Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
We make statements in this Quarterly Report on Form 10-Q that are forward-looking in nature. These include:
● Statements regarding our landfills, including capacity, duration, special projects, demand for and pricing of recyclables, landfill alternatives and related capital expenditures;
● Discussion of competition, loss of contracts, price increases and additional exclusive and/or long-term collection service arrangements;
● Forecasts of cash flows necessary for operations and free cash flow to reduce leverage as well as our ability to draw on our credit facility and access the capital markets to refinance or expand;
● Statements regarding our ability to access capital resources or credit markets at all or on favorable terms;
● Plans for, and the amounts of, certain capital expenditures for our existing and newly acquired properties and equipment;
● Statements regarding fuel, oil and natural gas demand, prices, and price volatility;
● Assessments of regulatory developments and potential changes in environmental, health, safety and tax laws and regulations; and
● Other statements on a variety of topics such as the COVID-19 pandemic, credit risk of customers, seasonality, labor/pension costs and labor union activity, operational and safety risks, acquisitions, litigation results, goodwill impairments, insurance costs and cybersecurity threats.
These statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “intends,” “may,” “might,” “will,” “could,” “should” or “anticipates,” or the negative thereof or comparable terminology, or by discussions of strategy.
Our business and operations are subject to a variety of risks and uncertainties and, consequently, actual results may differ materially from those projected by any forward-looking statements. Factors that could cause actual results to differ from those projected include, but are not limited to, risk factors detailed from time to time in our filings with the SEC and the securities commissions or similar regulatory authorities in Canada.
There may be additional risks of which we are not presently aware or that we currently believe are immaterial that could have an adverse impact on our business. We make no commitment to revise or update any forward-looking statements to reflect events or circumstances that may change, unless required under applicable securities laws.
OVERVIEW OF OUR BUSINESS
We are an integrated solid waste services company that provides non-hazardous waste collection, transfer and disposal services, along with recycling and resource recovery, in mostly exclusive and secondary markets across 43 states in the U.S. and six provinces in Canada. Waste Connections also provides non-hazardous oilfield waste treatment, recovery and disposal services in several basins across the U.S., as well as intermodal services for the movement of cargo and solid waste containers in the Pacific Northwest.
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We generally seek to avoid highly competitive, large urban markets and instead target markets where we can attain high market share either through exclusive contracts, vertical integration or asset positioning. In markets where waste collection services are provided under exclusive arrangements, or where waste disposal is municipally owned or funded or available at multiple municipal sources, we believe that controlling the waste stream by providing collection services under exclusive arrangements is often more important to our growth and profitability than owning or operating landfills. We also target niche markets, like E&P waste treatment and disposal services.
As of March 31, 2021, we served residential, commercial, industrial and E&P customers in 43 states in the U.S. and six provinces in Canada: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Delaware, Florida, Georgia, Idaho, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, North Dakota, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, Wisconsin and Wyoming, and the provinces of Alberta, British Columbia, Manitoba, Ontario, Québec and Saskatchewan.
The solid waste industry is local and highly competitive in nature, requiring substantial labor and capital resources. We compete for collection accounts primarily on the basis of price and, to a lesser extent, the quality of service, and compete for landfill business on the basis of tipping fees, geographic location and quality of operations. The solid waste industry has been consolidating and continues to consolidate as a result of a number of factors, including the increasing costs and complexity associated with waste management operations and regulatory compliance. Many small independent operators and municipalities lack the capital resources, management, operating skills and technical expertise necessary to operate effectively in such an environment. The consolidation trend has caused solid waste companies to operate larger landfills that have complementary collection routes that can use company-owned disposal capacity. Controlling the point of transfer from haulers to landfills has become increasingly important as landfills continue to close and disposal capacity moves farther from the collection markets it serves.
Generally, the most profitable operators within the solid waste industry are those companies that are vertically integrated or enter into long-term collection contracts. A vertically integrated operator will benefit from: (1) the internalization of waste, which is bringing waste to a company-owned landfill; (2) the ability to charge third-party haulers tipping fees either at landfills or at transfer stations; and (3) the efficiencies gained by being able to aggregate and process waste at a transfer station prior to landfilling.
The demand for our E&P waste services depends on the continued demand for, and production of, oil and natural gas. Crude oil and natural gas prices historically have been volatile. Macroeconomic and geopolitical conditions, including a significant decline in oil prices driven by both surplus production and supply, as well as the decrease in demand caused by factors including the COVID-19 pandemic, have resulted in decreased levels of oil and natural gas exploration and production activity and a corresponding decrease in demand for our E&P waste services. Additionally, across the industry there is uncertainty regarding future demand for oil and related services, as noted by several energy companies, many of whom are customers of our E&P operations. These companies have written down the values of their oil and gas assets in anticipation of the potential for the decarbonization of their energy product mix given an increased global focus on reducing greenhouse gases and addressing climate change. Such uncertainty regarding global demand has had a significant impact on the investment and operating plans of our E&P waste customers in the basins where we operate. If the prices of crude oil and natural gas substantially decline, it could lead to declines in the level of production activity and demand for our E&P waste services, which could result in the recognition of impairment charges on our intangible assets and property and equipment associated with our E&P operations.
THE COVID-19 PANDEMIC’S IMPACT ON OUR RESULTS OF OPERATION
March 11, 2021 marked the one year anniversary of COVID-19 being declared a global pandemic by the World Health Organization. The related economic disruptions largely associated with closures or restrictions put into effect following the onset of the COVID-19 pandemic resulted in declines in solid waste commercial collection, transfer station and landfill volumes, and roll off activity. Throughout the remaining fiscal year 2020, solid waste revenue and reported volumes largely reflected the pace and shape of the closures and subsequent reopening activity, with the timing and magnitude of recovery varying by market. Reported solid waste volumes in 2020 turned slightly negative in the first quarter, were most negative in the second quarter, and showed sequential improvement during the second half of the year, finishing the year
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at negative 3.1% in the fourth quarter. In the first quarter of 2021, the final period to include comparisons to pre-COVID-19 activity levels on a year over year basis, solid waste volumes were down 3.2%, reflecting the strong start to 2020 prior to the onset of the pandemic, compounded by the impact of an extra day in the quarter in 2020 due to leap year, as well as extreme winter weather in many markets during February 2021. Solid waste volumes increased 2.6% in March 2021 compared to March 2020.
The COVID-19 pandemic also contributed to the decline in demand for and the value of crude oil, which impacted E&P drilling activity and resulted in lower E&P waste revenue, with the quarterly run rate decreasing from approximately $60 million in the first quarter of 2020 to approximately $25 million by the second half of 2020.
Since the onset of the COVID-19 pandemic, protecting the health, welfare and safety of our employees has been our top priority. Recognizing the potential for financial hardship and other challenges, we looked to provide a safety net for our employees on issues of income and family health. To that end, in 2020, we incurred over $35 million in incremental COVID-19-related costs, primarily supplemental pay for frontline employees. As we continue to support our employees and their families, such costs are expected to continue in 2021, albeit to a lesser extent than in the prior year, as employee COVID-19 cases and related impacts are similarly abating.
The impact of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows in future periods will depend largely on future developments, including the duration and spread of the outbreak in the U.S. and Canada, the rate of vaccinations, the severity of COVID-19 variants, the actions to contain such coronavirus variants, and how quickly and to what extent normal economic and operating conditions can resume.
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with U.S. generally accepted accounting principles, or GAAP, requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the condensed consolidated financial statements. As described by the SEC, critical accounting estimates and assumptions are those that may be material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and that have a material impact on the financial condition or operating performance of a company. Such critical accounting estimates and assumptions are applicable to our reportable segments. Refer to our most recent Annual Report on Form 10-K for a complete description of our critical accounting estimates and assumptions.
NEW ACCOUNTING PRONOUNCEMENTS
For a description of the new accounting standards that affect us, see Note 3 to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020
The following table sets forth items in our Condensed Consolidated Statements of Net Income in thousands of U.S. dollars and as a percentage of revenues for the periods indicated.
Three Months Ended March 31,
2021
2020
Revenues
$
1,395,942
100.0
%
$
1,352,404
100.0
%
Cost of operations
825,920
59.2
815,424
60.3
Selling, general and administrative
141,422
10.1
136,052
10.1
Depreciation
157,402
11.3
150,821
11.2
Amortization of intangibles
32,192
2.3
31,638
2.3
Impairments and other operating items
634
0.0
1,506
0.1
Operating income
238,372
17.1
216,963
16.0
Interest expense
(42,425)
(3.0)
(37,990)
(2.8)
Interest income
1,103
0.1
2,175
0.2
Other income (expense), net
3,548
0.2
(9,521)
(0.7)
Income tax provision
(40,291)
(2.8)
(28,734)
(2.1)
Net income
160,307
11.6
142,893
10.6
Net loss attributable to noncontrolling interests
2
0.0
142
0.0
Net income attributable to Waste Connections
$
160,309
11.6
%
$
143,035
10.6
%
Revenues . Total revenues increased $43.5 million, or 3.2%, to $1.396 billion for the three months ended March 31, 2021, from $1.352 billion for the three months ended March 31, 2020.
Acquisitions closed subsequent to the three months ended March 31, 2020 increased revenues by $43.7 million for the three months ended March 31, 2021.
Operations that were divested subsequent to March 31, 2020 decreased revenues by $3.2 million for the three months ended March 31, 2021.
During the three months ended March 31, 2021, the net increase in prices charged to our customers at our existing operations was $52.2 million, consisting of $55.9 million of core price increases, partially offset by a decrease in surcharges of $3.7 million.
During the three months ended March 31, 2021, volume decreases in our existing business decreased solid waste revenues by $40.5 million, due primarily to one less business day in 2021 resulting from leap year occurring in the prior year period and the economic disruptions resulting from the COVID-19 pandemic that began in March 2020 and has continued through the first quarter of 2021. With the exception of our Western segment, the majority of our markets experienced declines in commercial collection, roll off collection, transfer station and landfill volumes, with our Northeastern U.S. and Canada markets the most severely impacted. These declines were partially offset by shelter at home requirements generating additional residential collection volumes and our Western segment’s transfer station and landfill operations recognizing increased volumes from third party collection providers disposing of increased residential collection volumes at our disposal locations.
E&P revenues at facilities owned during the three months ended March 31, 2021 and 2020 decreased $34.7 million. Decreases in the demand for crude oil as a result of economic disruptions from the COVID-19 pandemic resulted in a drop in the value of crude oil, decreases in drilling and production activity levels and decreases in overall demand for our E&P waste services.
An increase in the average Canadian dollar to U.S. dollar currency exchange rate resulted in an increase in revenues of $10.3 million for the three months ended March 31, 2021. The average Canadian dollar to U.S. dollar exchange rates on our Canadian revenues were 0.7898 and 0.7447 in the three months ended March 31, 2021 and 2020, respectively.
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Revenues from sales of recyclable commodities at facilities owned during the three months ended March 31, 2021 and 2020 increased $11.3 million due primarily to higher prices for old corrugated cardboard and other paper products and higher volumes collected from residential recycling customers, partially offset by decreased collected commercial recycling volumes caused by economic disruptions resulting from the COVID-19 pandemic.
Other revenues increased by $4.4 million during the three months ended March 31, 2021, due primarily to a $6.0 million increase resulting from higher prices for renewable energy credits associated with the generation of landfill gas at our Canada segment and a $0.5 million increase in other non-core revenue sources, partially offset by a $2.1 million decrease in intermodal revenues due primarily to customer losses resulting in a reduction in intermodal cargo volumes.
Cost of Operations . Total cost of operations increased $10.5 million, or 1.3%, to $825.9 million for the three months ended March 31, 2021, from $815.4 million for the three months ended March 31, 2020. The increase was primarily the result of $24.1 million of additional operating costs from acquisitions closed subsequent to the three months ended March 31, 2020 and $5.6 million resulting from an increase in the average foreign currency exchange rate in effect during the comparable reporting periods, partially offset by a decrease in operating costs at our existing operations of $17.2 million, assuming foreign currency parity, and a decrease in operating costs of $2.0 million at operations divested subsequent to the three months ended March 31, 2020.
The decrease in operating costs, assuming foreign currency parity, at our existing operations for the three months ended March 31, 2021, included the following declines totaling $19.6 million attributable to solid waste and E&P volume losses resulting from the impact of the COVID-19 pandemic: a decrease in direct labor expenses at our Southern and Eastern segments and our E&P operations of $5.8 million due to headcount reductions, a decrease in third-party disposal expenses at our Eastern, Southern, Central and Canada segments of $4.5 million, a decrease in equipment and facility maintenance and repair expenses at our Eastern segment and E&P operations of $3.6 million, a decrease in diesel fuel expense of $2.7 million, a decrease in subcontracted E&P operating expenses of $2.1 million and a decrease in expenses for processing recyclable commodities at our Eastern segment of $0.9 million due to a decrease in commercial recycling volumes collected.
The remaining increase in operating costs, assuming foreign currency parity, at our existing operations of $2.4 million for the three months ended March 31, 2021 consisted of an increase in employee medical benefits expenses of $3.6 million due to an increase in medical visits, an increase in labor expenses of $3.1 million at our Western and Central segments due primarily to employee pay increases exceeding the benefit in the current year period of one less calendar and business day due to leap year occurring in the prior year period, an increase in subcontracted hauling services at our solid waste operations of $2.4 million due to outsourcing the servicing of certain non-strategic contracts and commercial collection customers to third party haulers, an increase in cash incentive compensation to non-management personnel of $2.2 million to recognize the services they are providing during the COVID-19 pandemic as essential workers, an increase in third party disposal expenses in our Western segment of $1.7 million due primarily to increased residential collection volumes requiring disposal at third party facilities and $1.0 million of other net expense increases, partially offset by a decrease in expenses for auto and workers’ compensation claims of $8.0 million due primarily to higher claims severity in the prior year period and adjustments recorded in the current year period to decrease projected losses on outstanding claims originally recorded prior to 2021, a decrease in intermodal rail expenses of $1.8 million due to customer losses resulting in a reduction in cargo volume, a decrease in leachate disposal expenses of $1.0 million due to increased on-site treatment of leachate and the prior year period incurring higher costs to dispose of leachate in newly constructed landfill cells and a decrease in expenses for processing recyclable commodities in our Western segment of $0.8 million due to increased recyclable commodity values resulting in price reductions charged by third-party recycling processors.
Cost of operations as a percentage of revenues decreased 1.1 percentage points to 59.2% for the three months ended March 31, 2021, from 60.3% for the three months ended March 31, 2020. The decrease as a percentage of revenues consisted of a 0.7 percentage point decrease from a reduction in expenses for auto and workers’ compensation claims, a 0.3 percentage point decrease from lower maintenance and repair expenses, a 0.2 percentage point decrease from lower disposal expenses, a 0.2 percentage point decrease from lower diesel fuel expenses and a 0.2 percentage point decrease from leveraging existing personnel to support certain price-led revenue increases, partially offset by a 0.2 percentage point increase from the accrual of cash incentive compensation to non-management personnel, a 0.2 percentage point increase from higher employee medical benefits expenses and a 0.1 percentage point increase from all other net changes.
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SG&A . SG&A expenses increased $5.3 million, or 3.9%, to $141.4 million for the three months ended March 31, 2021, from $136.1 million for the three months ended March 31, 2020. The increase was comprised of $3.0 million of additional SG&A expenses from operating locations at acquisitions closed subsequent to the three months ended March 31, 2020, an increase of $1.5 million in SG&A expenses at our existing operations, assuming foreign currency parity, and $1.0 million resulting from an increase in the average foreign currency exchange rate in effect during the comparable reporting periods, partially offset by a decrease in SG&A expenses of $0.2 million at operations divested subsequent to the three months ended March 31, 2020.
The increase in SG&A expenses at our existing operations, assuming foreign currency parity, of $1.5 million for the three months ended March 31, 2021, was comprised of an increase in deferred compensation expenses of $5.7 million as a result of increases in the market value of investments to which employee deferred compensation liability balances are tracked, an increase in accrued recurring cash incentive compensation expense to our management of $5.0 million, an increase in professional fees of $1.6 million due primarily to adjustments recorded during the prior year period to reduce estimated accrued liabilities associated with unbilled legal services, an increase in share-based compensation expenses of $1.2 million due primarily to increased average share price values in the current period for equity awards accounted for as liabilities that were granted to employees of Progressive Waste prior to June 1, 2016 which are subject to valuation adjustments each period based on changes in fair value and an increase in employee medical benefits expenses of $1.2 million due to an increase in medical visits, partially offset by a collective decrease in travel, meeting, training and community activity expenses of $6.0 million from shelter at home and other restrictions on our employees due to the COVID-19 pandemic resulting in the cancellation of non-essential off-site activities, a decrease in equity-based compensation expenses of $3.4 million associated with an adjustment during the prior year period of our common shares held in our deferred compensation plan by certain key executives to fair value as a result of the shares being exchanged for other investment options, a decrease in expenses for uncollectible accounts receivable of $0.8 million primarily due to collections in the current period of customer accounts deemed uncollectible in prior periods, a decrease in office supplies and office utilities of $0.7 million due to office closures resulting from shelter at home restrictions, a decrease in direct acquisition expenses of $0.6 million due to a decrease in acquisition activity in the comparable periods, a decrease in equity-compensation expenses of $0.6 million due primarily to a decrease in the amount of performance-based restricted share units granted in 2019 and 2020 estimated to ultimately vest based on the achievement of required financial performance results and $1.1 million of other net expense decreases.
SG&A as a percentage of revenues was 10.1% for both the three months ended March 31, 2021 and 2020. SG&A remained unchanged as a percentage of revenues as a result of a 0.4 percentage point decrease from a reduction in travel, meeting, training and community activity expenses, a 0.3 percentage point decrease from a reduction in equity-based compensation expenses associated with the designation of our common shares held in our deferred compensation plan and a 0.1 percentage point decrease from the net impact of SG&A expenses from acquisitions closed subsequent to the three months ended March 31, 2020, partially offset by a 0.4 percentage point increase from cash incentive compensation expenses and a 0.4 percentage point increase from deferred compensation expenses.
Depreciation . Depreciation expense increased $6.6 million, or 4.4%, to $157.4 million for the three months ended March 31, 2021, from $150.8 million for the three months ended March 31, 2020. The increase was comprised of $5.0 million of depreciation from the impact of additions to our fleet and equipment purchased to support our existing operations, depreciation and depletion expense of $4.0 million from acquisitions closed subsequent to the three months ended March 31, 2020 and $1.1 million resulting from an increase in the average foreign currency exchange rate in effect during the comparable reporting periods, partially offset by a decrease in depletion expense of $2.7 million primarily at our E&P landfills as a decrease in demand for oil has resulted in decreased levels of oil and natural gas exploration and production activity and a corresponding decrease in disposal volumes and a decrease in depreciation and depletion expense of $0.8 million from operations divested subsequent to the three months ended March 31, 2020.
Depreciation expense as a percentage of revenues increased 0.1 percentage points to 11.3% for the three months ended March 31, 2021, from 11.2% for the three months ended March 31, 2020. The increase as a percentage of revenues consisted of a 0.3 percentage point increase from depreciation expense attributable to the impact of additions to our fleet and equipment, partially offset by a 0.2 percentage point decrease from depletion expense due to declines in E&P landfill volumes.
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Amortization of Intangibles . Amortization of intangibles expense increased $0.6 million, or 1.8%, to $32.2 million for the three months ended March 31, 2021, from $31.6 million for the three months ended March 31, 2020. The increase was the result of $2.8 million from intangible assets acquired in acquisitions closed subsequent to the three months ended March 31, 2020 and $0.3 million from an increase in the average foreign currency exchange rate in effect during the comparable reporting periods, partially offset by a decrease of $2.4 million from certain intangible assets becoming fully amortized subsequent to March 31, 2020 and a decrease of $0.1 million from operations divested subsequent to the three months ended March 31, 2020.
Amortization expense as a percentage of revenues was 2.3% for both the three months ended March 31, 2021 and 2020.
Impairments and Other Operating Items . Impairments and other operating items decreased $0.9 million, to net losses totaling $0.6 million for the three months ended March 31, 2021, from net losses totaling $1.5 million for the three months ended March 31, 2020.
The net losses of $0.6 million recorded during the three months ended March 31, 2021 consisted of $0.5 million of charges to terminate or write off the carrying cost of certain contracts that were not, or are not expected to be, renewed prior to their original estimated termination date and $0.1 million of other net charges.
The net losses of $1.5 million recorded during the three months ended March 31, 2020 consisted of $0.9 million of charges to terminate or write off the carrying cost of certain contracts that were not, or were not expected to be, renewed prior to their original estimated termination date and $0.6 million of other net charges.
Operating Income . Operating income increased $21.4 million, or 9.9%, to $238.4 million for the three months ended March 31, 2021, from $217.0 million for the three months ended March 31, 2020. The increase was due primarily to price increases for our solid waste services, operating income contributions from increased sales of recyclable commodities and renewable energy credits associated with the generation of landfill gas, operating income generated from acquisitions closed subsequent to the three months ended March 31, 2020 and an increase in the average Canadian dollar to U.S. dollar currency exchange rate, partially offset by declines in our existing solid waste and E&P volumes resulting from the impact of the COVID-19 pandemic.
Operating income as a percentage of revenues increased 1.1 percentage points to 17.1% for the three months ended March 31, 2021, from 16.0% for the three months ended March 31, 2020. The increase as a percentage of revenues was comprised of a 1.1 percentage point increase in cost of operations and a 0.1 percentage point increase in impairments and other operating items, partially offset by a 0.1 percentage point decrease in depreciation expense.
Interest Expense . Interest expense increased $4.4 million, or 11.7%, to $42.4 million for the three months ended March 31, 2021, from $38.0 million for the three months ended March 31, 2020. The increase was primarily attributable to an increase of $3.0 million from the March 2020 issuance of our 2050 Senior Notes (as defined below), an increase of $2.0 million from higher net interest rates on borrowings outstanding under our Credit Agreement due primarily to $600 million in interest rate swap agreements commencing in October 2020 at higher interest rates than $575 million in interest rate swap agreements which expired between September 2020 and October 2020, an increase of $0.9 million from the January 2020 issuance of our 2030 Senior Notes (as defined below) and $0.6 million of other net increases, partially offset by a decrease of $2.1 million due to a reduction in the average borrowings outstanding under our Credit Agreement.
Interest Income . Interest income decreased $1.1 million to $1.1 million for the three months ended March 31, 2021, from $2.2 million for the three months ended March 31, 2020. The decrease was primarily attributable to lower reinvestment rates in the current period.
Other Income (Expense), Net . Other income (expense), net increased $13.0 million, to an income total of $3.5 million for the three months ended March 31, 2021, from an expense total of $9.5 million for the three months ended March 31, 2020.
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Other income of $3.5 million recorded during the three months ended March 31, 2021 consisted of $1.2 million of income earned on investments purchased to fund our employee deferred compensation obligations, $1.2 million of adjustments to decrease certain accrued liabilities acquired in prior period acquisitions, an increase in foreign currency transaction gains of $0.7 million due to an increase in the value of the Canadian dollar and a $0.4 million increase in other net income sources.
Other expense of $9.5 million recorded during the three months ended March 31, 2020 consisted of $4.7 million of losses on investments purchased to fund our employee deferred compensation obligations, a $3.0 million adjustment to increase certain accrued liabilities acquired in the 2016 Progressive Waste acquisition and an increase in foreign currency transaction losses of $2.5 million due to a decrease in the value of the Canadian dollar, partially offset by a $0.7 million increase in other income sources.
Income Tax Provision . Income taxes increased $11.6 million, or 36.4%, to $40.3 million for the three months ended March 31, 2021, from $28.7 million for the three months ended March 31, 2020. Our effective tax rate for the three months ended March 31, 2021 was 20.1%. Our effective tax rate for the three months ended March 31, 2020 was 16.7%.
The income tax provision for the three months ended March 31, 2021 included a benefit of $2.0 million from share-based payment awards being recognized in the income statement when settled, as well as a portion of our internal financing being taxed at effective rates substantially lower than the U.S. federal statutory rate.
The income tax provision for the three months ended March 31, 2020 included a benefit of $5.1 million from share-based payment awards being recognized in the income statement when settled, as well as a portion of our internal financing being taxed at effective rates substantially lower than the U.S. federal statutory rate.
SEGMENT RESULTS
General
No single contract or customer accounted for more than 10% of our total revenues at the consolidated or reportable segment level during the periods presented. The following table disaggregates our revenue by service line for the periods indicated (dollars in thousands of U.S. dollars).
Three Months Ended March 31,
2021
2020
Commercial
$
426,395
$
416,507
Residential
400,819
365,731
Industrial and construction roll off
209,258
206,771
Total collection
1,036,472
989,009
Landfill
271,936
266,218
Transfer
189,323
180,765
Recycling
32,448
18,108
E&P
28,012
65,377
Intermodal and other
35,634
30,018
Intercompany
(197,883)
(197,091)
Total
$
1,395,942
$
1,352,404
Our Chief Operating Decision Maker evaluates operating segment profitability and determines resource allocations based on several factors, of which the primary financial measure is segment EBITDA. We define segment EBITDA as earnings before interest, taxes, depreciation, amortization, impairments and other operating items and other income (expense). Segment EBITDA is not a measure of operating income, operating performance or liquidity under GAAP and may not be comparable to similarly titled measures reported by other companies. Our management uses segment EBITDA in the evaluation of segment operating performance as it is a profit measure that is generally within the control of the operating segments.
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Prior to July 2020, we managed our operations through five geographic solid waste operating segments and our E&P segment, which were also our reportable segments. As of July 2020, our Chief Operating Decision Maker determined that the E&P and Southern operating segments met all of the aggregation criteria and eliminated our E&P segment by combining all operations of the E&P segment into the Southern segment. After giving effect to this combination, our reportable segments consist of our five geographic operating segments and no longer include a separate E&P segment. Each operating segment is responsible for managing several vertically integrated operations, which are comprised of districts. The segment information presented herein reflects the realignment of these districts. Segment results for the 2020 periods reflected in this report have been reclassified to reflect the realignment of our reportable segments for comparison with the same period in 2021.
At March 31, 2021, under the current orientation, our Southern segment services customers located in Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, New Mexico, North Dakota, southern Oklahoma, western Tennessee, Texas, Wyoming and along the Gulf of Mexico; our Eastern segment services customers located in Delaware, northern Illinois, Kentucky, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, eastern Tennessee, Vermont, Virginia and Wisconsin; our Western segment services customers located in Alaska, California, Idaho, Montana, Nevada, Oregon, Washington and western Wyoming; our Central segment services customers located in Arizona, Colorado, southern Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, New Mexico, Oklahoma, South Dakota, western Texas, Utah and eastern Wyoming; and our Canada segment services customers located in the state of Michigan and in the provinces of Alberta, British Columbia, Manitoba, Ontario, Québec and Saskatchewan.
Revenues, net of intercompany eliminations, for our reportable segments are shown in the following table in thousands of U.S. dollars and as a percentage of total revenues for the periods indicated:
Three Months Ended March 31,
2021
2020
Southern
$
338,161
24.2
%
$
369,256
27.3
%
Eastern
336,461
24.1
332,202
24.6
Western
297,004
21.3
271,981
20.1
Central
235,386
16.9
208,542
15.4
Canada
188,930
13.5
170,423
12.6
$
1,395,942
100.0
%
$
1,352,404
100.0
%
Segment EBITDA for our reportable segments is shown in the following table in thousands of U.S. dollars and as a percentage of segment revenues for the periods indicated:
Three Months Ended March 31,
2021
2020
Western
$
93,825
31.6
%
$
81,029
29.8
%
Southern
93,424
27.6
%
106,319
28.8
%
Eastern
89,121
26.5
%
84,662
25.5
%
Central
79,040
33.6
%
73,151
35.1
%
Canada
73,940
39.1
%
59,398
34.9
%
Corporate (a)
(750)
—
(3,631)
—
$
428,600
30.7
%
$
400,928
29.6
%
(a) The majority of Corporate expenses are allocated to the five operating segments. Direct acquisition expenses, expenses associated with common shares held in the deferred compensation plan exchanged for other investment options and share-based compensation expenses associated with Progressive Waste share-based grants outstanding at June 1, 2016 that were continued by the Company are not allocated to the five operating segments and comprise the net EBITDA for our Corporate segment for the periods presented.
A reconciliation of segment EBITDA to Income before income tax provision is included in Note 10 to our Condensed Consolidated Financial Statements included in Part 1, Item 1 of this report.
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Significant changes in revenue and segment EBITDA for our reportable segments for the three month periods ended March 31, 2021, compared to the three month periods ended March 31, 2020, are discussed below:
Segment Revenue
Revenue in our Southern segment decreased $31.1 million, or 8.4%, to $338.2 million for the three months ended March 31, 2021, from $369.3 million for the three months ended March 31, 2020. The components of the decrease consisted of a decline in revenue at our E&P operations of $34.3 million, partially offset by an increase in revenue at our solid waste operations of $3.2 million. The $34.3 million decrease in revenue at our E&P operations was attributable to decreases in the demand for crude oil as a result of economic disruptions from the COVID-19 pandemic resulting in a drop in the value of crude oil, decreases in drilling and production activity levels and decreases in overall demand for our E&P waste services. The components of the $3.2 million increase in revenue at our solid waste operations consisted of net price increases of $13.5 million, higher prices for old corrugated cardboard and other paper products contributing to a $1.6 million increase in sales from recyclable commodities and other revenue increases of $0.3 million, partially offset by solid waste volume decreases of $10.4 million attributable primarily to COVID-19-related economic disruptions driving declines in commercial collection, roll off collection and municipal solid waste landfill volumes and net revenue reductions from divestitures closed subsequent to March 31, 2020 of $1.8 million.
Revenue in our Eastern segment increased $4.3 million, or 1.3%, to $336.5 million for the three months ended March 31, 2021, from $332.2 million for the three months ended March 31, 2020. The components of the increase consisted of net price increases of $13.2 million, net revenue growth from acquisitions closed subsequent to the three months ended March 31, 2020 of $9.6 million and higher prices for old corrugated cardboard and other paper products contributing to a $5.6 million increase in sales from recyclable commodities, partially offset by solid waste volume decreases of $24.1 million attributable primarily to COVID-19-related economic disruptions in our Northeastern markets driving declines in commercial collection, roll off collection, transfer station and landfill volumes.
Revenue in our Western segment increased $25.0 million, or 9.2%, to $297.0 million for the three months ended March 31, 2021, from $272.0 million for the three months ended March 31, 2020. The components of the increase consisted of solid waste volume increases of $9.8 million attributable to increased residential collection, transfer station and landfill municipal solid waste volumes, net revenue growth from acquisitions closed subsequent to the three months ended March 31, 2020 of $8.5 million, net price increases of $7.0 million and recyclable commodity revenue increases of $1.8 million due primarily to higher prices for old corrugated cardboard and higher volumes collected from residential recycling customers, partially offset by intermodal revenue decreases of $2.1 million due primarily to customer losses resulting in a reduction in intermodal cargo volumes.
Revenue in our Central segment increased $26.9 million, or 12.9%, to $235.4 million for the three months ended March 31, 2021, from $208.5 million for the three months ended March 31, 2020. The components of the increase consisted of revenue growth from acquisitions closed subsequent to the three months ended March 31, 2020 of $25.2 million, net price increases of $9.4 million and other revenue increases of $0.2 million, partially offset by solid waste volume decreases of $6.5 million due to the impact of COVID-19-related economic disruptions driving decreases in roll off collection and landfill municipal solid waste volumes and net revenue reductions from divestitures closed subsequent to March 31, 2020 of $1.4 million.
Revenue in our Canada segment increased $18.5 million, or 10.9%, to $188.9 million for the three months ended March 31, 2021, from $170.4 million for the three months ended March 31, 2020. The components of the increase consisted of $10.3 million resulting from a higher average foreign currency exchange rate in effect during the comparable reporting periods, net price increases of $9.2 million, $6.0 million resulting from higher prices for renewable energy credits associated with the generation of landfill gas, recyclable commodity revenue increases of $2.0 million due primarily to higher prices for old corrugated cardboard and higher volumes collected from residential recycling customers and other revenue increases of $0.3 million, partially offset by solid waste volume decreases of $9.3 million due to the net impact of COVID-19-related economic disruptions driving decreases in commercial collection, roll off and transfer station volumes.
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Segment EBITDA
Segment EBITDA in our Western segment increased $12.8 million, or 15.8%, to $93.8 million for the three months ended March 31, 2021, from $81.0 million for the three months ended March 31, 2020. The increase was due primarily to an increase in revenues of $25.0 million, a decrease in intermodal rail expenses of $1.8 million due to customer losses resulting in a reduction in cargo volume, a collective decrease in travel, meeting, training, and community activity expenses of $0.9 million due to shelter at home and other restrictions on our employees due to the COVID-19 pandemic resulting in the cancellation of non-essential off-site activities, a decrease in expenses for auto and workers’ compensation claims of $0.9 million due primarily to adjustments recorded in the current year period to decrease projected losses on outstanding claims originally recorded prior to 2021 and a decrease in expenses for processing recyclable commodities of $0.8 million due to increased recyclable commodity values resulting in price reductions charged by third-party recycling processors, partially offset by a net $6.3 million increase in cost of operations and SG&A expenses attributable to acquired operations, an increase in corporate overhead expense allocations of $3.7 million due to an increase in the overhead allocation rate resulting from an increase in corporate expenses qualifying for allocation, an increase in labor expenses of $1.9 million due primarily to employee pay increases exceeding the benefit in the current year period of one less calendar and business day due to leap year occurring in the prior year period, an increase in third party disposal expenses of $1.7 million due primarily to increased residential collection volumes requiring disposal at third party facilities, an increase in third-party trucking and transportation expenses of $1.2 million due primarily to higher residential collection tonnage increasing transfer station volumes and landfill volumes in certain markets that require transportation services to our disposal sites, an increase in employee medical benefits expenses of $1.0 million due to an increase in medical visits and other expense increases of $0.8 million.
Segment EBITDA in our Southern segment decreased $12.9 million, or 12.1%, to $93.4 million for the three months ended March 31, 2021, from $106.3 million for the three months ended March 31, 2020. The decrease was due to a decline in E&P revenues of $34.3 million, an increase in corporate overhead expense allocations to our solid waste operations of $3.5 million due to an increase in the overhead allocation rate resulting from an increase in corporate expenses qualifying for allocation, an increase in subcontracted hauling services at our solid waste operations of $2.7 million due to outsourcing the servicing of certain non-strategic contracts and commercial collection customers to third party haulers, an increase in employee medical benefits expenses of $1.4 million due to an increase in medical visits and a decrease to EBITDA of $0.9 million from operations disposed of subsequent to the three months ended March 31, 2020, partially offset by a decrease in expenses for auto and workers’ compensation claims of $6.4 million at our solid waste operations due primarily to higher claims severity in the prior year period and adjustments recorded in the current year period to decrease projected losses on outstanding claims originally recorded prior to 2021, an increase in revenues at our solid waste operations of $5.0 million from organic growth and acquisitions, a decrease in labor expenses of $2.3 million due primarily to one less calendar and business day in the current year period due to leap year in the prior year period and a decrease in employee hours worked due to commercial and roll off collection volume declines, a decrease in third party disposal expenses at our solid waste operations of $1.7 million due primarily to declines in commercial and roll off collection volumes, a collective decrease in travel, meeting, training, and community activity expenses at our solid waste operations of $1.0 million due to shelter at home and other restrictions on our employees due to the COVID-19 pandemic resulting in the cancellation of non-essential off-site activities, a decrease in fuel expense at our solid waste operations of $0.9 million due to declines in the volume of fuel used in our operations, a net $1.2 million decrease in all other expenses at our solid waste operations and the following expense decreases at our E&P operations which were directly attributable to the decline in E&P volumes and corresponding decline in E&P revenues: a decrease in labor expenses of $3.0 million, a decrease in operating activities outsourced to third-parties of $2.1 million, a decrease in equipment and property repair and maintenance expenses of $2.1 million, a decrease in corporate overhead expense allocations of $0.7 million as the calculation of the overhead allocation rate from corporate is based upon revenues, a decrease in equipment rental expenses of $0.6 million, a decrease in fuel expense of $0.5 million, a decrease in royalty expenses paid on revenues of $0.5 million, a decrease in travel, meetings and training expenses of $0.5 million, a decrease in third-party trucking and transportation services of $0.4 million, a decrease in landfill operating supplies of $0.4 million and $0.6 million of other net expense decreases.
Segment EBITDA in our Eastern segment increased $4.4 million, or 5.3%, to $89.1 million for the three months ended March 31, 2021, from $84.7 million for the three months ended March 31, 2020. The increase was due primarily to an increase in revenues of $4.3 million, a decrease in third-party trucking and transportation expenses of $1.7 million attributable to declines in commercial and roll off collection volumes requiring third-party transportation services, a
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decrease in labor expenses of $1.5 million due to lower headcount resulting from reductions in the number of routes needed to service our collection customers, a decrease in truck, container, equipment and facility maintenance and repair expenses of $1.5 million due to a decrease in the number of routed vehicles and reductions in equipment operating hours, a decrease in expenses for uncollectible accounts receivable of $1.4 million due primarily to collections in the current period of customer accounts deemed uncollectible in prior periods, a decrease in leachate disposal expenses of $1.1 million due to increased on-site treatment of leachate and the prior year period incurring higher costs to dispose of leachate in newly constructed landfill cells, a decrease in expenses for auto and workers’ compensation claims of $1.0 million due primarily to adjustments recorded in the current year period to decrease projected losses on outstanding claims originally recorded prior to 2021, a decrease in expenses for processing recyclable commodities of $0.9 million due to declines in commercial recycling volumes, a decrease in fuel expense of $0.7 million due to reductions in collection routes and equipment hours operated resulting in declines in the volume of fuel used in our operations and a collective decrease in travel, meeting, training, and community activity expenses of $0.5 million due to shelter at home and other restrictions on our employees due to the COVID-19 pandemic resulting in the cancellation of non-essential off-site activities, partially offset by a net $5.0 million increase in cost of operations and SG&A expenses attributable to acquired operations, an increase in corporate overhead expense allocations of $3.9 million due to an increase in the overhead allocation rate resulting from an increase in corporate expenses qualifying for allocation, an increase in employee medical benefits expenses of $1.1 million due to an increase in medical visits and other expense increases of $0.2 million.
Segment EBITDA in our Central segment increased $5.8 million, or 8.0%, to $79.0 million for the three months ended March 31, 2021, from $73.2 million for the three months ended March 31, 2020. The increase was due primarily to an increase in revenues of $28.3 million from organic growth and acquisitions and a collective decrease in travel, meeting, training, and community activity expenses of $0.5 million due to shelter at home and other restrictions on our employees due to the COVID-19 pandemic resulting in the cancellation of non-essential off-site activities, partially offset by a net $15.7 million increase in cost of operations and SG&A expenses attributable to acquired operations, an increase in corporate overhead expense allocations of $3.2 million due to an increase in the overhead allocation rate resulting from an increase in corporate expenses qualifying for allocation, an increase in labor expenses of $1.5 million due primarily to employee pay increases exceeding the benefit in the current year period of one less calendar and business day due to leap year occurring in the prior year period, an increase in employee medical benefits expenses of $1.1 million due to an increase in medical visits, an increase in expenses for uncollectible accounts receivable of $0.9 million due primarily to the prior period benefiting from the collection of certain accounts previously deemed uncollectible and other expense increases of $0.6 million.
Segment EBITDA in our Canada segment increased $14.5 million, or 24.5%, to $73.9 million for the three months ended March 31, 2021, from $59.4 million for the three months ended March 31, 2020. The increase was comprised of an increase of $10.8 million assuming foreign currency parity during the comparable reporting periods and an increase of $3.7 million from a higher average foreign currency exchange rate in effect during the comparable reporting periods. The $10.8 million increase, which assumes foreign currency parity, was due primarily to an increase in revenues of $8.2 million, a decrease in third-party disposal expenses of $1.4 million attributable to declines in commercial and roll off collection volumes requiring disposal at third-party locations, a decrease in expenses for uncollectible accounts receivable of $0.8 million due primarily to collections in the current period of customer accounts deemed uncollectible in prior periods and a collective decrease in travel, meeting, training, and community activity expenses of $0.4 million due to shelter at home and other restrictions on our employees due to the COVID-19 pandemic resulting in the cancellation of non-essential off-site activities.
Segment EBITDA at Corporate increased $2.9 million, to a loss of $0.7 million for the three months ended March 31, 2021, from a loss of $3.6 million for the three months ended March 31, 2020. The increase was due to an increase in corporate overhead allocated through charges to our segments of $13.9 million due to an increase in expenses qualifying for allocation, a decrease in equity-based compensation expenses of $3.4 million associated with an adjustment during the prior year period of our common shares held in our deferred compensation plan by certain key executives to fair value as a result of the shares being exchanged for other investment options, a collective decrease in travel, meeting, training and community activity expenses of $2.2 million due to shelter at home and other restrictions on our employees due to the COVID-19 pandemic resulting in the cancellation of non-essential off-site activities, a decrease in direct acquisition expenses of $0.6 million due to a decrease in acquisition activity in the comparable periods and a decrease in equity-compensation expenses of $0.6 million due primarily to a decrease in the amount of performance-based restricted share
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units granted in 2019 and 2020 estimated to ultimately vest based on the achievement of required financial performance results, partially offset by an increase in accrued cash incentive compensation expense to our management and non-management employees of $8.5 million, an increase in deferred compensation expenses of $5.7 million as a result of decreases in the market value of investments to which employee deferred compensation liability balances are tracked, an increase in professional fees of $1.8 million due primarily to adjustments recorded during the prior year period to reduce estimated accrued liabilities associated with unbilled legal services, an increase in share-based compensation expenses of $1.2 million due primarily to increased average share price values in the current period for equity awards accounted for as liabilities that were granted to employees of Progressive Waste prior to June 1, 2016 which are subject to valuation adjustments each period based on changes in fair value and $0.6 million of other net expense increases.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth certain cash flow information for the three months ended March 31, 2021 and 2020 (in thousands of U.S. dollars):
Three Months Ended
March 31,
2021
2020
Net cash provided by operating activities
$
400,396
$
369,586
Net cash used in investing activities
(100,553)
(133,626)
Net cash provided by (used in) financing activities
(165,482)
627,389
Effect of exchange rate changes on cash, cash equivalents and restricted cash
403
(2,364)
Net increase in cash, cash equivalents and restricted cash
134,764
860,985
Cash, cash equivalents and restricted cash at beginning of period
714,389
423,221
Cash, cash equivalents and restricted cash at end of period
$
849,153
$
1,284,206
Operating Activities Cash Flows
For the three months ended March 31, 2021, net cash provided by operating activities was $400.4 million. For the three months ended March 31, 2020, net cash provided by operating activities was $369.6 million. The $30.8 million increase was due primarily to the following:
1) Increase in earnings — Our increase in net cash provided by operating activities was favorably impacted by $21.6 million from an increase in net income, excluding depreciation, amortization of intangibles, share-based compensation, adjustments to and payments of contingent consideration recorded in earnings and loss on disposal of assets and impairments, due primarily to price increases, earnings from acquisitions closed subsequent to the three months ended March 31, 2020, earnings generated from the increased sales of recyclable commodities and renewal energy credits associated with the generation of landfill gas and an increase in the average Canadian dollar to U.S. dollar currency exchange rate offsetting a decline in earnings at our E&P operations, as well as solid waste volume losses resulting from the COVID-19 pandemic.
2) Other long-term liabilities — Our increase in net cash provided by operating activities was favorably impacted by $19.3 million from other long-term liabilities, as changes in other long-term liabilities resulted in an increase to operating cash flows of $6.1 million for the three months ended March 31, 2021, compared to a decrease to operating cash flows of $13.2 million for the three months ended March 31, 2020. The increase for the three months ended March 31, 2021 was primarily attributable to the receipt of funds associated with the eminent domain purchase of an operating facility that will be replaced with a newly constructed facility in a future period. The decrease for the three months ended March 31, 2020 was primarily attributable to declines in our deferred compensation liabilities due to distributions and the cash settlement of equity awards accounted for as liabilities that were granted to employees of Progressive Waste prior to June 1, 2016.
3) Prepaid expenses — Our increase in net cash provided by operating activities was favorably impacted by $15.7 million from prepaid expenses due primarily to a decrease in prepaid insurance and prepaid vendor payments. Our prepaid expenses at March 31, 2021 include $49.7 million of prepaid income taxes.
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4) Deferred revenue — Our increase in net cash provided by operating activities was favorably impacted by $9.8 million from deferred revenue as changes in deferred revenue resulted in an increase to operating cash flows of $8.9 million for the three months ended March 31, 2021, compared to a decrease to operating cash flows of $0.9 million for the three months ended March 31, 2020. During the three months ended March 31, 2021, deferred revenue increased due to price increases on our advanced billed residential and commercial collection services, the timing of bi-monthly advance service billings and a landfill in our Southern segment receiving a $3.3 million advance payment for future disposal services. During the three months ended March 31, 2020, our deferred revenue decreased due primarily to commercial collection customer closures resulting from the COVID-19 pandemic that began in March 2020 which reduced the amount of advance service billings sent to our customers.
5) Deferred income taxes — Our increase in net cash provided by operating activities was unfavorably impacted by $14.9 million from deferred income taxes as changes in deferred income taxes resulted in an increase to operating cash flows of $8.4 million for the three months ended March 31, 2021, compared to an increase to operating cash flows of $23.3 million for the three months ended March 31, 2020. The higher increase in deferred taxes in the prior year period was attributable to increased capital expenditures providing tax benefits resulting from accelerated tax depreciation.
6) Accounts payable and accrued liabilities — Our increase in net cash provided by operating activities was unfavorably impacted by $10.8 million from accounts payable and accrued liabilities due primarily to the timing of interest payments and payroll cycles .
As of March 31, 2021, we had a working capital surplus of $397.1 million, including cash and equivalents of $743.5 million. Our working capital surplus increased $17.5 million from a working capital surplus of $379.6 million at December 31, 2020 including cash and equivalents of $617.3 million, due primarily to the impact of increased cash balances, decreased accounts payable and decreased book overdraft being partially offset by an increase in the current portion of notes payable, higher deferred revenue and a reduction in accounts receivable. To date, we have experienced no loss or lack of access to our cash and equivalents; however, we can provide no assurances that access to our cash and equivalents will not be impacted by adverse conditions in the financial markets. Our strategy in managing our working capital is generally to apply the cash generated from our operations that remains after satisfying our working capital and capital expenditure requirements, along with share repurchase and dividend programs, to reduce the unhedged portion of our indebtedness under our Credit Agreement and to minimize our cash balances.
Investing Activities Cash Flows
Net cash used in investing activities decreased $33.0 million to $100.6 million for the three months ended March 31, 2021, from $133.6 million for the three months ended March 31, 2020. The significant components of the decrease included the following:
1) A decrease in capital expenditures of $41.0 million due to decreases in vehicles for our collection operations and landfill site costs; less
2) An increase in cash paid for acquisitions of $2.6 million.
Financing Activities Cash Flows
Net cash used in financing activities increased $792.9 million to net cash used in financing activities of $165.5 million for the three months ended March 31, 2021, from net cash provided by financing activities of $627.4 million for the three months ended March 31, 2020. The significant components of the increase included the following:
1) An increase from the net change in long-term borrowings of $825.6 million (long-term borrowings decreased $5.4 million during the three months ended March 31, 2021 and increased $820.2 million during the three months ended March 31, 2020) due primarily to maintaining a portion of the proceeds from our 2050 Senior Notes offering in March 2020 in cash and borrowing on our credit facility in March 2020 to provide us with additional available cash reserves;
2) An increase in book overdraft of $13.0 million due primarily to maintaining additional funds in our bank accounts that are used to fund outstanding checks; and
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3) An increase in cash dividends paid of $5.9 million due primarily to an increase in our quarterly dividend rate for the three months ended March 31, 2021 to $0.205 per share, from $0.185 per share for the three months ended March 31, 2020; less
4) A decrease in payments to repurchase our common shares of $39.7 million due to fewer shares repurchased;
5) A decrease in debt issuance costs of $10.9 million due to the prior year period including costs incurred for the issuance of our 2030 Senior Notes and 2050 Senior Notes; and
6) A decrease in tax withholdings related to net share settlements of equity-based compensation of $4.6 million due to a decrease in the value of equity-based compensation awards vesting.
Our business is capital intensive. Our capital requirements include acquisitions and capital expenditures for landfill cell construction, landfill development, landfill closure activities and intermodal facility construction in the future.
On July 23, 2020, our Board of Directors approved, subject to receipt of regulatory approvals, the annual renewal of our normal course issuer bid, or the NCIB, to purchase up to 13,144,773 of our common shares during the period of August 10, 2020 to August 9, 2021 or until such earlier time as the NCIB is completed or terminated at our option. Shareholders may obtain a copy of our TSX Form 12 – Notice of Intention to Make a Normal Course Issuer Bid, without charge, by request directed to our Executive Vice President and Chief Financial Officer at (832) 442-2200. The timing and amounts of any repurchases pursuant to the NCIB will depend on many factors, including our capital structure, the market price of our common shares and overall market conditions. All common shares purchased under the NCIB will be immediately cancelled following their repurchase. Information regarding our NCIB can be found under the “Shareholders’ Equity” section in Note 16 to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q and is incorporated herein by reference.
Our Board of Directors authorized the initiation of a quarterly cash dividend in October 2010 and has increased it on an annual basis. In October 2020, our Board of Directors authorized an increase to our regular quarterly cash dividend of $0.02, from $0.185 to $0.205 per share. Cash dividends of $53.9 million and $48.0 million were paid during the three months ended March 31, 2021 and 2020, respectively. We cannot assure you as to the amounts or timing of future dividends.
We made $96.8 million in capital expenditures for property and equipment during the three months ended March 31, 2021, and we expect to make total capital expenditures for property and equipment of approximately $625 million in 2021. We have funded and intend to fund the balance of our planned 2021 capital expenditures principally through cash on hand, internally generated funds and borrowings under our Credit Agreement. In addition, we may make substantial additional capital expenditures in acquiring land and solid waste businesses. If we acquire additional landfill disposal facilities, we may also have to make significant expenditures to bring them into compliance with applicable regulatory requirements, obtain permits or expand our available disposal capacity. We cannot currently determine the amount of these expenditures because they will depend on the number, nature, condition and permitted status of any acquired landfill disposal facilities. We believe that our cash and equivalents, Credit Agreement and the funds we expect to generate from operations will provide adequate cash to fund our working capital and other cash needs for the foreseeable future. However, disruptions in the capital and credit markets could adversely affect our ability to draw on our Credit Agreement or raise other capital. Our access to funds under the Credit Agreement is dependent on the ability of the banks that are parties to the agreement to meet their funding commitments. Those banks may not be able to meet their funding commitments if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests within a short period of time.
As of March 31, 2021, $650.0 million under the term loan and $204.0 million under the revolving credit facility were outstanding under our Credit Agreement, exclusive of outstanding standby letters of credit of $118.4 million. We also have issued $6.8 million of letters of credit at March 31, 2021 under facilities other than the Credit Agreement. Our Credit Agreement matures in March 2023.
We are a well-known seasoned issuer with an effective shelf registration statement on Form S-3 filed with the SEC in May 2018, which registers an unspecified amount of debt securities, including debentures, notes or other types of debt. In the future, we may issue debt securities under our shelf registration statement or in private placements from time to time on an opportunistic basis, based on market conditions and available pricing. Unless otherwise indicated in the relevant
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offering documents, we expect to use the proceeds from any such offerings for general corporate purposes, including repaying, redeeming or repurchasing debt, acquiring additional assets or businesses, capital expenditures and increasing our working capital.
As of March 31, 2021, we had the following contractual obligations:
Payments Due by Period
(amounts in thousands of U.S. dollars)
Less Than
1 to 3
Over 5
Recorded Obligations
Total
1 Year
Years
3 to 5 Years
Years
Long-term debt
$
4,744,690
$
105,386
$
1,340,226
$
536,585
$
2,762,493
Cash interest payments
$
1,217,092
$
160,761
$
268,554
$
203,981
$
583,796
Contingent consideration
$
86,498
$
42,360
$
5,724
$
3,224
$
35,190
Operating leases
$
213,877
$
28,245
$
67,921
$
43,115
$
74,596
Final capping, closure and post-closure
$
1,500,547
$
16,726
$
40,739
$
9,541
$
1,433,541
____________________
Long-term debt payments include:
1) $204.0 million in principal payments due March 2023 related to our revolving credit facility under our Credit Agreement. We may elect to draw amounts on our Credit Agreement in U.S. dollar LIBOR rate loans, U.S. dollar base rate loans, Canadian-based bankers’ acceptances, and Canadian dollar prime rate loans. At March 31, 2021, $200.0 million of the outstanding borrowings drawn under the revolving credit facility were in U.S. LIBOR rate loans, which bear interest at the LIBOR rate plus the applicable margin (for a total rate of 1.31% on such date) and $4.0 million of the outstanding borrowings drawn under the revolving credit facility were in Canadian-based bankers’ acceptances, which bear interest at the Canadian Dollar Offered Rate plus the applicable acceptance fee (for a total rate of 1.61% on such date).
2) $650.0 million in principal payments due March 2023 related to our term loan under our Credit Agreement. Outstanding amounts on the term loan can be either base rate loans or LIBOR loans. At March 31, 2021, all amounts outstanding under the term loan were in LIBOR loans which bear interest at the LIBOR rate plus the applicable margin (for a total rate of 1.31% on such date).
3) $100.0 million in principal payments due 2021 related to our 2021 Senior Notes. The 2021 Senior Notes bear interest at a rate of 4.64%. We redeemed the 2021 Senior Notes on April 1, 2021.
4) $150.0 million in principal payments due 2021 related to our New 2021 Senior Notes. The New 2021 Senior Notes bear interest at a rate of 2.39%. We have recorded this obligation in the payments due in 1 to 3 years category in the table above as we have the intent and ability to redeem the New 2021 Senior Notes on June 1, 2021 using borrowings under our Credit Agreement.
5) $125.0 million in principal payments due 2022 related to our 2022 Senior Notes. The 2022 Senior Notes bear interest at a rate of 3.09%.
6) $200.0 million in principal payments due 2023 related to our 2023 Senior Notes. The 2023 Senior Notes bear interest at a rate of 2.75%.
7) $150.0 million in principal payments due 2024 related to our 2024 Senior Notes. The 2024 Senior Notes bear interest at a rate of 3.24%.
8) $375.0 million in principal payments due 2025 related to our 2025 Senior Notes. The 2025 Senior Notes bear interest at a rate of 3.41%.
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9) $400.0 million in principal payments due 2026 related to our 2026 Senior Notes. The 2026 Senior Notes bear interest at a rate of 3.03%.
10) $250.0 million in principal payments due 2027 related to our 2027 Senior Notes. The 2027 Senior Notes bear interest at a rate of 3.49%.
11) $500.0 million in principal payments due 2028 related to our 2028 Senior Notes. The 2028 Senior Notes bear interest at a rate of 4.25%.
12) $500.0 million in principal payments due 2029 related to our 2029 Senior Notes. The 2029 Senior Notes bear interest at a rate of 3.50%.
13) $600.0 million in principal payments due 2030 related to our 2030 Senior Notes. The 2030 Senior Notes bear interest at a rate of 2.60%.
14) $500.0 million in principal payments due 2050 related to our 2050 Senior Notes. The 2050 Senior Notes bear interest at a rate of 3.05%.
15) $38.0 million in principal payments related to our notes payable to sellers and other third parties. Our notes payable to sellers and other third parties bear interest at rates between 2.42% and 10.35% at March 31, 2021, and have maturity dates ranging from 2028 to 2036.
16) $9.8 million in principal payments related to our financing leases. Our financing leases bear interest at a rate of 1.89% at March, 31 2021, and have a lease expiration date of 2026.
The following assumptions were made in calculating cash interest payments:
1) We calculated cash interest payments on the Credit Agreement using the LIBOR rate plus the applicable LIBOR margin, the base rate plus the applicable base rate margin, the Canadian Dollar Offered Rate plus the applicable acceptance fee and the Canadian prime rate plus the applicable prime rate margin at March 31, 2021. We assumed the Credit Agreement is paid off when it matures in March 2023.
2) We calculated cash interest payments on our interest rate swaps using the stated interest rate in the swap agreement less the LIBOR rate through the earlier expiration of the term of the swaps or the term of the credit facility.
Contingent consideration payments include $67.0 million recorded as liabilities in our Condensed Consolidated Financial Statements at March 31, 2021, and $19.5 million of future interest accretion on the recorded obligations.
We are party to operating lease agreements and finance leases. These lease agreements are established in the ordinary course of our business and are designed to provide us with access to facilities and equipment at competitive, market-driven prices.
The estimated final capping, closure and post-closure expenditures presented above are in current dollars.
Amount of Commitment Expiration Per Period
(amounts in thousands of U.S. dollars)
Less Than
1 to 3
3 to 5
Over 5
Unrecorded Obligations (1)
Total
1 Year
Years
Years
Years
Unconditional purchase obligations
$
116,619
$
82,673
$
33,946
$
—
$
—
____________________
(1) We are party to unconditional purchase obligations. These purchase obligations are established in the ordinary course of our business and are designed to provide us with access to products at competitive, market-driven prices. At March 31, 2021, our unconditional purchase obligations consisted of multiple fixed-price fuel purchase contracts under which we have 46.7 million gallons remaining to be purchased for a total of $116.6 million. The current fuel purchase contracts expire on or before
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December 31, 2023. These arrangements have not materially affected our financial position, results of operations or liquidity during the three months ended March 31, 2021, nor are they expected to have a material impact on our future financial position, results of operations or liquidity.
We have obtained financial surety bonds, primarily to support our financial assurance needs and landfill and E&P operations. We provided customers and various regulatory authorities with surety bonds in the aggregate amounts of approximately $1.242 billion and $1.210 billion at March 31, 2021 and December 31, 2020, respectively. These arrangements have not materially affected our financial position, results of operations or liquidity during the three months ended March 31, 2021, nor are they expected to have a material impact on our future financial position, results of operations or liquidity.
From time to time, we evaluate our existing operations and their strategic importance to us. If we determine that a given operating unit does not have future strategic importance, we may sell or otherwise dispose of those operations. Although we believe our reporting units would not be impaired by such dispositions, we could incur losses on them.
The disposal tonnage that we received in the three month periods ended March 31, 2021 and 2020, at all of our landfills during the respective period, is shown below (tons in thousands):
Three Months Ended March 31,
2021
2020
Number
Total
Number
Total
of Sites
Tons
of Sites
Tons
Owned operational landfills and landfills operated under life-of-site agreements
87
10,189
88
10,843
Operated landfills
4
127
4
133
91
10,316
92
10,976
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NON-GAAP FINANCIAL MEASURES
Adjusted Free Cash Flow
We present adjusted free cash flow, a non-GAAP financial measure, supplementally because it is widely used by investors as a valuation and liquidity measure in the solid waste industry. Management uses adjusted free cash flow as one of the principal measures to evaluate and monitor the ongoing financial performance of our operations. We define adjusted free cash flow as net cash provided by operating activities, plus or minus change in book overdraft, plus proceeds from disposal of assets, less capital expenditures for property and equipment and distributions to noncontrolling interests. We further adjust this calculation to exclude the effects of items management believes impact the ability to assess the operating performance of our business. This measure is not a substitute for, and should be used in conjunction with, GAAP liquidity or financial measures. Other companies may calculate adjusted free cash flow differently. Our adjusted free cash flow for the three month periods ended March 31, 2021 and 2020, are calculated as follows (amounts in thousands of U.S. dollars):
Three Months Ended
March 31,
2021
2020
Net cash provided by operating activities
$
400,396
$
369,586
Less: Change in book overdraft
(16,849)
(3,848)
Plus: Proceeds from disposal of assets
2,080
3,499
Less: Capital expenditures for property and equipment
(96,793)
(137,781)
Adjustments:
Payment of contingent consideration recorded in earnings (a)
520
—
Transaction-related expenses (b)
526
1,146
Pre-existing Progressive Waste share-based grants (c)
97
6,440
Tax effect (d)
(188)
(3,318)
Adjusted free cash flow
$
289,789
$
235,724
____________________
(a) Reflects the addback of acquisition-related payments for contingent consideration that were recorded as expenses in earnings and as a component of cash flows from operating activities as the amounts paid exceeded the fair value of the contingent consideration recorded at the acquisition date.
(b) Reflects the addback of acquisition-related transaction costs.
(c) Reflects the cash settlement of pre-existing Progressive Waste share-based awards during the period.
(d) The aggregate tax effect of footnotes (a) through (c) is calculated based on the applied tax rates for the respective periods.
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Adjusted EBITDA
We present adjusted EBITDA, a non-GAAP financial measure, supplementally because it is widely used by investors as a performance and valuation measure in the solid waste industry. Management uses adjusted EBITDA as one of the principal measures to evaluate and monitor the ongoing financial performance of our operations. We define adjusted EBITDA as net income attributable to Waste Connections, plus or minus net income (loss) attributable to noncontrolling interests, plus income tax provision, plus interest expense, less interest income, plus depreciation and amortization expense, plus closure and post-closure accretion expense, plus or minus any loss or gain on impairments and other operating items, plus other expense, less other income. We further adjust this calculation to exclude the effects of other items management believes impact the ability to assess the operating performance of our business. This measure is not a substitute for, and should be used in conjunction with, GAAP financial measures. Other companies may calculate adjusted EBITDA differently. Our adjusted EBITDA for the three month periods ended March 31, 2021 and 2020, are calculated as follows (amounts in thousands of U.S. dollars):
Three Months Ended
March 31,
2021
2020
Net income attributable to Waste Connections
$
160,309
$
143,035
Less: Net loss attributable to noncontrolling interests
(2)
(142)
Plus: Income tax provision
40,291
28,734
Plus: Interest expense
42,425
37,990
Less: Interest income
(1,103)
(2,175)
Plus: Depreciation and amortization
189,594
182,459
Plus: Closure and post-closure accretion
3,709
3,908
Plus: Impairments and other operating items
634
1,506
Plus (less): Other expense (income), net
(3,548)
9,521
Adjustments:
Plus: Transaction-related expenses (a)
526
1,146
Plus: Fair value changes to equity awards (b)
339
2,541
Adjusted EBITDA
$
433,174
$
408,523
____________________
(a) Reflects the addback of acquisition-related transaction costs.
(b) Reflects fair value accounting changes associated with certain equity awards .
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Adjusted Net Income Attributable to Waste Connections and Adjusted Net Income per Diluted Share Attributable to Waste Connections
We present adjusted net income attributable to Waste Connections and adjusted net income per diluted share attributable to Waste Connections, both non-GAAP financial measures, supplementally because they are widely used by investors as a valuation measure in the solid waste industry. Management uses adjusted net income attributable to Waste Connections and adjusted net income per diluted share attributable to Waste Connections as one of the principal measures to evaluate and monitor the ongoing financial performance of our operations. We provide adjusted net income attributable to Waste Connections to exclude the effects of items management believes impact the comparability of operating results between periods. Adjusted net income attributable to Waste Connections has limitations due to the fact that it excludes items that have an impact on our financial condition and results of operations. Adjusted net income attributable to Waste Connections and adjusted net income per diluted share attributable to Waste Connections are not a substitute for, and should be used in conjunction with, GAAP financial measures. Other companies may calculate these non-GAAP financial measures differently. Our adjusted net income attributable to Waste Connections and adjusted net income per diluted share attributable to Waste Connections for the three month periods ended March 31, 2021 and 2020, are calculated as follows (amounts in thousands of U.S. dollars, except per share amounts):
Three Months Ended
March 31,
2021
2020
Reported net income attributable to Waste Connections
$
160,309
$
143,035
Adjustments:
Amortization of intangibles (a)
32,192
31,638
Impairments and other operating items (b)
634
1,506
Transaction-related expenses (c)
526
1,146
Fair value changes to equity awards (d)
339
2,541
Tax effect (e)
(8,543)
(9,304)
Adjusted net income attributable to Waste Connections
$
185,457
$
170,562
Diluted earnings per common share attributable to Waste Connections’ common shareholders:
Reported net income
$
0.61
$
0.54
Adjusted net income
$
0.70
$
0.65
____________________
(a) Reflects the elimination of the non-cash amortization of acquisition-related intangible assets .
(b) Reflects the addback of impairments and other operating items.
(c) Reflects the addback of acquisition-related transaction costs.
(d) Reflects fair value accounting changes associated with certain equity awards .
(e) The aggregate tax effect of the adjustments in footnotes (a) through (d) is calculated based on the applied tax rates for the respective periods.
INFLATION
Other than volatility in fuel prices, third party brokerage and labor costs in certain markets, inflation has not materially affected our operations in recent years. Consistent with industry practice, many of our contracts allow us to pass through certain costs to our customers, including increases in landfill tipping fees and, in some cases, fuel costs. To the extent that there are decreases in fuel costs, in some cases, a portion of these reductions are passed through to customers in the form of lower fuel and material surcharges. Therefore, we believe that we should be able to increase prices to offset many cost increases that result from inflation in the ordinary course of business. However, competitive pressures or delays in the timing of rate increases under our contracts, particularly amid the economic impact of the COVID-19 pandemic, may require us to absorb at least part of these cost increases, especially if cost increases exceed the average rate of inflation. Management’s estimates associated with inflation have an impact on our accounting for landfill liabilities.
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SEASONALITY
Based on historic trends, excluding any impact from the COVID-19 pandemic or an economic recession, we would expect our operating results to vary seasonally, with revenues typically lowest in the first quarter, higher in the second and third quarters and lower in the fourth quarter than in the second and third quarters. This seasonality reflects (a) the lower volume of solid waste generated during the late fall, winter and early spring because of decreased construction and demolition activities during winter months in Canada and the U.S. and (b) reduced E&P activity during harsh weather conditions, with expected fluctuation due to such seasonality between our highest and lowest quarters of approximately 10%. In addition, some of our operating costs may be higher in the winter months. Adverse winter weather conditions slow waste collection activities, resulting in higher labor and operational costs. Greater precipitation in the winter increases the weight of collected municipal solid waste, resulting in higher disposal costs, which are calculated on a per ton basis.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.