Waste Connections, Inc. 10-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk In the normal course of business, we are exposed to market risk, including changes in interest rates and prices of certain commodities. We use hedge agreements to manage a portion of our risks related to interest rates and fuel prices. While we are exposed to credit risk in the event of non-performance by counterparties to our hedge agreements, in all cases such counterparties are highly rated financial institutions and we do not anticipate non-performance under current market conditions. We do not hold or issue derivative financial instruments for trading purposes. We monitor our hedge positions by regularly evaluating the positions at market and by performing sensitivity analyses over the unhedged fuel and variable rate debt positions. At September 30, 2020, our derivative instruments included 10 interest rate swap agreements that effectively fix the interest rate on the applicable notional amounts of our variable rate debt as follows (dollars in thousands of U.S. dollars): ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fixed Variable ​ ​ ​ ​ Notional ​ Interest ​ Interest Rate ​ ​ ​ Expiration Date Entered ​ Amount ​ Rate Paid* ​ Received ​ Effective Date ​ Date May 2014 ​ $ 50,000 2.344 % 1-month LIBOR October 2015 October 2020 May 2014 ​ $ 25,000 2.326 % 1-month LIBOR October 2015 October 2020 May 2014 ​ $ 50,000 2.350 % 1-month LIBOR October 2015 October 2020 May 2014 ​ $ 50,000 2.350 % 1-month LIBOR October 2015 October 2020 August 2017 ​ $ 100,000 1.900 % 1-month LIBOR July 2019 July 2022 August 2017 ​ $ 200,000 2.200 % 1-month LIBOR October 2020 October 2025 August 2017 ​ $ 150,000 1.950 % 1-month LIBOR February 2020 February 2023 June 2018 ​ $ 200,000 ​ 2.925 % 1-month LIBOR ​ October 2020 ​ October 2025 June 2018 ​ $ 200,000 ​ 2.925 % 1-month LIBOR ​ October 2020 ​ October 2025 December 2018 ​ $ 200,000 ​ 2.850 % 1-month LIBOR ​ July 2022 ​ July 2027 ____________________ * Plus applicable margin. On September 28, 2020, we terminated four of our interest rate swaps with notional amounts of $150.0 million, $150.0 million, $50.0 million and $50.0 million, each of which would have expired in January 2021. As a result of terminating these interest rate swaps, we made total cash payments of $0.9 million to the counterparties of the swap agreements. Under derivatives and hedging guidance, the interest rate swap agreements are considered cash flow hedges for a portion of our variable rate debt, and we apply hedge accounting to account for these instruments. The notional amounts and all other significant terms of the swap agreements are matched to the provisions and terms of the variable rate debt being hedged. 67 Table of Contents We have performed sensitivity analyses to determine how market rate changes will affect the fair value of our unhedged floating rate debt. Such an analysis is inherently limited in that it reflects a singular, hypothetical set of assumptions. Actual market movements may vary significantly from our assumptions. Fair value sensitivity is not necessarily indicative of the ultimate cash flow or earnings effect we would recognize from the assumed market rate movements. We are exposed to cash flow risk due to changes in interest rates with respect to the unhedged floating rate balances owed at September 30, 2020 and December 31, 2019, of $3.7 million and $766.2 million, respectively, including floating rate debt under our Credit Agreement. A one percentage point increase in interest rates on our variable-rate debt as of September 30, 2020 and December 31, 2019, would decrease our annual pre-tax income by approximately $0.1 million and $7.7 million, respectively. All of our remaining debt instruments are at fixed rates, or effectively fixed under the interest rate swap agreements described above; therefore, changes in market interest rates under these instruments would not significantly impact our cash flows or results of operations, subject to counterparty default risk. The market price of diesel fuel is unpredictable and can fluctuate significantly. Because of the volume of fuel we purchase each year, a significant increase in the price of fuel could adversely affect our business and reduce our operating margins. To manage a portion of this risk, we periodically enter into fuel hedge agreements related to forecasted diesel fuel purchases, and we also enter into fixed price fuel purchase contracts. At September 30, 2020, we had no fuel hedge agreements in place; however, we have entered into fixed price fuel purchase contracts for 2020 as described below. For the year ending December 31, 2020, we expect to purchase approximately 79.9 million gallons of fuel, of which 44.2 million gallons will be purchased at market prices and 35.7 million gallons will be purchased under our fixed price fuel purchase contracts. We have performed sensitivity analyses to determine how market rate changes will affect the fair value of our unhedged, market rate diesel fuel purchases. Such an analysis is inherently limited in that it reflects a singular, hypothetical set of assumptions. Actual market movements may vary significantly from our assumptions. Fair value sensitivity is not necessarily indicative of the ultimate cash flow or earnings effect we would recognize from the assumed market rate movements. During the three month period of October 1, 2020 to December 31, 2020, we expect to purchase approximately 11.1 million gallons of fuel at market prices; therefore, a $0.10 per gallon increase in the price of fuel over the remaining three months in 2020 would decrease our pre-tax income during this period by approximately $1.1 million. We market a variety of recyclable materials, including compost, cardboard, mixed paper, plastic containers, glass bottles and ferrous and aluminum metals. We own and operate recycling operations and market other collected recyclable materials to third parties for processing before resale. Where possible, to reduce our exposure to commodity price risk with respect to recycled materials, we have adopted a pricing strategy of charging collection and processing fees for recycling volume collected from third parties. In the event of a decline in recycled commodity prices, a 10% decrease in average recycled commodity prices from the average prices that were in effect during the nine months ended September 30, 2020 and 2019, would have had a $5.8 million and $4.9 million impact on revenues for the nine months ended September 30, 2020 and 2019, respectively. We have operations in Canada and, where significant, we have quantified and described the impact of foreign currency translation on components of income, including operating revenue and operating costs. However, the impact of foreign currency has not materially affected our results of operations in 2019 or 2020. A $0.01 change in the Canadian dollar to U.S. dollar exchange rate would impact our annual revenue and EBITDA by approximately $9.4 million and $3.4 million, respectively. ​ 68 Table of Contents