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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, 2002
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.
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(Exact name of registrant as specified in its charter)
Delaware 94-3283464
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification)
35 Iron Point Circle
Suite 200
Folsom, California 95630
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(Address of principal executive offices) (Zip Code)
(916) 608-8200
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(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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]
Aggregate market value of voting stock held by non-affiliates of registrant as
of June 28, 2002: $835,998,082
Number of shares of Common Stock outstanding as of February 28, 2003: 28,086,871
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2003 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 20
3. LEGAL PROCEEDINGS 20
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 20
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 23
6. SELECTED FINANCIAL DATA 25
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 26
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK 39
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 40
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 40
PART III 73
PART IV
14. CONTROLS AND PROCEDURES 73
15. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS
ON FORM 8-K 73
SIGNATURES 74
CERTIFICATIONS 75
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS 77
EXHIBIT INDEX 78
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: (1) competition or unfavorable industry or economic conditions could
lead to a decrease in demand for our services and to a decline in prices we
realize for our services, (2) we depend in part on acquisitions for growth, we
may be required to pay higher prices for acquisitions and we may experience
difficulty in integrating and deriving synergies from acquisitions, or finding
acquisition targets suitable to our growth strategy, (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) large, long-term
collection contracts on which we depend may not be replaced when they expire or
are terminated, and (7) we are highly dependent on the services of our senior
management, who would 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 to reflect events or
circumstances after the date any such statement is made.
ITEM 1. BUSINESS
General
Waste Connections, Inc., a Delaware corporation organized in 1997, is an
integrated solid waste services company that provides solid waste collection,
transfer, disposal and recycling services in mostly secondary markets in the
Western, Midwestern and Southeastern U.S. We currently own and operate 90
collection operations, 23 transfer stations, 19 Subtitle D landfills, one
construction and demolition landfill and 18 recycling facilities and operate,
but do not own, an additional six transfer stations and ten Subtitle D
landfills. We also own one Subtitle D landfill site which is permitted for
operation, but not constructed as of December 31, 2002. As of December 31, 2002,
we served more than one million commercial, industrial and residential customers
in 22 states: Alabama, California, Colorado, Georgia, Illinois, Iowa, Kansas,
Kentucky, Minnesota, Mississippi, Montana, Nebraska, New Mexico, Ohio, Oklahoma,
Oregon, South Dakota, Tennessee, Texas, Utah, Washington, and Wyoming.
Approximately 50% of our revenues are in exclusive markets, where the majority
of revenues 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, Midwestern and Southeastern 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 in these
markets.
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, 2002.
1
Industry Background
We estimate that the U.S. solid waste services industry generated revenues
of approximately $40 billion in 2002. The solid waste services industry has
undergone significant consolidation and integration since 1990. We believe that,
particularly in the Western, Midwestern and Southeastern U.S., the following
factors have primarily caused the consolidation and integration of the waste
services industry:
- - Increased Impact of Regulations. Stringent industry regulations, such as the
Subtitle D regulations, have caused operating and capital costs to rise.
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" on page 7. 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, Midwestern and Southeastern 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, Midwestern and
Southeastern 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 at multiple municipal sources, we believe that controlling the waste
stream by providing collection services under exclusive arrangements is often
more important to our growth and profitability than owning or operating
landfills. In addition, regulations in some Western U.S. markets dictate the
disposal facility to be used. The large size of many western states increases
2
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.
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.
- - 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
our 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 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 markets through acquisitions. We use an initial
acquisition in a new market as an operating base and 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 suitable
"tuck-in" acquisition opportunities exist within our current and targeted
market areas that provide us with 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 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, Midwestern and
Southeastern U.S., and makes us an attractive buyer to many potential
acquisition candidates.
- - We currently deliver our services from approximately 112 operating locations
which are grouped into four regions, Pacific Northwest, Western, Central and
Eastern. We organized our business into these four regions on the basis of
their respective geographic characteristics, interstate waste flow, revenue
base, employee base, regulatory structure and acquisition opportunities.
3
Each region has a Regional Vice President and a Regional Controller,
reporting directly to the corporate management. They are responsible for
operations and accounting in that region and supervise a regional staff.
- - Our regions are divided into districts. Our district managers have
autonomous service and decision-making authority for their districts and are
responsible for maintaining service quality, promoting safety in their
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 acquired
businesses into our operations and obtaining the permits and other
governmental approvals required for us to operate them.
- - Operating Enhancements. We develop company-wide operating standards, which
are tailored for each of our markets based on industry standards and local
conditions. We implement cost controls and employee training and safety
procedures, and establish a sales and marketing plan for each market. We use
a wide area information system network, implement advanced management
information systems and financial controls, and consolidate certain
accounting, personnel 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
economies of scale and increase the volume of solid waste collected by the
acquired operations.
SERVICES
COMMERCIAL, INDUSTRIAL AND RESIDENTIAL WASTE SERVICES
We serve more than one million 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 610 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.
Waste Connections is continuing to provide service under some municipal
contracts that have expired, while new agreements are being negotiated. We do
not expect that the loss of any current contracts in negotiation for renewal or
likely to terminate in 2003 would have a material adverse affect on our revenues
or cash flows. No individual contract or customer accounted for more than 5% of
our total revenues for the year ended December 31, 2002.
We provide commercial and industrial services, other than those we perform
under governmental certificates, franchise agreements or municipal contracts,
under agreements generally 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 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.
4
We provide residential waste services, other than those we perform under
governmental certificates, franchise agreements or municipal contracts, 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 by competitors 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.
LANDFILLS
Currently, solid waste landfills in the United States must be designed,
permitted, operated, closed and maintained after closure in compliance with
federal, state and local regulations pursuant to Subtitle D of the Resource
Conservation and Recovery Act of 1976, as amended ("RCRA"). Operating a solid
waste landfill includes excavating, constructing liners and final caps,
continually spreading and compacting waste, covering waste with earth or other
inert material at least once a day with the objective of maintaining sanitary
conditions, using the airspace effectively and preparing the site so it can
ultimately be used for other purposes.
We seek to identify solid waste landfill acquisition candidates to achieve
vertical integration in markets where the economic and regulatory environment
makes landfill acquisitions attractive. In some markets, acquiring landfills
provides opportunities to vertically integrate our collection, transfer and
disposal operations while improving operating margins. When we have vertical
integration, we eliminate third party disposal costs and generally are able to
realize higher margins and stronger operating cash flows. The fees charged at
disposal facilities, which are known as "tipping fees," are based on market
factors and take into account the type and weight or volume of solid waste
deposited and the type and size of the vehicles used in the transportation of
the waste. We evaluate landfill acquisition candidates by determining, among
other things whether access to the landfill is economically feasible from our
existing market areas either directly or through transfer stations, the amount
and disposal cost of waste we currently dispose of at a facility owned by a
third party that could be diverted to the landfill acquisition candidate, the
expected life of the landfill, the potential for expanding the landfill and the
potential for material environmental liabilities at the landfill.
We owned and operated 20 landfills and operated, but did not own, ten
landfills at December 31, 2002. We also own one Subtitle D landfill site which
is permitted for operation, but not constructed as of December 31, 2002.
Currently, we own landfills in California, Colorado, Illinois, Kansas,
Minnesota, Nebraska, New Mexico, Oklahoma, Oregon, Tennessee and Washington. We
operate, but do not own, landfills in California, Colorado, Georgia,
Mississippi, Nebraska and New Mexico. With the exception of one landfill located
in Tennessee that only accepts construction and demolition waste, all landfills
that we own or operate are Subtitle D landfills. For operating contracts, the
owner of the property, generally a municipality, usually owns the permit and we
operate the landfill for a contracted term, which may be the life of the
landfill. The property owner is generally responsible for closure and
post-closure obligations under our seven operating contracts for which the
contracted term is not the life of the landfill. Our operating landfills that we
do not own include three landfills for which we have life-of-site operating
agreements and are responsible for all closure and post-closure liabilities.
Based on remaining permitted capacity as of December 31, 2002, and projected
annual disposal volumes, the average remaining landfill life for our 20 owned
and operated landfills and three landfills operated, but not owned, under
life-of-site operating agreements, is approximately 53 years. Many of our
existing landfills have the potential for expanded disposal capacity beyond the
amount currently permitted. 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. We are
currently seeking to expand permitted capacity at seven of our landfills for
which we consider expansions to be probable. Although we cannot be certain that
all future expansions will be permitted as designed, the average remaining
landfill life for our 20 owned and operated landfills and three landfills
operated, but not owned, under life-of-site operating agreements is
approximately 62 years when considering remaining permitted capacity, probable
expansion capacity and projected annual disposal volume. At December 31, 2002,
the expected remaining airspace capacity in tonnage of waste that can be
accepted at our 20 owned and operated landfills and three landfills operated,
but not owned, under life-of-site operating agreements is shown below (in
thousands):
5
PROBABLE
PERMITTED EXPANSION TOTAL
------------ ------------ ------------
Remaining tonnage 290,942 47,542 338,484
The following table reflects landfill capacity and airspace changes, as
measured in tons, for 20 owned and operated landfills and three landfills
operated, but not owned, under life-of-site operating agreements during the year
ended December 31, 2002 (in thousands):
PROBABLE
PERMITTED EXPANSION TOTAL
AIRSPACE AIRSPACE AIRSPACE
------------ ------------ ------------
Balance, beginning of year 271,139 21,890 293,029
Acquisitions and new life-of-site
operating agreements 16,195 -- 16,195
New expansions pursued -- 34,901 34,901
Permits granted 6,133 (6,133) --
Airspace consumed (5,454) -- (5,454)
Changes in engineering estimates 2,929 (3,116) (187)
------------ ------------ ------------
Balance, end of year 290,942 47,542 338,484
============ ============ ============
The estimated operating lives for our 20 owned and operated landfills and
three landfills operated, but not owned, under life-of-site operating
agreements, based on remaining permitted and probable expansion capacity and
projected annual disposal volume, in years, as of December 31, 2002, is as
follows:
0 to 10 11 to 20 21 to 40 41 to 50 51 + TOTAL
-------- -------- -------- -------- -------- --------
Owned and operated landfills 2 2 4 1 11 20
Operated landfills under
life-of-site contracts -- -- -- 1 2 3
-------- -------- -------- -------- -------- --------
2 2 4 2 13 23
======== ======== ======== ======== ======== ========
The seven operating contracts for which the contracted term is not the life
of the landfill have remaining terms of one to twelve years.
The disposal tonnage that we received in 2002 and 2001 at all of our
landfills is shown below (tons in thousands):
2002 2001
------------------------ ------------------------
NUMBER TOTAL NUMBER TOTAL
OF SITES TONS OF SITES TONS
---------- ---------- ---------- ----------
Owned and operated landfills 20 5,057 17 3,593
Operated landfills 7 610 8 471
Operated landfills under
life-of-site contracts 3 397 1 15
---------- ---------- ---------- ----------
30 6,064 26 4,079
========== ========== ========== ==========
6
TRANSFER STATION SERVICES
We have an active program to acquire, develop, own and operate transfer
stations in markets proximate to our operations. Transfer stations extend our
direct-haul reach and link disparate collection operations with disposal
capacity that we own, operate or have under contract. We owned 23 transfer
stations and operated six transfer stations at December 31, 2002. Currently, we
own transfer stations in Colorado, Georgia, Kansas, Montana, Nebraska, Oklahoma,
Oregon, Tennessee and Washington. In addition, we operate, but do not own,
transfer stations in California, Kentucky, Nebraska, and Tennessee. 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.
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 volatility and 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; therefore, 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
7
Management, Inc. Casella Waste Systems, Inc., and Waste Industries, Inc. are
other public companies with a regional focus and annual revenues in excess of
$200 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.
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 costs necessary to bring our operations into
environmental 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, 2002, we did not, to our
knowledge, transport hazardous wastes under circumstances that would
8
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 Environmental Protection Agency 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.
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.
9
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.
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.
10
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 in landfills of certain types of solid wastes, such as
yard wastes, leaves and tires. 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.
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 FINANCIAL SURETY 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 materially
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.
Conditions in the market for various lines of insurance have changed since
September 11, 2001, with many lines of insurance being subject to reduced
availability and substantial premium increases. Beginning August 1, 2002, we
significantly changed our insurance programs for automobile liability, property,
general liability and workers' compensation. Prior to this date, each of these
areas was third-party insured with a per incident deductible of up to $5,000.
Under our new insurance program, we have increased our per incident deductible
to $2 million for automobile liability claims, and $1 million for general
liability claims, workers' compensation claims and employer's liability claims.
During a 12 month period, our automobile liability policy will pay up to $3
million per claim and in aggregate, after we pay the $2 million per claim
deductible. Additionally, we have an umbrella policy with a third party
insurance company for automobile liability, general liability and employer's
liability that will pay, during a 12 month period, up to $25 million of claims
in excess of the $5 million limit for automobile claims and up to $25 million in
excess of the per incident deductible amount for all other claims. Our umbrella
policy also provides for no limit on statutory benefits for workers'
compensation claims reaching the $1 million deductible amount per incident. Our
umbrella policy does not cover property claims as the insurance limits for these
claims are in accordance with the replacement values of the insured property.
In November 2002, we purchased environmental protection insurance under a
three-year policy with limits of $10 million per occurrence and in the
aggregate. This insurance covers all owned or operated landfills and transfer
stations and all owned materials recycling facilities. Under our policy,
insurance is guaranteed for acquired and newly constructed facilities, but each
addition to the policy is underwritten on a site-specific basis and the premium
is set according to the conditions found at the site. Our policy provides
insurance for new pollution conditions that originate after the commencement of
our coverage. Pollution conditions existing prior to the commencement of our
coverage, if found, could be excluded from coverage.
The increased amounts that we self-insure could increase volatility in our
operating margins and reported earnings based on the timing of occurrences and
claim costs of incidents, accidents and injuries. Significant increases in
premiums on insurance that we
11
retain could reduce our margins. To the extent that the amount we pay in claims
exceeds the amount of any savings in premiums that we achieve by increasing the
amount that we self-insure, our operating margins will be reduced. Additionally,
if we were to incur a liability for environmental cleanups not covered under our
environmental insurance policy or in excess of our insurance coverage limits,
our financial condition could be materially and adversely affected.
We use financial surety bonds for a variety of corporate guarantees. The two
largest uses of financial surety bonds are for municipal contract performance
guarantees and landfill closure and post-closure financial assurance required
under certain environmental regulations. As a result of recent changes in the
insurance industry, we have experienced less availability and increased cost of
surety bonds for landfill closure and post-closure requirements. We generally
have not experienced significant difficulty in obtaining surety bonds for
performance under our municipal collection contracts or landfill operating
agreements. Environmental regulations require demonstrated financial assurance
to meet closure and post-closure requirements for landfills. In addition to
surety bonds, these requirements may also be met through alternative financial
assurance instruments, including insurance, letters of credit and restricted
cash deposits.
Our current surety bond underwriters have provided us with non-binding
commitments to issue up to $90 million of bonds, consisting of $50 million of
bonds for landfill closure and post-closure requirements and $40 million of
bonds for performance under collection contracts and landfill operating
agreements. These non-binding commitments do not have a stated expiration date;
however, individual bonds issued typically have a term of one year. At December
31, 2002, we had provided customers and various regulatory authorities with
surety bonds in the aggregate amount of approximately $36.3 million to secure
our landfill closure and post-closure requirements and $27.8 million to secure
performance under collection contracts and landfill operating agreements.
If our current bond underwriters are unwilling to issue additional bonds
under the current non-binding commitment, renew existing bonds upon expiration,
or increase their total commitment upon reaching the maximum issuance amount
under the current non-binding commitments, or if we are unable to obtain surety
bonds through new underwriters as such needs arise, we would need to arrange
other means of financial assurance, such as a cash trust or a letter of credit,
to secure contract performance or meet closure and post-closure requirements.
Such alternate financial assurance may not be readily available, and may result
in additional expense or capital outlays.
EMPLOYEES
At December 31, 2002, we employed 3,609 full-time employees, including 371
persons classified as professionals or managers, 2,772 employees involved in
collection, transfer, disposal and recycling operations, and 466 sales,
clerical, data processing or other administrative employees.
Approximately 238 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. In October 2002,
approximately 55 employees who are represented by the Teamsters Union commenced
a strike at our facilities in Pierce County, Washington. We continued to operate
these facilities with a combination of existing employees and strike
replacements. The employees have filed a petition to de-certify the union. In
connection with this labor dispute, we incurred costs of approximately $1.4
million in the fourth quarter of 2002 relating to travel and costs for
management assistance, replacement workers, security, legal expenses and other
expenses.
We do not expect any significant disruption in our business in 2003 as a
result of labor negotiations or employee strikes. We are not aware of any other
organizational efforts among our employees and we believe that our relations
with our employees are good. Approximately 94 of our drivers and mechanics at
our Vancouver, WA facilities are represented by the Teamsters Union. On January
31, 2003, the labor agreement with these employees expired and the employees
have continued to work under the terms of the expired labor agreement. We are
currently negotiating a new labor agreement with these employees and have no
reason to believe that we will not be successful in reaching a mutually
acceptable agreement.
AVAILABLE INFORMATION
Our internet website address is http:wasteconnections.com. We make our
reports on Forms 10-K, 10-Q and 8-K available on our website free of charge as
soon as reasonably practicable after we file them with the SEC.
12
RISK FACTORS
Outlined below are some of the risks that we face and that could affect our
business and financial statements for 2003 and beyond. However, they are not the
only risks that we face. There may be additional risks that we do not presently
know of or that we currently believe are immaterial which could also impair our
business.
RISKS RELATED TO OUR BUSINESS
Difficulties in making acquisitions, acquiring exclusive contracts and
- ----------------------------------------------------------------------
generating internal growth may cause our growth to be slower than expected.
- ---------------------------------------------------------------------------
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 generally 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:
- - the availability of capital to support our growth;
- - our ability to compete with existing and emerging companies;
- - our ability to maintain profit margins in the face of competitive pressures;
- - our ability to continue to recruit, train and retain qualified employees; and
- - 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,
- -------------------------------------------------------------------------
operating losses or a loss on sale of the business acquired.
- ------------------------------------------------------------
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 or
recognize an impairment of goodwill and/or intangible assets if we decide to
keep it.
Rapid growth may strain our management, operational, financial and other
- ------------------------------------------------------------------------
resources.
- ----------
From inception through December 31, 2002, we acquired 151 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
- -------------------------------------------------------------------------------
to integrate acquired businesses into our organization and operations.
- ----------------------------------------------------------------------
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
- ----------------------------------------------------------------------------
grow through acquisition.
- -------------------------
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
13
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.
Timing of acquisitions may cause fluctuations in our quarterly results, which
- -----------------------------------------------------------------------------
may cause our stock price to decline.
- -------------------------------------
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
- -------------------------------------------------------------------------------
larger and better capitalized companies, which may result in reduced revenues
- -----------------------------------------------------------------------------
and lower profits.
- ------------------
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.
- ---------------------------------------------------------------
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. For example, we have approximately 86 municipal contracts,
representing annual revenues of approximately $5.8 million, that could expire in
the next 12 months and have no renewal provisions. 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 may annex
unincorporated areas within counties where we provide collection services; as a
result, our customers in annexed areas may be required to obtain service from
competitors that have been franchised by the annexing municipalities to provide
those services. Municipalities in which services are currently provided on a
competitive basis may elect to franchise collection services. Unless we are
awarded franchises by these municipalities, we will lose customers.
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 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
- -------------------------------------------------------------------------------
satisfactory terms to meet our capital requirements, which would limit our
- --------------------------------------------------------------------------
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.
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. Using cash for acquisitions and capital expenditures 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 and
capital expenditures, we will need additional equity and/or debt financing. If
we incur 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 substantially all of our assets as collateral for
14
our credit facility, which could restrict our ability to obtain additional debt
on attractive terms. If we issue 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 depend significantly on the services of the members of our senior management
- -------------------------------------------------------------------------------
team, and the departure of any of those persons could cause our operating
- -------------------------------------------------------------------------
results to suffer.
- ------------------
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
- ------------------------------------------------------------------------------
decisions that adversely affect our operating results.
- ------------------------------------------------------
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.
Efforts by labor unions to organize our employees could divert management
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attention and increase our operating expenses.
- ----------------------------------------------
Labor unions often attempt to organize our employees, and these efforts will
likely continue in the future. Certain groups of our employees are represented
by unions, and we have negotiated collective bargaining agreements with some of
these groups. Additional groups of employees may seek union representation in
the future, and the negotiation of collective bargaining agreements with these
groups could divert management attention and result in increased operating
expenses and lower net income. If we are unable to negotiate acceptable
collective bargaining agreements, we might have to wait through "cooling off"
periods, which are often followed by union-initiated work stoppages, including
strikes. Depending on the type and duration of any labor disruptions, our
operating expenses could increase significantly, which could adversely affect
our financial condition, results of operations and cash flows.
The geographic concentration of our business makes our results vulnerable to
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factors affecting the regions in which we operate, and seasonal fluctuations may
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cause our business and financial results to vary among quarters, which could
- ----------------------------------------------------------------------------
create volatility in our stock price.
- -------------------------------------
Our business and financial results would be harmed by downturns in the
general economy of the regions in which we operate and other factors affecting
the regions, 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. We expect the fluctuation in our revenues between our
highest and lowest seasonally performing quarters to be in the range of
approximately 10% to 12%. 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
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.
- ----------------------
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, disposal, fuel or energy could reduce operating
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margins.
- --------
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. From time to time, the labor supply is tight in some 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
15
expensive temporary employees. Labor is our 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. If we incur increases in our
disposal costs in areas where we do not dispose of solid waste at a landfill
that we own or operate or if we incur increases in costs of operating landfills
that we do own or operate and if, in either case, we are unable to pass these
costs on to our customers, our operating results would 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. To partially reduce our exposure to fluctuations in the price of fuel, we
have entered into an unconditional obligation to purchase diesel fuel for
approximately 51 of our operating districts at a fixed price under a 12 month
agreement expiring on December 31, 2003. Although recent energy crises 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.
Decreased availability of surety bonds could require us to obtain other means of
- --------------------------------------------------------------------------------
financial assurance, which could result in additional capital outlays and
- -------------------------------------------------------------------------
increased expense and cause a reduction in our operating margins.
- -----------------------------------------------------------------
We use financial surety bonds for a variety of corporate guarantees. The two
largest uses of financial surety bonds are for municipal contract performance
guarantees and landfill closure and post-closure financial assurance required
under certain environmental regulations. As a result of recent changes in the
insurance industry, we have experienced less availability of surety bonds for
landfill closure and post-closure requirements. We generally have not
experienced significant difficulty in obtaining surety bonds for performance
under our municipal collection contracts or landfill operating agreements.
Environmental regulations require demonstrated financial assurance to meet
closure and post-closure requirements for landfills. In addition to surety
bonds, these requirements may also be met through alternative financial
assurance instruments, including insurance, letters of credit and restricted
cash deposits.
Our current surety bond underwriters have provided us with non-binding
commitments to issue up to $90 million of bonds, consisting of $50 million of
bonds for landfill closure and post-closure requirements and $40 million of
bonds for performance under collection contracts and landfill operating
agreements. These non-binding commitments do not have a stated expiration date;
however, individual bonds issued typically have a term of one year. At December
31, 2002, we had provided customers and various regulatory authorities with
surety bonds in the aggregate amount of approximately $36.3 million to secure
our landfill closure and post-closure requirements and $27.8 million to secure
performance under collection contracts and landfill operating agreements.
If our current bond underwriters are unwilling to issue additional bonds
under the current non-binding commitment, renew existing bonds upon expiration,
or increase their total commitment upon reaching the maximum issuance amount
under the current non-binding commitments, or if we are unable to obtain surety
bonds through new underwriters as such needs arise, we would need to arrange
other means of financial assurance, such as a cash trust or a letter of credit,
to secure contract performance or meet closure and post-closure requirements.
Such alternate financial assurance may not be readily available, and may result
in additional expense or capital outlays.
Increases in insurance costs and in the amount that we self-insure for various
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risks could reduce our operating margins.
- -----------------------------------------
Conditions in the market for various lines of insurance have changed since
September 11, 2001, with many lines of insurance being subject to reduced
availability and substantial premium increases. Beginning August 1, 2002, we
significantly changed our insurance programs for automobile liability, property,
general liability and workers' compensation. Prior to this date, each of these
areas was third-party insured with a per incident deductible of up to $5,000.
Under our new insurance program, we have increased our per incident deductible
to $2 million for automobile liability claims, and $1 million for general
liability claims, workers' compensation claims, and employer's liability claims.
Our automobile liability policy will pay up to $3 million in aggregate, after we
pay the $2 million deductible, during a 12 months period. Additionally, we have
an umbrella policy with a third party insurance company for automobile
liability, general liability and employer's liability that will pay, during a 12
month period, up to $25 million of claims in excess of the $5 million limit for
automobile claims and up to $25 million in excess of the per incident deductible
amount for all other claims. Our umbrella policy also provides for no limit on
statutory benefits for workers' compensation claims, after achieving the $1
million deductible amount per incident. Our umbrella policy does not cover
property claims as the insurance limits for these claims are in accordance with
the replacement values of the insured property. The increased amounts that we
self-insure could cause significant volatility in our operating margins and
reported earnings based on the occurrence and claim costs of incidents,
accidents and injuries. Significant increases in premiums on insurance that we
retain could reduce our margins. In addition, to the extent that the
16
amount we pay in claims exceeds the amount of any savings in premiums that we
achieve by increasing the amount that we self-insure, our operating margins will
be reduced.
Each business that we acquire or have acquired may have liabilities that we fail
- --------------------------------------------------------------------------------
or are unable to discover, including liabilities that arise from prior owners'
- ------------------------------------------------------------------------------
failure to comply with environmental laws, which may harm our financial
- -----------------------------------------------------------------------
condition.
- ----------
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 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
- -----------------------------------------------------------------------------
existing ones.
- --------------
We currently own and/or operate a number of landfills. Based on remaining
permitted capacity, probable expansion capacity and projected annual disposal
volumes, the estimated remaining lives of our owned landfills and landfills we
operate, but do not own, under life-of-site operating agreements range from
approximately 6 to 313 years, with an average remaining life of approximately 62
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 landfill sites or
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expansion of existing landfill sites may be unavailable, which could increase
- -----------------------------------------------------------------------------
our disposal costs and reduce our operating margins.
- ----------------------------------------------------
Operating permits for landfills in states where we operate must generally be
renewed every five to ten 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,
- -------------------------------------------------------------------------------
and our earnings would be lower if we are required to pay additional amounts.
- -----------------------------------------------------------------------------
We may be required to pay closure and post-closure costs of landfills and
any disposal facilities that we own or operate. Closure and post-closure costs
of our owned landfills, and landfills not owned, but operated under life-of-site
agreements, are generally incurred for a term of 30 years after final closure of
a landfill, and accrued based on engineering estimates of future requirements
associated with the final landfill design, final landfill capping 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
- --------------------------------------------------------------------------------
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
17
landfill development project that we do not expect to complete. Therefore, we
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
- --------------------------------------------------------------------------------
could materially impair our net worth.
- --------------------------------------
In June 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.
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. We are required to test
goodwill for impairment using the two-step process prescribed in FAS 142. The
first step is a screen for potential impairment, while the second step measures
the amount of the impairment, if any. In 2002, we performed the first of the
required impairment tests of goodwill and indefinite-lived intangible assets
based on the carrying values as of January 1, 2002 and September 30, 2002.
Subsequent to September 30, 2002, no events or changes in circumstances occurred
that indicated the potential existence of goodwill or indefinite-lived
intangible asset impairment. As a result of performing the tests for potential
impairment, we determined that no impairment existed as of January 1, 2002 or
December 31, 2002 and therefore, it was not necessary to write down any of our
goodwill or indefinite-lived intangible assets. We will continue to perform the
potential impairment tests on an annual basis during the fourth quarter of each
fiscal year. If, as a result of performing future impairment tests, we are
required to write down any of our goodwill or indefinite-lived intangible
assets, operating results would be negatively impacted and 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.
If we fail to comply with covenants and conditions in 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
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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.
RISKS RELATED TO OUR INDUSTRY
Extensive and evolving environmental laws and regulations may restrict our
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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.
18
We may be unable to obtain and maintain licenses or permits and zoning,
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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 force us to
dispose of collection waste at more distant landfills or at landfills owned by
other competitors, thus increasing our disposal costs and reducing our operating
margins.
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 EPA in October 1991 under Subtitle D of the RCRA. If
we fail to comply with these regulations, we could be required to undertake
investigatory or remedial activities, curtail operations or close landfills
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,
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 we or our predecessors arranged. We
have limited insurance coverage to compensate us for damages associated with
environmental conditions. If we were to incur liability for environmental
damage, environmental cleanups, corrective action or damage not covered by
insurance or in excess of the amount of our coverage, our financial condition
could be materially and adversely affected.
Fluctuations in prices for recycled commodities that we sell may cause our
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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.
Future changes in laws regulating the flow of solid waste in interstate commerce
- --------------------------------------------------------------------------------
could adversely affect our operating results.
- ---------------------------------------------
Certain courts have held that states may not regulate the flow of solid
waste in interstate commerce if the effect would be to discriminate between
interstate and intrastate commerce. If legislation should be enacted that would
overturn or modify these decisions, and if one or more of the states in which we
dispose of interstate waste should take action that would prohibit or increase
the costs of our continued disposal of interstate waste, our operating results
could be adversely affected.
19
ITEM 2. PROPERTIES
As of December 31, 2002, we owned 90 collection operations, 23 transfer
stations, 19 Subtitle D landfills, one construction and demolition landfill and
18 recycling facilities and operated, but did not own, an additional six
transfer stations and ten Subtitle D landfills. We also own one Subtitle D
landfill site which is permitted for operation, but not constructed as of
December 31, 2002. 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 is located in Folsom, California, where we lease
approximately 31,000 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 us to cease accepting more than 200 tons per day of out-of-state waste
at our Red Carpet Landfill in Oklahoma due to our alleged failure to obtain the
Department's prior approval of a disposal plan for that waste. At that time, the
Department assessed Waste Connections a fine of $0.2 million for past violations
related to accepting more than 200 tons per day of out-of-state waste prior to
obtaining the Department's approval of a disposal plan. While seeking the
Department's approval of a disposal plan, we continued to accept more than 200
tons a day of out-of-state waste because we believed, based on the advice of our
legal counsel, that the Department did not have the legal right to require us to
obtain its approval of a disposal plan prior to accepting more than 200 tons per
day of out-of-state waste. In June 2002, the Department issued an amended order
approving our disposal plan subject to conditions and increasing the fine
assessed against us to $2.2 million because we continued to accept more than 200
tons per day of out of state waste prior to obtaining its approval of our plan.
We objected to some of the conditions imposed in the order and initiated
litigation against the Department challenging this order. Based on our
consideration of the facts surrounding the order and the advice of our legal
counsel, in the event the matter is not settled and litigation proceeds, we
believe that we will prevail. Therefore, we believe that any payment resulting
from the order will not materially affect 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 2002.
EXECUTIVE OFFICERS
The following table sets forth certain information concerning our executive
officers as of March 15, 2003:
NAME AGE POSITIONS
- ---- --- ---------
Ronald J. Mittlestaedt (1) 39 President, Chief Executive Officer and Chairman
Steven F. Bouck 46 Executive Vice President and Chief Financial Officer
Darrell W. Chambliss 38 Executive Vice President - Operations
Robert D. Evans 56 Executive Vice President, General Counsel and Secretary
Kenneth O. Rose 54 Senior Vice President - Administration
Michael R. Foos 37 Vice President - Finance and Chief Accounting Officer
David M. Hall 45 Vice President - Business Development
Eric J. Moser 36 Vice President - Corporate Controller
Eric Hansen 38 Vice President - Information Technology
Jerri L. Hunt 51 Vice President - Human Resources and Risk Management
James M. Little 41 Vice President - Engineering
(1) Member of the Executive Committee of the Board of Directors.
20
Ronald J. Mittelstaedt has been President, Chief Executive Officer and a
director since Waste Connections was formed, and was elected Chairman in January
1998. 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. ("BFI")
from August 1988 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. degree 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. 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 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 BFI, 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. degree in Business Administration from
the University of Arkansas.
Robert D. Evans has been Executive Vice President, General Counsel and
Secretary of Waste Connections since June 2002. From 1978 until he joined the
company, Mr. Evans was a partner in the San Francisco law firm of Shartsis,
Friese & Ginsburg LLP, where he was also a member of the Management Committee.
Mr. Evans' practice included representing companies in mergers and acquisitions
and corporate finance transactions. Prior to joining Waste Connections, Mr.
Evans had been the company's primary outside counsel since its formation. Mr.
Evans holds a B.A. degree in Economics and a J.D. degree from the University of
California at Berkeley.
Kenneth O. Rose has been Senior Vice President - Administration since May
2002. He also served as a consultant to Waste Connections in March and April
2002. From May 2000 to March 2002, he provided consulting services to
WorldOil.Com, Inc. and Gulf Publishing Company. As Vice President -
Administration for Coach USA, Inc., from October 1996 to April 2000, Mr. Rose
was responsible for all corporate administrative activities in the United
States, Canada and Mexico. Mr. Rose has over seven years experience in the solid
waste industry obtained primarily with USA Waste Services, Inc. (including
Sanifill, Inc., which was a