10-K 1 h65751e10vk.htm FORM 10-K e10vk
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
     
(Mark One)
   
 
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2008
    or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
    For the transition period from          to
 
Commission file number 1-12154
Waste Management, Inc.
(Exact name of registrant as specified in its charter)
 
     
Delaware   73-1309529
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
1001 Fannin Street, Suite 4000
Houston, Texas
(Address of principal executive offices)
  77002
(Zip code)
 
Registrant’s telephone number, including area code: (713) 512-6200
 
Securities registered pursuant to Section 12(b) of the Act:
 
     
Title of Each Class
 
Name of Exchange on Which Registered
 
Common Stock, $.01 par value
  New York Stock Exchange
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
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 þ     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K (§ 229.405 of this chapter) 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.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer þ
  Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ
 
The aggregate market value of the voting stock held by non-affiliates of the registrant at June 30, 2008 was approximately $18.5 billion. The aggregate market value was computed by using the closing price of the common stock as of that date on the New York Stock Exchange (“NYSE”). (For purposes of calculating this amount only, all directors and executive officers of the registrant have been treated as affiliates.)
 
The number of shares of Common Stock, $0.01 par value, of the registrant outstanding at February 12, 2009 was 491,461,631 (excluding treasury shares of 138,820,830).
 
DOCUMENTS INCORPORATED BY REFERENCE
 
     
Document
 
Incorporated as to
 
Proxy Statement for the
2009 Annual Meeting of Stockholders
  Part III
 


 

 
TABLE OF CONTENTS
 
                 
        Page
 
      Business     1  
      Risk Factors     11  
      Unresolved Staff Comments     16  
      Properties     16  
      Legal Proceedings     17  
      Submission of Matters to a Vote of Security Holders     17  
 
PART II
      Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     18  
      Selected Financial Data     20  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     21  
      Quantitative and Qualitative Disclosures About Market Risk     53  
      Financial Statements and Supplementary Data     54  
      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     118  
      Controls and Procedures     118  
      Other Information     118  
 
PART III
      Directors, Executive Officers and Corporate Governance     118  
      Executive Compensation     118  
      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     119  
      Certain Relationships and Related Transactions, and Director Independence     119  
      Principal Accounting Fees and Services     119  
 
PART IV
      Exhibits, Financial Statement Schedules     119  
 Computation of Ratio of Earnings to Fixed Charges
 Subsidiaries of the Registrant
 Consent of Independent Registered Public Accounting Firm
 Certification of CEO Pursuant to Rule 15d-14(a)
 Certification of CFO Pursuant to Rule 15d-14(a)
 Certification of CEO Pursuant to Section 1350
 Certification of CFO Pursuant to Section 1350


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PART I
 
Item 1.   Business.
 
General
 
The financial statements presented in this report represent the consolidation of Waste Management, Inc., a Delaware corporation, our wholly-owned and majority-owned subsidiaries and certain variable interest entities for which we have determined that we are the primary beneficiary. Waste Management, Inc. is a holding company and all operations are conducted by its subsidiaries. When the terms “the Company,” “we,” “us” or “our” are used in this document, those terms refer to Waste Management, Inc., its consolidated subsidiaries and consolidated variable interest entities. When we use the term “WMI,” we are referring only to the parent holding company.
 
WMI was incorporated in Oklahoma in 1987 under the name “USA Waste Services, Inc.” and was reincorporated as a Delaware company in 1995. In a 1998 merger, the Illinois-based waste services company formerly known as Waste Management, Inc. became a wholly-owned subsidiary of WMI and changed its name to Waste Management Holdings, Inc. (“WM Holdings”). At the same time, our parent holding company changed its name from USA Waste Services to Waste Management, Inc. Like WMI, WM Holdings is a holding company and all operations are conducted by subsidiaries. For detail on the financial position, results of operations and cash flows of WMI, WM Holdings and their subsidiaries, see Note 22 to the Consolidated Financial Statements.
 
Our principal executive offices are located at 1001 Fannin Street, Suite 4000, Houston, Texas 77002. Our telephone number at that address is (713) 512-6200. Our website address is http://www.wm.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K are all available, free of charge, on our website as soon as practicable after we file the reports with the SEC. Our stock is traded on the New York Stock Exchange under the symbol “WMI.”
 
We are the leading provider of integrated waste services in North America. Using our vast network of assets and employees, we provide a comprehensive range of waste management services. Through our subsidiaries we provide collection, transfer, recycling, disposal and waste-to-energy services. In providing these services, we actively pursue projects and initiatives that we believe make a positive difference for our environment, including recovering and processing the methane gas produced naturally by landfills into a renewable energy source. Our customers include commercial, industrial, municipal and residential customers, other waste management companies, electric utilities and governmental entities. During 2008, no single customer accounted for more than 1% of our operating revenue. We employed approximately 45,900 people as of December 31, 2008.
 
Strategy
 
Our Company’s goals are targeted at serving five key stakeholders: our customers, our employees, the environment, the communities in which we work, and our shareholders. Our goals are:
 
  •  To be the waste solutions provider of choice for customers;
 
  •  To be a best place to work for employees;
 
  •  To be a leader in promoting environmental stewardship;
 
  •  To be a trusted and valued community partner; and
 
  •  To maximize shareholder value.
 
Our primary strategy is to improve our organization and maximize returns to shareholders by focusing on operational excellence, pricing excellence and the profitable growth of our business. Although current economic conditions are presenting challenges to us and others, we believe that continuously working to create more efficient operations and to attract and retain customers while raising prices are the steps that will allow us to weather the current environment. We continue our efforts toward revenue growth through pricing and differentiating our services to retain our customers. Additionally, we are working to lower operating and selling, general and administrative expenses through process standardization and productivity improvements. We do not have control over the general economic conditions that are affecting consumers and businesses, including ours. However, we do


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have the ability to react to a changing environment and proactively take steps to reduce the impact that current conditions may have on our operations.
 
In February 2009, we announced that we were taking steps to further streamline our organization by consolidating many of our Market Areas. Our principal operations are managed through six Groups, as described below. Each of our geographic Groups had been further divided into several Market Areas. As a result of our restructuring, the 45 separate Market Areas that we previously operated have been consolidated into 25 Areas. Management at this level of the organization is responsible for selling and marketing our services and coordinating all of our operations within the market. In addition, they implement market-based strategies and plans, and provide staff support in administration, financial control and analysis, human resources, customer service, pricing and business strategy, safety, fleet services, and community and municipal relations. We have found that our larger Market Areas generally were able to achieve efficiencies through economies of scale that were not present in the smaller Market Areas. We have also realigned our Corporate organization with this new structure in order to provide these support functions more efficiently. We currently estimate that this restructuring will eliminate over 1,000 employee positions throughout the Company and result in a restructuring charge of between $40 million and $50 million. We expect to recognize most of this charge during the first quarter of 2009. This realignment is the natural next step in our efforts to lower costs and further standardize processes and improve productivity, and we currently estimate that it will provide annualized cost savings in excess of $100 million.
 
We intend to continue building on our strategy to meet the needs of a changing environment. As the largest waste services provider in North America, we believe we are well positioned to meet the needs of our customers and communities as they, too, Think Green®. We believe that helping our customers achieve their environmental goals will enable us to achieve profitable growth. We regularly help customers reduce, reuse and recycle the waste they produce. We also focus on ways to convert waste to a usable energy source. By focusing on providing new environmentally responsible and sustainable solutions to our customers’ waste problems, we believe we can create a competitive advantage across all of our lines of business.
 
Our focus on operational excellence has provided us a strong foundation on which to build. We intend to take advantage of strategic opportunities as they arise and continue to seek profitable growth through targeted sales efforts and acquisitions. We also continue to seek to grow our current business in different areas that fit into our current operations. We believe that, even in these challenging economic times, we can make investments that will provide long-term value to our stockholders.
 
Operations
 
General
 
We currently manage and evaluate our principal operations through six operating Groups, of which four are organized by geographic area and two are organized by function. The geographic Groups include our Eastern, Midwest, Southern and Western Groups, and the two functional Groups are our Wheelabrator Group, which provides waste-to-energy services, and our WM Recycle America (“WMRA”) Group, which provides recycling services not managed by our geographic Groups. We also provide additional waste management services that are not managed through our six Groups. These services include in-plant services, where we work at our clients’ facilities to provide full-service waste management solutions and provide opportunities for process improvements and associated cost reductions in their waste management. Other services not managed within our Groups include methane gas recovery, sub-contracted and administrative services performed by our National Accounts and Upstream organizations, portable self-storage, fluorescent lamp recycling and healthcare solutions services, including medical waste disposal. These services are presented in this report as “Other.”
 
The table below shows the total revenues (in millions) contributed annually by each of our reportable segments in the three-year period ended December 31, 2008. More information about our results of operations by reportable


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segment is included in Note 20 to the Consolidated Financial Statements and in Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in this report.
 
                         
    Years Ended December 31,  
    2008     2007     2006  
 
Eastern
  $ 3,182     $ 3,281     $ 3,614  
Midwest
    3,117       3,141       3,141  
Southern
    3,667       3,681       3,759  
Western
    3,300       3,350       3,373  
Wheelabrator
    912       868       902  
WMRA
    1,014       953       740  
Other
    330       307       283  
Intercompany
    (2,134 )     (2,271 )     (2,449 )
                         
Total
  $ 13,388     $ 13,310     $ 13,363  
                         
 
The services we provide include collection, landfill (solid and hazardous waste landfills), transfer, Wheelabrator (waste-to-energy facilities and independent power production plants), recycling and other services, as described below. The following table shows revenues (in millions) contributed by these services for each of the three years indicated:
 
                         
    Years Ended December 31,  
    2008     2007     2006  
 
Collection
  $ 8,679     $ 8,714     $ 8,837  
Landfill
    2,955       3,047       3,197  
Transfer
    1,589       1,654       1,802  
Wheelabrator
    912       868       902  
Recycling
    1,180       1,135       905  
Other
    207       163       169  
Intercompany
    (2,134 )     (2,271 )     (2,449 )
                         
Total
  $ 13,388     $ 13,310     $ 13,363  
                         
 
Collection.  Our commitment to customers begins with a vast waste collection network. Collection involves picking up and transporting waste from where it was generated to a transfer station or disposal site. We generally provide collection services under one of two types of arrangements:
 
  •  For commercial and industrial collection services, typically we have a three-year service agreement. The fees under the agreements are influenced by factors such as collection frequency, type of collection equipment we furnish, type and volume or weight of the waste collected, distance to the disposal facility, labor costs, cost of disposal and general market factors. As part of the service, we provide steel containers to most customers to store their solid waste between pick-up dates. Containers vary in size and type according to the needs of our customers and the restrictions of their communities. Many are designed to be lifted mechanically and either emptied into a truck’s compaction hopper or directly into a disposal site. By using these containers, we can service most of our commercial and industrial customers with trucks operated by only one employee.
 
  •  For most residential collection services, we have a contract with, or a franchise granted by, a municipality, homeowners’ association or some other regional authority that gives us the exclusive right to service all or a portion of the homes in an area. These contracts or franchises are typically for periods of one to five years. We also provide services under individual monthly subscriptions directly to households. The fees for residential collection are either paid by the municipality or authority from their tax revenues or service charges, or are paid directly by the residents receiving the service.


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Landfill.  Landfills are the main depositories for solid waste in North America. At December 31, 2008, we owned or operated 267 solid waste landfills, which represents the largest network of landfills in North America. Solid waste landfills are built and operated on land with geological and hydrological properties that limit the possibility of water pollution, and are operated under prescribed procedures. A landfill must be maintained to meet federal, state or provincial, and local regulations. The operation and closure of a solid waste landfill includes excavation, construction of liners, continuous spreading and compacting of waste, covering of waste with earth or other inert material and constructing final capping of the landfill. These operations are carefully planned to maintain sanitary conditions, to maximize the use of the airspace and to prepare the site so it can ultimately be used for other purposes.
 
All solid waste management companies must have access to a disposal facility, such as a solid waste landfill. We believe it is usually preferable for our collection operations to use disposal facilities that we own or operate, a practice we refer to as internalization, rather than using third-party disposal facilities. Internalization generally allows us to realize higher consolidated margins and stronger operating cash flows. The fees charged at disposal facilities, which are referred to as tipping fees, are based on several factors, including competition and the type and weight or volume of solid waste deposited.
 
We also operate six secure hazardous waste landfills in the United States. Under federal environmental laws, the federal government (or states with delegated authority) must issue permits for all hazardous waste landfills. All of our hazardous waste landfills have obtained the required permits, although some can accept only certain types of hazardous waste. These landfills must also comply with specialized operating standards. Only hazardous waste in a stable, solid form, which meets regulatory requirements, can be deposited in our secure disposal cells. In some cases, hazardous waste can be treated before disposal. Generally, these treatments involve the separation or removal of solid materials from liquids and chemical treatments that transform waste into inert materials that are no longer hazardous. Our hazardous waste landfills are sited, constructed and operated in a manner designed to provide long-term containment of waste. We also operate a hazardous waste facility at which we isolate treated hazardous waste in liquid form by injection into deep wells that have been drilled in rock formations far below the base of fresh water to a point that is separated by other substantial geological confining layers.
 
Transfer.  At December 31, 2008, we owned or operated 355 transfer stations in North America. We deposit waste at these stations, as do other waste haulers. The solid waste is then consolidated and compacted to reduce the volume and increase the density of the waste and transported by transfer trucks or by rail to disposal sites.
 
Access to transfer stations is often critical to third-party haulers who do not operate their own disposal facilities in close proximity to their collection operations. Fees charged to third parties at transfer stations are usually based on the type and volume or weight of the waste transferred, the distance to the disposal site and general market factors.
 
The utilization of our transfer stations by our own collection operations improves internalization by allowing us to retain fees that we would otherwise pay to third parties for the disposal of the waste we collect. It allows us to manage costs associated with waste disposal because (i) transfer trucks, railcars or rail containers have larger capacities than collection trucks, allowing us to deliver more waste to the disposal facility in each trip; (ii) waste is accumulated and compacted at transfer stations that are strategically located to increase the efficiency of our collection operations; and (iii) we can retain the volume by managing the transfer of the waste to one of our own disposal sites.
 
The transfer stations that we operate but do not own are generally operated through lease agreements under which we lease property from third parties. There are some instances where transfer stations are operated under contract, generally for municipalities. In most cases we own the permits and will be responsible for the regulatory requirements relating to the operation, closure and post closure of the transfer station.
 
Wheelabrator.  As of December 31, 2008, we owned or operated 16 waste-to-energy facilities and five independent power production plants, or IPPs, which are located in the Northeast and in Florida, California and Washington.
 
At our waste-to-energy facilities, solid waste is burned at high temperatures in specially designed boilers to produce heat that is converted into high-pressure steam. As of December 31, 2008, our waste-to-energy facilities


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were capable of processing up to 21,100 tons of solid waste each day. In 2008, our waste-to-energy facilities received and processed 7.0 million tons of solid waste, or approximately 19,200 tons per day.
 
Our IPPs convert various waste and conventional fuels into steam. The plants burn wood waste, anthracite coal waste (culm), tires, landfill gas and natural gas. These facilities are integral to the solid waste industry, disposing of urban wood, waste tires, railroad ties and utility poles. Our anthracite culm facility in Pennsylvania processes the waste materials left over from coal mining operations from over half a century ago. Ash remaining after burning the culm is used to reclaim the land damaged by decades of coal mining.
 
We sell the steam produced at our waste-to-energy facilities and IPPs to industrial and commercial users. Steam that is not sold is used to generate electricity for sale to electric utilities. Fees charged for steam and electricity at our waste-to-energy facilities and IPPs are generally subject to the terms and conditions of long-term contracts that include interim adjustments to the prices charged for changes in market conditions such as inflation, natural gas prices and other general market factors.
 
Recycling.  Our WMRA Group focuses on improving the sustainability and future growth of recycling programs within communities and industries. In addition to our WMRA Group, our four geographic operating Groups provide certain recycling services that are embedded within the Groups’ other operations and, therefore, are not included within the WMRA Group’s financial results.
 
Recycling involves the separation of reusable materials from the waste stream for processing and resale or other disposition. Our recycling operations include the following:
 
Collection and materials processing — Through our collection operations, we collect recyclable materials from residential, commercial and industrial customers and direct these materials to one of our material recovery facilities (“MRFs”) for processing. We operate 98 MRFs where paper, metals and plastics are recovered for resale. We also operate six secondary processing facilities where materials received from MRFs can be further processed into raw products used in the manufacturing of consumer goods. Specifically, material processing services include data destruction, automated color sorting, and construction and demolition processing.
 
Plastics and rubber materials recycling — Using state-of-the-art sorting and processing technology, we process, inventory and sell plastic and rubber commodities making the recycling of such items more cost effective and convenient.
 
Electronics recycling services — We recycle discarded computers, communications equipment, and other electronic equipment. Services include the collection, sorting and disassembling of electronics in an effort to reuse or recycle all collected materials.
 
Commodities recycling — We market and resell recyclable commodities to customers world-wide. We manage the marketing of recyclable commodities for our own facilities and for third parties by maintaining comprehensive service centers that continuously analyze market prices, logistics, market demands and product quality.
 
Fees for recycling services are influenced by frequency of collection, type and volume or weight of the recyclable material, degree of processing required, the market value of the recovered material and other market factors.
 
Our WMRA Group purchases recyclable materials processed in our MRFs from various sources, including third parties and other operating subsidiaries of WMI. The cost per ton of material purchased is based on market prices and the cost to transport the finished goods to our customers. The price our WMRA Group pays for recyclable materials is often referred to as a “rebate.” Rebates are generally based upon the price we receive for sales of finished goods and market conditions, but in some cases are based on fixed contractual rates or defined minimum per-ton rates. As a result, changes in commodity prices can significantly affect our revenues, the rebates we pay to our suppliers and our operating income and margins.
 
Other.  We provide in-plant services, in which employees of our Upstream organization work full-time inside our customers’ facilities to provide full-service waste management solutions. Our vertically integrated waste


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management operations allow us to provide customers with full management of their waste, including identifying recycling opportunities, minimizing waste, and determining the most efficient means available for waste collection and disposal.
 
We also develop, operate and promote projects for the beneficial use of landfill gas through our Waste Management Renewable Energy Program. Landfill gas is produced naturally as waste decomposes in a landfill. The methane component of the landfill gas is a readily available, renewable energy source that can be gathered and used beneficially as an alternative to fossil fuel. The United States Environmental Protection Agency endorses landfill gas as a renewable energy resource, in the same category as wind, solar and geothermal resources. At December 31, 2008, landfill gas beneficial use projects were producing commercial quantities of methane gas at 111 of our solid waste landfills. At 80 of these landfills, the processed gas is delivered to electricity generators. The electricity is then sold to public utilities, municipal utilities or power cooperatives. At 23 landfills, the gas is delivered by pipeline to industrial customers as a direct substitute for fossil fuels in industrial processes. At eight landfills, the landfill gas is processed to pipeline-quality natural gas and then sold to natural gas suppliers.
 
In addition, we rent and service portable restroom facilities to municipalities and commercial customers under the name Port-O-Let®, and provide street and parking lot sweeping services. We also have begun providing portable self-storage, fluorescent lamp recycling and healthcare solutions services. From time to time, we are also contracted to construct waste facilities on behalf of third parties.
 
Competition
 
The solid waste industry is very competitive. Competition comes from a number of publicly held solid waste companies, private solid waste companies, large commercial and industrial companies handling their own waste collection or disposal operations and public and private waste-to-energy companies. We also have competition from municipalities and regional government authorities with respect to residential and commercial solid waste collection and solid waste landfills. The municipalities and regional governmental authorities are often able to offer lower direct charges to customers for the same service by subsidizing their costs through the use of tax revenues and tax-exempt financing. Generally, however, municipalities do not provide significant commercial and industrial collection or waste disposal.
 
We compete for disposal business on the basis of tipping fees, geographic location and quality of operations. Our ability to obtain disposal business may be limited in areas where other companies own or operate their own landfills, to which they will send their waste. We compete for collection accounts primarily on the basis of price and quality of services. Operating costs, disposal costs and collection fees vary widely throughout the geographic areas in which we operate. The prices that we charge are determined locally, and typically vary by the volume and weight, type of waste collected, treatment requirements, risk of handling or disposal, frequency of collections, distance to final disposal sites, the availability of airspace within the geographic region, labor costs and amount and type of equipment furnished to the customer. We face intense competition based on pricing and quality of service. Our customer service contracts limit our ability to implement certain price increases and pass through some of our increased costs. From time to time, competitors may reduce the price of their services and accept lower margins in an effort to expand or maintain market share or to successfully obtain competitively bid contracts.
 
Employees
 
At December 31, 2008, we had approximately 45,900 full-time employees, of which approximately 8,000 were employed in administrative and sales positions and the balance in operations. Approximately 11,000 of our employees are covered by collective bargaining agreements.
 
Financial Assurance and Insurance Obligations
 
Financial Assurance
 
Municipal and governmental waste service contracts generally require contracting parties to demonstrate financial responsibility for their obligations under the contract. Financial assurance is also a requirement for obtaining or retaining disposal site or transfer station operating permits. Various forms of financial assurance are


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also required by regulatory agencies for estimated closure, post-closure and remedial obligations at many of our landfills. In addition, certain of our tax-exempt borrowings require us to hold funds in trust for the repayment of our interest and principal obligations.
 
We establish financial assurance using surety bonds, letters of credit, insurance policies, trust and escrow agreements and financial guarantees. The type of assurance used is based on several factors; most importantly the jurisdiction, contractual requirements, market factors and availability of credit capacity. The following table summarizes the various forms and dollar amounts (in millions) of financial assurance that we had outstanding as of December 31, 2008:
 
                 
Surety bonds:
               
Issued by consolidated subsidiary(a)
  $ 273          
Issued by affiliated entity(b)
    1,094          
Issued by third-party surety companies
    1,589          
                 
Total surety bonds
          $ 2,956  
Letters of credit:
               
Revolving credit facility(c)
    1,803          
Letter of credit and term loan agreements(d)
    272          
Other lines of credit
    91          
                 
Total letters of credit
            2,166  
Insurance policies:
               
Issued by consolidated subsidiary(a)
    979          
Issued by affiliated entity(b)
    16          
                 
Total insurance policies
            995  
Funded trust and escrow accounts(e)
            258  
Financial guarantees(f)
            251  
                 
Total financial assurance
          $ 6,626  
                 
 
 
(a) We use surety bonds and insurance policies issued by a wholly-owned insurance subsidiary, National Guaranty Insurance Company of Vermont, the sole business of which is to issue financial assurance to WMI and our subsidiaries. National Guaranty Insurance Company is authorized to write up to approximately $1.4 billion in surety bonds or insurance policies for our closure and post-closure requirements, waste collection contracts and other business related obligations.
 
(b) We hold a non-controlling financial interest in an entity that we use to obtain financial assurance. Our contractual agreement with this entity does not specifically limit the amounts of surety bonds or insurance that we may obtain, making our financial assurance under this agreement limited only by the guidelines and restrictions of surety and insurance regulations.
 
(c) WMI has a $2.4 billion revolving credit facility that matures in August 2011. At December 31, 2008, $1,803 million of letters of credit and $300 million of borrowings were outstanding under the facility, leaving an unused and available credit capacity of $297 million. The increase in our utilization of this facility during 2008 is due to the expiration of our $350 million letter of credit facility in December 2008. The letters of credit that had previously been supported by that facility have been issued under the revolving credit facility.
 
(d) We have a $175 million letter of credit and term loan agreement that expires in June 2010 and a $105 million letter of credit and term loan agreement that expires in June 2013. At December 31, 2008, $272 million of letters of credit were outstanding under these agreements, leaving an unused and available credit capacity of $8 million.
 
(e) Our funded trust and escrow accounts have been established to support landfill closure, post-closure and environmental remediation obligations, the repayment of debt obligations and our performance under various


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operating contracts. Balances maintained in these trust funds and escrow accounts will fluctuate based on (i) changes in statutory requirements; (ii) future deposits made to comply with contractual arrangements; (iii) the ongoing use of funds for qualifying activities; (iv) acquisitions or divestitures of landfills; and (v) changes in the fair value of the financial instruments held in the trust fund or escrow accounts.
 
(f) WMI provides financial guarantees on behalf of its subsidiaries to municipalities, customers and regulatory authorities. They are provided primarily to support our performance of landfill closure and post-closure activities.
 
The assets held in our funded trust and escrow accounts may be drawn and used to meet the obligations for which the trusts and escrows were established. Other than these permitted draws on funds, virtually no claims have been made against our financial assurance instruments in the past, and considering our current financial position, management does not expect there to be claims against these instruments that will have a material adverse effect on our consolidated financial statements. In an ongoing effort to mitigate the risks of future cost increases and reductions in available capacity, we are continually evaluating various options to access cost-effective sources of financial assurance.
 
Insurance
 
We carry a broad range of insurance coverages, including general liability, automobile liability, real and personal property, workers’ compensation, directors’ and officers’ liability, pollution legal liability and other coverages we believe are customary to the industry. Our exposure to loss for insurance claims is generally limited to the per incident deductible under the related insurance policy. As of December 31, 2008, our per-incident deductible for our general liability program was $2.5 million and our per-incident deductible for our workers’ compensation insurance program was $5 million. As of December 31, 2008, our auto liability insurance program included a per-incident base deductible of $1 million, subject to additional aggregate deductibles in the $1 million to $5 million layer and the $5 million to $10 million layer of $2.4 million and $2.5 million, respectively. Effective January 1, 2009, we increased the per-incident base deductible of our auto liability insurance program to $5 million, subject to an additional aggregate deductible in the $5 million to $10 million range of $4.8 million. We do not expect the impact of any known casualty, property, environmental or other contingency to have a material impact on our financial condition, results of operations or cash flows. Our estimated insurance liabilities as of December 31, 2008 are summarized in Note 10 to the Consolidated Financial Statements.
 
Regulation
 
Our business is subject to extensive and evolving federal, state or provincial and local environmental, health, safety and transportation laws and regulations. These laws and regulations are administered by the U.S. EPA and various other federal, state and local environmental, zoning, transportation, land use, health and safety agencies in the United States and various agencies in Canada. Many of these agencies regularly examine our operations to monitor compliance with these laws and regulations and have the power to enforce compliance, obtain injunctions or impose civil or criminal penalties in case of violations.
 
Because the major component of our business is the collection and disposal of solid waste in an environmentally sound manner, a significant amount of our capital expenditures is related, either directly or indirectly, to environmental protection measures, including compliance with federal, state or provincial and local provisions that regulate the placement of materials into the environment. There are costs associated with siting, design, operations, monitoring, site maintenance, corrective actions, financial assurance, and facility closure and post-closure obligations. In connection with our acquisition, development or expansion of a disposal facility or transfer station, we must often spend considerable time, effort and money to obtain or maintain required permits and approvals. There cannot be any assurances that we will be able to obtain or maintain required governmental approvals. Once obtained, operating permits are subject to renewal, modification, suspension or revocation by the issuing agency. Compliance with these and any future regulatory requirements could require us to make significant capital and operating expenditures. However, most of these expenditures are made in the normal course of business and do not place us at any competitive disadvantage.


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The primary United States federal statutes affecting our business are summarized below:
 
  •  The Resource Conservation and Recovery Act of 1976, as amended, regulates handling, transporting and disposing of hazardous and non-hazardous waste and delegates authority to states to develop programs to ensure the safe disposal of solid waste. In 1991, the EPA issued its final regulations under Subtitle D of RCRA, which set forth minimum federal performance and design criteria for solid waste landfills. These regulations are typically implemented by the states, although states can impose requirements that are more stringent than the Subtitle D standards. We incur costs in complying with these standards in the ordinary course of our operations.
 
  •  The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, which is also known as Superfund, provides for federal authority to respond directly to releases or threatened releases of hazardous substances into the environment that have created actual or potential environmental hazards. CERCLA’s primary means for addressing such releases is to impose strict liability for cleanup of disposal sites upon current and former site owners and operators, generators of the hazardous substances at the site and transporters who selected the disposal site and transported substances thereto. Liability under CERCLA is not dependent on the intentional disposal of hazardous substances; it can be based upon the release or threatened release, even as a result of lawful, unintentional and non-negligent action, of hazardous substances as the term is defined by CERCLA and other applicable statutes and regulations. Liability may include contribution for cleanup costs incurred by a defendant in a CERCLA civil action or by an entity that has previously resolved its liability to federal or state regulators in an administrative or judicially approved settlement. Liability could also include liability to a PRP that voluntarily expends site clean-up costs. Further, liability may include damage to publicly owned natural resources. We are subject to potential liability under CERCLA as an owner or operator of facilities at which hazardous substances have been disposed or as a generator or transporter of hazardous substances disposed of at other locations.
 
  •  The Federal Water Pollution Control Act of 1972, known as the Clean Water Act, regulates the discharge of pollutants into streams, rivers, groundwater, or other surface waters from a variety of sources, including solid and hazardous waste disposal sites. If run-off from our operations may be discharged into surface waters, the Clean Water Act requires us to apply for and obtain discharge permits, conduct sampling and monitoring, and, under certain circumstances, reduce the quantity of pollutants in those discharges. In 1990, the EPA issued additional standards for management of storm water runoff that require landfills and other waste-handling facilities to obtain storm water discharge permits. In addition, if a landfill or other facility discharges wastewater through a sewage system to a publicly owned treatment works, the facility must comply with discharge limits imposed by the treatment works. Also, before the development or expansion of a landfill can alter or affect “wetlands,” a permit may have to be obtained providing for mitigation or replacement wetlands. The Clean Water Act provides for civil, criminal and administrative penalties for violations of its provisions.
 
  •  The Clean Air Act of 1970, as amended, provides for increased federal, state and local regulation of the emission of air pollutants. Certain of our operations are subject to the requirements of the Clean Air Act, including large municipal solid waste landfills and large municipal waste-to-energy facilities. Standards have also been imposed on manufacturers of transportation vehicles (including waste collection vehicles). In 1996 the EPA issued new source performance standards and emission guidelines controlling landfill gases from new and existing large landfills. The regulations impose limits on air emissions from large municipal solid waste landfills, subject most of our large municipal solid waste landfills to certain operating permitting requirements under Title V of the Clean Air Act, and, in many instances, require installation of landfill gas collection and control systems to control emissions or to treat and utilize landfill gas on or off-site. In general, controlling emissions involves drilling collection wells into a landfill and routing the gas to a suitable energy recovery system or combustion device. We are currently capturing and utilizing the renewable energy value of landfill gas at 111 of our solid waste landfills. In January 2003, the EPA issued additional regulations that required affected landfills to prepare, by January 2004, startup, shutdown and malfunction plans to ensure proper operation of gas collection, control and treatment systems.


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The EPA has issued new source performance standards and emission guidelines for large and small municipal waste-to-energy facilities, which include stringent emission limits for various pollutants based on Maximum Achievable Control Technology standards. These sources are also subject to operating permit requirements under Title V of the Clean Air Act. The Clean Air Act requires the EPA to review and revise the MACT standards applicable to municipal waste-to-energy facilities every five years.
 
  •  The Occupational Safety and Health Act of 1970, as amended, establishes certain employer responsibilities, including maintenance of a workplace free of recognized hazards likely to cause death or serious injury, compliance with standards promulgated by the Occupational Safety and Health Administration, and various reporting and record keeping obligations as well as disclosure and procedural requirements. Various standards for notices of hazards, safety in excavation and demolition work and the handling of asbestos, may apply to our operations. The Department of Transportation and OSHA, along with other federal agencies, have jurisdiction over certain aspects of hazardous materials and hazardous waste, including safety, movement and disposal. Various state and local agencies with jurisdiction over disposal of hazardous waste may seek to regulate movement of hazardous materials in areas not otherwise preempted by federal law.
 
There are also various state or provincial and local regulations that affect our operations. Sometimes states’ regulations are stricter than federal laws and regulations when not otherwise preempted by federal law. Additionally, our collection and landfill operations could be affected by legislative and regulatory measures requiring or encouraging waste reduction at the source and waste recycling.
 
Various states have enacted, or are considering enacting, laws that restrict the disposal within the state of solid waste generated outside the state. While laws that overtly discriminate against out-of-state waste have been found to be unconstitutional, some laws that are less overtly discriminatory have been upheld in court. Additionally, certain state and local governments have enacted “flow control” regulations, which attempt to require that all waste generated within the state or local jurisdiction be deposited at specific sites. In 1994, the United States Supreme Court ruled that a flow control ordinance that gave preference to a local facility that was privately owned was unconstitutional, but in 2007 the Court ruled that an ordinance directing waste to a facility owned by the local government was constitutional. In addition, from time to time, the United States Congress has considered legislation authorizing states to adopt regulations, restrictions, or taxes on the importation of out-of-state or out-of-jurisdiction waste. The United States Congress’ adoption of legislation allowing restrictions on interstate transportation of out-of-state or out-of-jurisdiction waste or certain types of flow control or the adoption of legislation affecting interstate transportation of waste at the state level could adversely affect our operations. Courts’ interpretation of flow control legislation or the Supreme Court decisions also could adversely affect our solid and hazardous waste management services.
 
Many states, provinces and local jurisdictions have enacted “fitness” laws that allow the agencies that have jurisdiction over waste services contracts or permits to deny or revoke these contracts or permits based on the applicant or permit holder’s compliance history. Some states, provinces and local jurisdictions go further and consider the compliance history of the parent, subsidiaries or affiliated companies, in addition to the applicant or permit holder. These laws authorize the agencies to make determinations of an applicant or permit holder’s fitness to be awarded a contract to operate, and to deny or revoke a contract or permit because of unfitness, unless there is a showing that the applicant or permit holder has been rehabilitated through the adoption of various operating policies and procedures put in place to assure future compliance with applicable laws and regulations.
 
See Note 10 to the Consolidated Financial Statements for disclosures relating to our current assessments of the impact of regulations on our current and future operations.


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Item 1A.   Risk Factors.
 
In an effort to keep our shareholders and the public informed about our business, we may make “forward-looking statements.” Forward-looking statements usually relate to future events and anticipated revenues, earnings, cash flows or other aspects of our operations or operating results. Forward-looking statements generally include statements containing:
 
  •  projections about accounting and finances;
 
  •  plans and objectives for the future;
 
  •  projections or estimates about assumptions relating to our performance; or
 
  •  our opinions, views or beliefs about the effects of current or future events, circumstances or performance.
 
You should view these statements with caution. These statements are not guarantees of future performance, circumstances or events. They are based on facts and circumstances known to us as of the date the statements are made. All phases of our business are subject to uncertainties, risks and other influences, many of which we do not control. Any of these factors, either alone or taken together, could have a material adverse effect on us and could change whether any forward-looking statement ultimately turns out to be true. Additionally, we assume no obligation to update any forward-looking statement as a result of future events, circumstances or developments. The following discussion should be read together with the Consolidated Financial Statements and the notes thereto. Outlined below are some of the risks that we believe could affect our business and financial statements for 2009 and beyond.
 
General economic conditions can adversely affect our revenues and our operating margins.
 
Our business is affected by changes in national and general economic factors that are outside of our control, including consumer confidence, interest rates and access to capital markets. Although our services are of an essential nature, a weak economy generally results in decreases in volumes of waste generated, which decreases our revenues. Additionally, consumer uncertainty and the loss of consumer confidence may limit the number or amount of services requested by customers and our ability to increase customers’ pricing. During weak economic conditions we may also be adversely impacted by customers’ inability to pay us in a timely manner, if at all, due to their financial difficulties, which could include bankruptcies. The availability of credit in the second half of 2008 was severely limited, which negatively affected business and consumer spending generally. If our customers do not have access to capital, we do not expect that our volumes will improve or that we will increase new business.
 
We have $2.8 billion of debt as of December 31, 2008 that is exposed to changes in market interest rates because of the combined impact of our variable rate tax-exempt bonds and our interest rate swap agreements. Therefore, any increase in interest rates can significantly increase our interest expenses. Additionally, the unavailability of credit on favorable terms can adversely impact our growth, development and capital spending plans.
 
The waste industry is highly competitive, and if we cannot successfully compete in the marketplace, our business, financial condition and operating results may be materially adversely affected.
 
We encounter intense competition from governmental, quasi-governmental and private sources in all aspects of our operations. In North America, the industry consists of two national waste management companies, regional companies and local companies of varying sizes and financial resources. We compete with these companies as well as with counties and municipalities that maintain their own waste collection and disposal operations. These counties and municipalities may have financial competitive advantages because tax revenues are available to them and tax-exempt financing is more readily available to them. Also, such governmental units may attempt to impose flow control or other restrictions that would give them a competitive advantage.
 
In addition, competitors may reduce their prices to expand sales volume or to win competitively bid contracts. When this happens, we may roll-back prices or offer lower pricing to attract or retain our customers, resulting in a negative impact to our revenue growth from yield on base business.


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If we do not successfully manage our costs, or do not successfully implement our plans and strategies to improve margins, our income from operations could be lower than expected.
 
In recent years, we have implemented several profit improvement initiatives aimed at lowering our costs and enhancing our revenues.
 
We have implemented price increases and environmental fees, and we have continued our fuel surcharge program, all of which have increased our internal revenue growth. The loss of volumes as a result of price increases may negatively affect our cash flows or results of operations. We continue to seek to divest under-performing and non-strategic assets if we cannot improve their profitability. We may not be able to successfully negotiate the divestiture of under-performing and non-strategic operations, which could result in asset impairments or the continued operation of low-margin businesses. Additionally, in February 2009 we announced that we had taken steps to realign our field operations to combine several of our Market Areas in an effort to achieve greater economies of scale in our local and regional operations and our Corporate organization to provide support functions more efficiently. If we are not able to fully or successfully implement our plans and strategies for any reason, many of which are out of our control, we may not see the expected improvements in our income from operations or our operating margins.
 
The seasonal nature of our business causes our quarterly results to fluctuate, and prior performance is not necessarily indicative of our future results.
 
Our operating revenues tend to be somewhat higher in summer months, primarily due to the higher volume of construction and demolition waste. The volumes of industrial and residential waste in certain regions where we operate also tend to increase during the summer months. Our second and third quarter revenues and results of operations typically reflect these seasonal trends. Additionally, certain destructive weather conditions that tend to occur during the second half of the year, such as the hurricanes generally experienced by our Southern Group, actually increase our revenues in the areas affected. However, for several reasons, including significant start-up costs, such revenue often generates earnings at comparatively lower margins. Certain weather conditions may result in the temporary suspension of our operations, which can significantly affect the operating results of the affected regions. The operating results of our first quarter also often reflect higher repair and maintenance expenses because we rely on the slower winter months, when waste flows are generally lower, to perform scheduled maintenance at our waste-to-energy facilities.
 
For these and other reasons, operating results in any interim period are not necessarily indicative of operating results for an entire year, and operating results for any historical period are not necessarily indicative of operating results for a future period.
 
We cannot predict with certainty the extent of future costs under environmental, health and safety laws, and cannot guarantee that they will not be material.
 
We could be liable if our operations cause environmental damage to our properties or to the property of other landowners, particularly as a result of the contamination of air, drinking water or soil. Under current law, we could even be held liable for damage caused by conditions that existed before we acquired the assets or operations involved. Also, we could be liable if we arrange for the transportation, disposal or treatment of hazardous substances that cause environmental contamination, or if a predecessor owner made such arrangements and under applicable law we are treated as a successor to the prior owner. Any substantial liability for environmental damage could have a material adverse effect on our financial condition, results of operations and cash flows.
 
In the ordinary course of our business, we have in the past, and may in the future, become involved in a variety of legal and administrative proceedings relating to land use and environmental laws and regulations. These include proceedings in which:
 
  •  agencies of federal, state, local or foreign governments seek to impose liability on us under applicable statutes, sometimes involving civil or criminal penalties for violations, or to revoke or deny renewal of a permit we need; and


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  •  local communities and citizen groups, adjacent landowners or governmental agencies oppose the issuance of a permit or approval we need, allege violations of the permits under which we operate or laws or regulations to which we are subject, or seek to impose liability on us for environmental damage.
 
We generally seek to work with the authorities or other persons involved in these proceedings to resolve any issues raised. If we are not successful, the adverse outcome of one or more of these proceedings could result in, among other things, material increases in our costs or liabilities as well as material charges for asset impairments.
 
The waste industry is subject to extensive government regulation, and existing or future regulations may restrict our operations, increase our costs of operations or require us to make additional capital expenditures.
 
Stringent government regulations at the federal, state, provincial, and local level in the United States and Canada have a substantial impact on our business. A large number of complex laws, rules, orders and interpretations govern environmental protection, health, safety, land use, zoning, transportation and related matters. Among other things, they may restrict our operations and adversely affect our financial condition, results of operations and cash flows by imposing conditions such as:
 
  •  limitations on siting and constructing new waste disposal, transfer or processing facilities or expanding existing facilities;
 
  •  limitations, regulations or levies on collection and disposal prices, rates and volumes;
 
  •  limitations or bans on disposal or transportation of out-of-state waste or certain categories of waste; or
 
  •  mandates regarding the disposal of solid waste, including requirements to recycle rather than landfill certain waste streams.
 
Regulations affecting the siting, design and closure of landfills could require us to undertake investigatory or remedial activities, curtail operations or close landfills temporarily or permanently. Future changes in these regulations may require us to modify, supplement or replace equipment or facilities. The costs of complying with these regulations could be substantial.
 
In order to develop, expand or operate a landfill or other waste management facility, we must have various facility permits and other governmental approvals, including those relating to zoning, environmental protection and land use. The permits and approvals are often difficult, time consuming and costly to obtain and could contain conditions that limit our operations.
 
Governmental authorities may enact climate change regulations that could increase our costs to operate.
 
Environmental advocacy groups and regulatory agencies in the United States have been focusing considerable attention on the emissions of greenhouse gases and their potential role in climate change. The adoption of laws and regulations to implement controls of greenhouse gases, including the imposition of fees or taxes, could adversely affect our collection and disposal operations. Additionally, certain of the states in which we operate are contemplating air pollution control regulations that are more stringent than existing and proposed federal regulations. Changing environmental regulations could require us to take any number of actions, including the purchase of emission allowances or installation of additional pollution control technology, and could make some operations less profitable, which could adversely affect our results of operations.
 
Significant shortages in fuel supply or increases in fuel prices will increase our operating expenses.
 
The price and supply of fuel are unpredictable, and can fluctuate significantly based on international, political and economic circumstances, as well as other factors outside our control, such as actions by the Organization of the Petroleum Exporting Countries, or OPEC, and other oil and gas producers, regional production patterns, weather conditions and environmental concerns. We have seen average quarterly fuel prices increase by as much as 56% on a year-over-year basis and decrease by as much as 9% on a year-over-year basis within the last two years. We need fuel to run our collection and transfer trucks and equipment used in our landfill operations. Supply shortages could substantially increase our operating expenses. Additionally, as fuel prices increase, our direct operating expenses


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increase and many of our vendors raise their prices as a means to offset their own rising costs. We have in place a fuel surcharge program, designed to offset increased fuel expenses; however, we may not be able to pass through all of our increased costs and some customers’ contracts prohibit any pass through of the increased costs. We may initiate other programs or means to guard against the rising costs of fuel, although there can be no assurances that we will be able to do so or that such programs will be successful. Regardless of any offsetting surcharge programs, the increased operating costs will decrease our operating margins.
 
We have substantial financial assurance and insurance requirements, and increases in the costs of obtaining adequate financial assurance, or the inadequacy of our insurance coverages, could negatively impact our liquidity and increase our liabilities.
 
The amount of insurance we are required to maintain for environmental liability is governed by statutory requirements. We believe that the cost for such insurance is high relative to the coverage it would provide, and therefore, our coverages are generally maintained at the minimum statutorily required levels. We face the risk of incurring additional costs for environmental damage if our insurance coverage is ultimately inadequate to cover those damages. We also carry a broad range of insurance coverages that are customary for a company our size. We use these programs to mitigate risk of loss, thereby allowing us to manage our self-insurance exposure associated with claims. The inability of our insurers to meet their commitments in a timely manner and the effect of significant claims or litigation against insurance companies may subject us to additional risks. To the extent our insurers were unable to meet their obligations, or our own obligations for claims were more than we estimated, there could be a material adverse effect to our financial results.
 
In addition, to fulfill our financial assurance obligations with respect to environmental closure and post-closure obligations, we generally obtain letters of credit or surety bonds, rely on insurance, including captive insurance, fund trust and escrow accounts or rely upon WMI financial guarantees. We currently have in place all financial assurance instruments necessary for our operations. We do not anticipate any unmanageable difficulty in obtaining financial assurance instruments in the future, although general economic factors may adversely affect the cost of our current financial assurance instruments. Additionally, in the event we are unable to obtain sufficient surety bonding, letters of credit or third-party insurance coverage at reasonable cost, or one or more states cease to view captive insurance as adequate coverage, we would need to rely on other forms of financial assurance. It is possible that we could be forced to deposit cash to collateralize our obligations. Other forms of financial assurance could be more expensive to obtain, and any requirements to use cash to support our obligations would negatively impact our liquidity and capital resources and could affect our ability to meet our obligations as they become due.
 
We may record material charges against our earnings due to any number of events that could cause impairments to our assets.
 
In accordance with generally accepted accounting principles, we capitalize certain expenditures and advances relating to disposal site development, expansion projects, acquisitions, software development costs and other projects. Events that could, in some circumstances, lead to an impairment include, but are not limited to, shutting down a facility or operation or abandoning a development project or the denial of an expansion permit. If we determine a development or expansion project is impaired, we will charge against earnings any unamortized capitalized expenditures and advances relating to such facility or project reduced by any portion of the capitalized costs that we estimate will be recoverable, through sale or otherwise. We also carry a significant amount of goodwill on our Consolidated Balance Sheet, which is required to be assessed for impairment annually, and more frequently in the case of certain triggering events. The recent downturn in the recycling commodities market could potentially cause the carrying value of WMRA’s assets to be lower than their fair value, resulting in an impairment to goodwill.
 
We may be required to incur charges against earnings if we determine that events such as those described cause impairments. Any such charges could have a material adverse effect on our results of operations.
 
Our revenues will fluctuate based on changes in commodity prices.
 
Our recycling operations process for sale certain recyclable materials, including fibers, aluminum and glass, all of which are subject to significant market price fluctuations. The majority of the recyclables that we process for


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sale are paper fibers, including old corrugated cardboard, known as OCC, and old newsprint, or ONP. The fluctuations in the market prices or demand for these commodities can affect our operating income and cash flows, as we experienced in 2008. In the fourth quarter of 2008, the monthly market prices for OCC and ONP fell by 79% and 72%, respectively, from their high points within the year. The decline in market prices for commodities resulted in a fourth quarter 2008 year-over-year decrease in revenue of almost $100 million. Additionally, our recycling operations offer rebates to suppliers. Therefore, even if we experience higher revenues based on increased market prices for commodities, the rebates we pay will also increase and in some circumstances, the rebates may have floors even as market prices decrease, which could eliminate any expected profit margins.
 
Additionally, there may be significant price fluctuations in the price of methane gas, electricity and other energy related products that are marketed and sold by our landfill gas recovery, waste-to-energy and independent power production plant operations. The marketing and sales of energy related products by our landfill gas and waste-to-energy operations are generally pursuant to long-term sales agreements. Therefore, market volatility does not cause our quarterly results to fluctuate significantly. However, as longer-term agreements expire and are up for renewal, or as market prices remain at lower levels for sustained periods, our revenues will be adversely affected. Additionally, revenues from our independent power production plants can be affected by price fluctuations. In the past two years, the year-over-year changes in the average quarterly electricity prices have ranged from increases of as much as 26% to decreases of as much as 5%.
 
The development and acceptance of alternatives to landfill disposal and waste-to-energy facilities could reduce our ability to operate at full capacity.
 
Our customers are increasingly using alternatives to landfill and waste-to-energy disposal, such as recycling and composting. In addition, some state and local governments mandate recycling and waste reduction at the source and prohibit the disposal of certain types of waste, such as yard waste, at landfills or waste-to-energy facilities. Although such mandates are a useful tool to protect our environment, these developments reduce the volume of waste going to landfills and waste-to-energy facilities in certain areas, which may affect our ability to operate our landfills and waste-to-energy facilities at full capacity, as well as the prices that we can charge for landfill disposal and waste-to-energy services.
 
Our operating expenses could increase as a result of labor unions organizing or changes in regulations related to labor unions.
 
Labor unions constantly make attempts to organize our employees, and these efforts will likely continue in the future. Certain groups of our employees have already chosen to be represented by unions, and we have negotiated collective bargaining agreements with some of the groups. Additional groups of employees may seek union representation in the future, and, if successful, the negotiation of collective bargaining agreements could divert management attention and result in increased operating expenses and lower net income. Considerable attention has been focused on proposed legislation that could amend the National Labor Relations Act that would make it easier for unions to become recognized as the bargaining representative for employees. Depending on the form of legislation, if any, that is ultimately enacted, it is reasonably possible that our operating expenses would increase as a result of the provisions of such legislation. If we are unable to negotiate acceptable collective bargaining agreements, or future legislation requires us to submit the terms of employment to binding arbitration in the event an agreement cannot be reached in a timely manner, our operating expenses could increase significantly as a result of work stoppages, including strikes, or unfavorable terms in agreements that result from arbitration. Any of these matters could adversely affect our financial condition, results of operations and cash flows.
 
Currently pending or future litigation or governmental proceedings could result in material adverse consequences, including judgments or settlements.
 
We are involved in civil litigation in the ordinary course of our business and from time-to-time are involved in governmental proceedings relating to the conduct of our business. The timing of the final resolutions to these types of matters is often uncertain. Additionally, the possible outcomes or resolutions to these matters could include adverse judgments or settlements, either of which could require substantial payments, adversely affecting our liquidity.


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We are increasingly dependent on technology in our operations and if our technology fails, our business could be adversely affected.
 
We may experience problems with either the operation of our current information technology systems or the development and deployment of new information technology systems that could adversely affect, or even temporarily disrupt, all or a portion of our operations until resolved. We encountered problems with the revenue management application that we had been piloting throughout 2007, resulting in the termination of the pilot, which has impeded our ability to realize improved operating margins as a result of a new system. Inabilities and delays in implementing new systems can also affect our ability to realize projected or expected cost savings. There can be no assurances that our issues related to the licensed application will not ultimately result in an impairment charge, which could be material.
 
Additionally, any systems failures could impede our ability to timely collect and report financial results in accordance with applicable laws and regulations.
 
We may experience adverse impacts on our reported results of operations as a result of adopting new accounting standards or interpretations.
 
Our implementation of and compliance with changes in accounting rules, including new accounting rules and interpretations, could adversely affect our reported operating results or cause unanticipated fluctuations in our reported operating results in future periods.
 
Unforeseen circumstances could result in a need for additional capital.
 
We currently expect to meet our anticipated cash needs for capital expenditures, scheduled debt repayments, acquisitions and other cash expenditures with our cash flows from operations and, to the extent necessary and available, additional financings. However, materially adverse events, including recent economic conditions, may reduce our cash flows from operations. Our Board of Directors has approved a capital allocation program for 2009 that provides for up to $1.3 billion in aggregate dividend payments, share repurchases, acquisitions and debt reductions. In December 2008, we announced that we expect future quarterly dividend payments, when declared by the Board of Directors, to be $0.29 per share. If the impact on our cash flows from operations is significant, we may need to reduce capital expenditures, acquisition activity or dividend declarations unless we are able to incur indebtedness to either pay for these activities or refinance our scheduled debt maturities. In light of the recent state of the credit markets, there can be no assurances that we will be able to obtain additional financings on acceptable terms. In these circumstances, we would likely use our revolving credit facility to meet our cash needs, to the extent available. As of December 31, 2008, we had $297 million of capacity under our revolving credit facility.
 
In the event of a default under our credit facility, we could be required to immediately repay all outstanding borrowings and make cash deposits as collateral for all obligations the facility supports, which we may not be able to do. Additionally, any such default could cause a default under many of our other credit agreements and debt instruments. Any such default would have a material adverse effect on our ability to operate.
 
Item 1B.   Unresolved Staff Comments.
 
None.
 
Item 2.   Properties.
 
Our principal executive offices are in Houston, Texas, where we lease approximately 400,000 square feet under leases expiring at various times through 2020. Our operating Group offices are in Pennsylvania, Illinois, Georgia, Arizona, New Hampshire and Texas. We also have field-based administrative offices in Arizona and Illinois. We own or lease real property in most locations where we have operations. We have operations in each of the fifty states other than Montana and Wyoming. We also have operations in the District of Columbia, Puerto Rico and throughout Canada.
 
Our principal property and equipment consists of land (primarily landfills and other disposal facilities, transfer stations and bases for collection operations), buildings, vehicles and equipment. We believe that our vehicles, equipment, and operating properties are adequately maintained and sufficient for our current operations. However,


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we expect to continue to make investments in additional equipment and property for expansion, for replacement of assets, and in connection with future acquisitions. For more information, see Management’s Discussion and Analysis of Financial Condition and Results of Operations included within this report.
 
The following table summarizes our various operations at December 31 for the periods noted:
 
                 
    2008     2007  
Landfills:
               
Owned
    212       216  
Operated through lease agreements
    27       26  
Operated through contractual agreements
    34       35  
                 
      273       277  
Transfer stations
    355       341  
Material recovery facilities
    98       99  
Secondary processing facilities
    6       6  
Waste-to-energy facilities
    16       16  
Independent power production plants
    5       5  
 
The following table provides certain information by Group regarding the 239 landfills owned or operated through lease agreements and a count, by Group, of contracted disposal sites as of December 31, 2008:
 
                                         
                            Contracted
 
          Total
    Permitted
    Expansion
    Disposal
 
    Landfills     Acreage(a)     Acreage(b)     Acreage(c)     Sites  
 
Eastern
    41       29,957       6,224       534       6  
Midwest
    75       29,357       7,539       1,755       9  
Southern
    77       38,409       12,146       378       12  
Western
    42       41,827       10,087       987       7  
Wheelabrator
    4       781       299       42        
                                         
      239       140,331       36,295       3,696       34  
                                         
 
 
(a) “Total acreage” includes permitted acreage, expansion acreage, other acreage available for future disposal that has not been permitted, buffer land and other land owned or leased by our landfill operations.
 
(b) “Permitted acreage” consists of all acreage at the landfill encompassed by an active permit to dispose of waste.
 
(c) “Expansion acreage” consists of unpermitted acreage where the related expansion efforts meet our criteria to be included as expansion airspace. A discussion of the related criteria is included within the Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates and Assumptions section included herein.
 
Item 3.   Legal Proceedings.
 
Information regarding our legal proceedings can be found under the Litigation section of Note 10 in the Consolidated Financial Statements included in this report.
 
Item 4.   Submission of Matters to a Vote of Security Holders.
 
We did not submit any matters to a vote of our stockholders during the fourth quarter of 2008.


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PART II
 
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “WMI.” The following table sets forth the range of the high and low per share sales prices for our common stock as reported on the NYSE:
 
                 
    High     Low  
 
2007
               
First Quarter
  $ 38.70     $ 32.56  
Second Quarter
    40.35       33.93  
Third Quarter
    40.80       33.94  
Fourth Quarter
    39.11       32.56  
2008
               
First Quarter
  $ 34.64     $ 28.10  
Second Quarter
    39.24       33.33  
Third Quarter
    37.34       31.05  
Fourth Quarter
    33.43       24.51  
2009
               
First Quarter (through February 12, 2009)
  $ 33.99     $ 27.60  
 
On February 12, 2009, the closing sale price as reported on the NYSE was $29.26 per share. The number of holders of record of our common stock at February 12, 2009 was 14,899.


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The graph below shows the relative investment performance of Waste Management, Inc. common stock, the Dow Jones Waste & Disposal Services Index and the S&P 500 Index for the last five years, assuming reinvestment of dividends at date of payment into the common stock. The graph is presented pursuant to SEC rules and is not meant to be an indication of our future performance.
 
Comparison of Cumulative Five Year Total Return
 
(PERFORMANCE GRAPH)
 
                                                 
   
12/31/03
 
12/31/04
 
12/31/05
 
12/31/06
 
12/31/07
 
12/31/08
 
Waste Management, Inc. 
  $ 100     $ 104     $ 108     $ 134     $ 123     $ 128  
S&P 500 Index
  $ 100     $ 111     $ 116     $ 135     $ 142     $ 90  
Dow Jones Waste & Disposal Services Index
  $ 100     $ 103     $ 110     $ 135     $ 141     $ 132  
 
In October 2004, we announced that our Board of Directors approved a capital allocation program authorizing up to $1.2 billion of stock repurchases and dividend payments annually for each of 2005, 2006 and 2007. In December 2007, we announced that our Board of Directors had approved a capital allocation plan for 2008 that authorized up to $1.4 billion of stock repurchases and dividends. Under these programs we paid quarterly cash dividends of $0.22 per share for a total of $476 million in 2006; $0.24 per share for a total of $495 million in 2007; and $0.27 per share for a total of $531 million in 2008.
 
We repurchased 31 million shares of our common stock for $1,072 million in 2006; 40 million shares of our common stock for $1,421 million in 2007; and 12 million shares of our common stock for $410 million in 2008. Our share repurchases in each year have been pursuant to Board authorized capital allocation programs, which were modified in both 2006 and 2007 by our Board of Directors to increase the amount of capital authorized for share repurchases by $350 million and $900 million, respectively. In 2008, all of our common stock repurchases occurred between January and July. In July 2008, we suspended our repurchases in connection with our proposal to acquire all of the outstanding stock of Republic Services, Inc., and when the proposal was withdrawn in October 2008, we determined that, given the state of the financial markets, it would be prudent to suspend repurchases for the foreseeable future. As a result, there are no repurchases to report for the three months ended December 31, 2008 and the repurchases made during 2008 are significantly less than that which was authorized.


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Item 6.   Selected Financial Data.
 
The information below was derived from the audited Consolidated Financial Statements included in this report and in previous annual reports we filed with the SEC. This information should be read together with those Consolidated Financial Statements and the notes thereto. The adoption of new accounting pronouncements, changes in certain accounting policies and certain reclassifications impact the comparability of the financial information presented below. These historical results are not necessarily indicative of the results to be expected in the future.
 
                                         
    Years Ended December 31,  
    2008(a)     2007(a)     2006(a)     2005     2004  
    (In millions, except per share amounts)  
 
Statement of Operations Data:
                                       
Operating revenues
  $ 13,388     $ 13,310     $ 13,363     $ 13,074     $ 12,516  
                                         
Costs and expenses:
                                       
Operating
    8,466       8,402       8,587       8,631       8,228  
Selling, general and administrative
    1,477       1,432       1,388       1,276       1,267  
Depreciation and amortization
    1,238       1,259       1,334       1,361       1,336  
Restructuring
    2       10             28       (1 )
(Income) expense from divestitures, asset impairments and unusual items
    (29 )     (47 )     25       68       (13 )
                                         
      11,154       11,056       11,334       11,364       10,817  
                                         
Income from operations
    2,234       2,254       2,029       1,710       1,699  
Other expense, net
    (478 )     (551 )     (555 )     (618 )     (521 )
                                         
Income before income taxes and accounting changes
    1,756       1,703       1,474       1,092       1,178  
Provision for (benefit from) income taxes
    669       540       325       (90 )     247  
                                         
Income before accounting changes
    1,087       1,163       1,149       1,182       931  
Accounting changes, net of taxes
                            8  
                                         
Net income
  $ 1,087     $ 1,163     $ 1,149     $ 1,182     $ 939  
                                         
Basic earnings per common share:
                                       
Income before accounting changes
  $ 2.21     $ 2.25     $ 2.13     $ 2.11     $ 1.62  
Accounting changes, net of taxes
                            0.01  
                                         
Net income
  $ 2.21     $ 2.25     $ 2.13     $ 2.11     $ 1.63  
                                         
Diluted earnings per common share:
                                       
Income before accounting changes
  $ 2.19     $ 2.23     $ 2.10     $ 2.09     $ 1.60  
Accounting changes, net of taxes
                            0.01  
                                         
Net income
  $ 2.19     $ 2.23     $ 2.10     $ 2.09     $ 1.61  
                                         
Cash dividends declared per common share (2005 includes $0.22 paid in 2006)
  $ 1.08     $ 0.96     $ 0.66     $ 1.02     $ 0.75  
                                         
Cash dividends paid
  $ 1.08     $ 0.96     $ 0.88     $ 0.80     $ 0.75  
                                         
Balance Sheet Data (at end of period):
                                       
Working capital (deficit)
  $ (701 )   $ (118 )   $ (86 )   $ 194     $ (386 )
Goodwill and other intangible assets, net
    5,620       5,530       5,413       5,514       5,453  
Total assets
    20,227       20,175       20,600       21,135       20,905  
Debt, including current portion
    8,326       8,337       8,317       8,687       8,566  
Stockholders’ equity
    5,902       5,792       6,222       6,121       5,971  


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(a) For more information regarding these financial data, see the Management’s Discussion and Analysis of Financial Condition and Results of Operations section included in this report. For disclosures associated with the impact of the adoption of new accounting pronouncements and changes in our accounting policies on the comparability of this information, see Note 2 of the Consolidated Financial Statements.
 
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
This section includes a discussion of our operations for the three years ended December 31, 2008. This discussion may contain forward-looking statements that anticipate results based on management’s plans that are subject to uncertainty. We discuss in more detail various factors that could cause actual results to differ from expectations in Item 1A, Risk Factors. The following discussion should be read in light of that disclosure and together with the Consolidated Financial Statements and the notes to the Consolidated Financial Statements.
 
Overview
 
In 2008, we saw significant changes in the environment in which we operate, including severe economic uncertainty, increasing market volatility and continued tightening of credit markets, as well as a merger of two of the largest industry competitors. The market conditions in 2008 contributed to record high fuel and commodity prices during most of the year and nearly unprecedented drops in these commodity prices in the second half of the year. We often note that we are a recession resilient industry, but in challenging economic times, reduced consumer and business spending means less waste is being produced. Additionally, businesses across the country are experiencing slower demands for their products and services and a tightening of the credit markets, which makes it more difficult for many of our customers to pay their bills, leading to decreases in the services they request and, in some cases, cancelling our services all together.
 
Against this backdrop, we believe that our results of operations show just how successful we have been in improving our business. The highlights in 2008 include:
 
  •  An increase in revenues of $78 million in 2008 as compared with the prior year, driven by internal revenue growth on base business due to yield of 2.8%;
 
  •  Income from operations as a percentage of revenue of 16.7% in 2008 as compared with 16.9% in 2007, in spite of:
 
  •  the dislocation in the recycling commodities markets experienced during the fourth quarter of 2008;
 
  •  sharply higher fuel costs throughout most of 2008; and
 
  •  higher operating expenses in the current year for non-recurring items, including
 
  (i)   a $33 million non-cash charge for an increase in the estimated present value of recorded obligations for environmental remediation liabilities due to a sharp decline in risk-free interest rates at year-end; and
 
  (ii)  $50 million of costs associated with labor related matters, which were primarily for the withdrawal of certain collective bargaining units from underfunded multi-employer pension funds, compared with $33 million of costs incurred for labor disruptions in 2007;
 
  •  Strong and consistent diluted earnings per share, which was $2.19 in 2008 compared with $2.23 in 2007; and
 
  •  An increase in cash flow generated from operating activities of 5.6%, from $2,439 million in 2007 to $2,575 million in 2008.
 
We experienced revenue increases during each of the first three quarters of 2008 as compared with 2007, followed by a significant decline in revenues in the fourth quarter caused primarily by the effect of the recycling commodities markets and the decrease in revenues from our fuel surcharge program. Our pricing program, which focuses on ensuring that we receive appropriate pricing for all of our services, continued to provide significant increases in our revenues from base business yield during 2008, reflecting our commitment to pricing discipline


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despite the economic environment. We are committed to our pricing excellence program, and do not intend to take volumes at prices that do not cover our costs and provide strong operating margins.
 
Our operating costs increased by $64 million, or less than one percent, in 2008 as compared with 2007. The largest contributors to the increase were the result of conditions discussed above. The negative effect of these cost increases was offset, in part, by benefits from our focus on operating efficiencies, managing fixed costs and reducing variable costs as our volumes decline due to (i) the slowdown in the economy; (ii) our pricing program; and (iii) divestitures.
 
Our selling, general and administrative expenses increased by $45 million, or 3.1%, in 2008 as compared with 2007. The increase is largely attributable to increased labor costs as a result of merit increases, headcount increases, higher compensation costs associated with our equity-based compensation program for our senior employees, and higher insurance and benefit costs. We have also seen an increase in bad debt expense as a result of the weakened economy. Finally, we have incurred significant costs for our business development initiatives, which are focused on gaining new customers and entering new lines of business that are complementary to our core operations. These are costs that we believe are necessary to position Waste Management as a leading environmental solutions provider.
 
As is our practice, we are including free cash flow, which is a non-GAAP measure of liquidity, in our disclosures because we use this measure in the evaluation and management of our business. We also believe it is indicative of our ability to pay our quarterly dividends, repurchase common stock, fund acquisitions and other investments and, in the absence of refinancings, to repay our debt obligations. Free cash flow is not intended to replace “Net cash provided by operating activities,” which is the most comparable GAAP measure. However, we believe free cash flow gives investors greater insight into how we view our liquidity. Nonetheless, the use of free cash flow as a liquidity measure has material limitations because it excludes certain expenditures that are required or that we have committed to, such as declared dividend payments and debt service requirements.
 
We calculate free cash flow as shown in the table below (in millions), which may not be the same as similarly titled measures presented by other companies:
 
                 
    Years Ended
 
    December 31,  
    2008     2007  
 
Net cash provided by operating activities
  $ 2,575     $ 2,439  
Capital expenditures
    (1,221 )     (1,211 )
Proceeds from divestitures of businesses (net of cash divested) and other sales of assets
    112       278  
                 
Free cash flow
  $ 1,466     $ 1,506  
                 
 
Our free cash flow in 2008 exceeded the $1.4 billion we targeted for the year, which we believe is indicative of our continued ability to generate strong cash flow from our operations even in a challenging economic environment. The decrease in our free cash flow when comparing 2008 with 2007 is due to decreased proceeds from divestitures, which is largely a result of having fewer underperforming operations to sell as part of our fix-or-seek-exit initiative, offset in large part by growth in our net cash provided by operating activities.
 
Outlook
 
In 2008, we experienced challenges associated with changing market conditions, which caused significant volatility in fuel and recyclable commodity prices, and the tightening of the economy, which has put negative pressure on both consumer and business spending, resulting in less consumption and waste produced. However, we are encouraged that our 2008 results demonstrate that the cornerstones of our business are resilient in a difficult economic environment. We believe we are well positioned to weather the current economic downturn. In 2009, we will focus on (i) ensuring that we are operating efficiently; and (ii) generating strong and consistent free cash flow.
 
In February 2009, we announced that we are taking steps to further streamline our organization by consolidating many of our Market Areas. As a result of our restructuring, the 45 separate Market Areas that we previously operated have been consolidated into 25 Areas. We currently estimate that this restructuring will eliminate over


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1,000 employee positions throughout the Company and result in a restructuring charge of between $40 million and $50 million. We expect to recognize most of this charge during the first quarter of 2009. This realignment is the next step in our efforts to lower costs and further standardize processes and improve productivity, and we currently estimate that it will provide annualized cost savings in excess of $100 million.
 
Although we expect that our net cash provided by operating activities may be negatively affected by general economic conditions, we believe that we will continue to generate strong cash flow from operations, which, along with our available cash, will provide sufficient liquidity to allow us to return value to our shareholders. Our 2009 capital allocation program provides for up to $1.3 billion in aggregate dividend payments, share repurchases, acquisitions and debt reductions. In 2009, we have significant debt repayment obligations, and while we currently intend to refinance a significant portion of the required repayments on a long-term basis, it is possible that we may not have access to the credit markets on acceptable terms. If the credit markets are not available to us, or are not available on terms we deem acceptable, we expect to rely on our available cash, our existing credit facility and the cash we generate from our operations to meet our debt repayment and other obligations. Our discretionary spending includes acquisitions of assets and businesses, dividends, repurchases of our common stock and certain capital expenditures. To the extent operating cash flows decline or are needed to support our debt repayment obligations, we have the ability to reduce our discretionary spending and still deliver superior service to our customers and a strong financial performance for our stockholders.
 
Over the years, the recyclables that we process have been subject to significant market price fluctuations, and in the first three quarters of 2008, increases in the prices of recycling commodities contributed to our revenue growth, margin expansion and earnings. However, our fourth quarter 2008 operating results reflect the significant dislocation in the commodities markets, including substantial reductions in demand both domestically and internationally. In this environment, we have experienced sharp declines in commodity prices and a degree of difficulty in selling recyclable commodities, including at contractually defined prices. We currently expect this market downturn to reduce our revenues and negatively affect our earnings and operating cash flows in 2009. Further, a sustained period of depressed commodity prices and/or demand for recyclables could result in a significant decline in the estimated fair value of WMRA, which could require us to record a non-cash impairment charge to their goodwill.
 
As discussed in our Overview, the cost of fuel also fell significantly in the second half of 2008. We do not expect future volatility in fuel prices to significantly affect our income from operations. However, we do expect the sharp decline in fuel prices to significantly reduce (i) the revenue provided by our fuel surcharge program; and (ii) our direct and indirect fuel costs in 2009 as compared with 2008.
 
Technology Update — On March 20, 2008, we filed a lawsuit in state court in the Southern District of Texas against SAP AG and SAP America, Inc., alleging fraud and breach of contract. The lawsuit relates to our 2005 software license from SAP for a waste and recycling revenue management system and agreement for SAP to implement the software on a fixed-fee basis. We have been assigned a trial date in October 2009. As we continue to assess the alternatives available to us, we may determine that the best course of action is to abandon the SAP revenue management system, which would result in an impairment charge of between $45 million and $55 million.
 
Basis of Presentation of Consolidated and Segment Financial Information
 
Accounting Changes — Effective January 1, 2008, we adopted SFAS No. 157 for assets and liabilities recognized at fair value on a recurring basis. Our adoption of SFAS No. 157 during the first quarter of 2008 resulted in the recognition of a $6 million charge to operating expenses and a corresponding $3 million credit to minority interest expense for the re-measurement of the fair value of environmental remediation recovery assets accounted for in accordance with Statement of Position No. 96-1, Environmental Remediation Liabilities. The adoption of SFAS No. 157 did not materially affect our consolidated financial position, results of operations or cash flows. Refer to Note 17 for information about our fair value measurements.
 
Effective January 1, 2007, we adopted FIN 48 and FSP No. 48-1. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of tax positions taken or expected to be taken in tax returns. In addition, FIN 48 provides guidance on the de-recognition, classification and disclosure of tax positions, as well as the accounting for related interest and penalties. FSP No. 48-1 provides guidance associated


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with the criteria that must be evaluated in determining if a tax position has been effectively settled and should be recognized as a tax benefit.
 
Refer to Note 2 of our Consolidated Financial Statements for additional information related to the impact of the implementation of these new accounting pronouncements on our results of operations and financial position.
 
Reclassification of Segment Information — During the second quarter of 2008, we moved certain Canadian business operations from the Western Group to the Midwest Group to facilitate improved business execution. We have reflected the impact of this change for all periods presented to provide financial information that consistently reflects our current approach to managing our operations.
 
Critical Accounting Estimates and Assumptions
 
In preparing our financial statements, we make numerous estimates and assumptions that affect the accounting for and recognition and disclosure of assets, liabilities, stockholders’ equity, revenues and expenses. We must make these estimates and assumptions because certain information that we use is dependent on future events, cannot be calculated with a high degree of precision from data available or simply cannot be readily calculated based on generally accepted methodologies. In some cases, these estimates are particularly difficult to determine and we must exercise significant judgment. In preparing our financial statements, the most difficult, subjective and complex estimates and the assumptions that deal with the greatest amount of uncertainty relate to our accounting for landfills, environmental remediation liabilities, asset impairments and self-insurance reserves and recoveries, as described below. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our financial statements.
 
Landfills — The cost estimates for final capping, closure and post-closure activities at landfills for which we have responsibility are estimated based on our interpretations of current requirements and proposed or anticipated regulatory changes. We also estimate additional costs, pursuant to the requirements of SFAS No. 143, based on the amount a third party would charge us to perform such activities even when we expect to perform these activities internally. We estimate the airspace to be consumed related to each final capping event and the timing of construction related to each final capping event and of closure and post-closure activities. Because landfill final capping, closure and post-closure obligations are measured at estimated fair value using present value techniques, changes in the estimated timing of construction of future landfill final capping and closure and post-closure activities would have an effect on these liabilities, related assets and results of operations.
 
Landfill Costs — We estimate the total cost to develop each of our landfill sites to its remaining permitted and expansion capacity. This estimate includes such costs as landfill liner material and installation, excavation for airspace, landfill leachate collection systems, landfill gas collection systems, environmental monitoring equipment for groundwater and landfill gas, directly related engineering, capitalized interest, on-site road construction and other capital infrastructure costs. Additionally, landfill development includes all land purchases for landfill footprint and required landfill buffer property. The projection of these landfill costs is dependent, in part, on future events. The remaining amortizable basis of each landfill includes costs to develop a site to its remaining permitted and expansion capacity and includes amounts previously expended and capitalized, net of accumulated airspace amortization, and projections of future purchase and development costs.
 
Final Capping Costs — We estimate the cost for each final capping event based on the area to be finally capped and the capping materials and activities required. The estimates also consider when these costs would actually be paid and factor in inflation and discount rates. Our engineering personnel allocate final landfill capping costs to specific capping events. The landfill capacity associated with each final capping event is then quantified and the final capping costs for each event are amortized over the related capacity associated with the event as waste is disposed of at the landfill. We review these costs annually, or more often if significant facts change. Changes in estimates, such as timing or cost of construction, for final capping events immediately impact the required liability and the corresponding asset. When the change in estimate relates to a fully consumed asset, the adjustment to the asset must be amortized immediately through expense. When the change in estimate relates to a final capping event that has not been fully consumed, the adjustment to the asset is recognized in income prospectively as a component of landfill airspace amortization.


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Closure and Post-Closure Costs — We base our estimates for closure and post-closure costs on our interpretations of permit and regulatory requirements for closure and post-closure maintenance and monitoring. The estimates for landfill closure and post-closure costs also consider when the costs would actually be paid and factor in inflation and discount rates. The possibility of changing legal and regulatory requirements and the forward-looking nature of these types of costs make any estimation or assumption less certain. Changes in estimates for closure and post-closure events immediately impact the required liability and the corresponding asset. When the change in estimate relates to a fully consumed asset, the adjustment to the asset must be amortized immediately through expense. When the change in estimate relates to a landfill asset that has not been fully consumed, the adjustment to the asset is recognized in income prospectively as a component of landfill airspace amortization.
 
Remaining Permitted Airspace — Our engineers, in consultation with third-party engineering consultants and surveyors, are responsible for determining remaining permitted airspace at our landfills. The remaining permitted airspace is determined by an annual survey, which is then used to compare the existing landfill topography to the expected final landfill topography.
 
Expansion Airspace — We include currently unpermitted expansion airspace in our estimate of remaining permitted and expansion airspace in certain circumstances. First, to include airspace associated with an expansion effort, we must generally expect the initial expansion permit application to be submitted within one year, and the final expansion permit to be received within five years. Second, we must believe the success of obtaining the expansion permit is likely, considering the following criteria:
 
  •  Personnel are actively working to obtain land use and local, state or provincial approvals for an expansion of an existing landfill;
 
  •  It is likely that the approvals will be received within the normal application and processing time periods for approvals in the jurisdiction in which the landfill is located;
 
  •  We have a legal right to use or obtain land to be included in the expansion plan;
 
  •  There are no significant known technical, legal, community, business, or political restrictions or similar issues that could impair the success of such expansion;
 
  •  Financial analysis has been completed, and the results demonstrate that the expansion has a positive financial and operational impact; and
 
  •  Airspace and related costs, including additional closure and post-closure costs, have been estimated based on conceptual design.
 
For unpermitted airspace to be initially included in our estimate of remaining permitted and expansion airspace, the expansion effort must meet all of the criteria listed above. These criteria are evaluated by our field-based engineers, accountants, managers and others to identify potential obstacles to obtaining the permits. Once the unpermitted airspace is included, our policy provides that airspace may continue to be included in remaining permitted and expansion airspace even if these criteria are no longer met, based on the facts and circumstances of a specific landfill. In these circumstances, continued inclusion must be approved through a landfill-specific review process that includes approval of the Chief Financial Officer and a review by the Audit Committee of the Board of Directors on a quarterly basis. Of the 42 landfill sites with expansions at December 31, 2008, 19 landfills required the Chief Financial Officer to approve the inclusion of the unpermitted airspace. Ten of these landfills required approval by the Chief Financial Officer because of community or political opposition that could impede the expansion process. The remaining nine landfills required approval primarily due to the permit application processes not meeting the one- or five-year requirements, as a result of state-specific permitting procedures.
 
Once the remaining permitted and expansion airspace is determined in cubic yards, an airspace utilization factor, or AUF, is established to calculate the remaining permitted and expansion capacity in tons. The AUF is established using the measured density obtained from previous annual surveys and then adjusted to account for settlement. The amount of settlement that is forecasted will take into account several site-specific factors including current and projected mix of waste type, initial and projected waste density, estimated number of years of life remaining, depth of underlying waste, anticipated access to moisture through precipitation or recirculation of landfill leachate, and operating practices. In addition, the initial selection of the AUF is subject to a subsequent


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multi-level review by our engineering group and the AUF used is reviewed on a periodic basis and revised as necessary. Our historical experience generally indicates that the impact of settlement at a landfill is greater later in the life of the landfill when the waste placed at the landfill approaches its highest point under the permit requirements.
 
When we include the expansion airspace in our calculations of remaining permitted and expansion airspace, we also include the projected costs for development, as well as the projected asset retirement cost related to final capping, and closure and post-closure of the expansion in the amortization basis of the landfill.
 
After determining the costs and remaining permitted and expansion capacity at each of our landfills, we determine the per ton rates that will be expensed as waste is received and deposited at the landfill by dividing the costs by the corresponding number of tons. We calculate per ton amortization rates for each landfill for assets associated with each final capping event, for assets related to closure and post-closure activities and for all other costs capitalized or to be capitalized in the future. These rates per ton are updated annually, or more often, as significant facts change.
 
It is possible that actual results, including the amount of costs incurred, the timing of final capping, closure and post-closure activities, our airspace utilization or the success of our expansion efforts could ultimately turn out to be significantly different from our estimates and assumptions. To the extent that such estimates, or related assumptions, prove to be significantly different than actual results, lower profitability may be experienced due to higher amortization rates, higher final capping, closure or post-closure rates, or higher expenses; or higher profitability may result if the opposite occurs. Most significantly, if it is determined that the expansion capacity should no longer be considered in calculating the recoverability of the landfill asset, we may be required to recognize an asset impairment. If it is determined that the likelihood of receiving an expansion permit has become remote, the capitalized costs related to the expansion effort are expensed immediately.
 
Environmental Remediation Liabilities — We are subject to an array of laws and regulations relating to the protection of the environment. Under current laws and regulations, we may have liabilities for environmental damage caused by our operations, or for damage caused by conditions that existed before we acquired a site. These liabilities include potentially responsible party, or PRP, investigations, settlements, certain legal and consultant fees, as well as costs directly associated with site investigation and clean up, such as materials and incremental internal costs directly related to the remedy. We provide for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. We routinely review and evaluate sites that require remediation and determine our estimated cost for the likely remedy based on several estimates and assumptions.
 
We estimate costs required to remediate sites where it is probable that a liability has been incurred based on site-specific facts and circumstances. We routinely review and evaluate sites that require remediation, considering whether we were an owner, operator, transporter, or generator at the site, the amount and type of waste hauled to the site and the number of years we were associated with the site. Next, we review the same type of information with respect to other named and unnamed PRPs. Estimates of the cost for the likely remedy are then either developed using our internal resources or by third-party environmental engineers or other service providers. Internally developed estimates are based on:
 
  •  Management’s judgment and experience in remediating our own and unrelated parties’ sites;
 
  •  Information available from regulatory agencies as to costs of remediation;
 
  •  The number, financial resources and relative degree of responsibility of other PRPs who may be liable for remediation of a specific site; and
 
  •  The typical allocation of costs among PRPs unless the actual allocation has been determined.
 
Asset Impairments — Our long-lived assets, including landfills and landfill expansions, are carried on our financial statements based on their cost less accumulated depreciation or amortization. We review the carrying value of our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In order to assess whether a potential impairment exists, the assets’ carrying values are compared with their undiscounted expected future cash flows. Estimating future cash flows requires significant judgment about factors such as general economic conditions and projected growth rates,


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and our estimates often vary from cash flows eventually realized. Impairments are measured by comparing the fair value of the asset to its carrying value. Fair value is generally determined by considering (i) internally developed discounted projected cash flow analysis of the asset; (ii) actual third-party valuations; and/or (iii) information available regarding the current market environment for similar assets. If the fair value of an asset is determined to be less than the carrying amount of the asset, an impairment in the amount of the difference is recorded in the period that the impairment indicator occurs.
 
There are other considerations for impairments of landfills and goodwill, as described below.
 
Landfills — Certain impairment indicators require significant judgment and understanding of the waste industry when applied to landfill development or expansion projects. For example, a regulator may initially deny a landfill expansion permit application though the expansion permit is ultimately granted. In addition, management may periodically divert waste from one landfill to another to conserve remaining permitted landfill airspace. Therefore, certain events could occur in the ordinary course of business and not necessarily be considered indicators of impairment of our landfill assets due to the unique nature of the waste industry.
 
Goodwill — At least annually, we assess whether goodwill is impaired. We assess whether an impairment exists by comparing the fair value of each Group to its carrying value, including goodwill. We rely on discounted cash flow analysis, which requires significant judgments and estimates about the future operations of each Group, to develop our estimates of fair value. Additional impairment assessments may be performed on an interim basis if we encounter events or changes in circumstances that would indicate that, more likely than not, the carrying value of goodwill has been impaired.
 
Self-insurance reserves and recoveries — We have retained a significant portion of the risks related to our health and welfare, automobile, general liability and workers’ compensation insurance programs. Our liabilities associated with the exposure for unpaid claims and associated expenses, including incurred but not reported losses, generally is estimated with the assistance of external actuaries and by factoring in pending claims and historical trends and data. Our estimated accruals for these liabilities could be significantly different than our ultimate obligations if variables such as the frequency or severity of future incidents are significantly different than what we assume. Estimated insurance recoveries related to recorded liabilities are recorded as assets when we believe that the receipt of such amounts is probable.
 
Results of Operations
 
Operating Revenues
 
Our operating revenues in 2008 were $13.4 billion, compared with $13.3 billion in 2007 and $13.4 billion in 2006. We manage and evaluate our operations primarily through our Eastern, Midwest, Southern, Western, Wheelabrator and WMRA Groups. These six operating Groups are our reportable segments. Shown below (in millions) is the contribution to revenues during each year provided by our six operating Groups and our Other waste services:
 
                         
    Years Ended December 31,  
    2008     2007     2006  
 
Eastern
  $ 3,182     $ 3,281     $ 3,614  
Midwest
    3,117       3,141       3,141  
Southern
    3,667       3,681       3,759  
Western
    3,300       3,350       3,373  
Wheelabrator
    912       868       902  
WMRA
    1,014       953       740  
Other
    330       307       283  
Intercompany
    (2,134 )     (2,271 )     (2,449 )
                         
Total
  $ 13,388     $ 13,310     $ 13,363  
                         


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Our operating revenues generally come from fees charged for our collection, disposal, transfer, Wheelabrator and recycling services. Revenues from our collection operations are influenced by factors such as collection frequency, type of collection equipment furnished, type and volume or weight of the waste collected, distance to the disposal facility and our disposal costs. Revenues from our landfill operations consist of tipping fees, which are generally based on the weight, volume and type of waste being disposed of at our disposal facilities. Fees charged at transfer stations are generally based on the volume of waste deposited, taking into account our cost of loading, transporting and disposing of the solid waste at a disposal site. Our Wheelabrator revenues are based on the type and volume of waste received at our waste-to-energy facilities and IPPs and fees charged for the sale of energy and steam. Recycling revenue, which is generated by our WMRA Group as well as recycling operations embedded in the operations of our four geographic operating Groups, generally consists of tipping fees and the sale of recyclable commodities to third parties. The fees we charge for our collection, disposal, transfer and recycling services generally include fuel surcharges, which are indexed to current market costs for fuel. Our “other” revenues include our in-plant services, methane gas recovery, Port-O-Let® services, street and parking lot sweeping services, portable self-storage, fluorescent lamp recycling and healthcare solutions services. Intercompany revenues between our operations have been eliminated in the consolidated financial statements. The mix of operating revenues from our different services is reflected in the table below (in millions):
 
                         
    Years Ended December 31,  
    2008     2007     2006  
 
Collection
  $ 8,679     $ 8,714     $ 8,837  
Landfill
    2,955       3,047       3,197  
Transfer
    1,589       1,654       1,802  
Wheelabrator
    912       868       902  
Recycling
    1,180       1,135       905  
Other
    207       163       169  
Intercompany
    (2,134 )     (2,271 )     (2,449 )
                         
Total
  $ 13,388     $ 13,310     $ 13,363  
                         
 
The following table provides details associated with the period-to-period change in revenues (dollars in millions) and includes internal revenue growth calculated as a percentage of revenues from related business and as a percentage of total Company revenues:
 
                                                 
    Period-to-Period Change
    Period-to-Period Change
 
    2008 vs. 2007     2007 vs. 2006  
          As a% of
    As a% of
          As a% of
    As a% of
 
          Related
    Total
          Related
    Total
 
    Amount     Business(a)     Company(b)     Amount     Business(a)     Company(b)  
 
Average yield:
                                               
Solid waste
  $ 347       3.2 %     2.6 %   $ 431       4.0 %     3.3 %
Waste-to-energy
    19       2.7       0.2       1       0.1        
                                                 
Base business
    366       3.2       2.8       432       3.7       3.3  
Commodity
    81       6.9       0.6       306       34.3       2.3  
Electricity (IPPs)
    8       10.8       0.1       2       2.7        
Fuel surcharges and mandated fees
    189       36.5       1.4       35       7.3       0.3  
                                                 
Total
    644       4.9       4.9       775       5.9       5.9  
Volume
    (557 )             (4.2 )     (588 )             (4.5 )
                                                 
Internal revenue growth
    87               0.7       187               1.4  
Acquisition
    117               0.9       37               0.3  
Divestitures
    (130 )             (1.0 )     (320 )             (2.4 )
Foreign currency translation
    4                     43               0.3  
                                                 
    $ 78               0.6 %   $ (53 )             (0.4 )%
                                                 


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(a) These percentages are calculated by dividing the amount of the current year increase by the prior year’s related business revenue adjusted to exclude the impacts of current year divestitures ($130 million and $320 million for 2008 and 2007, respectively). The table below summarizes the related business revenues for each year, which were used to calculate the percentages of related business:
 
                 
    Denominator  
    2008     2007  
 
Related business revenues:
               
Solid waste
  $ 10,715     $ 10,877  
Waste-to-energy
    693       716  
                 
Base business
    11,408       11,593  
Commodity
    1,180       893  
Electricity (IPPs)
    74       75  
Fuel surcharges and mandated fees
    518       482  
                 
Total Company
  $ 13,180     $ 13,043  
                 
 
(b) These percentages are calculated by dividing the amount of the current year increase or decrease by the prior year’s total company revenue ($13,310 million and $13,363 million for 2008 and 2007, respectively) adjusted to exclude the impacts of current year divestitures ($130 million and $320 million for 2008 and 2007, respectively).
 
Base Business — Yield on base business reflects the effect on our revenue from the pricing activities of our collection, transfer, disposal and waste-to-energy operations, exclusive of volume changes. Revenue growth from base business yield includes not only price and environmental and service fee increases, but also (i) certain average price changes related to the overall mix of services, which are due to both the types of services provided and the geographic locations where our services are provided; (ii) changes in average price from new and lost business; and (iii) price decreases to retain customers.
 
In both 2008 and 2007, our pricing excellence initiative was the primary contributor to our revenue growth from base business yield. Although our pricing programs are contributing to yield improvements in each of our core solid waste lines of business, the increase in revenue from base business yield has been driven by our collection operations in each reported period. Increased collection revenues due to yield were more than offset by revenue declines from lower collection volumes. However, we continue to find that, in spite of collection volume declines, increased yield on base business and a focus on controlling variable costs provide notable margin improvements and earnings expansion in our collection line of business.
 
Throughout 2008 and 2007, we also experienced increases in revenue due to yield on base business from our pricing excellence initiative at our transfer stations and the municipal solid waste streams at our landfills. The increases in transfer station revenues have been the most significant in the Eastern portion of the United States. At our landfills, municipal solid waste revenue growth from yield has been the most significant in our Southern Group, although the Midwest and Western Groups also provided notable revenue growth from yield in this line of business. In 2007, we also experienced increases in revenue due to yield on base business in the special waste and construction and demolition waste streams at our landfills.
 
In addition to the revenue growth provided by our pricing initiative, we saw an increase in revenue from yield at our waste-to-energy facilities in 2008. This increase was largely due to annual rate increases for electricity under long-term contracts and favorable energy market pricing, which is generally indexed to natural gas prices.
 
Revenues from our environmental fee, which is included in base business yield, were $181 million, $121 million and $76 million for the years ended December 31, 2008, 2007 and 2006, respectively.
 
Commodity — For the first nine months of 2008, revenues increased $178 million due to higher recycling prices as compared with the prior year period. However, during the fourth quarter of 2008, a rapid decline in commodity prices due to a significant decrease in the demand for commodities both domestically and


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internationally caused a year-over-year revenue decrease of $97 million. In 2008, average prices for old corrugated cardboard decreased 9% and average prices for old newsprint increased by 14%. However, when comparing commodity prices during the fourth quarter of 2008 with the comparable prior year period, average prices for old corrugated cardboard decreased by 58% and average prices for old newsprint decreased by 30%.
 
In 2007, average prices for old corrugated cardboard increased by 62% and average prices for old newsprint increased by 39% when compared with 2006, which drove the $306 million of revenue growth from commodity yield in 2007.
 
Fuel surcharges and mandated fees — Fuel surcharges increased revenues year-over-year by $189 million in 2008. This increase is due to our continued effort to pass on our higher fuel costs to our customers through fuel surcharges. Although our fuel surcharge program is designed to respond to changes in the market price for fuel, there is an administrative delay between the time our fuel costs change and when we are able to make the corresponding change in our fuel surcharges. This delay negatively affected our ability to fully recover our cost increases in the first six months of 2008 as the increases in our fuel surcharges consistently lagged the sharp increases in fuel costs throughout the first half of the year. However, the cost of fuel began to decline during the third quarter of 2008, allowing us to fully recover the fuel cost increases we incurred during the year.
 
Fuel surcharges increased revenues year-over-year by $29 million in 2007. Market prices for fuel were relatively flat for the first nine months of 2007, but increased sharply during the fourth quarter. Accordingly, all of the revenue increase due to fuel surcharges in 2007 was generated during the fourth quarter, and we were unable to fully recover our higher fuel costs for the period.
 
The mandated fees included in this line item are primarily related to the pass-through of fees and taxes assessed by various state, county and municipal governmental agencies at our landfills and transfer stations. These mandated fees have not had a significant impact on the comparability of revenues for the periods included in the table above.
 
Volume — The decline in our revenues due to lower volumes when comparing 2008 with 2007 has been driven by declines in our collection volumes and, to a lesser extent, lower transfer station, recycling and third-party disposal volumes. Decreases in 2008 revenue due to lower volumes are discussed in more detail below:
 
Our revenues from collection volumes continue to be affected by our focus on improving margins through increased pricing. However, the slowdown in the economy has also had a significant impact on our industrial collection line of business as a result of the continued slowdown in both residential and commercial construction activities across the United States. While our commercial collection line of business tends to be relatively recession resistant, we have experienced some volume declines in this business that we attribute to the sluggish economy.
 
Declines in revenue due to lower third-party volumes in our transfer station operations have been the most notable in our Eastern and Southern Groups and can generally be attributed to the effects of pricing and sluggish economic conditions. The declines in our revenues due to lower volumes in our recycling operations are attributable to the drastic decline in the demand for recyclables in late 2008, both domestically and internationally.
 
We have experienced declines in third-party revenue at our landfills due to reduced construction and demolition and municipal solid waste volumes throughout 2008, although the volume decline in our construction and demolition waste stream was at a slower rate than it had been in 2007 largely as a result of hurricane-related volume increases in our Southern Group. These volume declines have been offset, in part, by an increase in special waste disposal volumes, primarily in our Southern Group.
 
The decline in our revenues due to lower volumes when comparing 2007 with 2006 was driven by declines in our collection volumes and, to a lesser extent, lower transfer station and third-party disposal volumes. Decreases in 2007 revenue due to lower volumes are discussed in more detail below:
 
Collection volume declines significantly affected the revenues of each of our collection lines of business in each geographic operating Group, but they were the most significant in our industrial collection business due to the significant slowdown in residential construction across the United States.


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In 2007, declines in revenue due to lower third-party volumes in our transfer station operations were the most notable in our Eastern Group and were generally due to the effects of pricing. We also experienced declines in third-party revenue at our landfills due to reduced disposal volumes. The most significant declines were in our construction and demolition waste, particularly in our Southern Group. The reduction in construction and demolition volumes was largely due to the significant slowdown in residential construction across the United States. The volume declines for our municipal solid waste disposal operations were the most significant in our Midwest Group due primarily to our focus on pricing increases.
 
Waste-to-energy and recycling revenues also declined in 2007 due to volume decreases. In our waste-to-energy business, the decrease was largely due to the termination of an operating and maintenance agreement in May 2007. The revenue decline due to lower third-party volumes in our recycling business was primarily attributable to the decreases in certain brokerage activities and the closure of a plastics processing facility.
 
Acquisitions and Divestitures — Revenues increased $117 million in 2008 and $37 million in 2007 due to acquisitions, principally in the collection, transfer and recycling businesses, although we also made acquisitions in 2008 in our “Other” business as we focus on entering new lines of business. Divestitures accounted for decreased revenues of $130 million in 2008 and $320 million in 2007. These divestitures were primarily comprised of collection operations and, to a lesser extent, transfer station and recycling operations. In the second, third and fourth quarters of 2008, revenue growth from acquisitions exceeded revenue declines from divestitures, a trend we had not seen in over two years. This change reflects (i) that there are less under-performing operations that are being considered for divestiture and (ii) the resulting shift of focus to accretive acquisitions.
 
Operating Expenses
 
Our operating expenses include (i) labor and related benefits (excluding labor costs associated with maintenance and repairs included below), which include salaries and wages, bonuses, related payroll taxes, insurance and benefits costs and the costs associated with contract labor; (ii) transfer and disposal costs, which include tipping fees paid to third-party disposal facilities and transfer stations; (iii) maintenance and repairs relating to equipment, vehicles and facilities and related labor costs; (iv) subcontractor costs, which include the costs of independent haulers who transport waste collected by us to disposal facilities and are driven by variables such as volumes, distance and fuel prices; (v) costs of goods sold, which are primarily the rebates paid to suppliers associated with recycling commodities; (vi) fuel costs, which represent the costs of fuel and oil to operate our truck fleet and landfill operating equipment; (vii) disposal and franchise fees and taxes, which include landfill taxes, municipal franchise fees, host community fees and royalties; (viii) landfill operating costs, which include interest accretion on asset retirement and environmental remediation obligations, leachate and methane collection and treatment, landfill remediation costs and other landfill site costs; (ix) risk management costs, which include workers’ compensation and insurance and claim costs and (x) other operating costs, which include, among other costs, equipment and facility rent and property taxes.


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The following table summarizes the major components of our operating expenses, including the impact of foreign currency translation, for the years ended December 31 (dollars in millions):
 
                                                         
          Period-to-
          Period-to-
       
    2008     Period Change     2007     Period Change     2006  
 
Labor and related benefits
  $ 2,420     $ 8       0.3 %   $ 2,412     $ (67 )     (2.7 )%   $ 2,479  
Transfer and disposal costs
    1,048       (100 )     (8.7 )     1,148       (100 )     (8.0 )     1,248  
Maintenance and repairs
    1,074       (5 )     (0.5 )     1,079       (58 )     (5.1 )     1,137  
Subcontractor costs
    901       (1 )     (0.1 )     902       (69 )     (7.1 )     971  
Cost of goods sold
    812       43       5.6       769       180       30.6       589  
Fuel
    715       134       23.1       581       2       0.3       579  
Disposal and franchise fees and taxes
    608       6       1.0       602       (39 )     (6.1 )     641  
Landfill operating costs
    291       30       11.5       261       23       9.7       238  
Risk management
    209       (8 )     (3.7 )     217       (74 )     (25.4 )     291  
Other
    388       (43 )     (10.0 )     431       17       4.1       414  
                                                         
    $ 8,466     $ 64       0.8 %   $ 8,402     $ (185 )     (2.2 )%   $ 8,587  
                                                         
 
The changes in our operating expenses for 2008 and 2007 compared with the prior years can largely be attributed to the following:
 
  •  Volume declines and divestitures — In both 2008 and 2007, we experienced volume declines as a result of (i) the weakening economy; (ii) our focus on our pricing program and shedding unprofitable business; and (iii) divestitures. We continue to manage our fixed costs and reduce our variable costs as we experience volume declines, and have achieved significant cost savings as a result. These cost decreases have benefited each of the operating cost categories identified in the table above.
 
  •  Acquisitions and growth initiatives — During 2008, a significant portion of the cost savings derived from divestitures was offset by cost increases attributed to recently acquired businesses and, to a lesser extent, other growth initiatives.
 
  •  Fuel price increases — In each year, increased fuel costs have increased our operating expenses and negatively affected our operating margins. Diesel fuel prices varied significantly in 2008, reaching a record-high price of $4.76 per gallon in July and falling to a three-year low of $2.33 per gallon by the end of the year. On average, diesel fuel prices increased 32% from $2.88 per gallon in 2007 to $3.81 per gallon in 2008. For 2007, we experienced an average increase of $0.18 per gallon as compared with 2006, or almost 7%. Higher fuel costs caused increases in both our direct fuel costs and our subcontractor costs throughout 2008 and 2007. As disclosed in the Operating Revenues section above, we have a fuel surcharge program that is designed to recover our increased fuel costs. Although our fuel surcharge program is designed to respond to changes in the market price for fuel, there is an administrative delay between the time our fuel costs change and when we are able to make the corresponding change in our fuel surcharges. This delay negatively affected our ability to fully recover our cost increases in the first six months of 2008 as the increases in our fuel surcharges consistently lagged the sharp increases in fuel costs throughout the first half of the year. However, the cost of fuel declined during the last half of 2008, allowing us to fully recover the fuel costs increase we incurred during the year.
 
  •  Commodities markets — Market prices for recyclable commodities increased significantly from 2006 to 2007 and also continued to climb through most of 2008, resulting in higher costs of goods sold in both periods. However, during the fourth quarter of 2008, the market prices and demand for recyclable commodities declined sharply. The significant decrease in market prices during the fourth quarter of 2008 and significant decreases in our brokerage and recycling facility volumes during much of 2008 partially offset the effect of higher commodity prices on our cost of goods sold during the first three quarters of 2008.


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  •  Union-related labor issues — Our 2008 operating expenses were significantly affected by a labor disruption associated with the renegotiation of a collective bargaining agreement in Milwaukee, Wisconsin and the related agreement of the bargaining unit to withdraw from the underfunded Central States Pension Fund, which is discussed in Note 10 to the Consolidated Financial Statements. These activities increased the operating expenses of our Midwest Group by $32 million during the third and fourth quarters of 2008. Approximately $24 million of these costs have been included in the “Labor and related benefits” category, $21 million of which were associated with charges related to the bargaining unit agreeing to our proposal to withdraw them from the underfunded Central States Pension Fund. The remaining $8 million has been included in our “Other” category and was related to security and the deployment and lodging costs incurred for the Company’s replacement workers who were brought to Milwaukee from across the organization.
 
Additionally, during the fourth quarter of 2008, we incurred another $18 million in “Labor and related benefits” charges associated with the withdrawal of certain bargaining units in our Midwest and Eastern Groups from underfunded multi-employer pension plans.
 
In 2007, our Western Group incurred “Other” operating expenses of $33 million for security, labor, lodging, travel and other costs incurred as a result of labor disruptions in Oakland and Los Angeles, California.
 
  •  Changes in risk-free interest rates — We recognized a $33 million charge to landfill operating costs during the fourth quarter of 2008 due to a sharp decline in United States Treasury rates, which are used to estimate the present value of our environmental remediation obligations. During the fourth quarter of 2008, the discount rate used was reduced from 4.00% to 2.25%. During 2007, we recorded an $8 million charge to reduce the discount rate from 4.75% to 4.00% and during 2006 we recorded a $6 million decrease in expense to reflect an increase in the rate from 4.25% to 4.75%.
 
Many of the cost increases summarized above are due to general economic and market conditions over which we have little or no control. After considering the significant impacts of market-driven factors, we are encouraged that our results continue to reflect our focus on (i) identifying operational efficiencies that translate into cost savings; (ii) managing our fixed costs and reducing our variable costs as volumes decline due to our pricing program and the downturn in the economy; and (iii) reducing our costs in light of recent divestitures.
 
Other items affecting the comparability of our operating expenses by category for the three years presented include the following:
 
Labor and related benefits
 
  •  In each year, wages increased due to annual merit adjustments, although these higher costs have been more than offset by headcount reductions due to operational efficiencies and divestitures.
  •  We experienced additional overtime and other labor costs due to severe winter weather conditions during the first quarter of 2008 in our Midwest Group.
  •  Our accrued bonus expenses were lower in 2008 because our performance against targets established by our incentive plans was not as strong as it had been in either 2007 or 2006.
 
Transfer and disposal costs
 
  •  During 2008 and 2007, these costs decreased due to volume declines and divestitures.
  •  During 2008 and 2007, these costs further decreased due to our focus on improving internalization.
 
Disposal and franchise fees and taxes
 
  •  The favorable resolution of a disposal tax matter in our Eastern Group reduced these expenses by $18 million during 2007 and $3 million during 2008.
 
Landfill operating costs
 
  •  In 2008, these costs included the unfavorable impact of the January 1, 2008 adoption of SFAS No. 157, which resulted in a $6 million charge.


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  •  During 2007, we recognized an $8 million charge for a revision in our estimate of remediation costs associated with one of our prior operations.
 
Risk management
 
  •  Over the last three years, we have been successful in reducing these costs, which can be primarily attributed to our continued focus on safety and reduced accident and injury rates.
  •  For 2008, the decrease in expense was largely associated with reduced actuarial projections of workers’ compensation costs and reduced auto and general liability claims for current claim periods.
  •  For 2007, the decrease in expense was largely associated with reduced actuarial projections of auto and general liability claims and, to a lesser extent, reduced workers’ compensation costs, all primarily related to prior claim periods.
 
Other
 
  •  In 2007, we incurred $21 million of lease termination costs associated with the purchase of one of our independent power production plants that had previously been operated through a lease agreement.
  •  In 2008 and 2007, we had an increase in gains recognized on the sales of assets due to our focus on identifying under-utilized assets in order to increase our efficiency.
 
Selling, General and Administrative
 
Our selling, general and administrative expenses consist of (i) labor costs, which include salaries, bonuses, related insurance and benefits, contract labor, payroll taxes and equity-based compensation; (ii) professional fees, which include fees for consulting, legal, audit and tax services; (iii) provision for bad debts, which includes allowances for uncollectible customer accounts and collection fees; and (iv) other general and administrative expenses, which include, among other costs, facility-related expenses, voice and data telecommunication, advertising, travel and entertainment, rentals, postage and printing. In addition, the financial impacts of litigation settlements generally are included in our “other” selling, general and administrative expenses.
 
The following table summarizes the major components of our selling, general and administrative expenses for the years ended December 31 (dollars in millions):
 
                                                         
          Period-to-
          Period-to-
       
    2008     Period Change     2007     Period Change     2006  
 
Labor and related benefits
  $ 853     $ 18       2.2 %   $ 835     $ 41       5.2 %   $ 794  
Professional fees
    168       8       5.0       160       (1 )     (0.6 )     161  
Provision for bad debts
    57       8       16.3       49                   49  
Other
    399       11       2.8       388       4       1.0       384  
                                                         
    $ 1,477     $ 45       3.1 %   $ 1,432     $ 44       3.2 %   $ 1,388  
                                                         
 
A significant portion of the $45 million increase in our “Selling, general and administrative” expenses in 2008 was as a result of our focus on business development initiatives, including gaining new customers and entering new lines of business. We estimate that these initiatives increased our expenses by nearly $19 million when comparing 2008 with 2007. Approximately $8 million of the $19 million increase is associated with increased consulting costs and has been included in “Professional fees.” The remaining cost increases can generally be attributed to increased headcount, advertising and travel and entertainment costs.
 
Other significant changes in our selling, general and administrative expenses during the reported periods are summarized below:
 
Labor and related benefits — The increases in 2008 and 2007 are primarily attributable to (i) higher salaries and hourly wages due to merit raises; (ii) higher compensation costs due to an increase in headcount driven by an increase in the size of our sales force and our focus on our people and business development initiatives; and (iii) higher non-cash compensation costs associated with the equity-based compensation provided for by our long-term incentive plans. In 2008, we also experienced higher insurance and benefit costs. These increases were


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partially offset by lower bonus expenses accrued in 2008 because our performance against targets established by our incentive plan was not as strong as it had been in either 2007 or 2006.
 
Professional fees — We incurred significant costs in both 2008 and 2007 that are of a non-recurring nature. In 2008, we incurred over $7 million of legal and consulting costs to support our previously proposed acquisition of Republic Services, Inc. In 2007, our consulting fees were higher due to increased spending for various strategic initiatives, including the support and development of the SAP waste and recycling revenue management system, which we discontinued development of in early 2008. For information related to the current status of our pending litigation against SAP, refer to Note 10 of our Consolidated Financial Statements.
 
Provision for bad debts — The increase in our provision for bad debts in 2008 is due to the effects of the weakened economy, which has increased collection risks associated with certain customers.
 
Other — As discussed above, our continued focus on our sales, marketing and other initiatives and identifying new customers resulted in increases in our advertising costs and travel and entertainment costs in 2008. The comparability of these costs for the periods presented has also been affected by net charges of approximately $2 million in 2007 and $20 million in 2006 to record our estimated obligations for unclaimed property. Additionally, in both 2007 and 2006, our other costs increased due to higher sales and marketing costs and higher travel and entertainment costs due partially to the development of our revenue management system and our efforts to implement various initiatives.
 
Depreciation and Amortization
 
Depreciation and amortization includes (i) depreciation of property and equipment, including assets recorded due to capital leases, on a straight-line basis from three to 50 years; (ii) amortization of landfill costs, including those incurred and all estimated future costs for landfill development, construction, asset retirement costs arising from closure and post-closure, on a units-of-consumption method as landfill airspace is consumed over the estimated remaining permitted and expansion capacity of a site; (iii) amortization of landfill asset retirement costs arising from final capping obligations on a units-of-consumption method as airspace is consumed over the estimated capacity associated with each final capping event; and (iv) amortization of intangible assets with a definite life, either using a 150% declining balance approach or a straight-line basis over the definitive terms of the related agreements, which are generally from two to ten years depending on the type of asset.
 
The following table summarizes the components of our depreciation and amortization costs for the years ended December 31 (dollars in millions):
 
                                                         
          Period-to-
          Period-to-
       
    2008     Period Change     2007     Period Change     2006  
 
Depreciation of tangible property and equipment
  $ 785     $ (11 )     (1.4 )%   $ 796     $ (33 )     (4.0 )%   $ 829  
Amortization of landfill airspace
    429       (11 )     (2.5 )     440       (39 )     (8.1 )     479  
Amortization of intangible assets
    24       1       4.3       23       (3 )     (11.5 )     26  
                                                         
    $ 1,238     $ (21 )     (1.7 )%   $ 1,259     $ (75 )     (5.6 )%   $ 1,334  
                                                         
 
In both 2008 and 2007, the decrease in depreciation on tangible property and equipment is largely due to (i) components of enterprise-wide software becoming fully-depreciated; and (ii) our focus on identifying operational efficiencies as we shed unprofitable business, which has allowed us to retire or sell under-utilized assets.
 
The decrease in amortization of landfill airspace expense in 2008 and 2007 is largely due to volume declines as a result of (i) the slowdown in the economy; (ii) our pricing program, which has significantly reduced our collection volumes; and (iii) the redirection of waste to third-party disposal facilities in certain regions due to either the closure of our own landfills or the current capacity constraints of landfills where we are working on procuring an expansion permit. The comparability of our amortization of landfill airspace for the years ended December 31, 2008, 2007, and 2006 has also been affected by adjustments recorded in each year for changes in estimates related to our final capping, closure and post-closure obligations. During the years ended December 31, 2008, 2007 and 2006, landfill amortization expense was reduced by $3 million, $17 million and $1 million, respectively, for the effects of these


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changes in estimates. In each year, the majority of the reduced expense resulting from the revised estimates was associated with final capping changes that were generally the result of (i) concerted efforts to improve the operating efficiencies of our landfills and volume declines, both of which have allowed us to delay spending for final capping activities; (ii) landfill expansions that resulted in reduced or deferred final capping costs; or (iii) completed final capping construction that cost less than anticipated.
 
Restructuring
 
Management continuously reviews our organization to determine if we are operating under the most advantageous structure. As discussed in Note 24 to the Consolidated Financial Statements, in February 2009 we announced that we were taking steps to streamline our organization by consolidating many of our Market Areas and realigning our Corporate support organization. In 2008, we recognized $2 million of restructuring expenses for the reorganization of customer service functions in our Western Group and the realignment of certain operations in our Southern Group. In the first quarter of 2007, we restructured certain operations and functions, resulting in the recognition of a charge of approximately $9 million. We incurred an additional $1 million of costs for this restructuring during the second quarter of 2007, increasing total costs incurred to $10 million. Approximately $7 million of the 2007 restructuring costs was incurred by our Corporate organization, $2 million was incurred by our Midwest Group and $1 million was incurred by our Western Group. These charges included approximately $8 million for employee severance and benefit costs and approximately $2 million related to operating lease agreements.
 
The most significant cost savings we have obtained through these restructurings have been attributable to the labor and related benefits component of our “Selling, general and administrative” expenses.
 
(Income) Expense from Divestitures, Asset Impairments and Unusual Items
 
The following table summarizes the major components of “(Income) expense from divestitures, asset impairments and unusual items” for the year ended December 31 for the respective periods (in millions):
 
                         
    Years Ended December 31,  
    2008     2007     2006  
 
(Income) expense from divestitures (including held-for-sale impairments)
  $ (33 )   $ (59 )   $ (26 )
Impairments of assets held-for-use
    4       12       24  
Other
                27  
                         
    $ (29 )   $ (47 )   $ 25  
                         
 
(Income) expense from divestitures (including held-for-sale impairments) — The net gains from divestitures in all three years were a result of our fix-or-seek-exit initiative. In 2008, these gains were primarily related to the divestiture of underperforming collection operations in our Southern Group; in 2007, the gains were related to the divestiture of underperforming collection, transfer and recycling operations in our Eastern, Western, Southern and WMRA Groups; and in 2006, the gains were primarily related to the divestiture of underperforming collection operations in our Western Group. Gains recognized from divestitures in 2006 were partially offset by the recognition of aggregate impairment charges of $18 million, which were principally recognized by our Eastern Group, for business operations held for sale as required by SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
 
Impairments of assets held-for-use — During 2008, we recognized a $4 million impairment charge primarily as a result of a decision to close a landfill in our Southern Group. During 2007, we recognized $12 million in impairment charges due to impairments recognized for two landfills in our Southern Group. The impairments were necessary as a result of the re-evaluation of our business alternatives for one landfill and the expiration of a contract that we had expected would be renewed that had significantly contributed to the volumes for the second landfill. The $24 million of impairment charges recognized during 2006 was primarily related to the impairment of a landfill in our Eastern Group as a result of a change in our expectations for future expansions and the impairment of under-performing operations in our WMRA Group.


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Other — In 2006, we recognized a $26 million charge for the impact of an arbitration ruling against us related to the termination of a joint venture relationship in 2000.
 
Income From Operations by Reportable Segment
 
The following table summarizes income from operations by reportable segment for the years ended December 31 (dollars in millions):
 
                                                         
          Period-to-
          Period-to-
       
    2008     Period Change     2007     Period Change     2006  
 
Operating segments:
                                                       
Eastern
  $ 501     $ (19 )     (3.7 )%   $ 520     $ 131       33.7 %   $ 389  
Midwest
    463       (39 )     (7.8 )     502       47       10.3       455  
Southern
    863       47       5.8       816       12       1.5       804  
Western
    601       (3 )     (0.5 )     604       (16 )     (2.6 )     620  
Wheelabrator
    323       31       10.6       292       (23 )     (7.3 )     315  
WMRA
    52       (26 )     (33.3 )     78       64       *       14  
Other
    (58 )     (18 )     45.0       (40 )     (17 )     *       (23 )
Corporate and other
    (511 )     7       (1.4 )     (518 )     27       (5.0 )     (545 )
                                                         
Total
  $ 2,234     $ (20 )     (0.9 )%   $ 2,254     $ 225       11.1 %   $ 2,029  
                                                         
 
 
* Percentage change does not provide a meaningful comparison.
 
Operating segments — The most significant items affecting the results of operations of our geographic operating segments during the three-year period ended December 31, 2008, are (i) increased revenue from yield on base business as a result of our pricing strategies, particularly in our collection operations; (ii) declines in revenues due to lower volumes, which can be attributed to pricing competition, the significant downturn in construction and the slowdown of the general economy; and (iii) our continued focus on controlling costs through operating efficiencies. For the first nine months of 2008, our Groups also experienced an unfavorable effect on operating income of significantly higher fuel costs. However, during the fourth quarter of 2008, fuel costs decreased significantly enough to reverse this trend, resulting in an immaterial impact to the full year. See additional discussion in the Operating Revenues section above.
 
Summarized below are the other significant items specific to each operating segment’s results of operations for the years ended December 31, 2008, 2007 and 2006:
 
Eastern — The Group’s operating income for the year ended December 31, 2008 was negatively affected by a $14 million charge related to the withdrawal of certain collective bargaining units from underfunded multi-employer pension plans. This charge was offset, in part, by a reduction in landfill amortization expense as a result of changes in certain estimates related to our final capping, closure and post-closure obligations. The Group’s operating income for the year ended December 31, 2007 was favorably affected by (i) net divestiture gains of $33 million; (ii) an $18 million decrease in disposal fees and taxes due to the favorable resolution of a disposal tax matter; and (iii) a reduction in landfill amortization expense as a result of changes in certain estimates related to our final capping, closure and post-closure obligations. The Group’s operating income for the year ended December 31, 2006 was negatively affected by $26 million in impairment charges associated with (i) businesses being sold as part of our divestiture program; and (ii) a change in our expectations for future operations of a landfill. In 2006, the Group also incurred $14 million of strike-related costs incurred primarily in the New York City area.
 
Midwest — The Group’s 2008 operating results were negatively affected by $44 million of additional operating expenses primarily incurred as a result of a labor dispute in Milwaukee, Wisconsin. Included in the labor dispute expenses is a $32 million charge related to the withdrawal of certain of the Group’s bargaining units from underfunded multi-employer pension plans. In addition, the Group experienced unfavorable weather conditions in the first quarter of 2008. Positively affecting operating results both in 2008 and in 2007


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were divestiture gains of $4 million in 2008 and $1 million in 2007 and reductions in landfill amortization expense resulting from changes in certain estimates related to our final capping, closure and post-closure obligations.
 
Southern — During 2008, the increase in the Group’s operating income is largely due to $29 million of divestiture gains, offset, in part, by a $3 million landfill impairment charge. During 2007, the Group recorded $12 million of impairment charges attributable to two of its landfills. These charges were largely offset by gains on divestitures of $11 million.
 
Western — The Group’s 2008 operating results were negatively affected by an increase in landfill amortization expense as a result of changes in certain estimates related to our final capping, closure and post-closure obligations. In 2007, labor disputes negatively affected the Group’s operating results by $37 million, principally as a result of “Operating” expenses incurred for security, deployment and lodging costs for replacement workers. Gains on divestitures of operations were $16 million for the year ended December 31, 2007 as compared with $48 million for 2006.
 
Wheelabrator — The Group’s 2008 operating results were favorably affected by increases in market rates for energy during the second half of 2008. The decline in operating income for the year ended December 31, 2007 was driven by a $21 million charge recorded in the first quarter of 2007 for the early termination of a lease agreement. The early termination was due to the Group’s purchase of an independent power production plant that it had previously operated through a lease agreement. Additionally, the termination of an operating and maintenance agreement in May 2007 resulted in a decline in revenue and operating income compared with the prior year.
 
WMRA — During the first nine months of 2008 and throughout all of 2007, the Group’s operating income benefited from substantial increases in market prices for commodities. Also during these periods, the Group experienced income growth due to an increased focus on maintaining or reducing rebates made to suppliers. During the fourth quarter of 2008, however, commodity prices dropped sharply as a result of a significant decrease in the demand for commodities both domestically and internationally. This significant decline in commodity prices resulted in operating losses that more than offset the income generated during the first nine months of the year. Higher than normal operating expenses, including higher subcontractor, repair and maintenance, and facility start-up costs, also negatively affected the Group’s operating income throughout 2008. The comparison of the Group’s operating income for the periods presented has also been affected by (i) $7 million of net gains on divestitures in 2007 and (ii) the recognition in 2006 of $10 million of charges for a loss from a divestiture and an impairment of certain under-performing operations, which were slightly more than offset by savings associated with the Group’s cost control efforts.
 
Significant items affecting the comparability of the remaining components of our results of operations for the years ended December 31, 2008, 2007 and 2006 are summarized below:
 
Other — The unfavorable change in operating results in 2008 when compared with 2007 is the result of costs being incurred to support our increased focus on the identification and development of new lines of business that will complement our core business. The unfavorable change in operating results in 2007 when compared with 2006 is largely related to (i) certain year-end adjustments recorded in consolidation related to our reportable segments that were not included in the measure of segment income from operations used to assess their performance for the periods disclosed; and (ii) the deconsolidation of a variable interest entity in April 2006.
 
Corporate and Other — The decline in expenses in 2008 as compared with 2007 was primarily due to:
 
  •  lower bonus expense in 2008;
  •  the recognition of approximately $6 million of restructuring charges during the first quarter of 2007 for employee severance and benefit costs;
  •  reduced risk management costs in 2008, which is attributable to reduced actuarial projections of claim losses for workers’ compensation and auto and general liability claims; and
  •  higher employee healthcare coverage expenses in the third quarter of 2007 due to unusually high claims activity.


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The expense declines noted above were largely offset by the impacts of the following:
 
  •  a $32 million charge to landfill operating costs for the closed landfills that are managed by our closed sites management group through our Corporate organization, due to a sharp decline in United States Treasury rates in late 2008, which caused an increase in the present value of our environmental remediation obligations; and
• costs incurred for the potential acquisition of Republic during the third quarter of 2008.
 
The decline in expenses when comparing 2007 with 2006 was primarily due to:
 
• significantly lower risk management costs largely due to our focus on safety and controlling costs;
  •  a reduction in expenses from the discontinuation of depreciation for certain enterprise-wide software; and
  •  a $20 million charge recorded in 2006 to recognize unrecorded obligations associated with unclaimed property.
 
The expense declines noted above were offset, in part, by the impacts of the following:
 
  •  increased spending on the support and development of our information technology, people and pricing strategic initiatives;
  •  increased labor and related benefits costs; and
  •  restructuring charges recognized during the first quarter of 2007.
 
Other Components of Net Income
 
The following table summarizes the other major components of our income for the year ended December 31 for each respective period (dollars in millions):
 
                                                         
          Period-to-
          Period-to-
       
    2008     Period Change     2007     Period Change     2006  
 
Interest expense
  $ (455 )   $ 66       (12.7 )%   $ (521 )   $ 24       (4.4 )%   $ (545 )
Interest income
    19       (28 )     (59.6 )     47       (22 )     (31.9 )     69  
Equity in net losses of unconsolidated entities
    (4 )     31       *       (35 )     1       (2.8 )     (36 )
Minority interest
    (41 )     5       (10.9 )     (46 )     (2 )     4.5       (44 )
Other, net
    3       (1 )     (25.0 )     4       3       *       1  
Provision for income taxes
    669       129       *       540       215       *       325  
 
 
* Percentage change does not provide a meaningful comparison. Refer to the explanations of these items below for a discussion of the relationship between current year and prior year activity.
 
Interest Expense
 
Although our outstanding debt balances are relatively consistent year-over-year, the decline in interest costs when comparing 2008 with 2007 is generally related to (i) the maturity of higher rate debt that we have refinanced at lower interest rates; (ii) significant declines in market interest rates, which impact the interest expense associated with our interest rate swaps and our variable rate debt; and (iii) the early redemption of $244 million of 8.75% senior notes during the second quarter of 2008, which resulted in the recognition of a reduction in interest expense of approximately $10 million for the immediate recognition of fair value adjustments associated with terminated interest rate swaps that had been deferred and were being amortized over the life of the debt. The decrease in interest expense when comparing 2007 with 2006 is largely related to a decrease in our average debt balances.
 
We use interest rate derivative contracts to manage our exposure to changes in market interest rates. The combined impact of active and terminated interest rate swap agreements resulted in a net interest expense decrease of $50 million for 2008 and net interest expense increases of $11 million for 2007 and $4 million for 2006. Our active interest rate swaps decreased our interest expense in 2008 by $8 million compared with an increase in interest expense in 2007 from active hedges of $48 million. The significant change in the impact of our active interest rate swaps when comparing 2008 with 2007 has been driven by the decrease in short-term market interest rates, which


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drive our periodic interest obligations under our active swap agreements. Our periodic interest obligations under these agreements are based on a spread from the three-month LIBOR, which was as low as 1.43% in late 2008 and as high as 5.62% in the second half of 2007. In 2008, the year-over-year change in the impact of interest rate swaps is also due to our terminated swaps, which caused a $42 million reduction in interest expense in 2008 compared with a $37 million reduction in interest expense in 2007. Our terminated interest rate swaps are expected to reduce interest expense by $18 million in 2009, $11 million in 2010, and $5 million in 2011.
 
Interest Income
 
When comparing 2008 with 2007, the decrease in interest income is primarily due to (i) significant declines in market interest rates; (ii) the recognition of $7 million in interest income during the first quarter of 2007 for the favorable resolution of a disposal tax matter in our Eastern Group; and (iii) a decrease in our average cash and investment balances. When comparing 2007 with 2006, the decrease in interest income is primarily due to (i) a decrease in our average cash and investment balances; and (ii) $14 million of interest income realized in 2006 on tax refunds received from the IRS for the settlement of several federal audits.
 
Equity in Net Losses of Unconsolidated Entities
 
During the reported periods, our “Equity in net losses of unconsolidated entities” was primarily related to our equity interests in two coal-based synthetic fuel production facilities. The equity losses generated by the facilities were offset by the tax benefit realized as a result of these investments as discussed below within Provision for income taxes.
 
Our equity in the losses of these facilities was $3 million for the year ended December 31, 2008, $42 million for the year ended December 31, 2007 and $41 million for the year ended December 31, 2006. The significant decline in these losses in 2008 as compared with the prior year periods is due to the expiration of our investments at the end of 2007. The comparability of the losses incurred in 2007 and 2006 is primarily affected by (i) the impact of the partial phase-out of Section 45K credits during each year on our contractual obligations associated with funding the facilities’ losses; (ii) the temporary suspension of operations at the facilities in 2006; and (iii) the recognition of a cumulative adjustment necessary to appropriately reflect our life-to-date obligations to fund the costs of operating the facilities and the value of our investment, which was recognized in 2006. Refer to Note 8 for additional information related to the impact of these investments.
 
Minority Interest
 
On December 31, 2003, we consolidated two limited liability companies that own three waste-to-energy facilities operated by our Wheelabrator Group as a result of our implementation of FIN 46(R). Our minority interest expense for 2008, 2007 and 2006 is primarily related to the other members’ equity interest in the earnings of these entities. Additional information related to these investments is included in Note 19 to the Consolidated Financial Statements.
 
Provision for Income Taxes
 
We recorded a provision for income taxes of $669 million in 2008, $540 million in 2007 and $325 million in 2006. These tax provisions resulted in an effective income tax rate of approximately 38.1%, 31.7% and 22.1% for each of the three years, respectively. At current income levels, we expect that our 2009 recurring effective tax rate will be approximately 40%. The comparability of our reported income taxes for the years ended December 31, 2008, 2007 and 2006 is primarily affected by (i) increases in our income before taxes; (ii) differences in the impacts of tax audit settlements; and (iii) the impact of non-conventional fuel tax credits, which expired at the end of 2007. The impacts of tax audit settlements and non-conventional fuel tax credits, which are the items that had the most significant impacts on the comparability of our effective tax rate during the years ended December 31, 2008, 2007 and 2006, are summarized below:
 
  •  Tax audit settlements — When excluding the effect of interest income, the settlement of various tax audits resulted in a reduction in income tax expense of $26 million for the year ended December 31, 2008 (representing a 1.5 percentage point reduction in our effective tax rate), $40 million for the year ended


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  December 31, 2007 (representing a 2.3 percentage point reduction in our effective tax rate) and $149 million for the year ended December 31, 2006 (representing a 10.1 percentage point reduction in our effective tax rate).
 
  •  Non-conventional fuel tax credits — Through December 31, 2007, non-conventional fuel tax credits were derived from our landfills and our investments in the two coal-based, synthetic fuel production facilities discussed in the Equity in net losses of unconsolidated entities section above. Pursuant to Section 45K of the Internal Revenue Code, these tax credits were phased-out if the price of oil exceeded an annual average as determined by the IRS. Based on an estimated phase-out of 69% of Section 45K tax credits generated during 2007, our income taxes for the year ended December 31, 2007 included $50 million of non-conventional fuel tax credits. These tax credits resulted in a 2.9 percentage point reduction in our effective tax rate for the year ended December 31, 2007. In April 2008, the IRS published the phase-out percentage that must be applied to Section 45K tax credits generated in 2007, which was 67.2%. Our provision for income taxes for the first quarter of 2008 included an adjustment of our 2007 year-end estimate to the final 2007 phase-out, which resulted in the recognition of a $3 million benefit. Our income taxes for the year ended December 31, 2006 included $71 million of non-conventional fuel tax credits, resulting in a 4.8 percentage point reduction in our effective tax rate. Non-conventional fuel tax credits expired at the end of 2007 pursuant to Section 45K of the Internal Revenue Code.
 
Other items that have affected our reported income taxes during the reported periods include the following:
 
  •  Canadian tax rate changes and the related revaluation of deferred tax balances resulted in a $30 million tax benefit during 2007 compared with a $20 million tax benefit in 2006. We did not have any comparable adjustments during the year ended December 31, 2008.
 
  •  We recorded reductions to income tax expense of $8 million in 2008, $9 million in 2007 and $20 million in 2006 due to state-related tax items. These impacts were generally due to either (i) the revaluation of net accumulated deferred tax liabilities as a result of a decrease in our effective state tax rate or (ii) the expected utilization of state net operating loss and credit carryforwards.
 
Landfill and Environmental Remediation Discussion and Analysis
 
We owned or operated 267 solid waste and six hazardous waste landfills at December 31, 2008 and we owned or operated 271 solid waste and six hazardous waste landfills at December 31, 2007. At December 31, 2008 and 2007, the expected remaining capacity in cubic yards and tonnage of waste that can be accepted at our owned or operated landfills is shown below (in millions):
 
                                                 
    December 31, 2008     December 31, 2007  
    Remaining
                Remaining
             
    Permitted
    Expansion
    Total
    Permitted
    Expansion
    Total
 
    Capacity     Capacity     Capacity     Capacity     Capacity     Capacity  
 
Remaining cubic yards
    4,456       816       5,272       4,265       944       5,209  
Remaining tonnage
    3,979       794       4,773       3,787       893       4,680  
 
Based on remaining permitted airspace as of December 31, 2008 and projected annual disposal volumes, the weighted average remaining landfill life for all of our owned or operated landfills is approximately 32 years. Many of our landfills have the potential for expanded disposal capacity beyond what is currently permitted. We monitor the availability of permitted disposal capacity at each of our landfills and evaluate whether to pursue an expansion at a given landfill based on estimated future waste volumes and prices, remaining capacity and likelihood of obtaining an expansion permit. We are seeking expansion permits at 42 of our landfills that meet the expansion criteria outlined in the Critical Accounting Estimates and Assumptions section above. Although no assurances can be made that all future expansions will be permitted or permitted as designed, the weighted average remaining landfill life for all owned or operated landfills is approximately 39 years when considering remaining permitted airspace, expansion airspace and projected annual disposal volume.


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The number of landfills we own or operate as of December 31, 2008, segregated by their estimated operating lives (in years), based on remaining permitted and expansion airspace and projected annual disposal volume was as follows:
 
                                                 
    0 to 5     6 to 10     11 to 20     21 to 40     41+     Total  
 
Owned
    11       17       41       65       78       212  
Operated through lease(a)
    5       4       5       7       6       27  
Operating contracts(b)
    11       4       10       5       4       34  
                                                 
Total landfills
    27       25       56       77       88       273  
                                                 
 
 
(a) From an operating perspective, landfills we operate through lease agreements are similar to landfills we own because we own the landfill’s operating permit and will operate the landfill for the entire lease term, which in many cases is the life of the landfill. We are usually responsible for the closure and post-closure obligations of the landfills we lease.
 
(b) For operating contracts, the property owner 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 operating contracts.
 
The following table reflects landfill capacity and airspace changes, as measured in tons of waste, for landfills owned or operated by us during the years ended December 31, 2008 and 2007 (in millions):
 
                                                 
    December 31, 2008     December 31, 2007  
    Remaining
                Remaining
             
    Permitted
    Expansion
    Total
    Permitted
    Expansion
    Total
 
    Capacity     Capacity     Capacity     Capacity     Capacity     Capacity  
 
Balance, beginning of year
    3,787       893       4,680       3,760       959       4,719  
Acquisitions, divestitures, newly permitted landfills and closures
    20       15       35       (5 )     (15 )     (20 )
Changes in expansions pursued(a)
          94       94             60       60  
Expansion permits granted(b)
    228       (228 )           128       (128 )      
Airspace consumed
    (107 )           (107 )     (114 )           (114 )
Changes in engineering estimates and other(c)
    51       20       71       18       17       35  
                                                 
Balance, end of year
    3,979       794       4,773       3,787       893       4,680  
                                                 
 
 
(a) Amounts reflected here relate to the combined impact of (i) new expansions pursued; (ii) increases or decreases in the airspace being pursued for ongoing expansion efforts; (iii) adjustments for differences between the airspace being pursued and airspace granted; and (iv) decreases due to our decision to no longer pursue an expansion permit.
 
(b) We received expansion permits at 28 of our landfills during 2008 and 17 of our landfills during 2007, demonstrating our continued success in working with municipalities and regulatory agencies to expand the disposal capacity of our existing landfills.
 
(c) Changes in engineering estimates can result in changes to the estimated available remaining capacity of a landfill or changes in the utilization of such landfill capacity, affecting the number of tons that can be placed in the future. Estimates of the amount of waste that can be placed in the future are reviewed annually by our engineers and are based on a number of factors, including standard engineering techniques and site-specific factors such as current and projected mix of waste type; initial and projected waste density; estimated number of years of life remaining; depth of underlying waste; anticipated access to moisture through precipitation or recirculation of landfill leachate; and operating practices. We continually focus on improving the utilization of airspace through efforts that include recirculating landfill leachate where allowed by permit; optimizing the placement of daily cover materials; and increasing initial compaction through improved landfill equipment, operations and training.


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The tons received at our landfills in 2008 and 2007 are shown below (in thousands):
 
                                                 
    2008     2007  
    # of
    Total
    Tons
    # of
    Total
    Tons
 
    Sites     Tons     per Day     Sites     Tons     per Day  
 
Solid waste landfills
    267 (a)     106,731       391       271       113,449       417  
Hazardous waste landfills
    6       1,384       5       6       1,473       5  
                                                 
      273       108,115       396       277       114,922       422  
                                                 
Solid waste landfills closed or divested during related year
    9       882               8       1,555          
                                                 
              108,997 (b)                     116,477 (b)        
                                                 
 
 
(a) In 2008, we acquired five landfills, closed five landfills and discontinued operations at four landfills.
 
(b) These amounts include 2.0 million tons at December 31, 2008 and 2.4 million tons at December 31, 2007 that were received at our landfills but were used for beneficial purposes and generally were redirected from the permitted airspace to other areas of the landfill. Waste types that are frequently identified for beneficial use include green waste for composting and clean dirt for on-site construction projects.
 
When a landfill we own or operate (i) reaches its permitted waste capacity; (ii) is permanently capped; and (iii) receives certification of closure from the applicable regulatory agency, management of the site, including remediation activities, is generally transferred to our closed sites management group. In addition to the 273 active landfills we managed at December 31, 2008, we managed 195 closed landfills.
 
Landfill Assets — We capitalize various costs that we incur to make a landfill ready to accept waste. These costs generally include expenditures for land (including the landfill footprint and required landfill buffer property), permitting, excavation, liner material and installation, landfill leachate collection systems, landfill gas collection systems, environmental monitoring equipment for groundwater and landfill gas, directly related engineering, capitalized interest, and on-site road construction and other capital infrastructure costs. The cost basis of our landfill assets also includes estimates of future costs associated with landfill final capping, closure and post-closure activities, which are discussed further below.
 
The following table reflects the total cost basis of our landfill assets and accumulated landfill airspace amortization as of December 31, 2008 and 2007, and summarizes significant changes in these amounts during 2008 (in millions):
 
                         
          Accumulated
       
    Cost Basis of
    Landfill Airspace
       
    Landfill Assets     Amortization     Landfill Assets  
 
December 31, 2007
  $ 11,549     $ (5,834 )   $ 5,715  
Capital additions
    473             473  
SFAS No. 143 obligations incurred and capitalized
    51             51  
Acquisitions
    46             46  
Landfill airspace amortization expense
          (429 )     (429 )
Foreign currency translation
    (234 )     61       (173 )
Asset retirements and other adjustments
    (169 )     149       (20 )
                         
December 31, 2008
  $ 11,716     $ (6,053 )   $ 5,663  
                         
 
As of December 31, 2008, we estimate that we will spend approximately $500 million in 2009, and approximately $1 billion in 2010 and 2011 combined for the construction and development of our landfill assets. The specific timing of landfill capital spending is dependent on future events and spending estimates are subject to change due to fluctuations in landfill waste volumes, changes in environmental requirements and other factors impacting landfill operations.


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Landfill and Environmental Remediation Liabilities — As we accept waste at our landfills, we incur significant asset retirement obligations, which include liabilities associated with landfill final capping, closure and post-closure activities. These liabilities are accounted for in accordance with SFAS No. 143, Accounting for Asset Retirement Obligations and its Interpretations, and are discussed in Note 3 of our Consolidated Financial Statements. We also have liabilities for the remediation of properties that have incurred environmental damage, which generally was caused by operations or for damage caused by conditions that existed before we acquired operations or a site. We recognize environmental remediation liabilities when we determine that the liability is probable and the estimated cost for the likely remedy can be reasonably estimated.
 
The following table reflects our landfill liabilities and our environmental remediation liabilities as of December 31, 2008 and 2007, and summarizes significant changes in these amounts during 2008 (in millions):
 
                 
          Environmental
 
    Landfill     Remediation  
 
December 31, 2007
  $ 1,178     $ 284  
Obligations incurred and capitalized
    51        
Obligations settled
    (72 )     (38 )
Interest accretion
    77       8  
Revisions in cost estimates and interest rate assumptions(a)
    (13 )     49  
Acquisitions, divestitures and other adjustments
    (3 )     (4 )
                 
December 31, 2008
  $ 1,218     $ 299  
                 
 
 
(a) The significant increase in our environmental remediation liabilities for revisions in cost estimates and interest rate assumptions is largely related to the decline in the risk-free discount rate used to estimate the present value of the obligations. The impact of this revision in estimate is discussed further below.
 
Landfill Costs and Expenses — As disclosed in the Operating Expenses section above, our landfill operating costs include interest accretion on asset retirement obligations, interest accretion on and discount rate adjustments to environmental remediation liabilities and recovery assets, leachate and methane collection and treatment, landfill remediation costs, and other landfill site costs. The following table summarizes these costs for each of the three years indicated (in millions):
 
                         
    Years Ended December 31,  
    2008     2007     2006  
 
Interest accretion on landfill liabilities
  $ 77     $ 74     $ 70  
Interest accretion on and discount rate adjustments to environmental remediation liabilities and recovery assets
    41       18       3  
Leachate and methane collection and treatment
    69       58       59  
Landfill remediation costs
    17       17       6  
Other landfill site costs
    87       94       100  
                         
Total landfill operating costs
  $ 291     $ 261     $ 238  
                         
 
The increase in these costs in 2008 can largely be attributed to a significant decline in the risk-free discount rate that we use to estimate the present value of our environmental remediation liabilities, which is based on the rate for United States Treasury bonds with a term approximating the weighted-average period until settlement of the underlying obligations. During the fourth quarter of 2008, we recorded a $33 million charge to “Operating” expenses, offset in part by a $6 million reduction in “Minority interest” expense, to reduce the discount rate from 4.00% to 2.25%. We recorded an $8 million charge to “Operating” expenses during the fourth quarter of 2007 to reduce the discount rate from 4.75% to 4.00% and a $6 million decrease in “Operating” expenses during the fourth quarter of 2006 to increase the discount rate from 4.25% to 4.75%. Additionally, in 2008, our leachate collection costs were higher in our Eastern Group and Midwest Group due to increased precipitation and operational changes in these regions.


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Amortization of landfill airspace, which is included as a component of “Depreciation and amortization” expense, includes the following:
 
  •  the amortization of landfill capital costs, including (i) costs that have been incurred and capitalized and (ii) estimated future costs for landfill development and construction required to develop our landfills to their remaining permitted and expansion airspace; and
 
  •  the amortization of asset retirement costs arising from landfill final capping, closure and post-closure obligations, including (i) costs that have been incurred and capitalized and (ii) projected asset retirement costs.
 
Amortization expense is recorded on a units-of-consumption basis, applying cost as a rate per ton. The rate per ton is calculated by dividing each component of the amortizable basis of a landfill by the number of tons needed to fill the corresponding asset’s airspace. Landfill capital costs and closure and post-closure asset retirement costs are generally incurred to support the operation of the landfill over its entire operating life, and are, therefore, amortized on a per ton basis using a landfill’s total airspace capacity. Final capping asset retirement costs are attributed to a specific final capping event, and are, therefore, amortized on a per ton basis using each discrete capping event’s estimated airspace capacity. Accordingly, each landfill has multiple per ton amortization rates.
 
The following table calculates our landfill airspace amortization expense on a per ton basis:
 
                         
    Years Ended December 31,  
    2008     2007     2006  
 
Landfill airspace amortization expense (in millions)
  $ 429     $ 440     $ 479  
Tons received, net of redirected waste (in millions)
    107       114       126  
Average landfill airspace amortization expense per ton
  $ 4.01     $ 3.86     $ 3.80  
 
Different per ton amortization rates are applied at each of our 273 landfills, and per ton amortization rates vary significantly from one landfill to the next due to (i) inconsistencies that often exist in construction costs and provincial, state and local regulatory requirements for landfill development and landfill final capping, closure and post-closure activities; and (ii) differences in the cost basis of landfills that we develop versus those that we acquire. Accordingly, our landfill airspace amortization expense measured on a per ton basis can fluctuate due to changes in the mix of volumes received across the Company year-over-year. The comparability of our total Company average landfill airspace amortization expense per ton for the years ended December 31, 2008, 2007 and 2006 has also been affected by the recognition of reductions to amortization expense for changes in our estimates related to our final capping, closure and post-closure obligations. Landfill amortization expense was reduced by $3 million in 2008, $17 million in 2007 and $1 million in 2006, for the effects of these changes in estimates. In each year, the majority of the reduced expense resulted from revisions in the estimated timing or cost of final capping events that were generally the result of (i) concerted efforts to improve the operating efficiencies of our landfills and volume declines, both of which have allowed us to delay spending for final capping activities; (ii) landfill expansions that resulted in reduced or deferred final capping costs; or (iii) completed final capping construction that cost less than anticipated.
 
Liquidity and Capital Resources
 
We continually monitor our actual and forecasted cash flows, our liquidity and our capital resources, enabling us to plan for our present needs and fund unbudgeted business activities that may arise during the year as a result of changing business conditions or new opportunities. In addition to our working capital needs for the general and administrative costs of our ongoing operations, we have cash requirements for: (i) the construction and expansion of our landfills; (ii) additions to and maintenance of our trucking fleet; (iii) construction, refurbishments and improvements at waste-to-energy and materials recovery facilities; (iv) the container and equipment needs of our operations; (v) capping, closure and post-closure activities at our landfills; and (vi) repaying debt and discharging other obligations. We also are committed to providing our shareholders with a return on their investment through our capital allocation program that provides for dividend payments, share repurchases and investments in acquisitions that we believe will be accretive and provide continued growth in our business.


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Summary of Cash, Short-Term Investments, Restricted Trust and Escrow Accounts and Debt Obligations
 
The following is a summary of our cash, short-term investments available for use, restricted trust and escrow accounts and debt balances as of December 31, 2008 and December 31, 2007 (in millions):
 
                 
    2008     2007  
 
Cash and cash equivalents
  $ 480     $ 348  
                 
Restricted trust and escrow accounts:
               
Tax-exempt bond funds
  $ 123     $ 117  
Closure, post-closure and environmental remediation funds
    213       231  
Debt service funds
    35       47  
Other
    10       23  
                 
Total restricted trust and escrow accounts
  $ 381     $ 418  
                 
Debt:
               
Current portion
  $ 835     $ 329  
Long-term portion
    7,491       8,008  
                 
Total debt
  $ 8,326     $ 8,337  
                 
Increase in carrying value of debt due to hedge accounting for interest rate swaps
  $ 150     $ 72  
                 
 
Cash and cash equivalents — Cash and cash equivalents consist primarily of cash on deposit and money market funds that invest in United States government obligations, all of which have original maturities of three months or less.
 
Restricted trust and escrow accounts — Restricted trust and escrow accounts consist primarily of funds held in trust for the construction of various facilities or repayment of our debt obligations, funds deposited for purposes of settling landfill closure, post-closure and environmental remediation obligations and insurance escrow deposits. These balances are primarily included within long-term “Other assets” in our Consolidated Balance Sheets. See Note 3 to the Consolidated Financial Statements for additional discussion.
 
Debt — We use long-term borrowings in addition to the cash we generate from operations as part of our overall financial strategy to support and grow our business. We primarily use senior notes and tax-exempt bonds to borrow on a long-term basis, but also use other instruments and facilities when appropriate. The components of our long-term borrowings as of December 31, 2008 are described in Note 7 to the Consolidated Financial Statements.
 
Changes in our outstanding debt balances from December 31, 2007 to December 31, 2008 can primarily be attributed to (i) net debt repayments of $260 million; (ii) non-cash proceeds from tax-exempt borrowings, net of principal payments made directly from trust funds of $169 million; (iii) a $78 million increase in the carrying value of our debt due to hedge accounting for interest rate swaps; and (iv) the impacts of accounting for other non-cash changes in our balances due to foreign currency translation, interest and capital leases.
 
We have approximately $1.2 billion of scheduled debt maturities during the next twelve months. We have classified approximately $509 million of these borrowings as long-term as of December 31, 2008 based on our intent and ability to refinance these borrowings on a long-term basis.


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We have credit facilities in place to support our liquidity and financial assurance needs. The following table summarizes our outstanding letters of credit (in millions) at December 31 categorized by facility:
 
                 
    2008     2007  
 
Revolving credit facility(a)
  $ 1,803     $ 1,437  
Letter of credit facility(b)
          350  
Letter of credit and term loan agreements(c)
    272       294  
Other(d)
    91       90  
                 
    $ 2,166     $ 2,171  
                 
 
 
(a) WMI’s $2.4 billion revolving credit facility matures in August 2011. At December 31, 2008, $1,803 million of letters of credit and $300 million of borrowings were outstanding under the facility, leaving an unused and available credit capacity of $297 million. The increase in our utilization of this facility during 2008 is due to the expiration of our $350 million letter of credit facility in December 2008.
 
(b) This $350 million letter of credit facility expired in December 2008, and the letters of credit that had previously been supported by this facility were issued under the revolving credit facility.
 
(c) At December 31, 2008, we have a $175 million letter of credit and term loan agreement that expires in June 2010 and a $105 million letter of credit and term loan agreement that expires in June 2013. At December 31, 2008, no borrowings were outstanding under these agreements, and we had $8 million of unused and available capacity. At December 31, 2007, we also had a $15 million letter of credit and term loan agreement that expired in June 2008.
 
(d) These letters of credit are outstanding under various arrangements that do not provide for a committed credit capacity.
 
Summary of Cash Flow Activity
 
The following is a summary of our cash flows for the year ended December 31 for each respective period (in millions):
 
                         
    2008     2007     2006  
 
Net cash provided by operating activities
  $ 2,575     $ 2,439     $ 2,540  
                         
Net cash used in investing activities
  $ (1,183 )   $ (761 )   $ (788 )
                         
Net cash used in financing activities
  $ (1,256 )   $ (1,946 )   $ (1,803 )
                         
 
Net Cash Provided by Operating Activities — The most significant items affecting the comparison of our operating cash flows for 2008 and 2007 are summarized below:
 
  •  Earnings decline — Our income from operations, net of depreciation and amortization, decreased by $41 million, on a year-over-year basis, which negatively affected our cash flow from operations in 2008.
 
  •  Receivables — The change in our trade receivables balances, net of effects of acquisitions and divestitures, provided a source of cash of approximately $185 million in 2008. In 2008, our receivables balances declined primarily due to a decrease in fourth quarter revenues as compared with the prior year, but also due to improved efficiency of collections. Additionally, during the third quarter of 2008, we collected an outstanding receivable related to our investments in the synthetic fuel production facilities that provided us with Section 45K tax credits through 2007. Approximately $60 million of the cash we received represented amounts that we paid to the facilities during 2006 and 2007 for which we did not ultimately realize a tax benefit, and was reflected as an operating cash inflow.
 
  •  Increased income tax payments — Cash paid for income taxes, net of excess tax benefits associated with equity-based transactions, was approximately $170 million higher on a year-over-year basis, due in large part to an increase in both our taxable income and our effective tax rate. The comparability of our 2008 and


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  2007 effective tax rates is discussed in the Provision for income taxes section above. In addition, the overpayment of income taxes in 2006 reduced our 2007 tax payments.
 
  •  Decreased interest payments — Cash paid for interest was approximately $65 million lower on a year-over-year basis. This decline is due primarily to a decline in our weighted average borrowing rate, which can be attributed to the maturity of higher rate debt that we refinanced at lower rates and a decline in market rates.
 
  •  Accounts payable processes — In 2008, we began various initiatives to improve our working capital management, including reviewing our accounts payable process to ensure vendor payments are made on a basis that results in more optimal cash management. The changes made to the timing of our vendor payments favorably impacted our cash flow from operations on a year-over-year basis by approximately $30 million.
 
The most significant items affecting the comparison of our operating cash flows for 2007 and 2006 are summarized below:
 
  •  Earnings improvements — Our income from operations, net of depreciation and amortization, increased by $150 million, on a year-over-year basis, which positively affected our cash flows from operations in 2007.
 
  •  Decreased income tax payments and refunds — Cash paid for income taxes, net of excess tax benefits associated with equity-based transactions, was approximately $80 million lower on a year-over-year basis, largely due to excess tax payments in 2006, which reduced our estimated tax payment made in the third quarter of 2007. Cash tax refunds attributable to audit settlements decreased by approximately $40 million on a year-over-year basis.
 
  •  Risk management assets and liabilities — During 2007, we were able to reduce risk management liabilities by approximately $80 million, primarily as a result of reduced actuarial projections of claim losses for auto and general liability and worker’s compensation claims, which was attributed to our continued focus on safety and reduced accident and injury rates. While this non-cash reserve reduction had a positive impact on income from operations, it did not have a significant impact on our cash flow from operations.
 
  •  Trade receivables — The change in our receivables balances, net of effects of acquisitions and divestitures, negatively affected the comparison of our cash flows from operations by approximately $70 million. This decline is primarily attributable to increased trade receivables when comparing 2007 and 2006 as compared to decreased trade receivables when comparing 2006 to 2005.
 
  •  Increased bonus payments — Our bonus payments for 2006, which were paid in the first quarter of 2007, were higher than bonus payments for 2005 paid in 2006 due to the relative strength of our financial performance against incentive plan measures in 2006 as compared with 2005. The comparative changes in our liabilities for bonuses negatively affected the comparison of our cash flow from operations by approximately $60 million.
 
  •  Liabilities for unclaimed property — In 2007, we made significant cash payments for our obligations associated with unclaimed property, reducing our liabilities. In 2006, our liabilities for unclaimed property increased, primarily due to the charge to earnings required to fully record our obligations. The changes in our recorded obligations for unclaimed property negatively affected the comparison of our cash flow from operations by approximately $30 million.
 
Net Cash Used in Investing Activities — The most significant items affecting the comparison of our investing cash flows for the periods presented are summarized below:
 
  •  Cash paid for acquisitions — Our spending on acquisitions increased from $32 million during 2006 to $90 million during 2007 and $280 million in 2008 due to an increased focus on accretive acquisitions and other investments that will contribute to improved future results of operations and enhance and expand our existing service offerings.
 
  •  Proceeds from divestitures — Proceeds from divestitures (net of cash divested) and other sales of assets were $112 million in 2008, $278 million in 2007 and $240 million in 2006. Our proceeds from divestitures for all three years have been driven by the divestiture of under-performing and non-strategic operations. The


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  decrease in proceeds from divestitures in 2008 was largely a result of having fewer underperforming operations to sell as part of our fix-or-seek-exit initiative.
 
  •  Capital expenditures — We used $1,221 million during 2008 for capital expenditures, compared with $1,211 million in 2007 and $1,329 million in 2006. Capital expenditures in 2006 were higher than either 2007 or 2008 due to relatively high levels of fleet capital spending done in advance of significant mandated changes in heavy-duty truck engines beginning in January 2007.
 
  •  Purchases and sales of short-term investments — Net sales of short-term investments provided $184 million of cash in 2007, compared with $122 million during 2006. We used proceeds from the sale of our short-term investments to provide cash that we used to fund our common stock repurchases, dividend payments and debt repayments, which are discussed below. We did not hold any short-term investments during 2008.
 
  •  Net receipts from restricted funds — Net funds received from our restricted trust and escrow accounts, which are largely generated from the issuance of tax-exempt bonds for our capital needs, contributed $178 million to our investing activities in 2008 compared with $120 million in 2007 and $253 million in 2006.
 
Net Cash Used in Financing Activities — The most significant items affecting the comparison of our financing cash flows for the periods presented are summarized below:
 
  •  Share repurchases and dividend payments — Our 2008, 2007 and 2006 share repurchases and dividend payments have been made in accordance with capital allocation programs approved by our Board of Directors.
 
We paid $410 million for share repurchases in 2008 as compared with $1,421 million in 2007 and $1,072 million in 2006. We repurchased approximately 12 million, 40 million and 31 million shares of our common stock in 2008, 2007 and 2006, respectively. The significant decline in share repurchases during 2008 is largely attributable to the suspension of our share repurchases in connection with our proposal to acquire all of the outstanding stock of Republic Services, Inc. When the proposal was withdrawn in October 2008, we determined that, given the state of the financial markets, it would be prudent to suspend repurchases for the foreseeable future.
 
We paid an aggregate of $531 million in cash dividends during 2008 compared with $495 million in 2007 and $476 million in 2006. The increase in dividend payments is due to our quarterly per share dividend increasing from $0.22 in 2006, to $0.24 in 2007 and to $0.27 in 2008. The impact of the year-over-year increases in the per share dividend has been partially offset by a reduction in the number of our outstanding shares as a result of our share repurchase program.
 
In December 2008, our Board of Directors approved a new capital allocation program that includes the authorization for up to $1.3 billion in combined cash dividends, common stock repurchases, debt reduction and acquisitions in 2009. At this time, the Board of Directors also announced that it expects future quarterly dividend payments will be $0.29 per share. All future dividend declarations are at the discretion of the Board of Directors, and depend on various factors, including our net earnings, financial condition, cash required for future prospects and other factors the Board may deem relevant.
 
  •  Proceeds and tax benefits from the exercise of options and warrants — The exercise of common stock options and warrants and the related excess tax benefits generated a total of $44 million of financing cash inflows during 2008 compared with $168 million during 2007 and $340 million in 2006. We believe the relatively large impact of stock option and warrant exercises in 2006 was due to the substantial increase in the market value of our common stock during 2006 and the accelerated vesting of all outstanding stock options in December 2005 because the acceleration made additional options available for exercise.


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  •  Net debt repayments — Net debt repayments were $260 million in 2008, $256 million in 2007 and $500 million in 2006. The following summarizes our most significant cash borrowings and debt repayments made during each year (in millions):
 
                         
    Years Ended December 31,  
    2008     2007     2006  
 
Borrowings:
                       
Revolving credit facility
  $ 350     $ 300     $  
Canadian credit facility
    581       644       432  
Senior notes
    594              
                         
    $ 1,525     $ 944     $ 432  
                         
Repayments:
                       
Revolving credit facility
  $ (371 )   $     $  
Canadian credit facility
    (634 )     (680 )     (479 )
Senior notes
    (633 )     (300 )     (300 )
Tax exempt bonds
    (19 )     (52 )     (9 )
Tax exempt project bonds
    (67 )     (61 )     (50 )
Capital leases and other debt
    (61 )     (107 )     (94 )
                         
    $ (1,785 )   $ (1,200 )   $ (932 )
                         
Net repayments
  $ (260 )   $ (256 )   $ (500 )
                         
 
This summary excludes the impacts of non-cash borrowings and debt repayments. For the years ended December 31, 2008, 2007 and 2006, these non-cash financing activities were primarily associated with our tax-exempt bond financings. Proceeds from tax-exempt bond issuances, net of principal repayments made directly from trust funds, were $169 million in 2008, $144 million in 2007 and $157 million in 2006.
 
  •  Accrued liabilities for checks written in excess of cash balances — Changes in our accrued liabilities for checks written in excess of cash balances are reflected as “Other” financing activities in the Consolidated Statement of Cash Flows. There are significant changes in these accrued liability balances as of each year-end, which is generally attributable to the timing of cash deposits.
 
Summary of Contractual Obligations
 
The following table summarizes our contractual obligations as of December 31, 2008 and the anticipated effect of these obligations on our liquidity in future years (in millions):
 
                                                         
    2009     2010     2011     2012     2013     Thereafter     Total  
 
Recorded Obligations:
                                                       
Expected environmental liabilities(a)
                                                       
Final capping, closure and post-closure
  $ 108     $ 124     $ 84     $ 84     $ 90     $ 1,776     $ 2,266  
Environmental remediation
    49       35       24       18       15       152       293  
                                                         
      157       159       108       102       105       1,928       2,559  
Debt payments(b), (c)
    1,184       719       255       583       170       5,277       8,188  
Unrecorded Obligations:(d)
                                                       
Non-cancelable operating lease obligations
    81       71       58       57       46       272       585  
Estimated unconditional purchase obligations(e)
    103       103       65       53       41       269       634  
                                                         
Anticipated liquidity impact as of December 31, 2008
  $ 1,525     $ 1,052     $ 486     $ 795     $ 362     $ 7,746     $ 11,966  
                                                         


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(a) Environmental liabilities include final capping, closure, post-closure and environmental remediation costs. The amounts included here reflect environmental liabilities recorded in our Consolidated Balance Sheet as of December 31, 2008 without the impact of discounting and inflation. Our recorded environmental liabilities for final capping, closure and post-closure will increase as we continue to place additional tons within the permitted airspace at our landfills.
 
(b) Our debt obligations as of December 31, 2008 include $347 million of fixed rate tax-exempt bonds and $40 million of tax-exempt project bonds subject to repricing within the next twelve months, which is prior to their scheduled maturities. If the re-offerings of the bonds are unsuccessful, then the bonds can be put to us, requiring immediate repayment. We have classified the anticipated cash flows for these contractual obligations based on the scheduled maturity of the borrowing for purposes of this disclosure. For additional information regarding the classification of these borrowings in our Consolidated Balance Sheet as of December 31, 2008, refer to Note 7 to the Consolidated Financial Statements.
 
(c) Our recorded debt obligations include non-cash adjustments associated with discounts, premiums and fair value adjustments for interest rate hedging activities. These amounts have been excluded here because they will not result in an impact to our liquidity in future periods. In addition, $35 million of our future debt payments and related interest obligations will be made with debt service funds held in trust and included as long-term “Other assets” within our December 31, 2008 Consolidated Balance Sheet.
 
(d) Our unrecorded obligations represent operating lease obligations and purchase commitments from which we expect to realize an economic benefit in future periods. We have also made certain guarantees, as discussed in Note 10 to the Consolidated Financial Statements, that we do not expect to materially affect our current or future financial position, results of operations or liquidity.
 
(e) Our unconditional purchase obligations are for various contractual obligations that we generally incur in the ordinary course of our business. Certain of our obligations are quantity driven. For these contracts, we have estimated our future obligations based on the current market values of the underlying products or services. This approach has resulted in a significant decline in our reported contractual obligations associated with our waste paper purchase agreements due to the sharp decline in commodity prices late in 2008. Accordingly, the amounts reported in the table will not be indicative of our actual cash flow obligations associated with these contracts should the market prices for the recyclable commodities recover. See Note 10 to the Consolidated Financial Statements for discussion of the nature and terms of our unconditional purchase obligations.
 
We have contingencies that are not considered reasonably likely. As a result, the impact of these contingencies has not been included in the above table. See Note 10 to the Consolidated Financial Statements for further discussion of these contingencies.
 
Liquidity Impacts of Uncertain Tax Positions
 
As discussed in Note 8 to our Consolidated Financial Statements, we have liabilities associated with unrecognized tax benefits and related interest. These liabilities are primarily included as a component of long-term “Other liabilities” in our Consolidated Balance Sheet because the Company generally does not anticipate that settlement of the liabilities will require payment of cash within the next twelve months. We are not able to reasonably estimate when we would make any cash payments required to settle these liabilities, but do not believe that the ultimate settlement of our obligations will materially affect our liquidity.
 
Off-Balance Sheet Arrangements
 
We are party to guarantee arrangements with unconsolidated entities as discussed in the Guarantees section of Note 10 to the Consolidated Financial Statements. Our third-party guarantee arrangements are generally established to support our financial assurance needs and landfill operations. These arrangements have not materially affected our financial position, results of operations or liquidity during the year ended December 31, 2008 nor are they expected to have a material impact on our future financial position, results of operations or liquidity.


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Seasonal Trends and Inflation
 
Our operating revenues tend to be somewhat higher in the summer months, primarily due to the higher volume of construction and demolition waste. The volumes of industrial and residential waste in certain regions where we operate also tend to increase during the summer months. Our second and third quarter revenues and results of operations typically reflect these seasonal trends. Additionally, certain destructive weather conditions that tend to occur during the second half of the year, such as the hurricanes generally experienced by our Southern Group, can actually increase our revenues in the areas affected. However, for several reasons, including significant start-up costs, such revenue often generates earnings at comparatively lower margins. Certain weather conditions may result in the temporary suspension of our operations, which can significantly affect the operating results of the affected regions. The operating results of our first quarter also often reflect higher repair and maintenance expenses because we rely on the slower winter months, when waste flows are generally lower, to perform scheduled maintenance at our waste-to-energy facilities.
 
While inflationary increases in costs, including the cost of fuel, have affected our operating margins in recent periods, we believe that inflation generally has not had, and in the near future is not expected to have, any material adverse effect on our results of operations. However, management’s estimates associated with inflation have had, and will continue to have, an impact on our accounting for landfill and environmental remediation liabilities.
 
New Accounting Pronouncements
 
SFAS No. 157 — Fair Value Measurements
 
In February 2008, the FASB issued Staff Position FAS 157-2, Effective Date of FASB Statement No. 157, which delayed the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except those that are measured at fair value on a recurring basis. Accordingly, as of December 31, 2008, we have not applied the provisions of SFAS No. 157 to our asset retirement obligations, which are accounted for under the provisions of SFAS No. 143. FSP FAS 157-2 establishes January 1, 2009 as the effective date of SFAS No. 157 with respect to these fair value measurements for the Company. We do not currently expect the application of the fair value framework established by SFAS No. 157 to non-financial assets and liabilities measured on a non-recurring basis to have a material impact on our consolidated financial statements. However, we will continue to assess the potential effects of SFAS No. 157 as additional guidance becomes available.
 
SFAS No. 141(R) — Business Combinations
 
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations, which establishes principles for how the acquirer recognizes and measures in the financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. This statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for the Company beginning January 1, 2009. The portions of the statement that relate to business combinations completed before the effective date will not have a material impact on our consolidated financial statements. However, our adoption of SFAS No. 141(R) will significantly impact our accounting and reporting for future acquisitions, principally as a result of (i) expanded requirements to value acquired assets, liabilities and contingencies at their fair values; and (ii) the requirement that acquisition-related transaction and restructuring costs be expensed as incurred rather than capitalized as a part of the cost of the acquisition.
 
SFAS No. 160 — Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51
 
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51, which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It states that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 will be effective for the Company beginning January 1, 2009 and must be applied prospectively, except for the presentation and disclosure requirements, which must be applied


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retrospectively for all periods presented. The adoption of SFAS No. 160 will not have a material impact on our consolidated financial statements. However, it could impact our accounting for future transactions.
 
Item 7A.   Quantitative and Qualitative Disclosure About Market Risk.
 
In the normal course of business, we are exposed to market risks, including changes in interest rates, Canadian currency rates and certain commodity prices. From time to time, we use derivatives to manage some portion of these risks. Our derivatives are agreements with independent counterparties that provide for payments based on a notional amount, with no multipliers or leverage. As of December 31, 2008, all of our derivative transactions were related to actual or anticipated economic exposures although certain transactions did not qualify for hedge accounting. We are exposed to credit risk in the event of non-performance by our derivative counterparties. However, we monitor our derivative positions by regularly evaluating our positions and the creditworthiness of the counterparties, all of whom we either consider credit-worthy, or who have issued letters of credit to support their performance.
 
We have performed sensitivity analyses to determine how market rate changes might affect the fair value of our market risk sensitive derivatives and related positions. These analyses are inherently limited because they reflect a singular, hypothetical set of assumptions. Actual market movements may vary significantly from our assumptions. The effects of market movements may also directly or indirectly affect our assumptions and our rights and obligations not covered by the sensitivity analyses. Fair value sensitivity is not necessarily indicative of the ultimate cash flow or the earnings effect from the assumed market rate movements.
 
Interest Rate Exposure.  Our exposure to market risk for changes in interest rates relates primarily to our debt obligations, which are primarily denominated in U.S. dollars. In addition, we use interest rate swaps to manage the mix of fixed and floating rate debt obligations, which directly impacts variability in interest costs. As of December 31, 2008, 33% of our total debt is at variable interest rates, compared with 34% at December 31, 2007. An instantaneous, one percentage point increase in interest rates across all maturities and applicable yield curves would have decreased the fair value of our combined debt and interest rate swap positions by approximately $595 million at December 31, 2008 and $445 million at December 31, 2007. As disclosed in Note 7 to the Consolidated Financial Statements, there have not been any material changes in the amount or type of debt or derivatives outstanding since December 31, 2007; nor has there been a material change in the extent of our exposure to variability in interest rates. Accordingly, the significant increase when comparing the effect of the one percentage point increase at December 31, 2008 with December 31, 2007 can be attributed to a substantial decline in risk-free interest rates, which are used in the discounted cash flow analysis performed to support this disclosure. This analysis does not reflect the effect that increasing interest rates would have on items other than our outstanding debt and interest rate derivatives, nor the unfavorable impact they would have on interest expense and cash payments for interest.
 
We are also exposed to interest rate market risk because we have $381 million and $418 million of assets held in restricted trust funds and escrow accounts primarily included within long-term “Other assets” in our Consolidated Balance Sheets at December 31, 2008 and 2007, respectively. These assets are generally restricted for future capital expenditures and closure, post-closure and environmental remediation activities at our disposal facilities and are, therefore, invested in high quality, liquid instruments including money market accounts and U.S. government agency debt securities. Because of the short terms to maturity of these investments, we believe that our exposure to changes in fair value due to interest rate fluctuations is insignificant.
 
Currency Rate Exposure.  From time to time, we have used currency derivatives to mitigate the impact of currency translation on cash flows of intercompany Canadian-currency denominated debt transactions. Our foreign currency derivatives have not materially affected our financial position or results of operations for the periods presented. In addition, while changes in foreign currency exchange rates could significantly affect the fair value of our foreign currency derivatives, we believe these changes in fair value would not have a material impact to the Company.


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MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
 
Management of the Company, including the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. Our internal controls were designed to provide reasonable assurance as to (i) the reliability of our financial reporting; (ii) the reliability of the preparation and presentation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States; and (iii) the safeguarding of assets from unauthorized use or disposition.
 
We conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2008 based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Through this evaluation, we did not identify any material weaknesses in our internal controls. There are inherent limitations in the effectiveness of any system of internal control over financial reporting; however, based on our evaluation, we have concluded that our internal control over financial reporting was effective as of December 31, 2008.
 
The effectiveness of our internal control over financial reporting has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Stockholders of Waste Management, Inc.
 
We have audited the accompanying consolidated balance sheets of Waste Management, Inc. (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Waste Management, Inc. at December 31, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.
 
As discussed in Note 2 to the consolidated financial statements, effective January 1, 2007 the Company adopted Financial Accounting Standard Board (FASB) Interpretation No. 48 “Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109)” and FASB Staff Position No. FIN 48-1 “Definition of Settlement in FASB Interpretation No. 48.”
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Waste Management, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 17, 2009 expressed an unqualified opinion thereon.
 
ERNST & YOUNG LLP
 
Houston, Texas
February 17, 2009


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
The Board of Directors and Stockholders of Waste Management, Inc.
 
We have audited Waste Management, Inc.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Waste Management, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, Waste Management, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Waste Management, Inc. as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2008, and our report dated February 17, 2009 expressed an unqualified opinion thereon.
 
ERNST & YOUNG LLP
 
Houston, Texas
February 17, 2009


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    December 31,  
    2008     2007  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 480     $ 348  
Accounts receivable, net of allowance for doubtful accounts of $39 and $46, respectively
    1,463       1,674  
Other receivables
    147       218  
Parts and supplies
    110       103  
Deferred income taxes
    39       51  
Other assets
    96       86  
                 
Total current assets
    2,335       2,480  
Property and equipment, net of accumulated depreciation and amortization of $13,273 and $12,844, respectively
    11,402       11,351  
Goodwill
    5,462       5,406  
Other intangible assets, net
    158       124  
Other assets
    870       814  
                 
Total assets
  $ 20,227     $ 20,175  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
Accounts payable
  $ 716     $ 656  
Accrued liabilities
    1,034       1,151  
Deferred revenues
    451       462  
Current portion of long-term debt
    835       329  
                 
Total current liabilities
    3,036       2,598  
Long-term debt, less current portion
    7,491       8,008  
Deferred income taxes
    1,484       1,411  
Landfill and environmental remediation liabilities
    1,360       1,312  
Other liabilities
    671       744  
                 
Total liabilities
    14,042       14,073  
                 
Minority interest in subsidiaries and variable interest entities
    283       310  
                 
Commitments and contingencies
               
Stockholders’ equity:
               
Common stock, $0.01 par value; 1,500,000,000 shares authorized; 630,282,461 shares issued
    6       6  
Additional paid-in capital
    4,558       4,542  
Retained earnings
    5,631       5,080  
Accumulated other comprehensive income
    88       229  
Treasury stock at cost, 139,546,915 and 130,163,692 shares, respectively
    (4,381 )     (4,065 )
                 
Total stockholders’ equity
    5,902       5,792  
                 
Total liabilities and stockholders’ equity
  $ 20,227     $ 20,175  
                 
 
See notes to Consolidated Financial Statements.


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    Years Ended December 31,  
    2008     2007     2006  
 
Operating revenues
  $ 13,388     $ 13,310     $ 13,363  
                         
Costs and expenses:
                       
Operating
    8,466       8,402       8,587  
Selling, general and administrative
    1,477       1,432       1,388  
Depreciation and amortization
    1,238       1,259       1,334  
Restructuring
    2       10        
(Income) expense from divestitures, asset impairments and unusual items
    (29 )     (47 )     25  
                         
      11,154       11,056       11,334  
                         
Income from operations
    2,234       2,254       2,029  
                         
Other income (expense):
                       
Interest expense
    (455 )     (521 )     (545 )
Interest income
    19       47       69  
Equity in net losses of unconsolidated entities
    (4 )     (35 )     (36 )
Minority interest
    (41 )     (46 )     (44 )
Other, net
    3       4       1  
                         
      (478 )     (551 )     (555 )
                         
Income before income taxes
    1,756       1,703       1,474  
Provision for income taxes
    669       540       325  
                         
Net income
  $ 1,087     $ 1,163     $ 1,149  
                         
Basic earnings per common share
  $ 2.21     $ 2.25     $ 2.13  
                         
Diluted earnings per common share
  $ 2.19     $ 2.23     $ 2.10  
                         
Cash dividends declared per common share (2006 excludes $0.22 declared in 2005, but paid in 2006)
  $ 1.08     $ 0.96     $ 0.66  
                         
 
See notes to Consolidated Financial Statements.


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WASTE MANAGEMENT, INC.
 
 
                         
    Years Ended December 31,  
    2008     2007     2006  
 
Cash flows from operating activities:
                       
Net income
  $ 1,087     $ 1,163     $ 1,149  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation and amortization
    1,238       1,259       1,334  
Deferred income tax provision
    150       70       (23 )
Interest accretion on landfill liabilities
    77       74       70  
Interest accretion on and discount rate adjustments to environmental remediation liabilities and recovery assets
    41       17       3  
Provision for bad debts
    50       43       43  
Equity-based compensation expense
    48       37       28  
Minority interest
    41       46       44  
Equity in net losses of unconsolidated entities, net of distributions
    1       39       47  
Net gain from disposal of assets
    (33 )     (27 )     (15 )
Effect of (income) expense from divestitures, asset impairments and unusual items
    (29 )     (47 )     25  
Excess tax benefits associated with equity-based transactions
    (7 )     (26 )     (45 )
Change in operating assets and liabilities, net of effects of acquisitions and divestitures:
                       
Receivables
    216       (22 )     12  
Other current assets
    (9 )     6       (1 )
Other assets
    5       5       (9 )
Accounts payable and accrued liabilities
    (183 )     (88 )     (73 )
Deferred revenues and other liabilities
    (118 )     (110 )     (49 )
                         
Net cash provided by operating activities
    2,575       2,439       2,540  
                         
Cash flows from investing activities:
                       
Acquisitions of businesses, net of cash acquired
    (280 )     (90 )     (32 )
Capital expenditures
    (1,221 )     (1,211 )     (1,329 )
Proceeds from divestitures of businesses (net of cash divested) and other sales of assets
    112       278       240  
Purchases of short-term investments
          (1,220 )     (3,001 )
Proceeds from sales of short-term investments
          1,404       3,123  
Net receipts from restricted trust and escrow accounts
    178       120       253  
Other
    28       (42 )     (42 )
                         
Net cash used in investing activities
    (1,183 )     (761 )     (788 )
                         
Cash flows from financing activities:
                       
New borrowings
    1,525       944       432  
Debt repayments
    (1,785 )     (1,200 )     (932 )
Common stock repurchases
    (410 )     (1,421 )     (1,072 )
Cash dividends
    (531 )     (495 )     (476 )
Exercise of common stock options and warrants
    37       142       295  
Excess tax benefits associated with equity-based transactions
    7       26       45  
Minority interest distributions paid
    (56 )     (20 )     (22 )
Other
    (43 )     78       (73 )
                         
Net cash used in financing activities
    (1,256 )     (1,946 )     (1,803 )
                         
Effect of exchange rate changes on cash and cash equivalents
    (4 )     2       (1 )
                         
Increase (decrease) in cash and cash equivalents
    132       (266 )     (52 )
Cash and cash equivalents at beginning of year
    348       614       666  
                         
Cash and cash equivalents at end of year
  $ 480     $ 348     $ 614  
                         
 
See notes to Consolidated Financial Statements.


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WASTE MANAGEMENT, INC.
 
 
                                                                         
                            Accumulated
                         
                            Other
    Restricted
                   
                Additional
          Comprehensive
    Stock
                   
    Common Stock     Paid-In
    Retained
    Income
    Unearned
    Treasury Stock     Comprehensive
 
    Shares     Amounts     Capital     Earnings     (Loss)     Compensation     Shares     Amounts     Income  
 
Balance, December 31, 2005
    630,282     $ 6     $ 4,486     $ 3,615     $ 126     $ (2 )     (78,029 )   $ (2,110 )        
Net income
                      1,149                             $ 1,149  
Cash dividends declared
                      (355 )                              
Cash dividends adjustment
                      1                                
Equity-based compensation transactions, net of taxes
                24                   2       11,483       321        
Common stock repurchases
                                        (30,965 )     (1,073 )      
Unrealized loss resulting from changes in fair values of derivative instruments, net of taxes of $7
                            (11 )                       (11 )
Realized losses on derivative instruments reclassified into earnings, net of taxes of $3
                            5                         5  
Unrealized gain on marketable securities, net of taxes of $3
                            5                         5  
Translation adjustment of foreign currency statements
                            3                         3  
Underfunded post-retirement benefit obligations, net of taxes of $3
                            1                          
Other
                3                         912       26        
                                                                         
Balance, December 31, 2006
    630,282     $ 6     $ 4,513     $ 4,410     $ 129     $       (96,599 )   $ (2,836 )   $ 1,151  
                                                                         
Net income
                      1,163                             $ 1,163  
Cash dividends declared
                      (495 )                              
Equity-based compensation transactions, including dividend equivalents, net of taxes
                30       (2 )                 6,067       182        
Common stock repurchases
                                        (39,946 )     (1,421 )      
Unrealized loss resulting from changes in fair values of derivative instruments, net of taxes of $22
                            (34 )                       (34 )
Realized losses on derivative instruments reclassified into earnings, net of taxes of $30
                            47                         47  
Unrealized loss on marketable securities, net of taxes of $3
                            (5 )                       (5 )
Translation adjustment of foreign currency statements
                            89                         89  
Change in funded status of defined benefit plan liabilities, net of taxes of $3
                            3                         3  
Cumulative effect of change in accounting principle
                      4                                
Other
                (1 )                       314       10        
                                                                         
Balance, December 31, 2007
    630,282     $ 6     $ 4,542     $ 5,080     $ 229     $       (130,164 )   $ (4,065 )   $ 1,263  
                                                                         
Net income
                      1,087                             $ 1,087  
Cash dividends declared
                      (531 )                              
Equity-based compensation transactions, including dividend equivalents, net of taxes
                16       (4 )                 2,995       94        
Common stock repurchases
                                        (12,390 )     (410 )      
Unrealized gain resulting from changes in fair values of derivative instruments, net of taxes of $25
                            40                         40  
Realized gains on derivative instruments reclassified into earnings, net of taxes of $24
                            (39 )                       (39 )
Unrealized loss on marketable securities, net of taxes of $4
                            (7 )                       (7 )
Translation adjustment of foreign currency statements
                            (127 )                       (127 )
Change in funded status of defined benefit plan liabilities, net of taxes of $5
                            (8 )                       (8 )
Cumulative effect of change in accounting principle
                      (1 )                              
Other
                                        12              
                                                                         
Balance, December 31, 2008
    630,282     $ 6     $ 4,558     $ 5,631     $ 88     $       (139,547 )   $ (4,381 )   $ 946  
                                                                         
 
See notes to Consolidated Financial Statements.


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WASTE MANAGEMENT, INC.
 
 
1.   Business
 
The financial statements presented in this report represent the consolidation of Waste Management, Inc., a Delaware corporation; Waste Management’s wholly-owned and majority-owned subsidiaries; and certain variable interest entities for which Waste Management or its subsidiaries are the primary beneficiary as described in Note 19. Waste Management is a holding company and all operations are conducted by its subsidiaries. When the terms “the Company,” “we,” “us” or “our” are used in this document, those terms refer to Waste Management, Inc., its consolidated subsidiaries and consolidated variable interest entities. When we use the term “WMI,” we are referring only to Waste Management, Inc., the parent holding company.
 
We are the leading provider of integrated waste services in North America. Using our vast network of assets and employees, we provide a comprehensive range of waste management services. Through our subsidiaries we provide collection, transfer, recycling, disposal and waste-to-energy services. In providing these services, we actively pursue projects and initiatives that we believe make a positive difference for our environment, including recovering and processing the methane gas produced naturally by landfills into a renewable energy source. Our customers include commercial, industrial, municipal and residential customers, other waste management companies, electric utilities and governmental entities.
 
We manage and evaluate our principal operations through six operating Groups, of which four are organized by geographic area and two are organized by function. The geographic Groups include our Eastern, Midwest, Southern and Western Groups, and the two functional Groups are our Wheelabrator Group, which provides waste-to-energy services, and our WM Recycle America, or WMRA, Group, which provides recycling services not managed by our geographic Groups. We also provide additional waste management services that are not managed through our six Groups, which are presented in this report as “Other.” Refer to Note 20 for additional information related to our segments.
 
2.   Accounting Changes and Reclassifications
 
Accounting Changes
 
SFAS No. 157 — Fair Value Measurements
 
In September 2006, the Financial Accounting Standards Board issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Effective January 1, 2008, we adopted SFAS No. 157 for assets and liabilities recognized at fair value on a recurring basis. Our adoption of SFAS No. 157 during the first quarter of 2008 resulted in the recognition of a $6 million charge to operating expenses and a corresponding $3 million credit to minority interest expense for the re-measurement of the fair value of environmental remediation recovery assets accounted for in accordance with Statement of Position No. 96-1, Environmental Remediation Liabilities. The adoption of SFAS No. 157 did not materially affect our consolidated financial position, results of operations or cash flows. Refer to Note 17 for information about our fair value measurements.
 
SFAS No. 158 — Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans
 
In September 2006, the FASB issued SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS No. 158 requires companies to recognize the overfunded or underfunded status of their defined benefit pension and other post-retirement plans as an asset or liability and to recognize changes in that funded status through comprehensive income in the year in which the changes occur. As required, we adopted the recognition provisions of SFAS No. 158 on December 31, 2006.


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WASTE MANAGEMENT, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
With the adoption of SFAS No. 158 on December 31, 2006, we recorded a liability and a corresponding deferred loss adjustment to “Accumulated other comprehensive income” of $2 million related to the previously unaccrued liability balance associated with unfunded benefit obligations in our defined benefit pension and other post-retirement plans. The December 31, 2006 net increase of $1 million in “Accumulated other comprehensive income” attributable to the underfunded status of our post-retirement plans is associated with the net impact of adjustments to increase deferred tax assets by $3 million, partially offset by the additional $2 million related to liabilities recorded.
 
SFAS No. 158 also requires companies to measure the funded status of defined benefit pension and other post-retirement plans as of their year-end reporting date. The measurement date provisions of SFAS No. 158 were effective for us as of December 31, 2008. We applied the measurement provisions by measuring our benefit obligations as of September 30, 2007, our prior measurement date, and recognizing a pro-rata share of net benefit costs for the transition period from October 1, 2007 to December 31, 2008 as a cumulative effect of change in accounting principle in retained earnings as of December 31, 2008. The adoption of the measurement date provisions of SFAS No. 158 did not have a material impact on our financial position or results of operations for the periods presented.
 
FIN 48 — Accounting for Uncertainty in Income Taxes
 
In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (an interpretation of FASB Statement No. 109). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of tax positions taken or expected to be taken in tax returns. In addition, FIN 48 provides guidance on the de-recognition, classification and disclosure of tax positions, as well as the accounting for related interest and penalties. On May 2, 2007, the FASB issued FSP No. FIN 48-1, Definition of Settlement in FASB Interpretation No. 48, to provide guidance associated with the criteria that must be evaluated in determining if a tax position has been effectively settled and should be recognized as a tax benefit.
 
Our adoption of FIN 48 and FSP No. 48-1 effective January 1, 2007 resulted in the recognition of a $28 million increase in our liabilities for unrecognized tax benefits, a $32 million increase in our non-current deferred tax assets and a $4 million increase in our beginning retained earnings as a cumulative effect of change in accounting principle.
 
Refer to Note 8 for additional information about our unrecognized tax benefits.
 
Reclassifications
 
Statements of Cash Flows — As a result of an increase in the significance of certain non-cash expenses, we have elected to separately identify the effects of “Interest accretion on landfill liabilities,” “Interest accretion on and discount rate adjustments to environmental remediation liabilities and recovery assets” and “Equity-based compensation expense” within the “Cash flows from operating activities” section of our Consolidated Statements of Cash Flows. We have made reclassifications in our 2007 and 2006 Consolidated Statements of Cash Flows to conform prior year information with our current period presentation.
 
Segments — During the second quarter of 2008, we moved certain Canadian business operations from the Western Group to the Midwest Group to facilitate improved business execution. We have reflected the impact of this change for all periods presented to provide financial information that consistently reflects our current approach to managing our operations. Refer to Note 20 for further discussion about our reportable segments.
 
Certain other minor reclassifications have been made to our prior period consolidated financial information in order to conform to the current year presentation.


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WASTE MANAGEMENT, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
3.   Summary of Significant Accounting Policies
 
Principles of consolidation
 
The accompanying Consolidated Financial Statements include the accounts of WMI, its wholly-owned and majority-owned subsidiaries and certain variable interest entities for which we have determined that we are the primary beneficiary. All material intercompany balances and transactions have been eliminated. Investments in entities in which we do not have a controlling financial interest are accounted for under either the equity method or cost method of accounting, as appropriate.
 
Estimates and assumptions
 
In preparing our financial statements, we make numerous estimates and assumptions that affect the accounting for and recognition and disclosure of assets, liabilities, stockholders’ equity, revenues and expenses. We must make these estimates and assumptions because certain information that we use is dependent on future events, cannot be calculated with a high degree of precision from data available or simply cannot be readily calculated based on generally accepted methodologies. In some cases, these estimates are particularly difficult to determine and we must exercise significant judgment. In preparing our financial statements, the most difficult, subjective and complex estimates and the assumptions that deal with the greatest amount of uncertainty relate to our accounting for landfills, environmental remediation liabilities, asset impairments, and self-insurance reserves and recoveries. Each of these items is discussed in additional detail below. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our financial statements.
 
Cash and cash equivalents
 
Cash and cash equivalents consist primarily of cash on deposit and money market funds that invest in United States government obligations, all of which have original maturities of three months or less.
 
Concentrations of credit risk
 
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, investments held within our trust funds and escrow accounts, accounts receivable and derivative instruments. We make efforts to control our exposure to credit risk associated with these instruments by (i) placing our assets and other financial interests with a diverse group of credit-worthy financial institutions; (ii) holding high-quality financial instruments while limiting investments in any one instrument; and (iii) maintaining strict policies over credit extension that include credit evaluations, credit limits and monitoring procedures, although generally we do not have collateral requirements. In addition, our overall credit risk associated with trade receivables is limited due to the large number of geographically diverse customers we service. At December 31, 2008 and 2007, no single customer represented greater than 5% of total accounts receivable.
 
Trade and other receivables
 
Our receivables are recorded when billed or when cash is advanced and represent claims against third parties that will be settled in cash. The carrying value of our receivables, net of the allowance for doubtful accounts, represents the estimated net realizable value. We estimate our allowance for doubtful accounts based on historical collection trends, type of customer, such as municipal or non-municipal, the age of outstanding receivables and existing economic conditions. If events or changes in circumstances indicate that specific receivable balances may be impaired, further consideration is given to the collectibility of those balances and the allowance is adjusted accordingly. Past-due receivable balances are written-off when our internal collection efforts have been unsuccessful in collecting the amount due. Also, we recognize interest income on long-term interest-bearing notes receivable as the interest accrues under the terms of the notes.


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WASTE MANAGEMENT, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Landfill accounting
 
Cost Basis of Landfill Assets — We capitalize various costs that we incur to make a landfill ready to accept waste. These costs generally include expenditures for land (including the landfill footprint and required landfill buffer property), permitting, excavation, liner material and installation, landfill leachate collection systems, landfill gas collection systems, environmental monitoring equipment for groundwater and landfill gas, directly related engineering, capitalized interest, and on-site road construction and other capital infrastructure costs. The cost basis of our landfill assets also includes estimates of future costs associated with landfill final capping, closure and post-closure activities in accordance with SFAS No. 143, Accounting for Asset Retirement Obligations and its Interpretations. These costs are discussed below.
 
Final Capping, Closure and Post-Closure Costs — Following is a description of our asset retirement activities and our related accounting:
 
  •  Final Capping — Involves the installation of flexible membrane liners and geosynthetic clay liners, drainage and compacted soil layers and topsoil over areas of a landfill where total airspace capacity has been consumed. Final capping asset retirement obligations are recorded on a units-of-consumption basis as airspace is consumed related to the specific final capping event with a corresponding increase in the landfill asset. Each final capping event is accounted for as a discrete obligation and recorded as an asset and a liability based on estimates of the discounted cash flows and capacity associated with each final capping event.
 
  •  Closure — Includes the construction of the final portion of methane gas collection systems (when required), demobilization and routine maintenance costs. These are costs incurred after the site ceases to accept waste, but before the landfill is certified as closed by the applicable state regulatory agency. These costs are accrued as an asset retirement obligation as airspace is consumed over the life of the landfill with a corresponding increase in the landfill asset. Closure obligations are accrued over the life of the landfill based on estimates of the discounted cash flows associated with performing closure activities.
 
  •  Post-Closure — Involves the maintenance and monitoring of a landfill site that has been certified closed by the applicable regulatory agency. Generally, we are required to maintain and monitor landfill sites for a 30-year period. These maintenance and monitoring costs are accrued as an asset retirement obligation as airspace is consumed over the life of the landfill with a corresponding increase in the landfill asset. Post-closure obligations are accrued over the life of the landfill based on estimates of the discounted cash flows associated with performing post-closure activities.
 
We develop our estimates of these obligations using input from our operations personnel, engineers and accountants. Our estimates are based on our interpretation of current requirements and proposed regulatory changes and are intended to approximate fair value under the provisions of SFAS No. 143. Absent quoted market prices, the estimate of fair value should be based on the best available information, including the results of present value techniques. In many cases, we contract with third parties to fulfill our obligations for final capping, closure and post-closure. We use historical experience, professional engineering judgment and quoted and actual prices paid for similar work to determine the fair value of these obligations. We are required to recognize these obligations at market prices whether we plan to contract with third parties or perform the work ourselves. In those instances where we perform the work with internal resources, the incremental profit margin realized is recognized as a component of operating income when the work is performed.
 
Additionally, an estimate of fair value also should include the price that marketplace participants are able to receive for bearing the uncertainties inherent in these cash flows. However, when using discounted cash flow techniques, reliable estimates of market premiums may not be obtainable. In the waste industry, there generally is not a market for selling the responsibility for final capping, closure and post-closure obligations independent of selling the landfill in its entirety. Accordingly, we do not believe that it is possible to develop a methodology to


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WASTE MANAGEMENT, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
reliably estimate a market risk premium and have excluded any such premium from our determination of expected cash flows for landfill asset retirement obligations.
 
Once we have determined the final capping, closure and post-closure costs, we inflate those costs to the expected time of payment and discount those expected future costs back to present value. During the years ended December 31, 2008 and 2007, we inflated these costs in current dollars until the expected time of payment using an inflation rate of 2.5%. We discount these costs to present value using the credit-adjusted, risk-free rate effective at the time an obligation is incurred consistent with the expected cash flow approach. Any changes in expectations that result in an upward revision to the estimated cash flows are treated as a new liability and discounted at the current rate while downward revisions are discounted at the historical weighted-average rate of the recorded obligation. As a result, the credit-adjusted, risk-free discount rate used to calculate the present value of an obligation is specific to each individual asset retirement obligation. The weighted-average rate applicable to our asset retirement obligations at December 31, 2008 is between 6.00% and 7.25%, the range of the credit-adjusted, risk-free discount rates effective since adopting SFAS No. 143 in 2003. We expect to apply a credit-adjusted, risk-free discount rate of 8.00% to liabilities incurred in the first quarter of 2009.
 
We record the estimated fair value of final capping, closure and post-closure liabilities for our landfills based on the capacity consumed through the current period. The fair value of final capping obligations is developed based on our estimates of the airspace consumed to date for each final capping event and the expected timing of each final capping event. The fair value of closure and post-closure obligations is developed based on our estimates of the airspace consumed to date for the entire landfill and the expected timing of each closure and post-closure activity. Because these obligations are measured at estimated fair value using present value techniques, changes in the estimated cost or timing of future final capping, closure and post-closure activities could result in a material change in these liabilities, related assets and results of operations. We assess the appropriateness of the estimates used to develop our recorded balances annually, or more often if significant facts change.
 
Changes in inflation rates or the estimated costs, timing or extent of future final capping and closure and post-closure activities typically result in both (i) a current adjustment to the recorded liability and landfill asset; and (ii) a change in liability and asset amounts to be recorded prospectively over either the remaining capacity of the related discrete final capping event or the remaining permitted and expansion airspace (as defined below) of the landfill. Any changes related to the capitalized and future cost of the landfill assets are then recognized in accordance with our amortization policy, which would generally result in amortization expense being recognized prospectively over the remaining capacity of the final capping event or the remaining permitted and expansion airspace of the landfill, as appropriate. Changes in such estimates associated with airspace that has been fully utilized result in an adjustment to the recorded liability and landfill assets with an immediate corresponding adjustment to landfill airspace amortization expense.
 
During the years ended December 31, 2008, 2007 and 2006, adjustments associated with changes in our expectations for the timing and cost of future final capping, closure and post-closure of fully utilized airspace resulted in $3 million, $17 million and $1 million in net credits to landfill airspace amortization expense, respectively, with the majority of these credits resulting from revised estimates associated with final capping changes. In managing our landfills, our engineers look for ways to reduce or defer our construction costs, including final capping costs. The benefit recognized in these years was generally the result of (i) concerted efforts to improve the operating efficiencies of our landfills and volume declines, both of which have allowed us to delay spending for final capping activities; (ii) landfill expansions that resulted in reduced or deferred final capping costs; or (iii) completed final capping construction that cost less than anticipated.
 
Interest accretion on final capping, closure and post-closure liabilities is recorded using the effective interest method and is recorded as final capping, closure and post-closure expense, which is included in “Operating” costs and expenses within our Consolidated Statements of Operations.


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WASTE MANAGEMENT, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
Amortization of Landfill Assets — The amortizable basis of a landfill includes (i) amounts previously expended and capitalized; (ii) capitalized landfill final capping, closure and post-closure costs; (iii) projections of future purchase and development costs required to develop the landfill site to its remaining permitted and expansion capacity; and (iv) projected asset retirement costs related to landfill final capping, closure and post-closure activities.
 
Amortization is recorded on a units-of-consumption basis, applying cost as a rate per ton. The rate per ton is calculated by dividing each component of the amortizable basis of a landfill by the number of tons needed to fill the corresponding asset’s airspace. For landfills that we do not own, but operate through operating or lease arrangements, the rate per ton is calculated based on the lesser of the contractual term of the underlying agreement or the life of the landfill.
 
We apply the following guidelines in determining a landfill’s remaining permitted and expansion airspace:
 
  •  Remaining Permitted Airspace — Our engineers, in consultation with third-party engineering consultants and surveyors, are responsible for determining remaining permitted airspace at our landfills. The remaining permitted airspace is determined by an annual survey, which is then used to compare the existing landfill topography to the expected final landfill topography.
 
  •  Expansion Airspace — We also include currently unpermitted expansion airspace in our estimate of remaining permitted and expansion airspace in certain circumstances. First, to include airspace associated with an expansion effort, we must generally expect the initial expansion permit application to be submitted within one year, and the final expansion permit to be received within five years. Second, we must believe the success of obtaining the expansion permit is likely, considering the following criteria:
 
  •  Personnel are actively working to obtain land use and local, state or provincial approvals for an expansion of an existing landfill;
 
  •  It is likely that the approvals will be received within the normal application and processing time periods for approvals in the jurisdiction in which the landfill is located;
 
  •  We have a legal right to use or obtain land to be included in the expansion plan;
 
  •  There are no significant known technical, legal, community, business, or political restrictions or similar issues that could impair the success of such expansion;
 
  •  Financial analysis has been completed, and the results demonstrate that the expansion has a positive financial and operational impact; and
 
  •  Airspace and related costs, including additional closure and post-closure costs, have been estimated based on conceptual design.
 
For unpermitted airspace to be initially included in our estimate of remaining permitted and expansion airspace, the expansion effort must meet all of the criteria listed above. These criteria are evaluated by our field-based engineers, accountants, managers and others to identify potential obstacles to obtaining the permits. Once the unpermitted airspace is included, our policy provides that airspace may continue to be included in remaining permitted and expansion airspace even if these criteria are no longer met, based on the facts and circumstances of a specific landfill. In these circumstances, continued inclusion must be approved through a landfill-specific review process that includes approval of the Chief Financial Officer and a review by the Audit Committee of the Board of Directors on a quarterly basis. Of the 42 landfill sites with expansions at December 31, 2008, 19 landfills required the Chief Financial Officer to approve the inclusion of the unpermitted airspace. Ten of these landfills required approval by the Chief Financial Officer because of community or political opposition that could impede the