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Derivative Instruments and Hedging Activities
9 Months Ended
Sep. 30, 2011
Derivative Instruments and Hedging Activities [Abstract] 
Derivative Instruments and Hedging Activities
 
4.   Derivative Instruments and Hedging Activities
 
The following table summarizes the fair values of derivative instruments recorded in our Condensed Consolidated Balance Sheet (in millions):
 
                     
        September 30,
 		    December 31,
 		 
Derivatives Designated as Hedging Instruments   Balance Sheet Location   2011     2010  
 
Interest rate contracts
  Current other assets   $ —     $ 1  
Electricity commodity contracts
  Current other assets     1       —  
Interest rate contracts
  Long-term other assets     75       37  
Foreign exchange contracts
  Long-term other assets     8       —  
                     
Total derivative assets
      $ 84     $ 38  
                     
Interest rate contracts
  Current accrued liabilities   $ —     $ 11  
Electricity commodity contracts
  Current accrued liabilities     1       1  
Interest rate contracts
  Long-term accrued liabilities     68       13  
Foreign exchange contracts
  Long-term accrued liabilities     —       3  
                     
Total derivative liabilities
      $ 69     $ 28  
                     
 
 
We have not offset fair value amounts recognized for our derivative instruments. For information related to the methods used to measure our derivative assets and liabilities at fair value, refer to Note 13.
 
Interest Rate Derivatives
 
Interest Rate Swaps
 
We use interest rate swaps to maintain a portion of our debt obligations at variable market interest rates. As of September 30, 2011, we had approximately $6.1 billion in fixed-rate senior notes outstanding compared with $5.4 billion as of December 31, 2010. As of September 30, 2011, the interest payments on $1 billion, or 16%, of these senior notes have been swapped to variable interest rates to protect the debt against changes in fair value due to changes in benchmark interest rates, compared with $500 million, or 9%, as of December 31, 2010. The increase in the notional amount of our interest rate swaps from December 31, 2010 to September 30, 2011 was due to the execution of $600 million of interest rate swaps in March 2011 partially offset by the scheduled maturity of $100 million of interest rate swaps in March 2011.
 
We have designated our interest rate swaps as fair value hedges of our fixed-rate senior notes. Fair value hedge accounting for interest rate swap contracts has increased the carrying value of our debt instruments by $108 million as of September 30, 2011 and $79 million as of December 31, 2010.
 
Gains or losses on the derivatives as well as the offsetting losses or gains on the hedged items attributable to our interest rate swaps are recognized in current earnings. We include gains and losses on our interest rate swaps as adjustments to interest expense, which is the same financial statement line item where offsetting gains and losses on the related hedged items are recorded. The following table summarizes the fair value adjustments from interest rate swaps and the underlying hedged items on our results of operations (in millions):
 
                         
Three Months
 		  Statement of Operations
 		  Gain (Loss) on
 		  Gain (Loss) on
Ended September 30,   Classification   Swap   Fixed-Rate Debt
 
  2011     Interest expense   $ 25     $ (25 )
  2010     Interest expense   $ 10     $ (10 )
 
                         
Nine Months
 		  Statement of Operations
 		  Gain (Loss) on
 		  Gain (Loss) on
Ended September 30,   Classification   Swap   Fixed-Rate Debt
 
  2011     Interest expense   $ 37     $ (37 )
  2010     Interest expense   $ 24     $ (24 )
 
We also recognize the impacts of (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):
 
                                 
    Three Months
 		    Nine Months
 		 
    Ended September 30,     Ended September 30,  
Decrease to Interest Expense Due to Hedge Accounting for Interest Rate Swaps   2011     2010     2011     2010  
 
Periodic settlements of active swap agreements(a)
  $ 7     $ 6     $ 18     $ 24  
Terminated swap agreements
    2       4       8       15  
                                 
    $ 9     $ 10     $ 26     $ 39  
                                 
 
 
(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.
 
 
Forward-Starting Interest Rate Swaps
 
In 2009, we entered into forward-starting interest rate swaps with a total notional value of $525 million to hedge the risk of changes in semi-annual interest payments due to fluctuations in the forward ten-year LIBOR swap rate for anticipated fixed-rate debt issuances in 2011, 2012 and 2014. We designated these forward-starting interest rate swaps as cash flow hedges.
 
During the first quarter of 2011, $150 million of these forward-starting interest rate swaps were terminated contemporaneously with the actual issuance of senior notes in February 2011, and we paid cash of $9 million to settle the liability related to these swap agreements. The ineffectiveness recognized upon termination of the hedges was immaterial and the related deferred loss continues to be recognized as a component of “Accumulated other comprehensive income.” The deferred loss is being amortized as an increase to interest expense over the ten-year life of the senior notes issued in February 2011 using the effective interest method. The incremental interest expense associated with these forward-starting interest rate swaps was immaterial during the three and nine months ended September 30, 2011. As of September 30, 2011, the amount scheduled to be reclassified as an increase to interest expense over the next twelve months is immaterial.
 
The forward-starting interest rate swaps outstanding as of September 30, 2011 relate to anticipated debt issuances in November 2012 and March 2014. As of September 30, 2011, the fair value of these active interest rate derivatives was comprised of $68 million of long-term liabilities compared with $13 million of long-term liabilities as of December 31, 2010.
 
We recognized pre-tax and after-tax losses of $46 million and $28 million, respectively, to other comprehensive income for changes in the fair value of our forward-starting interest rate swaps during the three months ended September 30, 2011 and $53 million and $33 million, respectively, during the nine months ended September 30, 2011. We recognized pre-tax and after-tax losses of $22 million and $13 million, respectively, to other comprehensive income for changes in the fair value of our forward-starting interest rate swaps during the three months ended September 30, 2010 and $68 million and $41 million, respectively, during the nine months ended September 30, 2010. There was no significant ineffectiveness associated with these hedges during the three and nine months ended September 30, 2011 or 2010.
 
Treasury Rate Locks
 
In prior years, we used Treasury rate locks to secure underlying interest rates in anticipation of senior note issuances. These cash flow hedging agreements resulted in deferred losses, net of taxes, of $13 million at September 30, 2011 and $16 million at December 31, 2010, which are included in “Accumulated other comprehensive income.” These deferred losses are reclassified as an increase to interest expense over the life of the related senior note issuances, which extend through 2032. Pre-tax and after-tax amounts of $2 million and $1 million, respectively, for the three-month periods ended September 30, 2011 and September 30, 2010, and pre-tax and after-tax amounts of $6 million and $3 million, respectively, for the nine-month periods ended September 30, 2011 and September 30, 2010, were reclassified out of accumulated other comprehensive income and into interest expense. As of September 30, 2011, $7 million (on a pre-tax basis) is scheduled to be reclassified as an increase to interest expense over the next twelve months.
 
Credit-Risk-Related Contingent Features
 
Certain of our interest rate derivative instruments contain provisions related to the Company’s credit rating. If the Company’s credit rating were to fall to specified levels below investment grade, the counterparties have the ability to terminate the derivative agreements, resulting in settlement of all affected transactions. As of September 30, 2011, we had not experienced any credit events that would trigger these provisions, nor did we have any derivative instruments with credit-risk-related contingent features that were in a net liability position.
 
Foreign Currency Derivatives
 
We use foreign currency exchange rate derivatives to hedge our exposure to fluctuations in exchange rates for anticipated intercompany cash transactions between Waste Management Holdings, Inc., a wholly-owned subsidiary (“WM Holdings”), and its Canadian subsidiaries. As of September 30, 2011, we had foreign currency forward contracts outstanding for all of the anticipated cash flows associated with a debt arrangement between these wholly-owned subsidiaries. The hedged cash flows include C$370 million of principal, which is scheduled for payment on October 31, 2013, and interest payments scheduled as follows: C$10 million on November 30, 2011, C$11 million on November 30, 2012 and C$10 million on October 31, 2013. We designated our foreign currency derivatives as cash flow hedges.
 
Gains or losses on the underlying hedged items attributable to foreign currency exchange risk are recognized in current earnings. The gains or losses on our foreign currency forward contracts that are reclassified out of accumulated other comprehensive income are recognized as adjustments to other income and expense, which is the same financial statement line item where offsetting gains or losses on the related hedged items are recorded. The following table summarizes the pre-tax impacts of our foreign currency cash flow derivatives on our comprehensive income and results of operations (in millions):
 
                         
            Derivative Gain or
    Derivative Gain or
 		      (Loss) Reclassified
    (Loss) Recognized
 		      from AOCI into
Three Months
 		  in OCI
 		  Statement of Operations
 		  Income
Ended September 30,   (Effective Portion)   Classification   (Effective Portion)
 
  2011     $ 25     Other income (expense)   $ 33  
  2010     $ (12 )   Other income (expense)   $ (12 )
 
                         
            Derivative Gain or
    Derivative Gain or
 		      (Loss) Reclassified
    (Loss) Recognized
 		      from AOCI into
Nine Months
 		  in OCI
 		  Statement of Operations
 		  Income
Ended September 30,   (Effective Portion)   Classification   (Effective Portion)
 
  2011     $ 11     Other income (expense)   $ 21  
  2010     $ (7 )   Other income (expense)   $ (7 )
 
Amounts reported in other comprehensive income and accumulated other comprehensive income are reported net of tax. Adjustments to other comprehensive income for changes in the fair value of our foreign currency cash flow hedges resulted in the recognition of after-tax gains of $15 million and $7 million during the three and nine months ended September 30, 2011, respectively, as compared with the recognition of after-tax losses of $7 million and $4 million during the three and nine months ended September 30, 2010, respectively. After-tax adjustments for the reclassification of gains from accumulated other comprehensive income into income were $20 million and $13 million during the three and nine months ended September 30, 2011, respectively. After-tax adjustments for the reclassification of losses from accumulated other comprehensive income into income were $7 million and $4 million during the three and nine months ended September 30, 2010, respectively. There was no significant ineffectiveness associated with these hedges during the three and nine months ended September 30, 2011 or 2010.
 
Electricity Commodity Derivatives
 
As a result of the expiration of certain long-term electricity contracts at our waste-to-energy facilities, we use short-term “receive fixed, pay variable” electricity commodity swaps to mitigate the variability in our revenues and cash flows caused by fluctuations in the market prices for electricity. We hedged 672,360 megawatt hours, or approximately 26%, of our Wheelabrator Group’s full year 2010 merchant electricity sales, and the swaps executed through September 30, 2011 are expected to hedge about 1.6 million megawatt hours, or 49%, of the Group’s full year 2011 merchant electricity sales. For the three-month periods ended September 30, 2011 and 2010, we hedged 46% and 22%, respectively, of our merchant electricity sales. For the nine-month periods ended September 30, 2011 and 2010, we hedged 49% and 24%, respectively, of our merchant electricity sales. There was no significant ineffectiveness associated with these cash flow hedges and all financial statement impacts associated with these derivatives were immaterial for the three and nine-month periods ended September 30, 2011 and 2010.