10-K 1 h69024e10vk.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, 2009
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  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 Smaller reporting company o
(Do not check if a smaller reporting company)
 
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, 2009 was approximately $13.8 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 11, 2010 was 484,972,117 (excluding treasury shares of 145,310,344).
 
DOCUMENTS INCORPORATED BY REFERENCE
 
     
Document
 
Incorporated as to
 
Proxy Statement for the
2010 Annual Meeting of Stockholders
  Part III
 


 

 
TABLE OF CONTENTS
 
                 
        Page
 
PART I
  Item 1.     Business     2  
  Item 1A.     Risk Factors     11  
  Item 1B.     Unresolved Staff Comments     17  
  Item 2.     Properties     17  
  Item 3.     Legal Proceedings     18  
  Item 4.     Submission of Matters to a Vote of Security Holders     18  
 
PART II
  Item 5.     Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     19  
  Item 6.     Selected Financial Data     21  
  Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operations     22  
  Item 7A.     Quantitative and Qualitative Disclosures About Market Risk     56  
  Item 8.     Financial Statements and Supplementary Data     58  
  Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     128  
  Item 9A.     Controls and Procedures     128  
  Item 9B.     Other Information     128  
 
PART III
  Item 10.     Directors, Executive Officers and Corporate Governance     128  
  Item 11.     Executive Compensation     128  
  Item 12.     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     129  
  Item 13.     Certain Relationships and Related Transactions, and Director Independence     129  
  Item 14.     Principal Accounting Fees and Services     130  
 
PART IV
  Item 15.     Exhibits, Financial Statement Schedules     130  
 EX-10.12
 EX-12.1
 EX-21.1
 EX-23.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT


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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 23 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 “WM.”
 
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 2009, our largest customer represented approximately 1% of annual revenues. We employed approximately 43,400 people as of December 31, 2009.
 
Our Company’s goals are targeted at serving our customers, our employees, the environment, the communities in which we work, and our stockholders.
 
Our primary strategy continues to be to improve our organization and maximize returns to shareholders by focusing on operational excellence, pricing excellence and the profitable growth of our business. We believe that creating more efficient operations and attracting and retaining customers while ensuring appropriate pricing are the steps that provide the foundation for growth. We are continuing to focus on pricing and working to lower operating and selling, general and administrative expenses through process standardization and productivity improvements. We also are continuing programs designed to ensure we make the best use of our assets and capital to realize returns in addition to increasing our operating margins.
 
We intend to continue to focus on meeting 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.
 
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 business in different areas that fit into our current operations. We believe that making such investments will provide long-term value to our stockholders. In addition, we intend to continue to return value to our shareholders through common stock repurchases and dividend


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payments. We recently announced that our Board of Directors expects that future quarterly dividend payments will be increased to $0.315 per share in 2010, which is an 8.6% increase from the quarterly dividend we paid in 2009. This will result in an increase in the amount of free cash flow that we expect to pay out as dividends for the seventh straight year, which is an indication of our ability to generate strong and consistent cash flows. All future dividend declarations will be made at the discretion of our Board of Directors.
 
Operations
 
General
 
We manage and evaluate our principal operations through five Groups. Our four geographic Groups, which include our Eastern, Midwest, Southern and Western Groups, provide collection, transfer, recycling and disposal services. Our fifth Group is the Wheelabrator Group, which provides waste-to-energy services. We also provide additional services that are not managed through our five Groups, as described below. These operations are presented in this report as “Other.”
 
The table below shows the total revenues (in millions) contributed annually by each of our Groups, or reportable segments, in the three-year period ended December 31, 2009. More information about our results of operations by reportable segment is included in Note 21 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,  
    2009     2008     2007  
 
Eastern
  $ 2,960     $ 3,319     $ 3,411  
Midwest
    2,855       3,267       3,289  
Southern
    3,328       3,740       3,737  
Western
    3,125       3,387       3,444  
Wheelabrator
    841       912       868  
Other
    628       897       832  
Intercompany
    (1,946 )     (2,134 )     (2,271 )
                         
Total
  $ 11,791     $ 13,388     $ 13,310  
                         
 
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,  
    2009     2008     2007  
 
Collection
  $ 7,980     $ 8,679     $ 8,714  
Landfill
    2,547       2,955       3,047  
Transfer
    1,383       1,589       1,654  
Wheelabrator
    841       912       868  
Recycling
    741       1,180       1,135  
Other
    245       207       163  
Intercompany
    (1,946 )     (2,134 )     (2,271 )
                         
Total
  $ 11,791     $ 13,388     $ 13,310  
                         
 
Collection.  Our commitment to customers begins with a vast waste collection network. Collection involves picking up and transporting waste and recyclable materials from where it was generated to a transfer station,


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material recovery facility (“MRF”) 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.
 
Landfill.  Landfills are the main depositories for solid waste in North America. At December 31, 2009, we owned or operated 268 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 five 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, 2009, we owned or operated 345 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 critical to haulers who collect waste in areas not in close proximity to disposal facilities. Fees charged to third parties at transfer stations are usually based on the type and volume or weight of the waste deposited at the transfer station, the distance to the disposal site and general market factors.


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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 enables 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 network of 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 generally are 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 any regulatory requirements relating to the operation and closure of the transfer station.
 
Wheelabrator.  As of December 31, 2009, 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, 2009, our waste-to-energy facilities were capable of processing up to 21,100 tons of solid waste each day. In 2009, 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 generate steam at our waste-to-energy and IPP facilities for the production of electricity. We sell the electricity produced at our facilities into wholesale markets, which include investor-owned utilities, power marketers and regional power pools. Some of our facilities also sell steam directly to end users. Fees charged for electricity and steam at our waste-to-energy facilities and IPPs have generally been 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, electricity and other general market factors. In 2009, several of our long-term energy contracts and short-term pricing arrangements expired, significantly increasing our waste-to-energy revenues’ exposure to volatility attributable to changes in market prices for electricity, which generally correlate with fluctuations in natural gas prices in the markets where we operate. Refer to the Quantitative and Qualitative Disclosure About Market Risk section of this report for additional information about the Company’s current considerations related to the management of this market exposure.
 
Recycling.  Our recycling operations focus on improving the sustainability and future growth of recycling programs within communities and industries. During the first quarter of 2009, we transferred responsibility for the oversight of day-to-day recycling operations at our material recovery facilities and secondary processing facilities to the management teams of our geographic Groups. Before that, all of our recycling operations other than certain services that were embedded within the geographic Groups’ other operations had comprised, and been reported as, a separate segment. The financial results of our material recovery facilities and secondary processing facilities are now included as a component of their respective geographic Group and the financial results of our recycling brokerage business and electronics recycling services are included as part of our “Other” operations. We believe that integrating the management of our recycling facilities with the remainder of our solid waste business ensures that we are focusing on maximizing the profitability and return on invested capital of all aspects of our business and efficiently providing comprehensive environmental solutions to our customers.
 
In 2001, we became the first major solid waste company to focus on residential single-stream recycling, which allows customers to mix recyclable paper, plastic and glass in one bin. Residential single-stream programs have greatly increased the recycling rates. Single-stream recycling is possible through the use of various mechanized screens and optical sorting technologies. We have also been advancing the single-stream recycling programs for


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commercial applications. Recycling involves the separation of reusable materials from the waste stream for processing and resale or other disposition. Our recycling operations include the following:
 
Materials processing — Through our collection operations, we collect recyclable materials from residential, commercial and industrial customers and direct these materials to one of our MRFs for processing. We operate 90 MRFs where paper, metals, plastics, glass and other recyclable commodities are recovered for resale. We also operate eight secondary processing facilities where recyclable materials 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 materials recycling — Using state-of-the-art sorting and processing technology, we process, inventory and sell plastic commodities making the recycling of such items more cost effective and convenient.
 
Commodities recycling — We market and resell recyclable commodities to customers world-wide. We manage the marketing of recyclable commodities that are processed in our facilities by maintaining comprehensive service centers that continuously analyze market prices, logistics, market demands and product quality.
 
Fees for recycling services are influenced by the type of recyclable commodities being processed, the volume or weight of the recyclable material, degree of processing required, the market value of the recovered material and other market factors.
 
The recyclable materials processed in our MRFs are purchased from various sources, including third parties and our own operations. The cost per ton of material purchased is based on market prices and the cost to transport the finished goods to our customers to whom we sell the materials. The price we pay for recyclable materials is often referred to as a “rebate.” Rebates generally are 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.  Other services not managed within our Groups include the following:
 
We provide recycling brokerage and electronic recycling services. Recycling brokerage includes managing the marketing of recyclable materials for third parties. The experience of our recycling operations in managing recyclable commodities for our own operations gives us the expertise needed to effectively manage volumes for third parties. Utilizing the resources and knowledge of our recycling operations’ service centers, we can assist customers in marketing and selling their recyclable commodities with little to no capital requirements. We also provide electronics recycling. 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. In recent years, we have teamed with major electronics manufacturers to offer comprehensive “take-back” programs of their products to assist the general public in disposing of their old electronics in a convenient and environmentally safe manner.
 
We provide sustainability services to businesses through our Upstream® and Green Squad organizations. This includes in-plant services, where our employees work full-time inside our customers’ facilities to provide full-service waste management solutions and consulting services. Our vertically integrated waste management operations enable us to provide customers with full management of their waste. The breadth of our service offerings and the familiarity we have with waste management practices gives us the unique ability to assist customers in identifying recycling opportunities, minimizing waste, and determining the most efficient means available for waste collection and disposal.
 
We 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 EPA endorses landfill gas as a renewable energy resource, in the same category as wind, solar and geothermal resources. At December 31, 2009, landfill gas beneficial use projects were producing commercial quantities of methane gas at 119 of our solid waste landfills. At 87 of these landfills, the


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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 nine landfills, the landfill gas is processed to pipeline-quality natural gas and then sold to natural gas suppliers.
 
Our WM Healthcare Solutions subsidiary offers integrated medical waste services for healthcare facilities, pharmacies and individuals. We provide full-service solutions to facilities to assist them in best practices, indentifying waste streams and proper disposal. Our healthcare services also include a sharps mail return program through which individuals can safely dispose of their used syringes and lancets using our MedWaste Tracker system.
 
Although by their very nature many waste management services such as collection and disposal are local services, our National Accounts program works with customers whose locations span the United States. Our National Accounts program provides centralized customer service, billing and management of accounts to streamline the administration of customers’ multiple and nationwide locations’ waste management needs.
 
We also have begun investing in businesses and technologies that are designed to offer services and solutions ancillary or supplementary to our current operations. These investments include joint ventures, acquisitions and partial ownership interests. The solutions and services include the development, operation and marketing of plasma gasification facilities; operation of a landfill gas-to-liquid natural gas plant; solar powered compact trash compactors; and organic waste-to-fuel conversion technology. Part of our expansion of services includes offering portable self-storage services and fluorescent bulb and universal waste mail-back through our LampTracker® program.
 
Finally, 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.
 
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.
 
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 in our core business based on pricing and quality of service. We have also begun competing for business based on service offerings. As companies, individuals and communities have begun to look for ways to be more sustainable, we are ensuring our customers know about our comprehensive services that go beyond our core business of picking up and disposing of waste.
 
Employees
 
At December 31, 2009, we had approximately 43,400 full-time employees, of which approximately 7,300 were employed in administrative and sales positions and the balance in operations. Approximately 9,900 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 also


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are 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, 2009:
 
                 
Surety bonds:
               
Issued by consolidated subsidiary(a)
  $ 251          
Issued by affiliated entity(b)
    1,035          
Issued by third-party surety companies
    1,848          
                 
Total surety bonds
          $ 3,134  
Letters of credit:
               
Revolving credit facility(c)
    1,578          
Letter of credit facilities(d)
    371          
Other lines of credit
    173          
                 
Total letters of credit
            2,122  
Insurance policies:
               
Issued by consolidated subsidiary(a)
    1,066          
Issued by affiliated entity(b)
    16          
Issued by third-party insurance companies
    66          
                 
Total insurance policies
            1,148  
Funded trust and escrow accounts(e)
            241  
Financial guarantees(f)
            243  
                 
Total financial assurance
          $ 6,888  
                 
 
 
(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, 2009, we had no outstanding borrowings and $1,578 million of letters of credit issued and supported by the facility. The unused and available credit capacity of the facility was $822 million as of December 31, 2009.
 
(d) We have three separate letter of credit facilities, including a $175 million facility maturing in June 2010; a $105 million facility maturing June 2013; and a $100 million facility maturing December 2014. At December 31, 2009, $371 million of letters of credit were outstanding under these agreements, leaving an unused and available capacity of $9 million.
 
(e) Our funded trust and escrow accounts generally have been established to support landfill closure, post-closure and environmental remediation obligations and our performance under various 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


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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. 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.
 
(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.
 
Our $2.4 billion revolving credit facility becomes current in the third quarter of 2010. Accordingly, we will be working to renegotiate our existing facility in the near-term. We currently expect that the cost of a similar facility will be significantly higher than the cost of our existing facility. In an effort to manage our financial assurance costs as well as ensure that we have access to facilities that meet our ongoing financial assurance needs, we are currently evaluating options for alternative cost-effective sources of financial assurance.
 
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.
 
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, 2009, 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, 2009, our auto liability insurance program included a per-incident base deductible of $5 million, subject to additional aggregate deductibles in the $5 million to $10 million layer 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, 2009 are summarized in Note 11 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 119 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’s 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’s 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 11 to the Consolidated Financial Statements for disclosures relating to our current assessments of the impact of regulations on our current and future operations.
 
Item 1A.   Risk Factors.
 
In an effort to keep our stockholders 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,


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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 2010 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. In addition to disruption in the credit markets, economic conditions over the last eighteen months 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.
 
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 primarily 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.
 
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, both of which have increased our internal revenue growth and we have continued our fuel surcharge program to offset fuel costs. 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


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underperforming and non-strategic assets if we cannot improve their profitability. We may not be able to successfully negotiate the divestiture of underperforming and non-strategic operations, which could result in asset impairments or the continued operation of low-margin businesses. 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
 
  •  local communities, citizen groups, 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.


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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.
 
The adoption of climate change legislation or regulations restricting emissions of “greenhouse gases” 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 carbon dioxide, methane and other “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. Congress is currently working on legislation to control and reduce emissions of greenhouse gases in the United States, which includes establishing cap-and-trade programs. Additionally, the EPA recently announced proposed regulations to control emissions of greenhouse gases from stationary sources, including municipal solid waste landfills, and several states have already begun taking actions to reduce future emissions of greenhouse gases. Depending on the form of legislation and regulations that are ultimately enacted, our operating expenses could increase and some of our operations could be less profitable, as we may be required to take any number of actions, including the purchase of emission allowances or installation of additional pollution control technology.
 
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 47% 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 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


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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 other insurance coverages that are customary for a company our size. We use these programs to mitigate risk of loss, thereby enabling 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 currently do not anticipate any unmanageable difficulty in obtaining financial assurance instruments in the future, but general economic factors may adversely affect the cost of our current financial assurance instruments and changes in regulations may impose stricter requirements on the types of financial assurance that will be accepted. 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.
 
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 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%


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and 72%, respectively, from their high points within the year. Additionally, the decline in market prices for commodities resulted in a year-over-year decrease in revenue of $447 million in 2009. 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.
 
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. Many of our longer-term agreements expired in 2009, and the electricity prices we were able to charge without the benefit of long-term agreements were tied to market electricity prices, which generally correlate with fluctuations in natural gas prices in the markets where we operate. As a result, we experienced a $76 million decline in revenues for the year ended December 31, 2009 as compared with the prior year. Additionally, revenues from our independent power production plants can be affected by price fluctuations. If we are unable to successfully negotiate long-term contracts, or depending on market conditions even with long-term contracts, our revenues could be adversely affected.
 
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 and others are working to reduce the waste they generate. 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 landfills and our waste-to-energy facilities currently provide and have historically provided our highest operating margins. We have been expanding our service offerings and growing lines of businesses to have the ability to service waste streams that do not go to landfills or waste-to-energy facilities and to provide services for customers that wish to reduce waste entirely. However, it is reasonably possible that our revenues and our operating margins could be negatively affected due to disposal alternatives.
 
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 these unions. 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. Additionally, it is possible that attempts to amend federal labor laws could be successful and make it easier for unions to become recognized as the bargaining representative for employees. If we are unable to negotiate acceptable collective bargaining agreements, our operating expenses could increase significantly as a result of work stoppages, including strikes. 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


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adverse judgments or settlements, either of which could require substantial payments, adversely affecting our liquidity.
 
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.
 
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.
 
Our capital requirements could increase our expenses or cause us to change our growth and development plans.
 
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. Recent economic conditions have reduced our cash flows from operations and could do so in the future. If impacts on our cash flows from operations are significant, we may reduce or suspend capital expenditures, acquisition activity, dividend declarations or share repurchases. We may choose to incur indebtedness to pay for these activities, and there can be no assurances that we would be able to incur indebtedness on terms we deem acceptable. We also may need to incur indebtedness to refinance scheduled debt maturities, and it is possible that the cost of financing could increase significantly, thereby increasing our expenses and decreasing our net income.
 
Additionally, we have $3.0 billion of debt as of December 31, 2009 that is exposed to changes in market interest rates within the next twelve months because of the combined impact of our tax-exempt bonds, our interest rate swap agreements and borrowings outstanding under our Canadian Credit Facility. Therefore, increases in interest rates can increase our interest expenses which also would lower our net income.
 
We may use our revolving credit facility to meet our cash needs, to the extent available. As of December 31, 2009, we had $822 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. Without waivers from lenders party to those agreements, any such default would have a material adverse effect on our ability to continue 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 Group offices are in Pennsylvania, Illinois, Georgia, Arizona and New Hampshire. We also have field-based administrative offices in Arizona, Illinois and Texas. We


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own or lease real property in most locations where we have operations. We have operations in each of the fifty states other than Montana. 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, 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:
 
                 
    2009     2008  
 
Landfills:
               
Owned
    211       212  
Operated through lease agreements
    26       27  
Operated through contractual agreements
    36       34  
                 
      273       273  
Transfer stations
    345       355  
Material recovery facilities
    90       98  
Secondary processing facilities
    8       6  
Waste-to-energy facilities
    16       16  
Independent power production plants
    5       5  
 
The following table provides certain information by Group regarding the 237 landfills owned or operated through lease agreements and a count, by Group, of contracted disposal sites as of December 31, 2009:
 
                                         
                            Contracted
 
          Total
    Permitted
    Expansion
    Disposal
 
    Landfills     Acreage(a)     Acreage(b)     Acreage(c)     Sites  
 
Eastern
    40       30,419       6,406       533       7  
Midwest
    75       32,347       9,139       1,390       9  
Southern
    76       38,427       12,395       288       13  
Western
    42       38,452       8,666       993       7  
Wheelabrator
    4       781       299       39        
                                         
      237       140,426       36,905       3,243       36  
                                         
 
 
(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 11 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 2009.


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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 “WM.” 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
 
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
  $ 33.99     $ 22.10  
Second Quarter
    29.00       25.06  
Third Quarter
    30.80       26.31  
Fourth Quarter
    34.18       28.28  
2010
               
First Quarter (through February 11, 2010)
  $ 35.00     $ 31.30  
 
On February 11, 2010, the closing sale price as reported on the NYSE was $31.93 per share. The number of holders of record of our common stock at February 11, 2010 was 14,327.
 
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)
 
                         
   
12/31/04
 
12/31/05
 
12/31/06
 
12/31/07
 
12/31/08
 
12/31/09
Waste Management, Inc. 
  $100   $104   $129   $118   $124   $131
S&P 500 Index
  $100   $105   $121   $128   $  81   $102
Dow Jones Waste & Disposal Services Index
  $100   $106   $130   $136   $128   $146


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Under capital allocation programs approved by our Board of Directors, we have paid quarterly cash dividends of $0.24 per share for a total of $495 million in 2007; $0.27 per share for a total of $531 million in 2008; and $0.29 per share for a total of $569 million in 2009.
 
Our Board-approved capital allocation programs have also provided for common stock repurchases. The Company did not make any common stock repurchases in the first six months of 2009 due primarily to the state of the financial markets and the economy. In June 2009, we decided that the improvement in the capital markets and the economic environment supported a decision to repurchase up to $400 million of our common stock during the second half of 2009. We repurchased $226 million of our common stock during 2009, including $70 million of repurchases during the third quarter of 2009 and $156 million during the fourth quarter of 2009.
 
The following table summarizes common stock repurchases made during the fourth quarter of 2009:
 
Issuer Purchases of Equity Securities
 
                                 
            Total Number of
   
    Total
      Shares Purchased as
  Approximate Maximum
    Number of
  Average
  Part of Publicly
  Dollar Value of Shares that
    Shares
  Price Paid
  Announced Plans or
  May Yet be Purchased Under
Period
  Purchased   per Share(a)   Programs   the Plans or Programs
 
October 1 — 31
    1,218,000     $ 29.93       1,218,000     $ 293 million  
November 1 — 30
    2,383,900     $ 32.22       2,383,900     $ 216 million  
December 1 — 31
    1,272,900     $ 33.22       1,272,900     $ 174 million  
                                 
Total
    4,874,800     $ 31.91       4,874,800          
                                 
 
 
(a) This amount represents the weighted average price paid per share and includes a per share commission paid for all repurchases.


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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,  
    2009(a)     2008(a)     2007(a)     2006     2005  
    (In millions, except per share amounts)  
 
Statement of Operations Data:
                                       
Operating revenues
  $ 11,791     $ 13,388     $ 13,310     $ 13,363     $ 13,074  
                                         
Costs and expenses:
                                       
Operating
    7,241       8,466       8,402       8,587       8,631  
Selling, general and administrative
    1,364       1,477       1,432       1,388       1,276  
Depreciation and amortization
    1,166       1,238       1,259       1,334       1,361  
Restructuring
    50       2       10             28  
(Income) expense from divestitures, asset impairments and unusual items
    83       (29 )     (47 )     25       68  
                                         
      9,904       11,154       11,056       11,334       11,364  
                                         
Income from operations
    1,887       2,234       2,254       2,029       1,710  
Other expense, net
    (414 )     (437 )     (505 )     (511 )     (570 )
                                         
Income before income taxes
    1,473       1,797       1,749       1,518       1,140  
Provision for (benefit from) income taxes
    413       669       540       325       (90 )
                                         
Consolidated net income
    1,060       1,128       1,209       1,193       1,230  
Less: Net income attributable to noncontrolling interests
    66       41       46       44       48  
                                         
Net income attributable to Waste Management, Inc. 
  $ 994     $ 1,087     $ 1,163     $ 1,149     $ 1,182  
                                         
Basic earnings per common share
  $ 2.02     $ 2.21     $ 2.25     $ 2.13     $ 2.11  
                                         
Diluted earnings per common share
  $ 2.01     $ 2.19     $ 2.23     $ 2.10     $ 2.09  
                                         
Cash dividends declared per common share (2005 includes $0.22 paid in 2006)
  $ 1.16     $ 1.08     $ 0.96     $ 0.66     $ 1.02  
                                         
Cash dividends paid
  $ 1.16     $ 1.08     $ 0.96     $ 0.88     $ 0.80  
                                         
Balance Sheet Data (at end of period):
                                       
Working capital (deficit)
  $ 109     $ (701 )   $ (118 )   $ (86 )   $ 194  
Goodwill and other intangible assets, net
    5,870       5,620       5,530       5,413       5,514  
Total assets
    21,154       20,227       20,175       20,600       21,135  
Debt, including current portion
    8,873       8,326       8,337       8,317       8,687  
Total Waste Management, Inc. stockholders’ equity
    6,285       5,902       5,792       6,222       6,121  
Total equity
    6,591       6,185       6,102       6,497       6,402  
 
 
(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.


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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
This section includes a discussion of our results of operations for the three years ended December 31, 2009. 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.
 
2009 Overview
 
In our outlook for 2009, we communicated our belief that we would be well positioned to weather the challenges presented by the current economic environment. We also noted that we would focus our efforts on ensuring we are operating efficiently and generating strong and consistent free cash flows. When reviewing our 2009 financial results, we believe that our focus throughout the year on (i) maintaining our pricing discipline; (ii) controlling our costs and reducing discretionary spending; and (iii) ensuring that our cost structure is flexible enough to respond to volume changes in a timely manner has enabled us to produce solid results in a difficult environment.
 
During 2009, our most significant challenges included (i) reduced volumes due to an overall decrease in waste produced that can be attributed to sharp declines in residential and commercial construction and in consumer and business spending; (ii) an unusually weak recyclable commodities market for most of the year; and (iii) decreases in market prices for electricity, which affect the yield of our waste-to-energy and landfill gas-to-energy operations. Against this backdrop, we believe that our 2009 results of operations reflected the resilience of our core business and the opportunities that economic recovery will present for our more efficient organization. The highlights of our 2009 financial results include:
 
  •  Revenues of $11.8 billion and internal revenue growth from yield from collection and disposal operations of 2.9%;
 
  •  Income from operations of $1.9 billion and income from operations as a percentage of revenue of 16.0%, in spite of the recognition of $83 million of non-cash impairment charges, which were primarily a result of (i) our decision to abandon the SAP software as our revenue management system; and (ii) a change in expectations for the future operations of a landfill in California;
 
  •  Effective tax rate of 28.1% due principally to the favorable impacts of fourth quarter adjustments to our provision for income taxes related to the carry-back of a capital loss, recognition of state net operating losses and tax credits, and revaluation of deferred taxes due to Canadian tax rate reductions;
 
  •  Diluted earnings per share of $2.01; and
 
  •  Cash flow generated from operating activities of $2.4 billion and free cash flow of $1.2 billion.
 
In February 2009, we announced that we were consolidating our 45 Market Areas into 25 Areas to further streamline our operations, and throughout 2009 we incurred $50 million of restructuring costs related to these efforts. The restructuring was a result of our continued efforts to improve the efficiency of our operations. In 2009, we exceeded our expected cost savings of $120 million on an annualized basis due to the restructuring. Although one of our most significant focuses throughout 2009 was on controlling costs, there are areas in which we have purposefully increased spending, as we believe that the long-term benefits we will achieve outweigh their negative short-term effect on our costs and margins. These include professional fees related to expansion projects, acquisitions and the growth of new business lines. We also have not cut back on spending for information technology, which we believe is imperative to enable our employees to perform efficiently.
 
Liquidity and Cash Flow — Although the credit markets came to an unprecedented standstill in late 2008, in February 2009 we were able to issue an aggregate of $800 million of senior notes. The proceeds of this debt issuance were primarily used to refinance debt maturities, which is generally consistent with our practice. The state of the credit markets in late 2009 allowed us, in large part because of our investment grade credit rating and strong balance sheet, to issue an additional $600 million of 30-year senior notes at an interest rate of 6.125%. We believe that the decision to raise capital on such favorable terms was a prudent decision, and will increase our flexibility in


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pursuing acquisitions and investments in businesses when opportunities arise. Even with the increased indebtedness, we are well within our debt to capitalization goals and all of our financial covenant requirements. However, the increased indebtedness is expected to increase our interest expense in 2010.
 
As is our practice, we are presenting free cash flow, which is a non-GAAP measure of liquidity. We believe free cash flow gives investors insight into 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. However, 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 maturities.
 
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,  
    2009     2008  
 
Net cash provided by operating activities
  $ 2,362     $ 2,575  
Capital expenditures
    (1,179 )     (1,221 )
Proceeds from divestitures of businesses (net of cash divested) and other sales of assets
    28       112  
                 
Free cash flow
  $ 1,211     $ 1,466  
                 
 
The decrease in our free cash flow in 2009 as compared with 2008 was due, in large part, to the decline in operating cash flows. The decrease in cash flows provided by operating activities can generally be attributed to the economy and market conditions, the impacts of which are discussed in detail throughout the remainder of Management’s Discussion and Analysis of Financial Condition and Results of Operations. Decreased proceeds from divestitures on a year-over-year basis also contributed to the decline, due in large part to us having fewer underperforming operations to sell.
 
Our ability to generate over $1.2 billion in free cash flow in 2009 enabled us to return $795 million to stockholders during the year through the payment of $569 million in cash dividends and the repurchase of $226 million of our common stock.
 
Basis of Presentation of Consolidated and Segment Financial Information
 
Fair Value Measurements — In September 2006, the Financial Accounting Standards Board issued authoritative guidance associated with fair value measurements. This guidance defined fair value, established a framework for measuring fair value, and expanded disclosures about fair value measurements. In February 2008, the FASB delayed the effective date of the guidance for all non-financial assets and non-financial liabilities, except those that are measured at fair value on a recurring basis. Accordingly, we adopted this guidance for assets and liabilities recognized at fair value on a recurring basis effective January 1, 2008 and adopted the guidance for non-financial assets and liabilities measured on a non-recurring basis effective January 1, 2009. The application of the fair value framework did not have a material impact on our consolidated financial position, results of operations or cash flows.
 
Business Combinations — In December 2007, the FASB issued revisions to the authoritative guidance associated with business combinations. This guidance clarified and revised the principles for how an acquirer recognizes and measures identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree. This guidance also addressed the recognition and measurement of goodwill acquired in business combinations and expanded disclosure requirements related to business combinations. Effective January 1, 2009, we adopted the FASB’s revised guidance associated with business combinations. The portions of this guidance that relate to business combinations completed before January 1, 2009 did not have a material impact on our consolidated financial statements. Further, business combinations completed in 2009, which are discussed in Note 19 of our Consolidated Financial Statements, have not been material to our financial position, results of operations or cash flows. However, to the extent that future business combinations are material, our adoption of the FASB’s revised authoritative guidance associated with business combinations may significantly impact our


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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 when such amounts can be determined 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.
 
Noncontrolling Interests in Consolidated Financial Statements — In December 2007, the FASB issued authoritative guidance that established accounting and reporting standards for noncontrolling interests in subsidiaries and for the de-consolidation of a subsidiary. The guidance also established 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. We adopted this guidance on January 1, 2009. The presentation and disclosure requirements of this guidance, which must be applied retrospectively for all periods presented, have resulted in reclassifications to our prior period consolidated financial information and the remeasurement of our 2008 and 2007 effective tax rates, which are discussed in Note 9 of our Consolidated Financial Statements.
 
Refer to Note 2 of our Consolidated Financial Statements for additional information related to the impact of the implementation of new accounting pronouncements on our results of operations and financial position.
 
Reclassification of Segment Information — During the first quarter of 2009, we transferred responsibility for the oversight of day-to-day recycling operations at our material recovery facilities and secondary processing facilities to the management teams of our four geographic Groups. We believe that, by integrating the management of our recycling facilities’ operations with the remainder of our solid waste business, we can more efficiently provide comprehensive environmental solutions to our customers and ensure that we are focusing on maximizing the profitability and return on invested capital of our business on an integrated basis. As a result of this operational change, we also changed the way we review the financial results of our geographic Groups. Beginning in 2009, the financial results of our material recovery facilities and secondary processing facilities are included as a component of their respective geographic Group and the financial results of our recycling brokerage business and electronics recycling services are included as part of our “Other” operations. We have reflected the impact of these changes for all periods presented to provide financial information that consistently reflects our current approach to managing our geographic Group operations. Refer to Note 21 of our Consolidated Financial Statements for further discussion about our reportable segments.
 
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, 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 methods. 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. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our financial statements.
 
Landfills
 
Accounting for landfills requires that significant estimates and assumptions be made regarding (i) the cost to construct and develop each landfill asset; (ii) the estimated fair value of capping, closure and post-closure asset retirement obligations, which must consider both the expected cost and timing of these activities; (iii) the determination of each landfill’s remaining permitted and expansion airspace; and (iv) the airspace associated with each final capping event.
 
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


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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.
 
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-


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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 our Chief Financial Officer and a review by the Audit Committee of our Board of Directors on a quarterly basis. Of the 39 landfill sites with expansions at December 31, 2009, 14 landfills required the Chief Financial Officer to approve the inclusion of the unpermitted airspace. Nine of these landfills required approval by our Chief Financial Officer because of community or political opposition that could impede the expansion process. The remaining five landfills required approval primarily due to the permit application processes not meeting the one- or five-year 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.
 
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 is 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 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.
 
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, 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 or incur significantly higher amortization expense. 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, and certain legal and consultant fees, as well as costs directly associated with site investigation and clean up, such as materials, external contractor costs 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 a number of estimates and assumptions.


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Where it is probable that a liability has been incurred, we estimate costs required to remediate sites 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, and our estimates often vary from the 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 events or changes in circumstances that indicated the carrying value of the assets may not be recoverable occurred. These events or changes in circumstances are referred to as impairment indicators.
 
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 operating segment to its carrying value, including goodwill. We use a combination of two valuation methods, a market approach and an income approach, to estimate the fair value of our operating segments. Fair value computed by these two methods is arrived at using a number of factors, including projected future operating results, economic projections, anticipated future cash flows, comparable marketplace data and the cost of capital. There are inherent uncertainties related to these factors and to our judgment in applying them to this analysis. However, we believe that these two methods provide a reasonable approach to estimating the fair value of our operating segments.
 
The market approach estimates fair value by measuring the aggregate market value of publicly-traded companies with similar characteristics of our business as a multiple of their reported cash flows. We then apply that multiple to our operating segment’s cash flows to estimate their fair value. We believe that this approach is appropriate because it provides a fair value estimate using valuation inputs from entities with operations and economic characteristics comparable to our operating segments.


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The income approach is based on the long-term projected future cash flows of our operating segments. We discount the estimated cash flows to present value using a weighted-average cost of capital that considers factors such as the timing of the cash flows and the risks inherent in those cash flows. We believe that this approach is appropriate because it provides a fair value estimate based upon our operating segments’ expected long-term performance considering the economic and market conditions that generally affect our business.
 
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 differ significantly from our assumptions. 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 2009 were $11.8 billion, compared with $13.4 billion in 2008 and $13.3 billion in 2007. We manage and evaluate our operations primarily through our Eastern, Midwest, Southern, Western Groups, and our Wheelabrator Group, which includes our waste-to-energy facilities and independent power production plants, or IPPs. These five Groups are our reportable segments. Shown below (in millions) is the contribution to revenues during each year provided by our five Groups and our Other waste services:
 
                         
    Years Ended December 31,  
    2009     2008     2007  
 
Eastern
  $ 2,960     $ 3,319     $ 3,411  
Midwest
    2,855       3,267       3,289  
Southern
    3,328       3,740       3,737  
Western
    3,125       3,387       3,444  
Wheelabrator
    841       912       868  
Other
    628       897       832  
Intercompany
    (1,946 )     (2,134 )     (2,271 )
                         
Total
  $ 11,791     $ 13,388     $ 13,310  
                         
 
Our operating revenues generally come from fees charged for our collection, disposal, transfer, recycling and waste-to-energy services and from sales of commodities by our recycling and waste-to-energy operations. 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 MRF or disposal facility and our disposal costs. Revenues from our landfill operations consist of tipping fees, which are generally based on the type and weight or volume of waste being disposed of at our disposal facilities. Fees charged at transfer stations are generally based on the weight or volume of waste deposited, taking into account our cost of loading, transporting and disposing of the solid waste at a disposal site. Recycling revenue 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 waste-to-energy revenues, which are generated by our Wheelabrator Group, are based on the type and weight or volume of waste received at our waste-to-energy facilities and IPPs and amounts charged for the sale of energy and steam. Our “Other” revenues include our in-plant services, landfill gas-to-energy operations, Port-O-Let® services, street and parking lot sweeping services, portable self-storage, fluorescent lamp recycling and healthcare solutions services.


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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,  
    2009     2008     2007  
 
Collection
  $ 7,980     $ 8,679     $ 8,714  
Landfill
    2,547       2,955       3,047  
Transfer
    1,383       1,589       1,654  
Wheelabrator
    841       912       868  
Recycling
    741       1,180       1,135  
Other
    245       207       163  
Intercompany
    (1,946 )     (2,134 )     (2,271 )
                         
Total
  $ 11,791     $ 13,388     $ 13,310  
                         
 
The following table provides details associated with the period-to-period change in revenues (dollars in millions) along with an explanation of the significant components of the current period changes:
 
                                 
    Period-to-Period
    Period-to-Period
 
    Change
    Change
 
    2009 vs. 2008     2008 vs. 2007  
          As a % of
          As a % of
 
          Total
          Total
 
    Amount     Company(a)     Amount     Company(a)  
 
Average yield(b)
  $ (528 )     (3.9 )%   $ 644       4.9 %
Volume
    (1,078 )     (8.1 )     (557 )     (4.2 )
                                 
Internal revenue growth
    (1,606 )     (12.0 )     87       0.7  
Acquisitions
    97       0.7       117       0.9  
Divestitures
    (37 )     (0.2 )     (130 )     (1.0 )
Foreign currency translation
    (51 )     (0.4 )     4        
                                 
    $ (1,597 )     (11.9 )%   $ 78       0.6 %
                                 
 
 
(a) Calculated by dividing the amount of current year increase or decrease by the prior year’s total company revenue ($13,388 million and $13,310 million for 2009 and 2008, respectively) adjusted to exclude the impacts of current year divestitures ($37 million and $130 million for 2009 and 2008, respectively).
 
(b) The amounts reported herein represent the changes in our revenue attributable to average yield for the total Company. We analyze the changes in average yield in terms of related business revenues in order to differentiate the changes in yield attributable to our pricing strategies from the changes that are caused by market-driven price changes in commodities. The following table summarizes changes in revenues from average yield on a related-business basis:
 


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    Period-to-Period
    Period-to-Period
 
    Change
    Change
 
    2009 vs. 2008     2008 vs. 2007  
          As a % of
          As a % of
 
          Related
          Related
 
    Amount     Business(i)     Amount     Business(i)  
 
Average yield:
                               
Collection, landfill and transfer
  $ 321       3.0 %   $ 347       3.2 %
Waste-to-energy disposal(ii)
    2       0.5       3       0.7  
                                 
Collection and disposal(ii)
    323       2.9       350       3.1  
Recycling commodities
    (447 )     (36.3 )     81       6.9  
Electricity(ii)
    (76 )     (21.3 )     24       7.1  
Fuel surcharges and mandated fees
    (328 )     (46.5 )     189       36.5  
                                 
Total
  $ (528 )     (3.9 )   $ 644       4.9  
                                 
 
 
     
(i) Calculated by dividing the increase or decrease for the current year by the prior-year’s related business revenue, adjusted to exclude the impacts of divestitures for the current year ($37 million and $130 million for 2009 and 2008, respectively). The table below summarizes the related business revenues for each year, adjusted to exclude the impacts of divestitures:
 
                 
    Denominator  
    2009     2008  
 
Related business revenues:
               
Collection, landfill and transfer
  $ 10,622     $ 10,715  
Waste-to-energy disposal
    434       431  
                 
Collection and disposal
    11,056       11,146  
Recycling commodities
    1,233       1,180  
Electricity
    356       336  
Fuel surcharges and mandated fees
    706       518  
                 
Total Company
  $ 13,351     $ 13,180  
                 
 
 
     
(ii) Average revenue growth from yield from “Collection and disposal” excludes all electricity-related revenues generated by our Wheelabrator Group, which are reported as “Electricity” revenues. Before 2009, we reported electricity-related revenues from Wheelabrator’s IPPs as “Electricity” and electricity-related revenues from Wheelabrator’s waste-to-energy facilities in “Waste-to-energy.” Beginning in 2009, all of Wheelabrator’s electricity-related revenues are included in “Electricity” and only the disposal revenues are included in “Waste-to-energy disposal.” We have reflected the impact of this change for all years presented to provide information that consistently reflects our current approach.
 
Our revenues decreased $1,597 million, or 11.9%, in 2009 as compared with 2008. A substantial portion of these declines can be attributed to market factors, including (i) recyclable commodity prices; (ii) lower fuel prices, which reduced revenue provided by our fuel surcharge program; (iii) the effect of lower electricity prices on our waste-to-energy business; and (iv) foreign currency translation on revenues from our Canadian operations.
 
In addition, revenues continue to decline due to lower volumes, which have resulted from the slowdown in the economy. In 2009, economic pressures continued to significantly reduce consumer and business spending, which meant less waste was being generated. However, our revenue growth from average yield on our collection and disposal operations was $323 million in 2009 which demonstrates our commitment to pricing even in the current economic environment.
 
Towards the end of 2009, we began to see the trend of volume decline moderate. For the fourth quarter of 2009, our revenue decline was $102 million, or 3.3% as compared with the fourth quarter of 2008. This improvement, as

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compared with our full-year revenue decline of 11.9%, is primarily driven by the steady commodity price recovery trend that occurred throughout 2009 as compared with the severe decline in commodity pricing and demand in the fourth quarter of 2008. Additionally, in the fourth quarter of 2009, we began to see our year-over-year volume comparisons improve in our collection and disposal businesses.
 
The following provides further details associated with our period-to-period change in revenues.
 
Average yield
 
Collection and disposal average yield — This measure reflects the effect on our revenue from the pricing activities of our collection, transfer, landfill and waste-to-energy disposal operations, exclusive of volume changes. Revenue growth from collection and disposal average yield includes not only base rate changes 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 2009 and 2008, the increases in revenues from yield were driven by our collection operations, which experienced substantial yield growth in all lines of business and in every geographic operating group, primarily as a result of our continued focus on pricing initiatives, including various fee increases. As discussed below, increased collection revenues due to pricing have been more than offset by revenue declines from lower collection volumes. However, increased revenue growth from yield on base business and a focus on controlling variable costs has consistently provided margin improvements in our collection line of business. In addition to the revenue growth from yield in the collection line of business, we experienced increases in revenues from yield at our landfills and our transfer stations due to our continued focus on pricing activities.
 
Revenues from our environmental fee, which are included in average yield on collection and disposal, increased by $37 million and $60 million for the years ended December 31, 2009 and 2008, respectively. Environmental fee revenues totaled $218 million for the year ended December 31, 2009 compared with $181 million in 2008 and $121 million in 2007.
 
Recycling commodities — For the first nine months of 2008, record high commodity prices favorably impacted our revenue growth. Then, during the fourth quarter of 2008, we saw a rapid decline in commodity prices due to a significant decrease in the demand for commodities both domestically and internationally. Commodity demand and prices continued to be weak in the first nine months of 2009 as compared with record-high commodity prices experienced through September of 2008. However, market prices for recyclable commodities are recovering and prices have increased significantly from the record lows experienced in late 2008 and early 2009. While commodity prices are still significantly less than the levels seen in 2007 and the first nine months of 2008, the current price recovery trend contributed to revenue growth in the fourth quarter of 2009 and is expected to contribute to revenue growth in the coming year.
 
Electricity — The changes in revenue from yield provided by our waste-to-energy business are largely due to fluctuations in rates charged for electricity under our power purchase contracts that generally correlate with natural gas prices in the markets where we operate. In 2009, we experienced a decline of $76 million in revenue from yield at our waste-to-energy facilities due to the falling electricity prices. During 2009, approximately 34% of the electricity revenue at our waste-to-energy facilities was subject to current market rates, which is an increase from 18% during 2008. Our waste-to-energy facilities’ exposure to market price volatility is increasing as more long-term contracts expire.
 
In 2008, we saw an increase of $24 million in revenue from yield provided by our waste-to-energy business. This increase was largely due to annual rate increases for electricity under long-term contracts and favorable energy market pricing.
 
Fuel surcharges and mandated fees — Revenue generated by our fuel surcharge program decreased by $328 million and increased by $189 million for the years ended December 31, 2009 and 2008, respectively. The fluctuation is directly attributable to the fluctuation in the crude oil index prices we use for our fuel surcharge program.


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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 — Our collection business accounted for $622 million of the total volume decrease in 2009. Our industrial collection operations experienced the most significant revenue declines due to lower volumes primarily as a result of the continued slowdown in both residential and commercial construction activities across the United States. Our commercial and residential collection lines of business tend to be more recession resistant than our other lines of business. However, we still experienced some commercial and residential collection volume declines in 2009 that we attribute to the recessionary economic environment, as well as to pricing and competition.
 
In 2009, we also experienced a 16% decline in third-party revenue due to volume at our landfills. This decrease was most significant in our more economically sensitive special waste and construction and demolition waste streams, although municipal solid waste streams at our landfills have also decreased. Lower third-party volumes in our transfer station operations also caused revenue declines and can generally be attributed to economic conditions and the effects of pricing and competition. Lower volumes in our recycling operations caused declines in revenues of $74 million in 2009. These decreases are attributable to the drastic decline in the domestic and international demand for recyclables in late 2008. Demand for recyclable commodities has recovered throughout 2009, although it has yet to compare favorably to the levels we experienced in advance of the market shift in the fourth quarter of 2008.
 
In 2008, revenue declines due to lower volumes were driven by lower collection volumes and, to a lesser extent, lower transfer station and third-party disposal volumes. Declines in revenues from volumes in these lines of business were most significantly affected by (i) our focus on improving margins through increased pricing; and (ii) economic conditions, which particularly affected our industrial collection line of business. Revenue declines attributable to lower volumes also affected our recycling operations due to the rapid decline in demand for recyclable commodities experienced during the fourth quarter of 2008
 
Acquisitions and divestitures — Revenues increased $97 million and $117 million for the years ended December 31, 2009 and 2008, respectively, due to acquisitions, principally in the collection, transfer and recycling businesses, although we also made acquisitions starting in 2008 in our “Other” business as we focused on entering new, complementary lines of business. Divestitures accounted for decreased revenues of $37 million and $130 million for the years ended December 31, 2009 and 2008, respectively. These divestitures were primarily comprised of collection operations and, to a lesser extent, transfer station and recycling operations. Beginning in the second quarter of 2008, revenue growth from acquisitions exceeded revenue declines from divestitures, a trend we had not seen in over two years. This change reflects our shift in focus from divesting underperforming operations to acquiring businesses.
 
Operating Expenses
 
Our operating expenses include (i) labor and related benefits (excluding labor costs associated with maintenance and repairs discussed 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 affected 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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Our operating expenses decreased by $1,225 million, or 14.5% when comparing 2009 with 2008 and increased $64 million, or 0.8% when comparing 2008 with 2007. Operating expenses as a percentage of revenues were 61.4% in 2009, 63.2% in 2008 and 63.1% in 2007. The changes in our operating expenses during the years ended December 31, 2009 and 2008 can largely be attributed to the following:
 
Volume declines and divestitures — Throughout 2009 and 2008, we experienced volume declines as a result of (i) the economy; (ii) pricing and competition; 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 below.
 
Changes in market prices for recyclable commodities — Market prices for recyclable commodities declined sharply when comparing 2009 with 2008. This significant decrease in market prices was the driver of the decrease in cost of goods sold during 2009. Market prices for recyclable commodities climbed robustly through most of 2008, achieving levels during the first nine months of 2008 that had not been seen in several years. However, during the fourth quarter of 2008, the market prices and demand for recyclable commodities declined sharply. The resulting near-historic low prices and reduced demand carried into the first quarter of 2009 and, although prices have steadily increased during 2009, they remained significantly below prior-year levels throughout most of 2009.
 
Fuel price changes — Lower market prices for fuel caused decreases in both our direct fuel costs and our subcontractor costs for the year ended December 31, 2009. On average, diesel fuel prices decreased 35%, from $3.81 per gallon for 2008 to $2.46 per gallon for 2009. 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% in 2008 from $2.88 per gallon in 2007 to $3.81 per gallon.
 
Changes in risk-free interest rates — We recognized $35 million in favorable adjustments during 2009 compared with $33 million in unfavorable adjustments during 2008 and $8 million in unfavorable adjustments during 2007 due to changes in United States Treasury rates, which are used to estimate the present value of our environmental remediation obligations and recovery assets. Over the course of 2009, the discount rate we use increased from 2.25% to 3.75%. During 2008, the discount rate we use declined from 4.00% to 2.25%. During 2007, the discount rate we use declined from 4.75% to 4.00%. These adjustments have been reflected in the landfill operating costs category in the table below.
 
Canadian exchange rates — When comparing the average exchange rate for the years ended December 31, 2009 and 2008, the Canadian exchange rate weakened by 7%, which decreased our expenses in all operating cost categories. The weakening of the Canadian dollar decreased our total operating expenses by $40 million for 2009 as compared with 2008. Changes in currency exchange rates had very little impact when comparing the years ended December 31, 2008 and 2007.
 
Acquisitions and growth initiatives — In both 2009 and 2008, we have experienced cost increases attributable to recently acquired businesses and, to a lesser extent, our various growth and business development initiatives. These cost increases have affected each of the operating cost categories identified in the table below.


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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-
       
    2009     Period Change     2008     Period Change     2007  
 
Labor and related benefits
  $ 2,260     $ (160 )     (6.6 )%   $ 2,420     $ 8       0.3 %   $ 2,412  
Transfer and disposal costs
    937       (111 )     (10.6 )     1,048       (100 )     (8.7 )     1,148  
Maintenance and repairs
    1,033       (41 )     (3.8 )     1,074       (5 )     (0.5 )     1,079  
Subcontractor costs
    700       (201 )     (22.3 )     901       (1 )     (0.1 )     902  
Cost of goods sold
    488       (324 )     (39.9 )     812       43       5.6       769  
Fuel
    414       (301 )     (42.1 )     715       134       23.1       581  
Disposal and franchise fees and taxes
    578       (30 )     (4.9 )     608       6       1.0       602  
Landfill operating costs
    222       (69 )     (23.7 )     291       30       11.5       261  
Risk management
    211       2       1.0       209       (8 )     (3.7 )     217  
Other
    398       10       2.6       388       (43 )     (10.0 )     431  
                                                         
    $ 7,241     $ (1,225 )     (14.5 )%   $ 8,466     $ 64       0.8 %   $ 8,402  
                                                         
 
The period-to-period changes for each category of operating expenses are discussed below.
 
Labor and related benefits —
 
  •  When comparing 2009 with 2008, the cost declines were generally a result of (i) headcount and overtime reductions related to volume declines; (ii) effects of foreign currency translation; (iii) a benefit from the restructuring we initiated in January of 2009, although most of these savings are reflected in our selling, general and administrative expenses; and (iv) cost savings provided by our operational improvement initiatives. These cost savings have been offset, in part, by higher hourly wages due to merit increases; and (ii) increased accrued bonus expense as our performance against targets established by our annual incentive plans was stronger than it had been in 2008.
 
  •  When comparing 2008 with 2007, wages increased due to annual merit adjustments, although these higher costs were 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 2007.
 
  •  The comparability of our labor and related benefits costs for the periods presented has also been affected by costs incurred for the resolution of labor disputes with certain collective bargaining units. Such costs increased our 2009 expense by $9 million and our 2008 expense by $42 million. The costs incurred during 2009 and 2008 were primarily associated with the withdrawal of certain bargaining units from underfunded multi-employer pension plans.
 
Transfer and disposal costs — During 2009 and 2008, these cost decreases were a result of volume declines and our continued focus on reducing disposal costs associated with our third-party disposal volumes by improving internalization. The 2009 decrease was also partially due to foreign currency translation.
 
Maintenance and repairs — During 2009, these costs declined as a result of volume declines and various fleet initiatives that have favorably affected our maintenance, parts and supplies costs. These decreases have been offset partially by cost increases due to differences in the timing and scope of planned maintenance projects at our waste-to-energy and landfill gas-to-energy facilities.
 
Subcontractor costs — During 2009, these cost decreases are a result of volume declines, a significant decrease in diesel fuel prices and the effects of foreign currency translation.
 
Cost of goods sold — The 2009 and 2008 cost changes are principally due to changes in the recycling commodity rebates we pay to our customers as a result of changes in market prices for recyclable commodities discussed above and volume declines.


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Fuel — The cost changes for 2009 and 2008 are a result of changes in market prices for diesel fuel discussed above and volume declines.
 
Disposal and franchise fees and taxes — These cost decreases are principally a result of volume declines, although the comparability of the periods presented is also affected by the favorable resolution of a disposal tax matter in our Eastern Group, which reduced these expenses by $18 million during 2007 and $3 million during 2008.
 
Landfill operating costs — The changes in this category for the years presented was primarily driven by the changes in U.S. Treasury rates used to estimate the present value of our environmental remediation obligations and recovery assets. The impacts of these rate changes are discussed above.
 
Risk management — Our consistent risk management costs reflect the success we have had over the last several years in managing 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.
 
Other — The comparison of these costs has been significantly affected by the following:
 
  •  In 2009, we had a significant increase in the property taxes assessed for one of our waste-to-energy facilities.
 
  •  In 2008 and 2007, we had relatively higher gains recognized on the sales of assets due to our focus on identifying and selling under-utilized assets in order to increase our efficiency.
 
  •  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.
 
  •  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.
 
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-
       
    2009     Period Change     2008     Period Change     2007  
 
Labor and related benefits
  $ 775     $ (78 )     (9.1 )%   $ 853     $ 18       2.2 %   $ 835  
Professional fees
    167       (1 )     (0.6 )     168       8       5.0       160  
Provision for bad debts
    54       (3 )     (5.3 )     57       8       16.3       49  
Other
    368       (31 )     (7.8 )     399       11       2.8       388  
                                                         
    $ 1,364     $ (113 )     (7.7 )%   $ 1,477     $ 45       3.1 %   $ 1,432  
                                                         
 
Significant changes in our selling, general, and administrative expenses during the reported periods are as summarized below:
 
Labor and related benefits — In 2009, our labor and related benefits costs have declined because we have been realizing benefits associated with our January 2009 restructuring The comparability of our labor and related benefits expenses in 2009 has also been affected by a significant decrease in non-cash compensation costs associated with the equity-based compensation provided for by our long-term incentive plans as a result of (i) a decline in the grant-date fair value of our equity awards; (ii) lower performance against established targets for certain awards than in the


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prior year; and (iii) the reversal of all compensation costs previously recognized for our 2008 performance share units based on a determination that it is no longer probable that the targets established for that award will be met. This decrease in non-cash compensation costs was offset, in part, by higher costs associated with our salary deferral plan, the costs of which are directly affected by equity-market conditions. Additionally, contract labor costs incurred for various Corporate support functions were lower during 2009 than in 2008.
 
The 2008 increase in labor and related benefits costs was primarily attributable to (i) higher salaries and hourly wages due to merit increases; (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. Additionally, we also experienced higher insurance and benefit costs. These increases were offset partially 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 2007.
 
Professional fees — In 2009, we experienced a slight decrease in professional fees due primarily to lower consulting fees related to our various strategic initiatives as compared with 2008. This decrease was largely offset by higher legal fees and expenses in 2009.
 
In 2008, our professional fees increased year-over-year due to legal and consulting costs we incurred related to (i) the support of a proposed acquisition in 2008; and (ii) our business development initiatives. These increases were partially offset by lower consulting costs in 2008 related to various strategic initiatives during 2007, including the support and development of the SAP waste and recycling revenue management system, which we discontinued development of in early 2008.
 
Provision for bad debts — The $3 million decline in our provision for bad debts in 2009 can be generally attributed to (i) the decrease in our revenues and accounts receivable due to current economic conditions and market factors; and (ii) our continued focus on the management and collection of our receivables. However, in 2008, our provision for bad debts increased $8 million as the effects of the weakened economy increased collection risks associated with certain customers.
 
Other — During 2009, our costs associated with advertising, meetings, seminars, and travel and entertainment declined as a result of our increased efforts to reduce controllable spending. These lower costs were due in part to the recent restructuring. This decline was offset partially by higher legal expenses. In 2008, we were focusing on our sales, marketing and other initiatives and identifying new customers, which resulted in increases in our advertising costs and travel and entertainment.
 
Depreciation and Amortization
 
Depreciation and amortization includes (i) depreciation of property and equipment, including assets recorded for 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 and 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.


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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-
       
          Period
          Period
       
    2009     Change     2008     Change     2007  
 
Depreciation of tangible property and equipment
  $ 779     $ (6 )     (0.8 )%   $ 785     $ (11 )     (1.4 )%   $ 796  
Amortization of landfill airspace
    358       (71 )     (16.6 )     429       (11 )      (2.5 )     440  
Amortization of intangible assets
    29       5       20.8       24       1       4.3       23  
                                                         
    $ 1,166     $ (72 )     (5.8 )%   $ 1,238     $ (21 )     (1.7 )%   $ 1,259  
                                                         
 
In both 2009 and 2008, the decrease in depreciation of tangible property and equipment is largely due to (i) components of enterprise-wide software becoming fully-depreciated; and (ii) our focus on retiring or selling under-utilized assets.
 
The decrease in amortization of landfill airspace expense in 2009 and 2008 is largely due to volume declines as a result of (i) the slowdown in the economy; (ii) our pricing program and competition, both of which have significantly reduced our collection volumes; and (iii) the re-direction 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, 2009, 2008, and 2007 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, 2009, 2008 and 2007, landfill amortization expense was reduced by $14 million, $3 million and $17 million, respectively, for the effects of these 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) effectively managing the cost of final capping material and construction; or (iii) landfill expansions that resulted in reduced or deferred final capping costs.
 
Restructuring
 
In January 2009, we took steps to further streamline our organization by (i) consolidating our Market Areas; (ii) integrating the management of our recycling operations with our other solid waste business; and (iii) realigning our Corporate organization with this new structure in order to provide support functions more efficiently.
 
Our principal operations are managed through our Groups. Each of our four geographic Groups had been further divided into 45 Market Areas. As a result of our restructuring, the Market Areas were consolidated into 25 Areas. We found that our larger Market Areas generally were able to achieve efficiencies through economies of scale that were not present in our smaller Market Areas, and this reorganization has allowed us to lower costs and to continue to standardize processes and improve productivity. In addition, during the first quarter of 2009, responsibility for the oversight of day-to-day recycling operations at our material recovery facilities and secondary processing facilities was transferred from our Waste Management Recycle America, or WMRA, organization to our four geographic Groups. By integrating the management of our recycling facilities’ operations with our other solid waste business, we are able to more efficiently provide comprehensive environmental solutions to our customers. In addition, as a result of this realignment, we have significantly reduced the overhead costs associated with managing this portion of our business and have increased the geographic Groups’ focus on maximizing the profitability and return on invested capital of our business on an integrated basis.
 
This restructuring eliminated over 1,500 employee positions throughout the Company. During 2009, we recognized $50 million of pre-tax charges associated with this restructuring, of which $41 million were related to employee severance and benefit costs. The remaining charges were primarily related to lease obligations that we will continue to incur over the remaining lease term for certain operating lease agreements.


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(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,  
    2009     2008     2007  
 
(Income) expense from divestitures (including held-for-sale impairments)
  $     $ (33 )   $ (59 )
Asset impairments (excluding held-for-sale impairments)
    83       4       12  
                         
    $ 83     $ (29 )   $ (47 )
                         
 
(Income) expense from divestitures (including held-for-sale impairments) — The net gains from divestitures during 2008 and 2007 were a result of our focus on selling underperforming businesses. In 2008, these gains were primarily related to the divestiture of underperforming collection operations in our Southern Group; and in 2007, the gains were related to the divestiture of underperforming collection, transfer and recycling operations in our Eastern, Western and Southern Groups.
 
Asset impairments (excluding held-for-sale impairments) — Through December 31, 2008, we had capitalized $70 million of accumulated costs associated with the development of our waste and recycling revenue management system. A significant portion of these costs was specifically associated with the purchase of the license of SAP’s waste and recycling revenue management software and the efforts required to develop and configure that software for our use. After a failed pilot implementation of the software in one of our smallest Market Areas, the development efforts associated with the SAP revenue management system were suspended in 2007. As disclosed in Note 11 to the Consolidated Financial Statements, in March 2008, we filed suit against SAP and are currently scheduled for trial in May 2010.
 
During 2009, we determined to enhance and improve our existing revenue management system and not pursue alternatives associated with the development and implementation of a revenue management system that would include the licensed SAP software. Accordingly, after careful consideration of the failures of the SAP software, we determined to abandon any alternative that would include the use of the SAP software. The determination to abandon the SAP software as our revenue management system resulted in a non-cash charge of $51 million, $49 million of which was recognized during the first quarter of 2009 and $2 million of which was recognized during the fourth quarter of 2009.
 
We recognized an additional $32 million of impairment charges during 2009, $27 million of which was recognized by the West Group during the fourth quarter of 2009 to fully impair a landfill in California as a result of a change in our expectations for the future operations of the landfill. The remaining impairment charges were primarily attributable to a charge required to write down our investments in certain portable self-storage operations to their fair value as a result of our acquisition of a controlling financial interest in those operations.
 
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 related to 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.


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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-
       
          Period
          Period
       
    2009     Change     2008     Change     2007  
 
Reportable segments:
                                                       
Eastern
  $ 483     $ (40 )     (7.6 )%   $ 523     $ (27 )     (4.9 )%   $ 550  
Midwest
    450       (25 )     (5.3 )     475       (49 )     (9.4 )     524  
Southern
    768       (104 )     (11.9 )     872       46       5.6       826  
Western
    521       (91 )     (14.9 )     612       (6 )     (1.0 )     618  
Wheelabrator
    235       (88 )     (27.2 )     323       31       10.6       292  
Other
    (136 )     (76 )     *       (60 )     (22 )     *       (38 )
Corporate and other
    (434 )     77       (15.1 )     (511 )     7       (1.4 )     (518 )
                                                         
Total
  $ 1,887     $ (347 )     (15.5 )%   $ 2,234     $ (20 )     (0.9 )%   $ 2,254  
                                                         
 
 
* Percentage change does not provide a meaningful comparison.
 
Reportable segments — The most significant items affecting the results of operations of our four geographic Groups during the three-year period ended December 31, 2009 are summarized below:
 
  •  During 2009 and 2008, each Group experienced declines in revenues due to lower volumes, resulting in decreased income from operations. The volume declines were generally the result of the significant downturn in the overall economic environment, particularly in our industrial collection line of business, which has been affected by the sharp decline in residential and commercial construction across the United States.
 
  •  Significantly lower recycling commodity prices in 2009 as compared with 2008 had an unfavorable effect on each of the four geographic Group’s results. During the fourth quarter of 2008, commodity prices dropped sharply from the prices we experienced throughout 2007 and the first nine months of 2008. This decline was a result of a significant decrease in the demand for commodities both domestically and internationally. The resulting near-historic low prices and reduced demand carried into 2009 and, although prices have steadily recovered, they remained significantly below the levels of the prior two years. When comparing 2008 to 2007, the significant decline in commodity prices that occurred during the fourth quarter of 2008 resulted in operating losses that more than offset the increases in operating income generated during the first nine months of 2008.
 
  •  During 2009, we recorded $50 million of charges associated with our January 2009 restructuring. During 2008 and 2007, we recorded restructuring charges of $2 million and $10 million, respectively. Refer to Note 12 of our Consolidated Financial Statements for information related to the impact of these charges on each of our reportable segments.
 
The negative impact of these factors has been partially offset by the favorable effects of (i) increased revenue growth from yield on our collection and disposal business as a result of our pricing strategies, particularly in our collection operations; and (ii) cost savings attributed to our January 2009 restructuring, our continued focus on controlling costs through operating efficiencies, and our increased focus on reducing controllable selling, general and administrative expenses, particularly for travel and entertainment during 2009.
 
Other significant items affecting the comparability of each Groups’ results of operations for years ended December 31, 2009, 2008 and 2007 are summarized below:
 
Eastern — During 2009, the Group recognized (i) an $18 million increase in revenues and income from operations associated with an oil and gas lease at one of our landfills; and (ii) a $9 million charge related to bargaining unit employees in New Jersey agreeing to our proposal to withdraw them from an underfunded, multi-employer pension fund. During 2008, the Group’s operating income was negatively affected by a


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$14 million charge related to the withdrawal of certain collective bargaining units from underfunded multi-employer pension plans. The Group’s operating income for 2007 was favorably affected by (i) net divestiture gains of $33 million; and (ii) an $18 million decrease in disposal fees and taxes due to the favorable resolution of a disposal tax matter.
 
Midwest — During 2009, the Group’s operating results were favorably affected by a $10 million reduction in landfill amortization expense as a result of changes in certain estimates related to final capping, closure and post-closure obligations. 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 are $32 million in charges 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.
 
Additionally, when comparing the average exchange rate for 2009 with 2008, the Canadian exchange rate weakened by 7%, which decreased the Group’s income from operations. The effects of foreign currency translation were the most significant to this Group because substantially all of our Canadian operations are managed by our Midwest organization. Changes in foreign currency exchange rates did not have a significant impact on the comparison of 2008 with 2007.
 
Southern — During 2008, the Group’s operating income was favorably affected by $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 2009 income from operations includes the recognition of an impairment charge of $27 million as a result of a change in expectations for the future operations of a landfill in California, which was offset, in part, by the recognition of a $6 million gain associated with the sale of water rights at a landfill. During 2008, the Group recognized a $6 million gain primarily related to the sale of surplus real estate. 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 2007.
 
Wheelabrator — The comparability of the Group’s 2009 income from operations with the prior years has been significantly affected by (i) a decline in market prices for electricity, which had a more significant impact on the Group’s results in 2009 due to the expiration of several long-term energy contracts and short-term pricing arrangements; (ii) an increase in costs for international and domestic business development activities; and (iii) an increase in “Operating” expenses of $11 million as a result of a significant increase in the property taxes assessed for one of our waste-to-energy facilities. Exposure to current electricity market prices increased from 18% of total electricity production in 2008 to 34% in 2009. The Group’s exposure to current electricity market price volatility is expected to continue to grow to about 50% by the end of 2010 as several long-term contracts are set to expire next year. The Group’s 2008 operating results were favorably affected by increases in market rates for energy during the second half of 2008, while the Group’s 2007 operating results were unfavorably affected by a $21 million charge 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.
 
Significant items affecting the comparability of the remaining components of our results of operations for the years ended December 31, 2009, 2008 and 2007 are summarized below:
 
Other — The unfavorable change in 2009 operating results compared with 2008 is largely due to (i) the effect that the previously discussed lower recycling commodity prices had on our recycling brokerage activities; (ii) an increase in costs being incurred to support the identification and development of new lines of business that will complement our core business; (iii) the unfavorable impact lower energy prices during 2009 had on our landfill-gas-to-energy operations; and (iv) 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.


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The unfavorable change in operating results in 2008 when compared with 2007 is the result of (i) the unfavorable effect that the previously discussed fourth quarter of 2008 sharp drop in recycling commodity prices had on our recycling brokerage activities; and (ii) costs being incurred to support our increased focus on the identification and development of new lines of business that will complement our core business.
 
Corporate and Other — Significant items affecting the comparability of expenses for the periods presented include:
 
  •  the recognition of $34 million of favorable adjustments during 2009 by our closed sites management group due to increases in U.S. Treasury rates used to estimate the present value of our environmental remediation obligations and environmental remediation recovery assets, while in 2008 and 2007, the same group recognized charges to landfill operating costs of $32 million and $8 million, respectively, due to declines in U.S. Treasury rates during those periods;
 
  •  a significant decline in “Selling, general and administrative” expenses in 2009 resulting from workforce reductions associated with the January 2009 restructuring, increased efforts to reduce our controllable spending and lower equity compensation costs;
 
  •  $51 million of non-cash abandonment charges recognized during 2009 associated with the determination that we would not pursue alternatives associated with the development and implementation of a revenue management system that would include the licensed SAP software;
 
  •  2008 cost decreases attributable to lower risk management expenses due to reduced actuarial projections of claim losses for workers’ compensation and auto and general liability claims and lower bonus expense due to relatively weak performance against established targets offset, in part, by costs incurred for a proposed acquisition;
 
  •  restructuring charges of $9 million in 2009 and $6 million in 2007; and
 
  •  employee healthcare coverage expenses in the third quarter of 2007 due to unusually high claims activity.
 
Interest Income and Expense — Our interest expense was $426 million in 2009, $455 million in 2008, and $521 million in 2007. Interest income was $13 million in 2009, $19 million in 2008, and $47 million in 2007. The decreases in interest income and expense for the periods presented are primarily attributable to significant declines in market interest rates.
 
Interest expense — Lower market interest rates have increased the benefits to interest expense provided by our active interest rate swap agreements and reduced the interest expense associated with our tax-exempt bonds and our Canadian Credit Facility. The impacts of each of these items on our interest expense for the years ended December 31, 2009, 2008 and 2007 are summarized below:
 
Interest rate swaps — We use interest rate swaps to manage our exposure to changes in market interest rates. The impacts to interest expense of our interest rate swaps are primarily related to (i) net periodic settlements of current interest on our active interest rate swaps and (ii) the amortization of previously terminated interest rate swap agreements as adjustments to interest expense. The following table summarizes the impact of periodic settlements of active swap agreements and the impact of terminated swap agreements on our results of operations (in millions):
 
                         
(Increase) Decrease to Interest Expense Due to Hedge
  Years Ended December 31,  
Accounting for Interest Rate Swaps
  2009     2008     2007  
 
Periodic settlements of active swap agreements(a)
  $ 46     $ 8     $ (48 )
Terminated swap agreements(b)
    19       42       37  
                         
    $ 65     $ 50     $ (11 )
                         
 
 
(a) These amounts represent the net of our periodic variable-rate interest obligations and the swap counterparties’ fixed-rate interest obligations. Our variable-rate obligations are based on a spread from the three-month LIBOR. Three-month LIBOR rates have varied significantly during the reported periods. During


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2007, the three-month LIBOR exceeded 5.0% for most of the year, while during 2008 the rate was as high as 4.8% and as low as 1.4% and during 2009 rates were consistently below 1.0% for most of the year.
 
(b) The amortization to interest expense of terminated swap agreements has decreased due to the maturity of certain previously hedged senior notes. In addition, in 2008, this amount included a $10 million net reduction in interest expense associated with the early retirement of $244 million of 8.75% senior notes. At December 31, 2009, $18 million (on a pre-tax basis) of the carrying value of debt associated with terminated swap agreements is scheduled to be reclassified as a reduction to interest expense over the next twelve months.
 
Tax-exempt bonds — Certain of our tax-exempt bonds are subject to remarketing processes that result in periodic adjustments to the interest rates of the bonds. As of December 31, 2009, $817 million of our tax-exempt bonds are “variable-rate” instruments and re-price on either a daily or weekly basis. We also have tax-exempt bonds with term interest rate periods that end before the bonds’ scheduled maturities and $387 million of these bonds were re-priced during 2009. These remarketing processes have significantly reduced the weighted average interest rates of our tax-exempt bonds, which decreased from 4.5% at December 31, 2007 to 4.0% at December 31, 2008 and 3.4% at December 31, 2009.
 
Canadian credit facility — Borrowings outstanding under our Canadian Credit Facility have short-term maturities, but are generally renewed at maturity under the terms of the facility, which results in the effective interest rates of the borrowings being reset to reflect current market interest rates. The weighted average interest rates of borrowings outstanding under our Canadian Credit Facility have decreased from 5.3% as of December 31, 2007 to 3.3% as of December 31, 2008 and 1.3% at December 31, 2009.
 
In the fourth quarter of 2009, the Company issued an additional $600 million of senior notes, which mature in 2039 and have a coupon rate of 6.125%. This debt issuance is expected to increase our average debt balances and our interest expense in 2010 as we currently expect to use the proceeds from the issuance to make various acquisitions and investments, rather than as a source for the repayment of existing debt. As of December 31, 2009, the Company’s debt-to-total capital ratio was 57.4%, which continues to be consistent with our targeted long-term debt-to-total capitalization of up to 60%.
 
Interest income — When comparing 2009 with 2008, the decrease in interest income is generally related to the decline in market interest rates, offset, in part, by an increase in our cash and cash equivalents balances throughout the year. As of December 31, 2009, our cash and cash equivalents balances exceeded $1 billion, due in large part to our $600 million issuance of senior notes during the fourth quarter 2009. We currently expect to utilize a significant portion of these funds for investments and acquisitions in the first half of 2010, including our anticipated purchase of a 40% equity investment in Shanghai Environment Group, which is discussed in Note 11 of our Consolidated Financial Statements, and additional investments in our waste-to-energy and solid waste businesses.
 
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.
 
Equity in Net Losses of Unconsolidated Entities — During 2007, 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 benefits realized as a result of these investments as discussed below within Provision for income taxes.
 
Provision for Income Taxes — We recorded provisions for income taxes of $413 million in 2009, $669 million in 2008 and $540 million in 2007. These tax provisions resulted in an effective income tax rate of approximately 28.1%, 37.2% and 30.9% for each of the three years, respectively. At current income levels, we expect that our 2010 recurring effective tax rate will be approximately 38%. The comparability of our reported income taxes for the years ended December 31, 2009, 2008 and 2007 is primarily affected by (i) variations in our income before taxes; (ii) the utilization of capital loss carry-back; (iii) the realization of state net operating loss and credit carry-forwards; (iv) changes in effective


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state and Canadian statutory tax rates; (v) differences in the impacts of tax audit settlements; and (vi) the impact of non-conventional fuel tax credits, which expired at the end of 2007. The impacts of these items are summarized below:
 
  •  Utilization of capital loss carry-back — During 2009, we generated a capital loss from the liquidation of a foreign subsidiary and determined that the capital loss could be utilized to offset capital gains from prior years (specifically 2006 and 2007). The utilization of this capital loss resulted in a reduction to our 2009 “Provision for income taxes” of $65 million, representing a 4.4 percentage point reduction in our effective tax rate.
 
  •  State net operating loss and credit carry-forwards — During 2009 and 2008, we realized state net operating loss and credit carry-forwards by reducing related valuation allowances, resulting in a reduction to our “Provision for income taxes” for those periods of $35 million and $3 million, respectively. No corresponding benefit was recognized in 2007.
 
  •  Canadian and state effective tax rates — During 2009, the provincial tax rates in Ontario were reduced, which resulted in a $13 million tax benefit as a result of the revaluation of the related deferred tax balances. During 2007, the Canadian federal government enacted tax rate reductions, which resulted in a $30 million tax benefit for the revaluation of the related deferred tax balances. We did not have any comparable adjustments to Canadian rates during 2008. During 2009, our current state tax rate increased from 6.0% to 6.25% and our deferred state tax rate increased from 5.5% to 5.75%. During 2008, our current state tax rate increased from 5.5% to 6.0%. The increases in these rates was primarily due to changes in state law.
 
  •  Tax audit settlements — Excluding the effects of interest income, the settlement of various tax audits resulted in reductions in income tax expense of $11 million for the year ended December 31, 2009, $26 million for the year ended December 31, 2008 and $40 million for the year ended December 31, 2007.
 
  •  Non-conventional fuel tax credits — Through December 31, 2007, non-conventional fuel tax credits were derived from our landfills and our investments in two coal-based, synthetic fuel production facilities. 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. Non-conventional fuel tax credits expired at the end of 2007.
 
Noncontrolling Interests — Net income attributable to noncontrolling interests was $66 million in 2009, $41 million in 2008 and $46 million in 2007. In each period, these amounts have been principally related to third parties’ equity interests in two limited liability companies that own three waste-to-energy facilities operated by our Wheelabrator Group. The profitability of one of the LLCs has improved in 2009 as a result of an increase in the rentals paid by Wheelabrator to the LLC for the lease of one of the facilities. We have consolidated these variable interest entities since 2003 because we have determined that we are the primary beneficiary for accounting purposes. We are in the process of reconsidering our consolidation of the LLCs as a result of revised authoritative guidance associated with the consolidation of variable interest entities. Additional information related to these investments is included in Note 20 to the Consolidated Financial Statements.
 
The comparison of these amounts for the reported periods has also been affected by significant adjustments recognized in consolidated operating expenses for changes in the present value of our environmental remediation obligations and recovery assets as a result of changes in the U.S. Treasury rates used to measure these balances.
 
Landfill and Environmental Remediation Discussion and Analysis
 
We owned or operated 268 solid waste and five hazardous waste landfills at December 31, 2009 and we owned or operated 267 solid waste and six hazardous waste landfills at December 31, 2008. At December 31, 2009 and


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2008, 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, 2009   December 31, 2008
    Remaining
          Remaining
       
    Permitted
  Expansion
  Total
  Permitted
  Expansion
  Total
    Capacity   Capacity   Capacity   Capacity   Capacity   Capacity
 
Remaining cubic yards
    4,546       739       5,285       4,456       816       5,272  
Remaining tonnage
    4,075       726       4,801       3,979       794       4,773  
 
Based on remaining permitted airspace as of December 31, 2009 and projected annual disposal volumes, the weighted average remaining landfill life for all of our owned or operated landfills is approximately 35 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 39 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 41 years when considering remaining permitted airspace, expansion airspace and projected annual disposal volume.
 
The number of landfills we own or operate as of December 31, 2009, 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
    14       11       37       68       81       211  
Operated through lease(a)
    5       4       5       5       7       26  
Operating contracts(b)
    12       5       10       5       4       36  
                                                 
Total landfills
    31       20       52       78       92       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.


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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, 2009 and 2008 (in millions):
 
                                                 
    December 31, 2009     December 31, 2008  
    Remaining
                Remaining
             
    Permitted
    Expansion
    Total
    Permitted
    Expansion
    Total
 
    Capacity     Capacity     Capacity     Capacity     Capacity     Capacity  
 
Balance, beginning of year
    3,979       794       4,773       3,787       893       4,680  
Acquisitions, divestitures, newly permitted landfills and closures
    33             33       20       15       35  
Changes in expansions pursued(a)
          83       83             94       94  
Expansion permits granted(b)
    129       (129 )           228       (228 )      
Airspace consumed
    (92 )           (92 )     (107 )           (107 )
Changes in engineering estimates and other(c)
    26       (22 )     4       51       20       71  
                                                 
Balance, end of year
    4,075       726       4,801       3,979       794       4,773  
                                                 
 
 
(a) Amounts reflected here relate to the combined impacts 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 decisions to no longer pursue expansion permits.
 
(b) We received expansion permits at ten of our landfills during 2009 and 28 of our landfills during 2008, 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.
 
The tons received at our landfills in 2009 and 2008 are shown below (in thousands):
 
                                                 
    2009     2008  
    # of
    Total
    Tons
    # of
    Total
    Tons
 
    Sites     Tons     per Day     Sites     Tons     per Day  
 
Solid waste landfills
    268 (a)     91,901       337       267       106,731       391  
Hazardous waste landfills
    5       1,026       4       6       1,384       5  
                                                 
      273       92,927       341       273       108,115       396  
                                                 
Solid waste landfills closed or divested during related year
    4       328               9       882          
                                                 
              93,255 (b)                     108,997 (b)        
                                                 
 
 
(a) In 2009, we acquired 3 landfills, closed 4 landfills and resumed operations at one landfill that we had previously closed.


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(b) These amounts include 1.5 million tons at December 31, 2009 and 2.0 million tons at December 31, 2008 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 receives certification of closure from the applicable regulatory agency, we generally transfer the management of the site, including any remediation activities, to our closed sites management group. As of December 31, 2009, our closed sites management group manages 201 closed landfills.
 
Landfill Assets — We capitalize various costs that we incur to ready a landfill 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, 2009 and 2008, and summarizes significant changes in these amounts during 2009 (in millions):
 
                         
          Accumulated
       
    Cost Basis of
    Landfill Airspace
       
    Landfill Assets     Amortization     Landfill Assets  
 
December 31, 2008
  $ 11,716     $ (6,053 )   $ 5,663  
Capital additions
    380             380  
Asset retirement obligations incurred and capitalized
    39             39  
Acquisitions
    35             35  
Amortization of landfill airspace
          (358 )     (358 )
Foreign currency translation
    169       (45 )     124  
Asset retirements and other adjustments
    (38 )     8       (30 )
                         
December 31, 2009
  $ 12,301     $ (6,448 )   $ 5,853  
                         
 
As of December 31, 2009, we estimate that we will spend approximately $500 million in 2010, and approximately $1 billion in 2011 and 2012 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.
 
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 authoritative guidance associated with accounting for asset retirement obligations, 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.


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The following table reflects our landfill liabilities and our environmental remediation liabilities as of December 31, 2009 and 2008, and summarizes significant changes in these amounts during 2009 (in millions):
 
                 
          Environmental
 
    Landfill     Remediation  
 
December 31, 2008
  $ 1,218     $ 299  
Obligations incurred and capitalized
    39        
Obligations settled
    (80 )     (43 )
Interest accretion
    80       6  
Revisions in cost estimates and interest rate assumptions
    5       (7 )
Acquisitions, divestitures and other adjustments
    5       1  
                 
December 31, 2009
  $ 1,267     $ 256  
                 
 
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,  
    2009     2008     2007  
 
Interest accretion on landfill liabilities
  $ 80     $ 77     $ 74  
Interest accretion on and discount rate adjustments to environmental remediation liabilities and recovery assets
    (30 )     41       17  
Leachate and methane collection and treatment
    69       69       59  
Landfill remediation costs
    23       17       17  
Other landfill site costs
    80       87       94  
                         
Total landfill operating costs
  $ 222     $ 291     $ 261  
                         
 
The comparison of these costs for the reported periods has been most significantly affected by accounting for changes in the risk-free discount rate that we use to estimate the present value of our environmental remediation liabilities and environmental remediation recovery assets, which is based on the rate for U.S. Treasury bonds with a term approximating the weighted-average period until settlement of the underlying obligations. Additionally, in 2009 and 2008, our leachate collection costs were higher in certain of our geographic Groups than they had been in 2007, primarily due to increased precipitation in the affected regions.
 
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.


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The following table calculates our landfill airspace amortization expense on a per ton basis:
 
                         
    Years Ended December 31,
    2009   2008   2007
 
Amortization of landfill airspace (in millions)
  $ 358     $ 429     $ 440  
Tons received, net of redirected waste (in millions)
    92       107       114  
Average landfill airspace amortization expense per ton
  $ 3.90     $ 4.01     $ 3.86  
 
Different per ton amortization rates are applied at each of our 273 landfills, and per ton amortization rates vary significantly from one landfill to another 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 we receive 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, 2009, 2008 and 2007 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 $14 million in 2009, $3 million in 2008 and $17 million in 2007, 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) effectively managing the cost of final capping material and construction; or (iii) landfill expansions that resulted in reduced or deferred final capping costs.
 
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 and landfill equipment; (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; (vi) repaying debt and discharging other obligations; and (vii) investments in acquisitions that we believe will be accretive and provide continued growth in our business. 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 and Cash Equivalents, Restricted Trust and Escrow Accounts and Debt Obligations
 
The following is a summary of our cash and cash equivalents, restricted trust and escrow accounts and debt balances as of December 31, 2009 and December 31, 2008 (in millions):
 
                 
    2009     2008  
 
Cash and cash equivalents
  $ 1,140     $ 480  
                 
Restricted trust and escrow accounts:
               
Tax-exempt bond funds
  $ 65     $ 123  
Closure, post-closure and environmental remediation funds
    231       213  
Debt service funds
          35  
Other
    10       10  
                 
Total restricted trust and escrow accounts
  $ 306     $ 381  
                 
Debt:
               
Current portion
  $ 749     $ 835  
Long-term portion
    8,124       7,491  
                 
Total debt
  $ 8,873     $ 8,326  
                 
Increase in carrying value of debt due to hedge accounting for interest rate swaps
  $ 91     $ 150  
                 
 
Cash and cash equivalents — Cash and cash equivalents consist primarily of cash on deposit and money market funds that invest in U.S. government obligations, all of which have original maturities of three months or less. The year-over-year increase in our cash balances is largely attributable to our November 2009 senior note issuance, which is discussed below. We intend to use a significant portion of the proceeds of this debt issuance to fund investments and acquisitions during the first half of 2010, including our anticipated purchase of a 40% equity investment in Shanghai Environment Group, which is discussed in Note 11 of our Consolidated Financial Statements, as well as additional investments in our waste-to-energy and solid waste businesses. Pending application of the offering proceeds as described, we have temporarily invested the proceeds in money market funds, which are reflected as cash equivalents in our December 31, 2009 Consolidated Balance Sheet.
 
Restricted trust and escrow accounts — Restricted trust and escrow accounts consist primarily of (i) funds deposited for purposes of settling landfill closure, post-closure and environmental remediation obligations; and (ii) funds received from the issuance of tax-exempt bonds held in trust for the construction of various projects or facilities. These balances are primarily included within long-term “Other assets” in our Consolidated Balance Sheets.
 
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, 2009 are described in Note 7 to the Consolidated Financial Statements.
 
Changes in our outstanding debt balances from December 31, 2008 to December 31, 2009 can primarily be attributed to (i) $1,749 million of cash borrowings, including $793 million in net proceeds from the February 2009 issuance of $800 million of senior notes and $592 million in net proceeds from the November 2009 issuance of $600 million of senior notes; (ii) the cash repayment of $1,335 million of outstanding borrowings; (iii) proceeds from tax-exempt borrowings of $130 million; (iv) a $59 million decrease in the carrying value of our debt due to hedge accounting for interest rate swaps; (v) a $40 million increase in the carrying value of our debt due to foreign currency translation; and (vi) the impacts of accounting for other non-cash changes in our debt balances due to acquisitions, interest accretion and capital leases.
 
As of December 31, 2009, we had (i) $998 million of debt maturing within twelve months, consisting primarily of U.S.$255 million under our Canadian credit facility and $600 million of 7.375% senior notes that mature in


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August 2010; and (ii) $767 million of fixed-rate tax-exempt borrowings subject to re-pricing within the next twelve months. The amount reported as the current portion of long-term debt as of December 31, 2009 excludes certain of these amounts because we have the intent and ability to refinance portions of our current maturities on a long-term basis. Refer to Note 7 of our Consolidated Financial Statements for information related to our classification of current maturities based on our intent and ability, given the capacity available under our revolving credit facility and Canadian credit facility, to refinance certain of these borrowings on a long-term basis.
 
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:
 
                 
    2009     2008  
 
Revolving credit facility(a)
  $ 1,578     $ 1,803  
Letter of credit facilities(b)
    371       272  
Other(c)
    173       91  
                 
    $ 2,122     $ 2,166  
                 
 
 
(a) WMI’s $2.4 billion revolving credit facility matures in August 2011. At December 31, 2009, we had no outstanding borrowings and $1,578 million of letters of credit issued and supported by the facility. The unused and available credit capacity was $822 million at December 31, 2009.
 
(b) At December 31, 2009, we have a $175 million letter of credit facility that expires in June 2010, a $105 million letter of credit facility that expires in June 2013 and a $100 million letter of credit facility that expires in December 2014. At December 31, 2009, no borrowings were outstanding under these agreements, and we had $9 million of unused and available capacity.
 
(c) These letters of credit are outstanding under various arrangements that do not obligate the counterparty to provide a committed capacity.
 
Summary of Cash Flow Activity
 
The following is a summary of our cash flows for the years ended December 31 (in millions):
 
                         
    2009     2008     2007  
 
Net cash provided by operating activities
  $ 2,362     $ 2,575     $ 2,439  
                         
Net cash used in investing activities
  $ (1,250 )   $ (1,183 )   $ (761 )
                         
Net cash used in financing activities
  $ (457 )   $ (1,256 )   $ (1,946 )
                         
 
Net Cash Provided by Operating Activities — The most significant items affecting the comparison of our operating cash flows for 2009 and 2008 are summarized below:
 
  •  Decrease in earnings — Our income from operations, excluding depreciation and amortization, decreased by $419 million on a year-over-year basis. However, this earnings decline included the impact of the following non-cash charges:
 
  •  The determination to abandon the SAP software as our revenue management system resulted in non-cash impairment charges of $51 million
 
  •  The recognition of a $27 million non-cash charge in the fourth quarter of 2009 as a result of a change in expectations for the future operations of a landfill in California.
 
Further, approximately $55 million of the year-over-year decrease in earnings is related to the impact of divestiture gains and gains on sale of assets for which the cash flow impacts are reflected in investing activities in the caption “Proceeds from divestitures of businesses and other sales of assets.”
 
The comparison of our 2009 and 2008 income from operations was also affected by an $86 million decrease in non-cash charges attributable to (i) equity-based compensation expense; (ii) interest accretion on landfill liabilities; and (iii) interest accretion and discount rate adjustments on environmental remediation liabilities


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and recovery assets. While the decrease in non-cash charges favorably affected our earnings comparison, there is no impact on net cash provided by operating activities.
 
  •  Change in receivables — There was a significant decrease in the operating cash flows provided by changes in our receivables balances, net of effects of acquisitions and divestitures, when comparing 2009 with 2008. This decrease is primarily attributable to unusual activity in 2008, including (i) the significant decrease in sequential quarter revenues when comparing the fourth quarter of 2008 with the third quarter of 2008, which was driven by the decline in the demand and market prices for recyclable commodities; and (ii) the collection of a $60 million outstanding receivable related to our investments in synthetic fuel production facilities that provided us with Section 45K tax credits through 2007.
 
  •  Decreased income tax payments — Cash paid for income taxes, net of excess tax benefits associated with equity-based transactions, was approximately $140 million lower on a year-over-year basis. The comparability of our effective tax rates is discussed in the Provision for income taxes section above.
 
  •  Decreased interest payments — Cash paid for interest was approximately $60 million lower on a year-over-year basis. This decrease is primarily due to a decline in market interest rates, which (i) increased the benefits to our interest costs provided by our active interest rate swap agreements; and (ii) reduced the interest costs associated with our variable-rate tax-exempt debt.
 
  •  Decreased bonus payments — Employee bonus payments earned in 2008, which were paid in the first quarter of 2009, were lower than the bonus payments earned in 2007 but paid in 2008 due to the relative strength of our financial performance against incentive measures in 2007 as compared with 2008. The year-over-year decrease in cash bonuses favorably affected the comparison of our cash flow from operations by approximately $35 million.
 
  •  Termination of interest rate swaps — In December 2009, we elected to terminate interest rate swaps with a notional amount of $350 million that were scheduled to mature in November 2012. Upon termination of the swaps, we received $20 million in cash for their fair value plus accrued interest receivable. The cash proceeds received from the termination of interest rate swap agreements have been classified as a change in other assets within “Net cash provided by operating activities” in the Consolidated Statement of Cash Flows.
 
  •  Accounts payable processes — We continue to work to improve our working capital management, including continuing to manage our accounts payable process in a manner that provides optimal cash management, which has favorably impacted our year-over-year cash flow from operations change by approximately $20 million.
 
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 a refund of 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 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.


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  •  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.
 
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:
 
  •  Acquisitions — Our spending on acquisitions increased from $90 million during 2007 to $280 million during 2008 and to $281 million in 2009 due to an increased focus on acquisitions and other investments.
 
  •  Divestitures — Proceeds from divestitures (net of cash divested) and other sales of assets were $28 million in 2009, $112 million in 2008, and $278 million in 2007. Our proceeds from divestitures for all three years have been driven by the divestiture of underperforming and non-strategic operations. The decrease in proceeds from divestitures in 2008 and 2009 was largely a result of having fewer underperforming operations to sell as part of our fix-or-seek-exit initiative.
 
  •  Capital expenditures — We used $1,179 million during 2009 for capital expenditures, compared with $1,221 million in 2008 and $1,211 million in 2007.
 
  •  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 $196 million to our investing activities in 2009 compared with $178 million in 2008 and $120 million in 2007.
 
  •  Purchases and sales of short-term investments — Net sales of short-term investments provided $184 million of cash in 2007. 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 or 2009.
 
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 2009, 2008 and 2007 share repurchases and dividend payments have been made in accordance with capital allocation programs approved by our Board of Directors.
 
We paid $226 million for share repurchases in 2009, compared with $410 million in 2008 and $1,421 million in 2007. We repurchased approximately 7 million, 12 million and 40 million shares of our common stock in 2009, 2008 and 2007, respectively. The significant declines in share repurchases for 2008 and 2009 are largely attributable to the suspension of our share repurchases in late 2008 given the state of the financial markets and the economy. Given the stabilization of the capital markets and economic conditions, we elected to resume our share repurchases during the third quarter of 2009.
 
We paid an aggregate of $569 million in cash dividends during 2009, compared with $531 million in 2008 and $495 million in 2007. The increase in dividend payments is due to our quarterly per share dividend increasing from $0.24 in 2007, to $0.27 in 2008 and to $0.29 in 2009.
 
In December 2009, the Board of Directors announced that it expects future quarterly dividend payments will be $0.315 per share for dividends declared in 2010. All future share repurchases will be made at the discretion of management and the Board of Directors will declare dividends at their discretion, with any decisions dependent on various factors, including our net earnings, financial condition, cash required for future acquisitions and investments and other factors the Board may deem relevant.


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  •  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 $24 million of financing cash inflows during 2009 compared with $44 million during 2008 and $168 million in 2007.
 
  •  Net debt repayments — Net debt borrowings were $414 million in 2009, and net debt repayments were $260 million in 2008 and $256 million in 2007. The following summarizes our most significant cash borrowings and debt repayments made during each year (in millions):
 
                         
    Years Ended December 31,  
    2009     2008     2007  
 
Borrowings:
                       
Revolving credit facility
  $     $ 350     $ 300  
Canadian credit facility
    364       581       644  
Senior notes
    1,385       594        
                         
    $ 1,749     $ 1,525     $ 944  
                         
Repayments:
                       
Revolving credit facility
  $ (310 )   $ (371 )   $  
Canadian credit facility
    (395 )     (634 )     (680 )
Senior notes
    (500 )     (633 )     (300 )
Tax exempt bonds
    (65 )     (19 )     (52 )
Tax exempt project bonds
    (39 )     (67 )     (61 )
Capital leases and other debt
    (26 )     (61 )     (107 )
                         
    $ (1,335 )   $ (1,785 )   $ (1,200 )
                         
Net borrowings (repayments)
  $ 414     $ (260 )   $ (256 )
                         
 
This summary excludes the impacts of non-cash borrowings and debt repayments. For the years ended December 31, 2009, 2008 and 2007, 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 $105 million in 2009, $169 million in 2008 and $144 million in 2007.
 
  •  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.


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Summary of Contractual Obligations
 
The following table summarizes our contractual obligations as of December 31, 2009 and the anticipated effect of these obligations on our liquidity in future years (in millions):
 
                                                         
    2010     2011     2012     2013     2014     Thereafter     Total  
Recorded Obligations:
                                                       
Expected environmental liabilities(a)
                                                       
Final capping, closure and post-closure
  $ 125     $ 100     $ 96     $ 90     $ 90     $ 1,947     $ 2,448  
Environmental remediation
    41       36       23       17       14       146       277  
                                                         
      166       136       119       107       104       2,093       2,725  
Debt payments(b),(c),(d)
    985       259       584       174       430       6,358       8,790  
Unrecorded Obligations:(e)
                                                       
Non-cancelable operating lease obligations
    88       75       72       58       47       258       598  
Estimated unconditional purchase obligations(f),(g),(h)
    166       61       53       31       18       278       607  
                                                         
Anticipated liquidity impact as of December 31, 2009
  $ 1,405     $ 531     $ 828     $ 370     $ 599     $ 8,987     $ 12,720  
                                                         
 
 
(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, 2009 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) The amounts reported here represent the scheduled principal payments related to our long-term debt, excluding related interest.
 
(c) Our debt obligations as of December 31, 2009 include $767 million of tax-exempt bonds subject to re-pricing 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, 2009, refer to Note 7 to the Consolidated Financial Statements.
 
(d) 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.
 
(e) 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 11 to the Consolidated Financial Statements, that we do not expect to materially affect our current or future financial position, results of operations or liquidity.
 
(f) 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. Accordingly, the amounts reported in the table are not necessarily indicative of our actual cash flow obligations. See Note 11 to the Consolidated Financial Statements for discussion of the nature and terms of our unconditional purchase obligations.
 
(g) In December 2009, we entered into a plan under SEC Rule 10b5-1 to effect market purchases of our common stock. We have included $58 million of common stock repurchases in our 2010 contractual obligations because this amount represents the minimum amount of common stock that could be repurchased under the terms of the plan. We repurchased $68 million of our common stock pursuant to the plan, which was completed on February 12, 2010.


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(h) In August 2009, we entered into an agreement to purchase a 40% equity investment in Shanghai Environment Group, a subsidiary of Shanghai Chengtou Holding, for approximately $140 million. As of December 31, 2009, our investment was subject to regulatory approval. Accordingly, the impact of this cash investment was excluded from amounts reported herein. The Ministry of Commerce of the People’s Republic of China approved the transaction in January 2010 and we currently expect the transaction to close during the first half of 2010.
 
Liquidity Impacts of Uncertain Tax Positions
 
As discussed in Note 9 of 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 11 to the Consolidated Financial Statements. These arrangements have not materially affected our financial position, results of operations or liquidity during the year ended December 31, 2009 nor are they expected to have a material impact on our future financial position, results of operations or liquidity.
 
Seasonal Trends and Inflation
 
Our operating revenues normally tend to be somewhat higher in the summer months, primarily due to the traditional seasonal increase in the 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, although we saw a significantly weaker seasonal volume increase during 2009 than we generally experience.
 
Additionally, certain destructive weather conditions that tend to occur during the second half of the year, such as the hurricanes experienced by our Southern Group, can actually increase our revenues in the areas affected. However, for several reasons, including significant mobilization 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 years, 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, as of December 31, 2009, approximately 35% of our collection revenues were generated under long-term franchise agreements with municipalities or similar local or regional authorities. These contractual agreements generally provide for price adjustments based on various indicies intended to measure inflation. Additionally, 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
 
Consolidation of Variable Interest Entities — In June 2009, the FASB issued revised authoritative guidance associated with the consolidation of variable interest entities. This revised guidance replaces the current quantitative-based assessment for determining which enterprise has a controlling interest in a variable interest entity with an approach that is now primarily qualitative. This qualitative approach focuses on identifying the enterprise that has (i) the power to direct the activities of the variable interest entity that can most significantly impact the entity’s performance; and (ii) the obligation to absorb losses and the right to receive benefits from the entity that could potentially be significant to the variable interest entity. This revised guidance also requires an ongoing assessment of whether an enterprise is the primary beneficiary of a variable interest entity rather than a reassessment only upon


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the occurrence of specific events. The new FASB-issued authoritative guidance associated with the consolidation of variable interest entities is effective for the Company January 1, 2010. The change in accounting may either be applied by recognizing a cumulative-effect adjustment to retained earnings on the date of adoption or by retrospectively restating one or more years and recognizing a cumulative-effect adjustment to retained earnings as of the beginning of the earliest year restated. We are currently in the process of assessing the provisions of this revised guidance and have not determined whether the adoption will have a material impact on our consolidated financial statements.
 
Multiple-Deliverable Revenue Arrangements — In September 2009, the FASB amended authoritative guidance associated with multiple-deliverable revenue arrangements. This amended guidance addresses the determination of when individual deliverables within an arrangement may be treated as separate units of accounting and modifies the manner in which transaction consideration is allocated across the separately identifiable deliverables. The amendments to authoritative guidance associated with multiple-deliverable revenue arrangements are effective for the Company January 1, 2011, although the FASB does permit early adoption of the guidance provided that it is retroactively applied to the beginning of the year of adoption. The new accounting standard may be applied either retrospectively for all periods presented or prospectively to arrangements entered into or materially modified after the date of adoption. We are in the process of assessing the provisions of this new guidance and currently do not expect that the adoption will have a material impact on our consolidated financial statements. However, our adoption of this guidance may significantly impact our accounting and reporting for future revenue arrangements to the extent they are material.
 
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. As of December 31, 2009, all of our derivative transactions were related to actual or anticipated economic exposures. 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.
 
Interest Rate Exposure — Our exposure to market risk for changes in interest rates relates primarily to our financing activities, although our interest costs can also be significantly affected by our on-going financial assurance needs, which are discussed in the Financial Assurance and Insurance Obligations section of Item 1.
 
As of December 31, 2009, we had $8.8 billion of long-term debt when excluding the impacts of accounting for fair value adjustments attributable to interest rate derivatives, discounts and premiums. The effective interest rates of approximately $3.0 billion of our outstanding debt obligations are subject to change during 2010. The most significant components of our variable-rate debt obligations are (i) $1.1 billion of “receive fixed, pay variable” interest rate swaps associated with outstanding fixed-rate senior notes; (ii) $817 million of tax-exempt bonds that are subject to re-pricing on either a daily or weekly basis through a remarketing process; (iii) $767 million of tax-exempt bonds with term interest rate periods that are subject to re-pricing within twelve months; and (iv) $257 million of outstanding advances under our Canadian Credit Facility. As of December 31, 2008, the effective interest rates of approximately $3.4 billion of our outstanding debt obligations was subject to change within twelve months.
 
The decrease in outstanding debt obligations exposed to variable interest rates in 2009 is generally as a result of an $850 million decrease in the notional amount of outstanding interest rate swaps offset, in part, by an increase in the portion of our outstanding tax-exempt bonds with term interest rate periods that are subject to re-pricing within twelve months. The decline in our variable-rate debt obligations has reduced the potential volatility to our operating results and cash flows that results from fluctuations in market interest rates. We currently estimate that a 100 basis point increase in the interest rates of our outstanding variable-rate debt obligations would increase our 2010 interest expense by approximately $23 million.
 
Our remaining outstanding debt obligations have fixed interest rates through either the scheduled maturity of the debt or, for certain of our “fixed-rate” tax exempt bonds, through the end of a term interest rate period that exceeds twelve months. In addition, as of December 31, 2009, we have Treasury rate locks with a notional amount


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of $200 million and forward-starting interest rate swaps with a notional amount of $525 million. The fair value of our fixed-rate debt obligations and various interest rate derivative instruments can increase or decrease significantly if market interest rates change.
 
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. An instantaneous, one percentage point increase in interest rates across all maturities and applicable yield curves attributable to these instruments would have decreased the fair value of our combined debt and interest rate derivative positions by approximately $610 million at December 31, 2009.
 
We are also exposed to interest rate market risk because we have significant cash and cash equivalent balances as well as assets held in restricted trust funds and escrow accounts. These assets are generally invested in high quality, liquid instruments including money market funds that invest in U.S. government obligations with original maturities of three months or less. 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.
 
Commodity Price Exposure — In the normal course of our business, we are subject to operating agreements that expose us to market risks arising from changes in the prices for commodities such as diesel fuel; recyclable materials, including aluminum, old corrugated cardboard and old newsprint; and electricity, which generally correlates with natural gas prices in the markets where we operate. During the three years ended December 31, 2009, we generally have not entered into derivatives to hedge the risks associated with changes in the market prices of these commodities. Alternatively, we attempt to manage these risks through operational strategies that focus on capturing our costs in the prices we charge our customers for the services provided. Accordingly, as the market prices for these commodities increase or decrease, our revenues also increase or decrease.
 
During 2009, approximately 34% of the electricity revenue at our waste-to-energy facilities was subject to current market rates, and we currently expect that nearly 50% of our electricity revenues at our waste-to-energy facilities will be at market rates in 2010. Our exposure to variability associated with changes in market prices for electricity has increased because several long-term power purchase agreements have expired. The energy markets have changed significantly since the expiring contracts were executed and we have found that medium- and long-term electricity contracts are less favorable in the current environment. As we renegotiate our power-purchase agreements, we expect that a more substantial portion of our energy sales at our waste-to-energy facilities and landfill gas-to-energy plants will be based on current market rates. Accordingly, in 2010 we will be implementing a more actively managed energy program, which will include a hedging strategy intended to decrease the exposure of our revenues to volatility due to market prices for electricity.
 
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, 2009 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, 2009.
 
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, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. 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, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, 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 certain provisions of ASC Topic 740, “Income Taxes” related to accounting for uncertainty in income taxes. Additionally, effective January 1, 2009, the Company adopted certain provisions of ASC Topic 810, “Consolidation” related to noncontrolling interests in consolidated financial statements.
 
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, 2009, 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 16, 2010 expressed an unqualified opinion thereon.
 
ERNST & YOUNG LLP
 
Houston, Texas
February 16, 2010


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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, 2009, 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, 2009, 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, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2009, and our report dated February 16, 2010 expressed an unqualified opinion thereon.
 
ERNST & YOUNG LLP
 
Houston, Texas
February 16, 2010


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    December 31,  
    2009     2008  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 1,140     $ 480  
Accounts receivable, net of allowance for doubtful accounts of $31 and $39, respectively
    1,408       1,463  
Other receivables
    119       147  
Parts and supplies
    110       110  
Deferred income taxes
    116       39  
Other assets
    117       96  
                 
Total current assets
    3,010       2,335  
Property and equipment, net of accumulated depreciation and amortization of $13,994 and $13,273, respectively
    11,541       11,402  
Goodwill
    5,632       5,462  
Other intangible assets, net
    238       158  
Other assets
    733       870  
                 
Total assets
  $ 21,154     $ 20,227  
                 
 
LIABILITIES AND EQUITY
Current liabilities:
               
Accounts payable
  $ 567     $ 716  
Accrued liabilities
    1,128       1,034  
Deferred revenues
    457       451  
Current portion of long-term debt
    749       835  
                 
Total current liabilities
    2,901       3,036  
Long-term debt, less current portion
    8,124       7,491  
Deferred income taxes
    1,509       1,484  
Landfill and environmental remediation liabilities
    1,357       1,360  
Other liabilities
    672       671  
                 
Total liabilities
    14,563       14,042  
                 
Commitments and contingencies
               
Equity:
               
Waste Management, Inc. 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
    4,543       4,558  
Retained earnings
    6,053       5,631  
Accumulated other comprehensive income
    208       88  
Treasury stock at cost, 144,162,063 and 139,546,915 shares, respectively
    (4,525 )     (4,381 )
                 
Total Waste Management, Inc. stockholders’ equity
    6,285       5,902  
Noncontrolling interests
    306       283  
                 
Total equity
    6,591       6,185  
                 
Total liabilities and equity
  $ 21,154     $ 20,227  
                 
 
See notes to Consolidated Financial Statements.


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    Years Ended December 31,  
    2009     2008     2007  
 
Operating revenues
  $ 11,791     $ 13,388     $ 13,310  
                         
Costs and expenses:
                       
Operating
    7,241       8,466       8,402  
Selling, general and administrative
    1,364       1,477       1,432  
Depreciation and amortization
    1,166       1,238       1,259  
Restructuring
    50       2       10  
(Income) expense from divestitures, asset impairments and unusual items
    83       (29 )     (47 )
                         
      9,904       11,154       11,056  
                         
Income from operations
    1,887       2,234       2,254  
                         
Other income (expense):
                       
Interest expense
    (426 )     (455 )     (521 )
Interest income
    13       19       47  
Equity in net losses of unconsolidated entities
    (2 )     (4 )     (35 )
Other, net
    1       3       4  
                         
      (414 )     (437 )     (505 )
                         
Income before income taxes
    1,473       1,797       1,749  
Provision for income taxes
    413       669       540  
                         
Consolidated net income
    1,060       1,128       1,209  
Less: Net income attributable to noncontrolling interests
    66       41       46  
                         
Net income attributable to Waste Management, Inc. 
  $ 994     $ 1,087     $ 1,163  
                         
Basic earnings per common share
  $ 2.02     $ 2.21     $ 2.25  
                         
Diluted earnings per common share
  $ 2.01     $ 2.19     $ 2.23  
                         
Cash dividends declared per common share
  $ 1.16     $ 1.08     $ 0.96  
                         
 
See notes to Consolidated Financial Statements.


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    Years Ended December 31,  
    2009     2008     2007  
 
Cash flows from operating activities:
                       
Consolidated net income
  $ 1,060     $ 1,128     $ 1,209  
Adjustments to reconcile consolidated net income to net cash provided by operating activities:
                       
Depreciation and amortization
    1,166       1,238       1,259  
Deferred income tax (benefit) provision
    (94 )     150       70  
Interest accretion on landfill liabilities
    80       77       74  
Interest accretion on and discount rate adjustments to environmental remediation liabilities and recovery assets
    (30 )     41       17  
Provision for bad debts
    48       50       43  
Equity-based compensation expense
    30       48       37  
Equity in net losses of unconsolidated entities, net of distributions
    2       1       39  
Net gain from disposal of assets
    (13 )     (33 )     (27 )
Effect of (income) expense from divestitures, asset impairments and unusual items
    83       (29 )     (47 )
Excess tax benefits associated with equity-based transactions
    (4 )     (7 )     (26 )
Change in operating assets and liabilities, net of effects of acquisitions and divestitures:
                       
Receivables
    29       216       (22 )
Other current assets
    (4 )     (9 )     6  
Other assets
    20       5       5  
Accounts payable and accrued liabilities
    51       (183 )     (88 )
Deferred revenues and other liabilities
    (62 )     (118 )     (110 )
                         
Net cash provided by operating activities
    2,362       2,575       2,439  
                         
Cash flows from investing activities:
                       
Acquisitions of businesses, net of cash acquired
    (281 )     (280 )     (90 )
Capital expenditures
    (1,179 )     (1,221 )     (1,211 )
Proceeds from divestitures of businesses (net of cash divested) and other sales of assets
    28       112       278  
Purchases of short-term investments
                (1,220 )
Proceeds from sales of short-term investments
                1,404  
Net receipts from restricted trust and escrow accounts
    196       178       120  
Other
    (14 )     28       (42 )
                         
Net cash used in investing activities
    (1,250 )     (1,183 )     (761 )
                         
Cash flows from financing activities:
                       
New borrowings
    1,749       1,525       944  
Debt repayments
    (1,335 )     (1,785 )     (1,200 )
Common stock repurchases
    (226 )     (410 )     (1,421 )
Cash dividends
    (569 )     (531 )     (495 )
Exercise of common stock options and warrants
    20       37       142  
Excess tax benefits associated with equity-based transactions
    4       7       26  
Distributions paid to noncontrolling interests
    (50 )     (56 )     (20 )
Other
    (50 )     (43 )     78  
                         
Net cash used in financing activities
    (457 )     (1,256 )     (1,946 )
                         
Effect of exchange rate changes on cash and cash equivalents
    5       (4 )     2  
                         
Increase (decrease) in cash and cash equivalents
    660       132       (266 )
Cash and cash equivalents at beginning of year
    480       348       614  
                         
Cash and cash equivalents at end of year
  $ 1,140     $ 480     $ 348  
                         
 
See notes to Consolidated Financial Statements.


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Table of Contents

 
                                                                                 
                Waste Management, Inc. Stockholders’ Equity        
                                        Accumulated
                   
                                        Other
                   
                            Additional
          Comprehensive
                   
          Comprehensive
    Common Stock     Paid-In
    Retained
    Income
    Treasury Stock     Noncontrolling
 
    Total     Income     Shares     Amounts     Capital     Earnings     (Loss)     Shares     Amounts     Interests  
 
Balance, December 31, 2006
  $ 6,497               630,282     $ 6     $ 4,513     $ 4,410     $ 129       (96,599 )   $ (2,836 )   $ 275  
Comprehensive Income:
                                                                               
Net income
    1,209     $ 1,209                         1,163                         46  
Other comprehensive income (loss), net of taxes:
                                                                               
Unrealized losses resulting from changes in fair value of derivative instruments, net of taxes of $22
    (34 )     (34 )                             (34 )                  
Realized losses on derivative instruments reclassified into earnings, net of taxes of $30
    47       47                               47                    
Unrealized gains (losses) on marketable securities, net of taxes of $3
    2       2                               (5 )                 7  
Foreign currency translation adjustments
    89       89                               89                    
Change in funded status of defined benefit plan liabilities, net of taxes of $3
    3       3                               3                    
                                                                                 
Other comprehensive income (loss)
    107       107                                                                  
                                                                                 
Comprehensive income
    1,316     $ 1,316                                                                  
                                                                                 
Cash dividends declared
    (495 )                               (495 )                        
Equity-based compensation transactions, including dividend equivalents, net of taxes
    210                           30       (2 )           6,067       182        
Common stock repurchases
    (1,421 )                                           (39,946 )     (1,421 )      
Distributions paid to noncontrolling interests
    (20 )                                                       (20 )
Cumulative effect of change in accounting principle
    4                                 4                          
Other
    11                           (1 )                 314       10       2  
                                                                                 
Balance, December 31, 2007
  $ 6,102               630,282     $ 6     $ 4,542     $ 5,080     $ 229       (130,164 )   $ (4,065 )   $ 310  
Comprehensive Income:
                                                                               
Net income
    1,128     $ 1,128                         1,087                         41  
Other comprehensive income (loss), net of taxes:
                                                                               
Unrealized gains resulting from changes in fair value of derivative instruments, net of taxes of $25
    40       40                               40                    
Realized gains on derivative instruments reclassified into earnings, net of taxes of $24
    (39 )     (39 )                             (39 )                  
Unrealized losses on marketable securities, net of taxes of $4
    (18 )     (18 )                             (7 )                 (11 )
Foreign currency translation adjustments
    (127 )     (127 )                             (127 )                  
Change in funded status of defined benefit plan liabilities, net of taxes of $5
    (8 )     (8 )                             (8 )                  
                                                                                 
Other comprehensive income (loss)
    (152 )     (152 )                                                                
                                                                                 
Comprehensive income
    976     $ 976                                                                  
                                                                                 
Cash dividends declared
    (531 )                               (531 )                        
Equity-based compensation transactions, including dividend equivalents, net of taxes
    106                           16       (4 )           2,995       94        
Common stock repurchases
    (410 )                                           (12,390 )     (410 )      
Distributions paid to noncontrolling interests
    (56 )                                                       (56 )
Cumulative effect of change in accounting principle
    (1 )                               (1 )                        
Other
    (1 )                                           12             (1 )
                                                                                 
Balance, December 31, 2008
  $ 6,185               630,282     $ 6     $ 4,558     $ 5,631     $ 88       (139,547 )   $ (4,381 )   $ 283  


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WASTE MANAGEMENT, INC.
 
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY — (Continued)
(In Millions, Except Shares in Thousands)
 
                                                                                 
                Waste Management, Inc. Stockholders’ Equity        
                                        Accumulated
                   
                                        Other
                   
                            Additional
          Comprehensive
                   
          Comprehensive
    Common Stock     Paid-In
    Retained
    Income
    Treasury Stock     Noncontrolling
 
    Total     Income     Shares     Amounts     Capital     Earnings     (Loss)     Shares     Amounts     Interests  
 
Balance, December 31, 2008
  $ 6,185               630,282     $ 6     $ 4,558     $ 5,631     $ 88       (139,547 )   $ (4,381 )   $ 283  
Comprehensive Income:
                                                                               
Net income
    1,060     $ 1,060                         994                         66  
Other comprehensive income (loss), net of taxes:
                                                                               
Unrealized losses resulting from changes in fair value of derivative instruments, net of taxes of $13
    (21 )     (21 )                             (21 )                  
Realized losses on derivative instruments reclassified into earnings, net of taxes of $21
    32       32                               32                    
Unrealized gains on marketable securities, net of taxes of $2
    10       10                               4                   6  
Foreign currency translation adjustments
    99       99                               99                    
Change in funded status of defined benefit plan liabilities, net of taxes of $4
    6       6                               6                    
                                                                                 
Other comprehensive income (loss)
    126       126                                                                  
                                                                                 
Comprehensive income
    1,186     $ 1,186                                                                  
                                                                                 
Cash dividends declared
    (569 )