer stations, into waters
of the United States. If run-off from our owned or operated transfer stations or
run-off or collected leachate from our owned or operated landfills is discharged
into streams, rivers or other surface waters, the Clean Water Act would require
us to apply for and obtain a discharge permit, conduct sampling and monitoring
and, under certain circumstances, reduce the quantity of pollutants in such
discharge. Also, virtually all landfills are required to comply with the EPA's
storm water regulations issued in November 1990, which are designed to prevent
contaminated landfill storm water runoff from flowing into surface waters. We
believe that our facilities comply in all material respects with the Clean Water
Act requirements. Various states in which we operate or in which we may operate
in the future have been delegated authority to implement the Clean Water Act
permitting requirements, and some of these states have adopted regulations that
are more stringent than the federal requirements. For example, states often
require permits for discharges to ground water as well as surface water.
THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION, AND LIABILITY ACT OF
1980 ("CERCLA")
CERCLA established a regulatory and remedial program intended to provide
for the investigation and cleanup of facilities where or from which a release of
any hazardous substance into the environment has occurred or is threatened.
CERCLA's primary mechanism for remedying such problems is to impose strict joint
and several liability for cleanup of facilities on current owners and operators
of the site, former owners and operators of the site at the time of the disposal
of the hazardous substances, any person who arranges for the transportation,
disposal or treatment of the hazardous substances, and the transporters who
select the disposal and treatment facilities. CERCLA also imposes liability for
the cost of evaluating and remedying any damage to natural resources. The costs
of CERCLA investigation and cleanup can be very substantial. Liability under
CERCLA does not depend on the existence or disposal of "hazardous waste" as
defined by RCRA; it can also be based on the existence of even very small
amounts of the more than 700 "hazardous substances" listed by the EPA, many of
which can be found in household waste. In addition, the definition of "hazardous
substances" in CERCLA incorporates substances designated as hazardous or toxic
under the federal Clean Water Act, Clear Air Act and Toxic Substances Control
Act. If we were found to be a responsible party for a CERCLA cleanup, the
enforcing agency could hold us, or any other generator, transporter or the owner
or operator of the contaminated facility, responsible for all investigative and
remedial costs, even if others were also liable. CERCLA also authorizes the
imposition of a lien in favor of the United States on all real property subject
to, or affected by, a remedial action for all costs for which a party is liable.
CERCLA gives a responsible party the right to bring a contribution action
against other responsible parties for their allocable shares of investigative
and remedial costs. Our ability to obtain reimbursement from others for their
allocable shares of such costs would be limited by our ability to find other
responsible parties and prove the extent of their responsibility and by the
financial resources of such other parties. Various state laws also impose
liability for investigation, cleanup and other damages associated with hazardous
substance releases.
THE CLEAN AIR ACT
The Clean Air Act generally, through state implementation of federal
requirements, regulates emissions of air pollutants from certain landfills based
on factors such as the date of the landfill construction and tons per year of
emissions of regulated pollutants. Larger landfills and landfills located in
areas where the ambient air does not meet certain requirements of the Clean Air
Act may be subject to even more extensive air pollution controls and emission
limitations. In addition, the EPA has issued standards regulating the disposal
of asbestos-containing materials. Air permits to construct may be required for
gas collection and flaring systems, and operating permits may be required,
depending on the potential air emissions. State air regulatory programs may
implement the federal requirements but may impose additional restrictions. For
example, some state air programs uniquely regulate odor and the emission of
toxic air pollutants.
8
THE OCCUPATIONAL SAFETY AND HEALTH ACT OF 1970 (THE "OSH ACT")
The OSH Act is administered by the Occupational Safety and Health
Administration ("OSHA"), and in many states by state agencies whose programs
have been approved by OSHA. The OSH Act establishes employer responsibilities
for worker health and safety, including the obligation to maintain a workplace
free of recognized hazards likely to cause death or serious injury, to comply
with adopted worker protection standards, to maintain certain records, to
provide workers with required disclosures and to implement certain health and
safety training programs. Various OSHA standards may apply to our operations,
including standards concerning notices of hazards, safety in excavation and
demolition work, the handling of asbestos and asbestos-containing materials, and
worker training and emergency response programs.
FLOW CONTROL/INTERSTATE WASTE RESTRICTIONS
Certain permits and approvals, as well as certain state and local
regulations, may limit a landfill or transfer station to accepting waste that
originates from specified geographic areas, restrict the importation of
out-of-state waste or wastes originating outside the local jurisdiction or
otherwise discriminate against non-local waste. These restrictions, generally
known as flow control restrictions, are controversial, and some courts have held
that some flow control schemes violate constitutional limits on state or local
regulation of interstate commerce. From time to time, federal legislation is
proposed that would allow some local flow control restrictions. Although no such
federal legislation has been enacted to date, if such federal legislation should
be enacted in the future, states in which we own or operate landfills could
limit or prohibit the importation of out-of-state waste or direct that wastes be
handled at specified facilities. Such state actions could adversely affect our
landfills. These restrictions could also result in higher disposal costs for our
collection operations. If we were unable to pass such higher costs through to
our customers, our business, financial condition and operating results could be
adversely affected.
Certain state and local jurisdictions may also seek to enforce flow control
restrictions through local legislation or contractually. In certain cases, we
may elect not to challenge such restrictions. These restrictions could reduce
the volume of waste going to landfills in certain areas, which may adversely
affect our ability to operate our landfills at their full capacity and/or reduce
the prices that we can charge for landfill disposal services. These restrictions
may also result in higher disposal costs for our collection operations. If we
were unable to pass such higher costs through to our customers, our business,
financial condition and operating results could be adversely affected.
STATE AND LOCAL REGULATION
Each state in which we now operate or may operate in the future has laws
and regulations governing the generation, storage, treatment, handling,
transportation and disposal of solid waste, occupational safety and health,
water and air pollution and, in most cases, the siting, design, operation,
maintenance, closure and post-closure maintenance of landfills and transfer
stations. State and local permits and approval for these operations may be
required and may be subject to periodic renewal, modification or revocation by
the issuing agencies. In addition, many states have adopted statutes comparable
to, and in some cases more stringent than, CERCLA. These statutes impose
requirements for investigation and cleanup of contaminated sites and liability
for costs and damages associated with such sites, and some provide for the
imposition of liens on property owned by responsible parties. Furthermore, many
municipalities also have ordinances, local laws and regulations affecting our
operations. These include zoning and health measures that limit solid waste
management activities to specified sites or activities, flow control provisions
that direct or restrict the delivery of solid wastes to specific facilities,
laws that grant the right to establish franchises for collection services and
then put such franchises out for bid, and bans or other restrictions on the
movement of solid wastes into a municipality.
Permits or other land use approvals with respect to a landfill, as well as
state or local laws and regulations, may specify the quantity of waste that may
be accepted at the landfill during a given time period, and/or specify the types
of waste that may be accepted at the landfill. Once an operating permit for a
landfill is obtained, it must generally be renewed periodically.
There has been an increasing trend at the state and local level to mandate
and encourage waste reduction at the source and waste recycling, and to prohibit
or restrict the disposal of certain types of solid wastes, such as yard wastes,
leaves and tires, in landfills. The enactment of regulations reducing the volume
and types of wastes available for transport to and disposal in landfills could
prevent us from operating our facilities at their full capacity.
9
Some state and local authorities enforce certain federal laws in addition
to state and local laws and regulations. For example, in some states, RCRA, the
OSH Act, parts of the Clean Air Act and parts of the Clean Water Act are
enforced by local or state authorities instead of by the EPA, and in some states
those laws are enforced jointly by state or local and federal authorities.
PUBLIC UTILITY REGULATION
In many states, public authorities regulate the rates that landfill
operators may charge. The adoption of rate regulation or the reduction of
current rates in states in which we own or operate landfills could adversely
affect our business, financial condition and operating results.
Solid waste collection services in all unincorporated areas of Washington
and in electing municipalities in Washington are provided under G certificates
awarded by the WUTC. The WUTC also sets rates for regulated solid waste
collection services in Washington.
RISK MANAGEMENT, INSURANCE AND PERFORMANCE BONDS
We maintain environmental and other risk management programs appropriate
for our business. Our environmental risk management program includes evaluating
existing facilities and potential acquisitions for environmental law compliance.
We do not presently expect environmental compliance costs to increase above
current levels, but we cannot predict whether future acquisitions will cause
such costs to increase. We also maintain a worker safety program that encourages
safe practices in the workplace. Operating practices at all Waste Connections
operations emphasize minimizing the possibility of environmental contamination
and litigation. Our facilities comply in all material respects with applicable
federal and state regulations.
We carry a broad range of insurance, which our management considers
adequate to protect our assets and operations. The coverage includes general
liability, comprehensive property damage, workers' compensation and other
coverage customary in the industry. These policies generally exclude coverage
for damages associated with environmental conditions. Because of the limited
availability and high cost of environmental impairment liability insurance, we
have obtained such coverage only for selected sites. If a site without such
coverage were to incur liability for environmental cleanups, corrective action
or damage, our financial condition could be materially and adversely affected.
We will continue to investigate obtaining environmental impairment liability
insurance for our sites without such coverage, particularly if we acquire or
operate additional landfills. We believe that most other landfill operators do
not carry such insurance.
Municipal solid waste collection contracts may require performance bonds or
other means of financial assurance to secure contractual performance. Certain
environmental regulations also require demonstrated financial assurance to meet
closure and post-closure requirements for landfills. We have experienced
decreased availability of performance bonds for our current operations due to
changes in the insurance industry. At December 31, 2001, we had provided
customers and various regulatory authorities with surety in the aggregate amount
of approximately $20.6 million to secure our obligations (exclusive of letters
of credit backing certain municipal bond obligations). If we are unable to
obtain surety bonds or letters of credit in sufficient amounts or at acceptable
rates, we could be precluded from entering into additional municipal solid waste
collection contracts or obtaining or retaining landfill operating permits.
EMPLOYEES
At December 31, 2001, we employed approximately 2,400 full-time employees,
including approximately 266 persons classified as professionals or managers,
approximately 1,856 employees involved in collection, transfer, disposal and
recycling operations, and approximately 277 sales, clerical, data processing or
other administrative employees.
Approximately 116 of our drivers and mechanics are represented by the
Teamsters Union in various locations. These employees are subject to labor
agreements that are subject to renegotiation periodically. We do not expect any
significant disruption in our business as a result of labor negotiations.
We are not aware of any other organizational efforts among our employees
and believe that our relations with our employees are good.
10
RISK FACTORS
RISKS RELATED TO OUR BUSINESS
Difficulties in making acquisitions, acquiring exclusive contracts and
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generating internal growth may cause our growth to be slower than expected.
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Our growth strategy includes expanding through acquisitions, acquiring
additional exclusive arrangements and generating internal growth. Since
inception, most of our growth has been through acquisitions. Internally
generated growth for the industry and Waste Connections has been less than 8%
per year. Although we have identified numerous acquisition candidates that we
believe are suitable, we may not be able to acquire them at prices or on terms
and conditions favorable to us. Our ability to grow also depends on several
other factors, including
o the availability of capital to support our growth,
o our ability to compete with existing and emerging companies,
o our ability to maintain profit margins in the face of competitive
pressures,
o our ability to continue to recruit, train and retain qualified employees
and
o continued strong demand for our services.
Difficulties in any of these areas could hinder our growth.
Our acquisitions may not be successful, resulting in changes in strategy,
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operating losses or a loss on sale of the business acquired.
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Even if we are able to make acquisitions on advantageous terms and are able
successfully to integrate them into our operations and organization, some may
not successfully fulfill our strategy in a given market due to factors that we
cannot control, such as market position or customer base. As a result, operating
margins could be less than we originally anticipated when we made the
acquisition. We then may change our strategy with respect to the market or
businesses acquired in the market and decide to sell the operation at a loss.
Rapid growth may strain our management, operational, financial and other
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resources.
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From inception through December 31, 2001,we acquired 134 solid waste
services related businesses. To maintain and manage our growth, we will need to
expand our management information systems capabilities and our operational and
financial systems and controls. We will also need to attract, train, motivate,
retain and manage additional senior managers, technical professionals and other
employees. Failure to do any of these things would restrict our ability to
maintain and improve our profitability while continuing to grow.
Our growth and future financial performance depend significantly on our ability
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to integrate acquired businesses into our organization and operations.
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Part of our strategy is to achieve economies of scale and operating
efficiencies by growing through acquisitions. We may not achieve these goals
unless we effectively combine the operations of acquired businesses with our
existing operations. Our senior management team may not be able to integrate our
completed and future acquisitions. Any difficulties we encounter in the
integration process could interfere with our operations and reduce our operating
margins.
We compete for acquisition candidates with other purchasers, some of which have
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greater financial resources than Waste Connections. These competitors may be
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able to offer more favorable acquisition terms, thus limiting our ability to
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grow through acquisition.
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Other companies have adopted or will probably adopt our strategy of
acquiring and consolidating regional and local businesses. We expect that
increased consolidation in the solid waste services industry will increase
competitive pressures. Increased competition for acquisition candidates may make
fewer acquisition opportunities available to us, and may cause us to make
acquisitions on less attractive terms, such as higher purchase prices.
Acquisition costs may increase to levels beyond our financial capability or to
levels that would adversely affect our operating results and financial
condition. Our ongoing ability to make acquisitions will depend in part on the
relative attractiveness of our common stock as consideration for potential
acquisition candidates. This attractiveness may depend largely on the relative
market price and capital appreciation prospects of our common stock compared to
the common stock of
11
our competitors. If the market price of our common stock were to decline
materially over a prolonged period of time, we may find it difficult to make
acquisitions on attractive terms.
Timing of acquisitions may cause fluctuations in our quarterly results, which
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may cause our stock price to decline.
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We are not always able to control the timing of our acquisitions. Obtaining
third party consents and regulatory approvals, completing due diligence on the
acquired businesses, and finalizing transaction terms and documents are not
entirely within our control and may take longer than we anticipate, causing
certain transactions to be delayed. Our inability to complete acquisitions in
the time frames that we expect may cause our operating results to be less
favorable than expected, which could cause our stock price to decline.
We may be unable to compete effectively with governmental service providers and
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larger and better capitalized companies, which may result in reduced revenues
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and lower profits.
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Our industry is highly competitive, fragmented and requires substantial labor
and capital resources. Some of the markets in which we compete or will likely
compete are served by one or more large, national solid waste companies, as well
as by numerous regional and local solid waste companies of varying sizes and
resources, some of which have accumulated substantial goodwill in their markets.
We also compete with counties, municipalities and solid waste districts that
maintain their own waste collection and disposal operations. These operators may
have financial advantages over Waste Connections because of their access to user
fees and similar charges, tax revenues and tax-exempt financing. Some of our
competitors may also be better capitalized, have greater name recognition or be
able to provide services at a lower cost than Waste Connections.
We may lose contracts through competitive bidding, early termination or
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governmental action, which would cause our revenues to decline.
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We derive a substantial portion of our revenue from services provided under
exclusive municipal contracts, franchise agreements and governmental
certificates. Many of these will be subject to competitive bidding at some time
in the future. We also intend to bid on additional municipal contracts and
franchise agreements. We may not be the successful bidder. In addition, some of
our customers may terminate their contracts with us before the end of the
contract term. Municipalities in Washington may by law annex unincorporated
territory, which would likely remove such territory from the area covered by
governmental certificates issued to us by the Washington Utilities and
Transportation Commission ("WUTC"). Annexation would reduce the areas covered by
our governmental certificates and subject more of our Washington operations to
competitive bidding in the future. Moreover, legislative action could amend or
repeal the laws governing WUTC regulation, which could harm our competitive
position by subjecting more areas to competitive bidding. If we were not able to
replace revenues from contracts lost through competitive bidding or early
termination or from the renegotiation of existing contracts with other revenues
within a reasonable time period, our revenues could decline.
We may not have enough capital or be able to raise enough additional capital on
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satisfactory terms to meet our capital requirements, which would limit our
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growth through acquisitions.
- ----------------------------
Continued growth will require additional capital. We expect to finance
future acquisitions through cash from operations borrowings under our credit
facility, issuing additional equity or debt securities and/or seller financing.
If acquisition candidates are unwilling to accept, or we are unwilling to issue,
shares of our common stock as part of the consideration for acquisitions or if
our common stock does not maintain a sufficient market value, we may have to use
more of our cash or borrowings under our credit facility to fund acquisitions.
Using cash for acquisitions limits our financial flexibility and makes us more
likely to seek additional capital through future debt or equity financings. If
available cash from operations and borrowings under the credit facility are not
sufficient to fund acquisitions, we will need additional equity and/or debt
financing. If we seek more debt, our interest expense would increase and we may
have to agree to financial covenants that limit our operational and financial
flexibility. We have pledged all of our assets as collateral for our credit
facility, which could restrict our ability to obtain additional debt on
attractive terms .If we seek more equity, we may dilute the ownership interests
of our then-existing stockholders. If we are unable to obtain additional equity
and/or debt financing on attractive terms, our rate of growth through
acquisitions may decline. We will also need to make substantial capital
expenditures to develop or acquire new landfills, transfer stations and other
facilities and to maintain such properties.
12
We depend significantly on the services of the members of our management team,
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and the departure of any of those persons could cause our operating results to
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suffer.
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Our success depends significantly on the continued individual and
collective contributions of our senior and district management team. Key members
of our management have entered into employment agreements, but we may not be
able to enforce these agreements. The loss of the services of any member of our
senior or district management or the inability to hire and retain experienced
management personnel could harm our operating results.
Our decentralized decision making structure could allow local managers to make
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decisions that adversely affect our operating results.
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We manage our operations on a decentralized basis. Local managers have the
authority to make many decisions concerning their operations without obtaining
prior approval from executive officers, subject to compliance with general
company-wide policies. Poor decisions by local managers could result in loss of
customers or increases in costs, in each case reducing operating results.
The geographic concentration of our business makes our results vulnerable to
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factors affecting the western U.S., and seasonal fluctuations may cause our
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business and financial results to vary among quarters, which could negatively
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affect our stock price.
- -----------------------
Our business and financial results would be harmed by downturns in the
general economy of the western U.S. and other factors affecting the region, such
as state regulations affecting the solid waste services industry and severe
weather conditions. Based on historic trends experienced by the businesses we
have acquired, we expect our operating results to vary seasonally, with revenues
typically lowest in the first quarter, higher in the second and third quarters,
and lower in the fourth quarter than in the second and third quarters. This
seasonality reflects the lower volume of solid waste generated during the late
fall, winter and early spring months because of decreased construction and
demolition activities during the winter months in the western U.S. In addition,
some of our operating costs should be generally higher in the winter months.
Adverse winter weather conditions slow waste collection activities, resulting in
higher labor and operational costs. Greater precipitation in the winter
increases the weight of collected waste, resulting in higher disposal costs,
which are calculated on a per ton basis. Because of these factors, we expect
operating income to be generally lower in the winter months, and our stock price
may be negatively affected by these variations.
Unusually adverse weather conditions may interfere with our operations, harming
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our operating results.
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Our collection and landfill operations could be adversely affected, beyond
the normal seasonal variations described above, by unusually long periods of
inclement weather, which could interfere with collection and landfill
operations, reduce the volume of waste generated by our customers and delay the
development of landfill capacity. Periods of particularly harsh weather may
force us to temporarily suspend certain of our operations.
Increases in the costs of labor, fuel or energy could reduce our operating
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margins.
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Our continued success will depend on our ability to attract and retain
qualified personnel. We compete with other businesses in our markets for
qualified employees. The labor market is currently tight in many of our markets.
A shortage of qualified employees would require us to enhance our wage and
benefits packages to compete more effectively for employees or to hire more
expensive temporary employees. Labor is our second largest cost, and even
relatively small increases in labor costs per employee could materially affect
our cost structure. If we fail to attract and retain qualified employees, to
control our labor costs, or to recover any increased labor costs through
increased prices we charge for our services or otherwise offset such increases
with cost savings in other areas, our operating margins could suffer. Although
fuel and energy costs account for a relatively small portion of our total
operating expenses, the price of fuel and energy is volatile, and shortages
sometimes occur. Although the recent energy crisis affecting California and
other western states in which we operate did not materially affect our
operations or profitability in those regions, further significant increases in
the cost of fuel or energy, or shortages of fuel or energy, could interrupt or
curtail our operations and lower our operating margins.
Each business that we acquire or have acquired may have liabilities that we fail
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or are unable to discover, including liabilities that arise from prior owners'
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failure to comply with environmental laws, which may harm our financial
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condition.
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As a successor owner, we may be legally responsible for these liabilities.
Even if we obtain legally enforceable representations, warranties and
indemnities from the sellers of such businesses, they may not cover the
liabilities fully. Some environmental liabilities, even if we do not expressly
assume them, may be imposed on Waste Connections under various legal theories.
Our insurance program
13
does not cover liabilities associated with any environmental cleanup or
remediation of our own sites. A successful uninsured claim against Waste
Connections could harm our financial condition.
Our growth may be limited by the inability to obtain new landfills and expand
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existing ones.
- --------------
We currently own and operate a number of landfills. Based on current waste
flows, the estimated remaining lives of our landfills range from approximately
10 to 313 years, with an average remaining life of approximately 82 years. Our
ability to meet our growth objectives may depend in part on our ability to
acquire, lease and expand landfills and develop new landfill sites. We may not
be able to obtain new landfill sites or expand the permitted capacity of our
landfills when necessary. Obtaining new landfill sites is important to our
expansion into new non-exclusive markets; if we do not believe that we can
obtain a landfill site in a non-exclusive market, we may choose not to enter
into that market. Expanding existing landfill sites is important in those
markets where the remaining life of our landfills is relatively short. We may
choose to forego acquisitions and internal growth in these markets because
increased volumes would further shorten the life of these landfills. Either of
these circumstances could result in slower growth.
In some areas in which we operate, suitable land for new sites or expansion of
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existing landfill sites may be unavailable which could increase our disposal
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costs and reduce our operating margins.
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Operating permits for landfills in states where we operate must generally
be renewed at least every five years. It has become increasingly difficult and
expensive to obtain required permits and approvals to build, operate and expand
solid waste management facilities, including landfills and transfer stations.
The process often takes several years, requires numerous hearings and compliance
with zoning, environmental and other requirements and is resisted by citizen,
public interest or other groups. We may not be able to obtain or maintain the
permits we require to expand, and such permits may contain burdensome terms and
conditions. Even when granted, final permits to expand are often not approved
until the remaining permitted disposal capacity of a landfill is very low. Local
laws and ordinances also may affect our ability to obtain permits to expand
landfills. If we were to exhaust our permitted capacity at a landfill, our
ability to expand internally would be limited, and we could be required to cap
and close that landfill and forced to dispose of collected waste at more distant
landfills or at landfills operated by our competitors. The resulting increased
costs would reduce our operating margins.
Our accruals for our landfill closure and post-closure costs may be inadequate,
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and our earnings would be lowered if we are required to pay additional amounts.
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We may be required to pay closure and post-closure costs of landfills and
any disposal facilities that we own or operate. We accrue for future closure and
post-closure costs of our owned landfills, generally for a term of 30 years
after final closure of a landfill, based on engineering estimates of future
requirements associated with the final landfill design and closure and
post-closure process. Our obligations to pay closure or post-closure costs may
exceed the amount we accrued and reserved and other amounts available from funds
or reserves established to pay such costs. Paying additional amounts would lower
our earnings and could cause our stock price to decline.
We may incur additional charges related to capitalized expenditures, which would
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lower our earnings.
- -------------------
In accordance with accounting principles generally accepted in the United
States, we capitalize some expenditures and advances relating to acquisitions,
pending acquisitions and landfill development projects. We expense indirect
acquisition costs such as executive salaries, general corporate overhead, public
affairs and other corporate services as we incur those costs. We charge against
earnings any unamortized capitalized expenditures and advances (net of any
amount that we estimate we will recover, through sale or otherwise)that relate
to any operation that is permanently shut down, any pending acquisition that is
not consummated and any landfill development project that we do not expect to
complete. Therefore, Waste Connections may incur charges against earnings in
future periods, which could lower our stock price.
Recent accounting pronouncements may require a write-down of our goodwill, which
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could materially impair our net worth.
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In July 2001, the Financial Accounting Standards Board issued Statement No.
142, Goodwill and Other Intangible Assets. ("FAS 142"). FAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to their
acquisition and supercedes APB 17, Intangible Assets. The most significant
changes made by FAS 142 are: (1) goodwill and indefinite-lived intangible assets
will no longer be amortized; (2) goodwill will be tested for impairment at least
annually at the reporting unit level; and (3) intangible assets deemed to have
an indefinite life will be tested for impairment at least annually.
14
As a result of our acquisition strategy, we have a material amount of
goodwill recorded on our financial statements. Under FAS 142, effective January
1, 2002, we no longer amortize our existing goodwill. In addition, we will test
goodwill for impairment using the two-step process prescribed in Statement 142.
The first step is a screen for potential impairment, while the second step
measures the amount of the impairment, if any. Prior to June 30, 2002, we expect
to perform the first of the required impairment tests of goodwill and indefinite
lived intangible assets based on the carrying values as of January 1, 2002. If,
as a result of the implementation of FAS 142, we are required to write-down any
of our goodwill, our net worth will be reduced. Our credit agreement contains a
covenant requiring us to maintain a minimum funded debt to capitalization ratio,
and net worth is one of the components of capitalization. A reduction in net
worth, therefore, if substantial, could limit the amount that we can borrow
under our credit agreement and any failure to comply with the agreement could
result in an event of default under the credit agreement. We will not be able to
determine if a reduction in our goodwill will be required until completion of
the impairment tests upon adoption of FAS 142.
If we fail to comply with covenants and conditions of our credit facility, we
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may be unable to make acquisitions and may be required to repay our debt early,
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which could harm our financial results.
- ---------------------------------------
Our credit facility requires us to obtain the consent of the lending banks
before acquiring any other business for more than $25 million in cash and
assumed debt. If we are not able to obtain our banks' consent to acquisitions of
this size, we may not be able to complete them, which could inhibit our growth.
Our credit facility also contains financial covenants based on our current and
projected financial condition after completing an acquisition. If we cannot
satisfy these financial covenants on a pro forma basis after completing an
acquisition, we would not be able to complete the acquisition without a waiver
from our lending banks. Whether or not a waiver is needed, if the results of our
future operations differ materially from what we expect, we may no longer be
able to comply with the covenants in the credit facility. Our failure to comply
with these covenants may result in a default under the credit facility, which
would allow our lending banks to accelerate the date for repayment of debt
incurred under the credit facility and could harm our business and financial
results.
Provisions in our charter and bylaws may deter changes in control that could
- ----------------------------------------------------------------------------
benefit our stockholders.
- -------------------------
Provisions in our Certificate of Incorporation and By-Laws, and in the
Delaware General Corporation Law, may deter tender offers and hostile takeovers
and delay or prevent changes in control or management of Waste Connections,
including transactions in which stockholders might be paid more than current
market prices for their shares. These provisions may also limit our
stockholders' ability to approve transactions that they believe are in their
best interests.
We do not intend to pay cash dividends on our common stock.
- -----------------------------------------------------------
We have never paid cash dividends on our common stock. We do not currently
anticipate paying any cash dividends on the common stock. We intend to retain
all earnings to fund the operation and expansion of our business. In addition,
our existing credit facility restricts the payment of cash dividends.
RISKS RELATED TO OUR INDUSTRY
Extensive and evolving environmental laws and regulations may restrict our
- --------------------------------------------------------------------------
operations and growth and increase our costs.
- ---------------------------------------------
Environmental laws and regulations have been enforced more and more
stringently in recent years because of greater public interest in protecting the
environment. These laws and regulations impose substantial costs on us and
affect our business in many ways, including as described below. In addition,
federal, state and local governments may change the rights they grant to and the
restrictions they impose on solid waste services companies, and those changes
could restrict our operations and growth.
We may be unable to obtain and maintain licenses or permits and zoning,
- -----------------------------------------------------------------------
environmental and/or other land use approvals that we need to own and operate
- -----------------------------------------------------------------------------
our landfills.
- --------------
These licenses or permits and approvals are difficult and time-consuming to
obtain and renew, and elected officials and citizens' groups frequently oppose
them. Failure to obtain and maintain the permits and approvals we need to own or
operate landfills (including increasing their capacity) could increase our
disposal costs and reduce our operating margins.
15
Extensive regulations that govern the design, operation and closure of landfills
- --------------------------------------------------------------------------------
may restrict our landfill operations or increase our costs of operating
- -----------------------------------------------------------------------
landfills.
- ----------
These regulations include the regulations that establish minimum federal
requirements adopted by the U.S. Environmental Protection Agency in October 1991
under Subtitle D of the Resource Conservation and Recovery Act of 1976. If we
fail to comply with these regulations, we could be required to undertake
investigatory or remedial activities, curtail operations or close a landfill
temporarily or permanently. Future changes to these regulations may require us
to modify, supplement or replace equipment or facilities at substantial costs.
If regulatory agencies fail to enforce these regulations vigorously or
consistently, our competitors whose facilities do not comply with the Subtitle D
regulations or their state counterparts may obtain an advantage over us. Our
financial obligations arising from any failure to comply with these regulations
could harm our business and earnings.
We may be subject in the normal course of business to judicial and
- ------------------------------------------------------------------
administrative proceedings involving federal, state or local agencies or
- ------------------------------------------------------------------------
citizens' groups, which could interrupt our operations, require expensive
- -------------------------------------------------------------------------
remediation, and create negative publicity.
- -------------------------------------------
Governmental agencies may impose fines or penalties on us. They may also
attempt to revoke or deny renewal of our operating permits, franchises or
licenses for violations or alleged violations of environmental laws or
regulations, or to require us to remediate potential environmental problems
relating to waste that we or our predecessors collected, transported, disposed
of or stored. Individuals or community groups might also bring actions against
us in connection with our operations. Any adverse outcome in these proceedings
could harm our operations and financial results and create adverse publicity
about Waste Connections, which could damage our competitive position and stock
price.
Liabilities for environmental damage may adversely affect our business and
- --------------------------------------------------------------------------
earnings.
- ---------
We are liable for any environmental damage that our solid waste facilities
cause, including damage to neighboring landowners or residents, particularly as
a result of the contamination of soil, groundwater or surface water, and
especially drinking water. We may be liable for damage resulting from conditions
existing before we acquired these facilities. We may also be liable for any
on-site environmental contamination caused by pollutants or hazardous substances
whose transportation, treatment or disposal that we or our predecessors
arranged. Any substantial liability for environmental damage could harm our
business and earnings.
Fluctuations in prices for recycled commodities that we sell may cause our
- --------------------------------------------------------------------------
revenues and operating results to decline.
- ------------------------------------------
We provide recycling services to some of our customers. The sale prices of
and demand for recyclable materials, particularly paper products, are frequently
volatile and when they decline our revenues and operating results may decline.
ITEM 2. PROPERTIES
As of December 31, 2001, we owned and operated 74 collection operations, 26
transfer stations, 17 Subtitle D landfills and 18 recycling facilities and
operated an additional nine transfer stations and nine Subtitle D landfills. We
lease various offices and facilities, including our corporate offices in Folsom,
California. We own various equipment, including waste collection and
transportation vehicles, related support vehicles, carts, containers, and heavy
equipment used in landfill operations. We believe that our existing facilities
and equipment are generally adequate for our current operations. However, we
expect to make additional investments in property and equipment for expansion
and replacement of assets and in connection with future acquisitions.
Our corporate headquarters are located in Folsom, California, where we
lease approximately 14,800 square feet of space.
ITEM 3. LEGAL PROCEEDINGS
In January 2002, the Oklahoma Department of Environmental Quality Land
Protection Division ("the Department") issued an order to Waste Connections
requiring it to cease accepting more than 200 tons per day of out-of-state waste
at its Red Carpet Landfill location in Oklahoma due to the alleged failure of
Waste Connections to file an approved disposal plan from the Department.
Additionally, the Department assessed Waste Connections fines totaling $220,000
for past violations related to accepting more than 200 tons per day of
out-of-state waste prior to filing an approved disposal plan. We believe, based
on advice from our legal counsel, that the order issued by the Department is
without merit as we have properly complied with Oklahoma statutes related to
disposal plan submission. Additionally, we believe that certain Oklahoma
statutes provide exemption from the disposal plan requirement if the landfill
meets certain design, construction and operating requirements. We believe that
our landfill meets such requirements.
16
Therefore, we believe that any payment resulting from the order will not have a
material impact on our cash flows, financial condition or results of operations.
Additionally, we are a party to various legal proceedings in the ordinary
course of business and as a result of the extensive governmental regulation of
the solid waste industry. Our management does not believe that these
proceedings, either individually or in the aggregate, are likely to have a
material adverse effect on our business, financial condition, operating results
or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 2001.
MANAGEMENT
EXECUTIVE OFFICERS
The following table sets forth certain information concerning our executive
officers as of March 15, 2002:
NAME AGE POSITIONS
---- --- ---------
Ronald J. Mittlestaedt(1) 38 President, Chief Executive Officer and
Chairman
Steven F. Bouck 45 Executive Vice President and Chief
Financial Officer
Darrell W. Chambliss 37 Executive Vice President - Operations,
Secretary
David M. Hall 44 Vice President - Business Development
Michael R. Foos 36 Vice President - Finance and Chief
Accounting Officer
Eric J. Moser 35 Vice President - Corporate Controller,
Treasurer
Jerri L. Hunt 50 Vice President - Human Resources and Risk
Management
James M. Little 40 Vice President - Engineering
Eric Hansen 37 Vice President - Information Technology
(1) Member of the Executive Committee of the Board of Directors.
Ronald J. Mittelstaedt has been President, Chief Executive Officer and a
director since Waste Connections was formed, and was elected Chairman in January
1998. He also served as a consultant to Waste Connections in August and
September 1997. Mr. Mittelstaedt has more than 14 years of experience in the
solid waste industry. He served as a consultant to United Waste Systems, Inc.,
with the title of Executive Vice President, from January 1997 to August 1997,
where he was responsible for corporate development for all states west of
Colorado. As Regional Vice President of USA Waste Services, Inc. (including
Sanifill, Inc., which was acquired by USA Waste Services, Inc.) from November
1993 to January 1997, he was responsible for all operations in 16 states and
Canada. Mr. Mittelstaedt held various positions at Browning-Ferris Industries,
Inc. from August 1987 to November 1993, most recently as Division Vice President
in northern California, overseeing the San Jose market. Previously he was the
District Manager responsible for BFI's operations in Sacramento and the
surrounding areas. He holds a B.S. in Finance from the University of California
at Santa Barbara.
Steven F. Bouck has been Executive Vice President and Chief Financial
Officer since February 1998. Mr. Bouck held various positions with First
Analysis Corporation from 1986 to 1998, including most recently as Managing
Director coordinating corporate finance. In that capacity, he provided merger
and acquisition advisory services to companies in the environmental industry.
Mr. Bouck was also responsible for assisting in investing venture capital funds
focused on the environmental industry that were managed by First Analysis. In
connection with those investments, he served on the boards of directors of
several companies. While at First Analysis, Mr. Bouck also provided analytical
research coverage of a number of publicly traded environmental services
companies. Mr. Bouck holds B.S. and M.S. degrees in mechanical engineering from
Rensselaer Polytechnic Institute and an M.B.A. in Finance from the Wharton
School. He has been a Chartered Financial Analyst since 1990.
Darrell W. Chambliss has been Executive Vice President - Operations and
Secretary since October 1, 1997. Mr. Chambliss held various management positions
at USA Waste Services, Inc. (including Sanifill, Inc. and United Waste, Inc.,
both of which were acquired by USA Waste Services, Inc.) from April 1995 to
September 1997, including most recently Division Manager in Corning, California,
where he was responsible for the operations of 19 operating companies as well as
supervising and integrating acquisitions. From July 1989 to April 1995, he held
various management positions with Browning-Ferris Industries, Inc., including
serving as Assistant District Manager in San Jose, California, where he was
responsible for a significant hauling operation, and serving as District Manager
in Tucson, Arizona for more than three years. Mr. Chambliss holds a B.S. in
Business Administration from the University of Arkansas.
17
David M. Hall has been Vice President - Business Development since August
1, 1998. Mr. Hall has more than 15 years of experience in the solid waste
industry with extensive operating and marketing experience in the Western U.S.
From October, 1995 to July 1998, Mr. Hall was the Divisional Vice President of
USA Waste Services, Inc., Rocky Mountain Division (including for Sanifill, Inc.
which was acquired by USA Waste Services, Inc.). In that position, he oversaw
all operations and business development in six Rocky Mountain states. Prior to
his employment with Sanifill, Mr. Hall held various management positions with
BFI from October 1986 to October 1995, including Vice President of Sales for the
Western United States. Mr. Hall was employed from 1979 to 1986 in a variety of
sales and marketing management positions in the high technology sector. Mr. Hall
received a BS degree in Management and Marketing in 1979 from Southwest Missouri
State University.
Michael R. Foos has been Vice President - Finance and Chief Accounting
Officer since October 1999. From October 1997 to September 1999, Mr. Foos served
as Vice President and Corporate Controller of Waste Connections. Mr. Foos served
as Division Controller of USA Waste Services, Inc. (including Sanifill, Inc.,
which was acquired by USA Waste Services, Inc.) from October 1996 to September
1997, where he was responsible for financial compilation and reporting and
acquisition due diligence for a seven-state region. Mr. Foos served as Assistant
Regional Controller at USA Waste Services, Inc. from August 1995 to September
1996, where he was responsible for internal financial reporting for operations
in six states and Canada. Mr. Foos also served as District Controller for Waste
Management, Inc. from February 1990 to July 1995, and was a member of the audit
staff of Deloitte & Touche from 1987 to 1990. Mr. Foos holds a B.S. in
Accounting from Ferris State University.
Eric J. Moser has been Vice President - Corporate Controller and Treasurer
since October 1999. From October 1997 to September 1999, Mr. Moser served as
Waste Connections' Treasurer and Assistant Corporate Controller. From August
1995 to September 1997, Mr. Moser held various finance positions at USA Waste
Services, Inc. (including Sanifill, Inc., which was acquired by USA Waste
Services, Inc.), most recently as Controller of the Ohio Division, where he was
responsible for internal financial compilation and reporting and acquisition due
diligence. Previously Mr. Moser was Controller of the Michigan Division of USA
Waste Services, Inc., where he was responsible for internal financial reporting.
Mr. Moser served as Controller for Waste Management, Inc. from June 1993 to
August 1995, where he was responsible for internal financial reporting for a
hauling company, landfill and transfer station. Mr. Moser holds a B.S. in
Accounting from Illinois State University.
Jerri L. Hunt has been Vice President - Human Resources and Risk Management
since December 1999. From 1994 to 1999, Ms. Hunt held various positions with
First Union National Bank (including the Money Store, which was acquired by
First Union National Bank), most recently Vice President of Human Resources in
which she managed all aspects of human resources for over 5,000 employees
located throughout the United States. From 1989 to 1994, Ms. Hunt served as
Manager of Human Resources and Risk Management for BFI, where she was
responsible for all aspects of human resources and safety and environmental
compliance matters. Ms. Hunt also served as a Human Resources Supervisor for
United Parcel Service from 1976 to 1989. She holds a B.S. degree from California
State University, Sacramento and a masters degree in Human Resources from Golden
Gate University.
James M. Little has been Vice President - Engineering since September 1999.
Mr. Little held various management positions with Waste Management, Inc.
(formerly USA Waste Services, Inc., which was acquired by Waste Management, Inc.
and Chambers Development Co. Inc., which was acquired by USA Waste Services,
Inc.) from April 1990 to September 1999, including Regional Environmental
Manager and Regional Landfill Manger, and most recently Division Manager in
Ohio, where he was responsible for the operations of ten operating companies in
the Northern Ohio area. Mr. Little is a certified professional geologist and
holds a B.S. in Geology from Slippery Rock University of Pennsylvania.
Eric Hansen has been Vice President - Information Technology since January
2001. From April 1998 to December 2000, Mr. Hansen served as Waste Connections'
Director of Management Information Systems. Mr. Hansen served as Information
Systems Manager with Fibres International from October 1997 to April 1998. Mr.
Hansen held various positions including NT Administrator for the Multnomah
Athletic Club in Portland, Oregon from August 1989 to October 1997. Mr. Hansen
earned a Bachelor of Science degree from Portland State University in 1989.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock trades on The Nasdaq Stock Market(R) - National Market
under the symbol "WCNX". The following table shows the high and low sale prices
for the common stock as reported by the Nasdaq National Market for the periods
indicated.
HIGH LOW
----------- -----------
2000
First Quarter $ 14.94 $ 9.25
Second Quarter 19.75 9.75
Third Quarter 25.94 17.13
Fourth Quarter 35.25 21.69
2001
First Quarter $ 33.50 $ 23.00
Second Quarter 37.31 25.70
Third Quarter 34.90 22.20
Fourth Quarter 32.90 25.47
On March 13, 2002, there were 76 record holders of Waste Connections common
stock.
We have never paid cash dividends on our common stock. We do not currently
anticipate paying any cash dividends on our common stock. We intend to retain
all earnings to fund the operation and expansion of our business. In addition,
our existing credit facility restricts the payment of cash dividends.
ITEM 6. SELECTED FINANCIAL DATA
This table sets forth selected financial data of Waste Connections and our
predecessors for the periods indicated. This data should be read in conjunction
with and is qualified by reference to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Item 7 in this Annual
Report on Form 10-K and our audited consolidated financial statements, including
the notes thereto and the independent auditors' report thereon and the other
financial information included in Item 8 in this Form 10-K. The selected data in
this section are not intended to replace the consolidated financial statements
included in this Report.
The entities Waste Connections acquired in September 1997 from
Browning-Ferris Industries, Inc. ("BFI") are collectively referred to as Waste
Connections' predecessors.
19
WASTE CONNECTIONS, INC. AND PREDECESSORS
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PREDECESSORS
COMBINED
NINE MONTHS WASTE CONNECTIONS, INC.
ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, -------------------------------------------------------------------
1997 1997 1998 1999 2000 2001
----------- ----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA (1):
Revenues $ 18,114 $ 47,510 $ 99,624 $ 184,225 $ 304,355 $ 377,533
Operating expenses:
Cost of operations 14,753 36,213 71,635 112,686 174,510 210,590
Selling, general and administrative 3,009 5,088 9,967 15,754 25,416 32,007
Depreciation and amortization 1,083 3,180 8,008 14,769 27,195 36,138
Start-up and integration -- 493 -- -- -- --
Loss on disposal of operations -- -- -- -- 833 4,879
Stock compensation -- 4,395 632 265 163 --
Acquisition-related expenses -- -- -- 9,003 150 --
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations (731) (1,859) 9,382 31,748 76,088 93,919
Interest expense (456) (1,957) (3,458) (11,531) (28,705) (30,045)
Other income (expense), net 14 449 410 (66) 116 (5,891)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income tax
provision and minority interests (1,173) (3,367) 6,334 20,151 47,499 57,983
Minority interests -- -- -- -- -- (7,338)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income tax
provision (1,173) (3,367) 6,334 20,151 47,499 50,645
Income tax provision -- (332) (3,040) (10,924) (19,310) (19,932)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary item (1,173) (3,699) 3,294 9,227 28,189 30,713
Extraordinary item - early extinguishment
of debt, net of tax benefits -- -- (1,027) -- -- (185)
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ (1,173) $ (3,699) $ 2,267 $ 9,227 $ 28,189 $ 30,528
=========== =========== =========== =========== =========== ===========
Redeemable convertible preferred
stock accretion -- (531) (917) -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) applicable to common
stockholders $ (1,173) $ (4,230) $ 1,350 $ 9,227 $ 28,189 $ 30,528
=========== =========== =========== =========== =========== ===========
Basic income (loss) per common share:
Income (loss) before extraordinary item $ (0.73) $ 0.23 $ 0.49 $ 1.21 $ 1.14
Extraordinary item -- (0.10) -- -- (.01)
----------- ----------- ----------- ----------- -----------
Net income (loss) per common share $ (0.73) $ 0.13 $ 0.49 $ 1.21 $ 1.13
=========== =========== =========== =========== ===========
Diluted income (loss) per common share:
Income (loss) before extraordinary item $ (0.73) $ 0.19 $ 0.46 $ 1.17 $ 1.11
Extraordinary item -- (0.08) -- -- (.01)
----------- ----------- ----------- ----------- -----------
Net income (loss) per common share $ (0.73) $ 0.11 $ 0.46 $ 1.17 $ 1.10
=========== =========== =========== =========== ===========
Shares used in calculating basic income
(loss) per share 5,825,142 10,412,868 18,655,801 23,301,358 27,069,685
=========== =========== =========== =========== ===========
Shares used in calculating diluted income
(loss) per share 5,825,142 12,323,990 19,929,539 23,994,994 27,675,639
=========== =========== =========== =========== ===========
See footnotes on page 21.
20
WASTE CONNECTIONS, INC.
---------------------------------------------------------------------
DECEMBER 31,
---------------------------------------------------------------------
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Cash and equivalents $ 1,327 $ 3,351 $ 2,393 $ 2,461 $ 7,279
Working capital (deficit) (5,380) (14,167) (10,149) (10,398) (4,665)
Property and equipment, net 23,275 51,422 335,260 384,237 465,806
Total assets 45,905 176,659 617,958 810,104 979,353
Long-term debt (2) 14,500 68,274 275,145 334,194 416,171
Redeemable convertible preferred stock 7,523 -- -- -- --
Total stockholders' equity 5,374 66,837 218,521 334,208 379,965
(1) The entities Waste Connections acquired in September 1997 from BFI are
collectively referred to as Waste Connections' predecessors.
(2) Excludes redeemable convertible preferred stock, which converted into common
stock upon our May 1998 initial public offering.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial and Operating Data," our Consolidated Financial Statements and the
notes thereto included elsewhere herein.
Overview
Waste Connections, Inc. is a regional, integrated solid waste services
company that provides solid waste collection, transfer, disposal and recycling
services in secondary markets of the Western U.S. As of December 31, 2001, we
served more than 800,000 commercial, industrial and residential customers in
California, Colorado, Iowa, Kansas, Kentucky, New Mexico, Minnesota,
Mississippi, Montana, Nebraska, Oklahoma, Oregon, South Dakota, Tennessee,
Texas, Utah, Washington, and Wyoming. As of that date, we owned 74 collection
operations and operated or owned 35 transfer stations, 26 Subtitle D landfills
and 18 recycling facilities.
We intend to pursue an acquisition-based growth strategy, and we have
acquired 134 businesses from our inception in September 1997 through December
31, 2001, with 18 of these acquisitions occurring in 2001. Excluding debt
assumed, the aggregate consideration for acquisitions occurring in 2001, using
the purchase method of accounting, was approximately $63.6 million. From
inception through December 31, 2001, the results of operations of these acquired
businesses have been included in our financial statements only from the
respective dates of acquisition, except for 14 acquisitions accounted for under
the poolings-of-interests method of accounting, which are included for all
periods presented. We anticipate that a substantial part of our future growth
will come from acquiring additional solid waste collection, transfer and
disposal businesses and, as a consequence, additional acquisitions could
continue to affect period-to-period comparisons of our operating results.
Critical Accounting Policies
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Allowance for doubtful accounts. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. If the financial condition of our customers was to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. In addition, if certain customer and
billing information is not properly integrated from acquisitions that we close,
additional allowances may be required.
Impairment of intangible assets. We periodically evaluate acquired
businesses for potential impairment indicators. Our judgments regarding the
existence of impairment indicators are based on regulatory factors, market
conditions and operational performance of our acquired businesses. Future events
could cause us to conclude that impairment indicators exist and that goodwill or
other intangibles associated with our acquired businesses is impaired. Any
resulting impairment loss could have a material adverse impact on our financial
condition and results of operations. As of December 31, 2001, intangible assets
represented 43.7% of our total assets.
21
Accounting for landfills. Landfill permitting, acquisition and preparation
costs are amortized using a units-of-production method as permitted airspace of
the landfill is consumed. Landfill preparation costs include the costs of
construction associated with excavation, liners, site berms and the installation
of leak detection and leachate collection systems. In determining the
amortization rate for a landfill, preparation costs include the total estimated
costs to complete construction of the landfill's permitted capacity.
Units-of-production amortization rates are determined annually for our operating
landfills.
We periodically evaluate our landfill sites for potential impairment
indicators. Our judgments regarding the existence of impairment indicators are
based on regulatory factors, market conditions and operational performance of
our landfills. Future events could cause us to conclude that impairment
indicators exist and that our landfill carrying costs are impaired. Any
resulting impairment loss could have a material adverse impact on our financial
condition and results of operations.
Landfill depletion rates are determined by management based on estimates
provided by our internal and third party engineers and consider the information
provided by surveys which are performed at least annually. Significant changes
in our estimates could result in material increases to our landfill depletion
rates which could have a material adverse impact on our financial condition and
results of operations.
We reserve for estimated landfill closure and post-closure maintenance
costs at the landfills we own. We will have additional material financial
obligations relating to closure and post-closure costs of the other disposal
facilities that we currently own or operate and that we may own or operate in
the future. The net present value of the closure and post closure commitment is
calculated assuming an inflation rate of 3% and a discount rate of 7.5%.
Discounted amounts previously recorded are accreted to reflect the effect of the
passage of time. Significant reductions in our estimates of the remaining lives
of our landfills or significant increases in our estimates of the landfill
closure and post-closure maintenance costs could have a material adverse impact
on our financial condition and results of operations.
General
Our revenues consist mainly of fees we charge customers for solid waste
collection, transfer, disposal and recycling services. A large part of our
collection revenues comes from providing commercial, industrial and residential
services. We frequently perform these services under service agreements or
franchise agreements with counties or municipal contracts. Our existing
franchise agreements and all of our existing municipal contracts give Waste
Connections the exclusive right to provide specified waste services in the
specified territory during the contract term. These exclusive arrangements are
awarded, at least initially, on a competitive bid basis and subsequently on a
bid or negotiated basis. We also provide residential collection s