Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K.
We make statements in this Annual Report on Form 10-K that are forward-looking in nature. These include:
● Statements regarding our landfills, including capacity, duration, special projects, demand for and pricing of recyclables, estimated closure and post-closure liabilities, landfill alternatives and related capital expenditures, operating expenses and leachate;
● 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;
● Plans for, and the amount 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, inflation, credit risk of customers, seasonality, labor/pension costs and labor union activity, employee retention costs, operational and safety risks, acquisitions, litigation developments and 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, those listed under the heading “ITEM 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K.
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.
Industry Overview
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
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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.
Executive Overview
We are an integrated solid waste services company that provides non-hazardous waste collection, transfer and disposal services, including by rail, along with resource recovery primarily through recycling and renewable fuels generation, in mostly exclusive and secondary markets across 44 states in the U.S. and six provinces in Canada. Waste Connections also provides E&P waste services in several basins across the U.S. and Canada, as well as intermodal services for the movement of cargo and solid waste containers in the Pacific Northwest.
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 non-hazardous E&P waste treatment, recovery and disposal services.
2023 Financial Performance
The functional currency of the Company, as the parent corporate entity, and its operating subsidiaries in the United States is the U.S. dollar. The functional currency of the Company’s Canadian operations is the Canadian dollar. The reporting currency of the Company is the U.S. dollar. The Company’s consolidated Canadian dollar financial position is translated to U.S. dollars by applying the foreign currency exchange rate in effect at the consolidated balance sheet date. The Company’s consolidated Canadian dollar results of operations and cash flows are translated to U.S. dollars by applying the average foreign currency exchange rate in effect during the reporting period. The resulting translation adjustments are included in other comprehensive income or loss. Gains and losses from foreign currency transactions are included in earnings for the period.
Operating Results
Revenues in 2023 increased 11.2% to $8.022 billion from $7.212 billion in 2022. Acquisitions closed during, or subsequent to the prior year, net of divestitures, accounted for $407.3 million in incremental revenues in 2023. Excluding the impact of such acquisitions, revenues increased 5.6% due predominantly to higher internal growth in solid waste. Solid waste internal growth was up 6.2%, due to higher price increases, partially offset by lower surcharges, lower volumes and lower recycled commodities. Pricing growth was 9.0%, with core pricing up 9.5%, offset by materials and environmental surcharges of 0.5%. Volumes decreased by 2.0% due primarily to the intentional shedding of lower quality revenue, including through the purposeful non-renewal of certain residential hauling contracts, and decreases in the value of recycled commodities resulted in a 0.8% offset to internal solid waste growth. Higher E&P waste activity resulted in a 0.2% increase to overall growth, while decreases in landfill gas sales, including renewable energy credits, and other revenue resulted in a 0.2% decrease to overall growth and foreign exchange impacts resulted in a 0.5% decrease to overall growth.
Net income attributable to Waste Connections decreased 8.7% to $762.8 million in 2023, from $835.7 million in 2022, principally as a result of impairments and other operating items, which increased to $238.8 million in 2023 from $18.2
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million in 2022. In 2023, adjusted earnings before interest, taxes, depreciation and amortization, or adjusted EBITDA, a non-GAAP financial measure (refer to page 75 of this Annual Report on Form 10-K for a definition and reconciliation to Net income attributable to Waste Connections), increased 13.6% to $2.523 billion, from $2.221 billion in 2022. As a percentage of revenue, adjusted EBITDA increased from 30.8% in 2022, to 31.5% in 2023. This 0.7 percentage point increase reflects a 1.3 percentage point increase primarily from price-led organic growth in solid waste exceeding cost inflation and lower cost of fuel during the year, partially offset by a 0.6 percentage point decrease from lower recycled commodity and landfill gas revenues. Adjusted net income attributable to Waste Connections, a non-GAAP financial measure (refer to page 76 of this Annual Report on Form 10-K for a definition and reconciliation to Net income attributable to Waste Connections), in 2023 increased 9.7% to $1.081 billion from $985.3 million in 2022.
Adjusted Free Cash Flow
Net cash provided by operating activities increased 5.2% to $2.127 billion in 2023, from $2.022 billion in 2022, on increases in cash interest from $177.4 million to $260.9 million and increases in cash taxes from $100.2 million to $207.0 million. Capital expenditures for property and equipment increased from $912.7 million in 2022 to $934.0 million in 2023. Adjusted free cash flow, a non-GAAP financial measure (refer to page 74 of this Annual Report on Form 10-K for a definition and reconciliation to Net cash provided by operating activities), increased by $59.3 million to $1.224 billion in 2023, from $1.165 billion in 2022. Adjusted free cash flow as a percentage of revenues was 15.3% in 2023, as compared to 16.2% in 2022.
Return of Capital and Distributions to Shareholders
In 2023, we distributed $270.6 million to shareholders through cash dividends declared by our Board of Directors, which also increased the quarterly cash dividend by 11.8%, from $0.255 to $0.285 per common share in October 2023. Cash dividends increased $27.6 million, or 11.4%, from $243.0 million in 2022 due to a 10.9% increase in the quarterly cash dividend declared by our Board of Directors in November 2022, followed by the additional increase in October 2023. Our Board of Directors intends to review the quarterly dividend during the fourth quarter of each year, with a long-term objective of increasing the amount of the dividend. We expect the amount of capital we return to shareholders through share repurchases to vary depending on our financial condition and results of operations, capital structure, the amount of cash we deploy on acquisitions, expectations regarding the timing and size of acquisitions, the market price of our common shares, and overall market conditions. We cannot assure as to the amounts or timing of future dividends or share repurchases. We have the ability under our Credit Agreement and Term Loan Agreement to repurchase our common shares and pay dividends provided that we maintain specified financial ratios.
Capital Position
We target a Leverage Ratio, as defined substantially identically in both our Credit Agreement and Term Loan Agreement, of approximately 2.5x – 3.0x total debt to EBITDA. The Leverage Ratio is a non-GAAP ratio (refer to page 76 of this Annual Report on Form 10-K for more information on this ratio). The combination of lower debt resulting from opportunistic repayment during 2023 and higher EBITDA in 2023 resulted in a decrease in our Leverage Ratio from 2.93x at December 31, 2022 to 2.60x at December 31, 2023. Cash balances decreased from $78.6 million at December 31, 2022 to $78.4 million at December 31, 2023, and we had $1.357 billion of remaining borrowing capacity under our Credit Agreement, which matures in July 2026. In total, we had $1.103 billion in prepayable debt outstanding at December 31, 2023.
Critical Accounting Estimates and Assumptions
The preparation of financial statements in conformity with 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 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.
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We believe that of our significant accounting policies, which are described in Note 3 of our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, we believe these are the most critical to fully understand and evaluate our financial condition and results of operations.
Insurance liabilities . We maintain insurance policies for automobile, general, employer’s, environmental, cyber, employment practices and directors’ and officers’ liability as well as for employee group health insurance, property insurance and workers’ compensation. We carry umbrella policies for certain types of claims to provide excess coverage over the underlying policies and per incident deductibles or self-insured retentions. Our insurance accruals are based on claims filed and estimates of claims incurred but not reported and are developed by our management with assistance from our third-party actuary and third-party claims administrator. The insurance accruals are influenced by our past claims experience factors and by published industry development factors. If we experience insurance claims or costs above or below our historically evaluated levels, our estimates could be materially affected. The frequency and amount of claims or incidents could vary significantly over time, which could materially affect our self-insurance liabilities. Additionally, the actual costs to settle the self-insurance liabilities could materially differ from the original estimates and cause us to incur additional costs in future periods associated with prior year claims.
Income taxes . Deferred income tax assets and liabilities are determined based on differences between the financial reporting and income tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. If our judgment and estimates concerning assumptions made in calculating our expected future income tax rates are incorrect, our deferred income tax assets and liabilities would change. Based on our deferred income tax liability balance at December 31, 2023, each 0.1 percentage point change to our expected future income tax rates would change our deferred income tax liability balance and income tax expense by approximately $3.9 million.
Accounting for landfills . We recognize landfill depletion expense as airspace of a landfill is consumed. Our landfill depletion rates are based on the remaining disposal capacity at our landfills, considering both permitted and probable expansion airspace. We calculate the net present value of our final capping, closure and post-closure commitments by estimating the total obligation in current dollars, inflating the obligation based upon the expected date of the expenditure and discounting the inflated total to its present value using a credit-adjusted risk-free rate. Any changes in expectations that result in an upward revision to the estimated undiscounted cash flows are treated as a new liability and are inflated and discounted at rates reflecting market conditions. Any changes in expectations that result in a downward revision (or no revision) to the estimated undiscounted cash flows result in a liability that is inflated and discounted at rates reflecting the market conditions at the time the cash flows were originally estimated. This policy results in our final capping, closure and post-closure liabilities being recorded in “layers.” The resulting final capping, closure and post-closure obligations are recorded on the consolidated balance sheet along with an offsetting addition to site costs, which is amortized to depletion expense as the remaining landfill airspace is consumed. Interest is accreted on the recorded liability using the corresponding discount rate. In the event that changes in an estimate for a closure and post-closure liability are associated with a significant change in facts and circumstances at a landfill or a non-operating section of a landfill, corresponding adjustments to recorded liabilities and Impairments and other operating items are made as soon as is practical. The accounting methods discussed below require us to make certain estimates and assumptions. Changes to these estimates and assumptions, including as a result of inflation, could have a material effect on our financial condition and results of operations. Any changes to our estimates are applied prospectively.
Landfill development costs . Landfill development costs include the costs of acquisition, construction associated with excavation, liners, site berms, groundwater monitoring wells, gas recovery systems and leachate collection systems. We estimate the total costs associated with developing each landfill site to its final capacity. Total landfill costs include the development costs associated with expansion airspace. Expansion airspace is described below. Landfill development costs depend on future events and thus actual costs could vary significantly from our estimates. Material differences between estimated and actual development costs may affect our cash flows by increasing our capital expenditures and thus affect our results of operations by increasing our landfill depletion expense.
Final capping, closure and post-closure obligations . We accrue for estimated final capping, closure and post-closure maintenance obligations at the landfills we own, and the landfills that we operate, but do not own, under life-of-site
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agreements. We could have additional material financial obligations relating to final capping, closure and post-closure costs at other disposal facilities that we currently own or operate or that we may own or operate in the future. Our discount rate assumption for purposes of computing 2023 and 2022 “layers” for final capping, closure and post-closure obligations is based on our long-term credit adjusted risk free rate. Our discount rate was 5.50% for 2023 and ranged from 3.25% to 5.50% for 2022. Our long-term inflation rate assumption was 2.75% for 2023 and ranged from 2.25% to 2.75% for 2022. Significant reductions in our estimates of the remaining lives of our landfills or significant increases in our estimates of the landfill final capping, closure and post-closure maintenance costs could have a material adverse effect on our financial condition and results of operations. In the event that changes in an estimate for a closure and post-closure liability are associated with a significant change in facts and circumstances at a landfill or a non-operating section of a landfill, corresponding adjustments to recorded liabilities and Impairments and other operating items are made as soon as is practical. In 2023, we recorded an additional $159.5 million of charges to adjust the carrying value of a closure and post-closure liability at an area of a landfill site that has been deemed to reach final capacity. Additionally, changes in regulatory or legislative requirements could increase our costs related to our landfills, resulting in a material adverse effect on our financial condition and results of operations.
Disposal capacity . Our internal and third-party engineers perform surveys at least annually to estimate the remaining disposal capacity at our landfills. Our landfill depletion rates are based on the remaining disposal capacity, considering both permitted and probable expansion airspace, at the landfills that we own and at landfills that we operate, but do not own, under life-of-site agreements. Our landfill depletion rate is based on the term of the operating agreement at our operated landfill that has capitalized expenditures. Expansion airspace consists of additional disposal capacity being pursued through means of an expansion that has not yet been permitted. Expansion airspace that meets the following criteria is included in our estimate of total landfill airspace:
1)
whether the land where the expansion is being sought is contiguous to the current disposal site, and we either own the expansion property or have rights to it under an option, purchase, operating or other similar agreement;
2)
whether total development costs, final capping costs, and closure/post-closure costs have been determined;
3)
whether internal personnel have performed a financial analysis of the proposed expansion site and have determined that it has a positive financial and operational impact;
4)
whether internal personnel or external consultants are actively working to obtain the necessary approvals to obtain the landfill expansion permit; and
5)
whether we consider it probable that we will achieve the expansion (for a pursued expansion to be considered probable, there must be no significant known technical, legal, community, business or political restrictions or similar issues existing that we believe are more likely than not to impair the success of the expansion).
We may be unsuccessful in obtaining permits for expansion disposal capacity at our landfills. In such cases, we will charge the previously capitalized development costs to expense. This will adversely affect our operating results and cash flows and could result in greater landfill depletion expense being recognized on a prospective basis.
We periodically evaluate our landfill sites for potential impairment indicators. Our judgments regarding the existence of impairment indicators are based on regulatory factors, market conditions and operational performance of our landfills. Future events could cause us to conclude that impairment indicators exist and that our landfill carrying costs are impaired. Any resulting impairment loss could have a material adverse effect on our financial condition and results of operations.
Goodwill and indefinite-lived intangible assets testing . Goodwill and indefinite-lived intangible assets are tested for impairment on at least an annual basis in the fourth quarter of the year. In addition, we evaluate our reporting units for impairment if events or circumstances change between annual tests indicating a possible impairment. Examples of such events or circumstances include, but are not limited to, the following:
● a significant adverse change in legal factors or in the business climate;
● an adverse action or assessment by a regulator;
● a more likely than not expectation that a segment or a significant portion thereof will be sold;
● the testing for recoverability of a significant asset group within a segment; or
● current period or expected future operating cash flow losses.
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As part of our goodwill impairment test, we estimate the fair value of each of our reporting units using discounted cash flow analyses. Our reporting units consisted of our six geographic solid waste operating segments at December 31, 2023, 2022 and 2021. We compare the fair value of each reporting unit with the carrying value of the net assets assigned to the reporting unit. If the fair value of a reporting unit is greater than the carrying value of the net assets, including goodwill, assigned to the reporting unit, then no impairment results. If the fair value is less than its carrying value, an impairment charge is recorded for the amount by which the carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. In testing indefinite-lived intangible assets for impairment, we compare the estimated fair value of each indefinite-lived intangible asset to its carrying value. If the fair value of the indefinite-lived intangible asset is less than its carrying value, an impairment charge would be recorded to earnings in our Consolidated Statements of Net Income.
Discounted cash flow analyses require significant assumptions and estimates about the future operations of each reporting unit and the future discrete cash flows related to each indefinite-lived intangible asset. Significant judgments inherent in these analyses include the determination of appropriate discount rates, the amount and timing of expected future cash flows, growth rates and income tax rates. In assessing the reasonableness of our determined fair values of our reporting units, we evaluate our results against our current market capitalization. For our impairment testing of our operating segments for the year ended December 31, 2023, we determined that the indicated fair value of each of our reporting units exceeded their carrying value in excess of 200% and, therefore, we did not record an impairment charge. The detailed results of our 2023, 2022 and 2021 impairment tests are described in Note 3 of our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
Business Combination Accounting . We recognize, separately from goodwill, the identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values. We measure and recognize goodwill as of the acquisition date as the excess of: (a) the aggregate of the fair value of consideration transferred, the fair value of the noncontrolling interest in the acquiree (if any) and the acquisition date fair value of our previously held equity interest in the acquiree (if any), over (b) the fair value of assets acquired and liabilities assumed. At the acquisition date, we measure the fair values of all assets acquired and liabilities assumed that arise from contractual contingencies. We measure the fair values of all noncontractual contingencies if, as of the acquisition date, it is more likely than not that the contingency will give rise to an asset or liability.
General
Our revenues consist mainly of fees we charge customers for collection, transfer, recycling and disposal of non-hazardous solid waste and treatment, recovery and disposal of non-hazardous E&P waste.
Our solid waste collection business involves the collection of waste from residential, commercial and industrial customers for transport to transfer stations, or directly to landfills or recycling centers. Solid waste collection services include both recurring and temporary customer relationships. The services are performed under service agreements, municipal contracts or franchise agreements with governmental entities. Our existing franchise agreements and most of our existing municipal contracts give us the exclusive right to provide specified waste services in the specified territory during the contract term. These exclusive arrangements are awarded, at least initially, on a competitive bid basis and subsequently on a bid or negotiated basis. The standard customer service agreements generally range from one to five years in duration, although some exclusive franchises are for significantly longer periods. Residential collection services are also provided on a subscription basis with individual households.
The fees we charge for collection services are based primarily on the market, collection frequency and level of service, route density, type and volume or weight of the waste collected, type of equipment and containers furnished, the distance to the disposal or processing facility, the cost of disposal or processing, and prices charged by competitors for similar services.
The terms of our contracts sometimes limit our ability to pass on price increases. Long-term solid waste collection contracts often contain a formula, generally based on a published price index, that automatically adjusts fees to cover increases in some, but not all, operating costs, or that limit increases to less than 100% of the increase in the applicable price index.
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Revenue at landfills is primarily generated by charging tipping fees on a per ton and/or per yard basis to third parties based on the volume disposed and the nature of the waste.
Revenue at transfer stations is primarily generated by charging tipping or disposal fees on a per ton and/or per yard basis. The fees charged to third parties are based primarily on the market, type and volume or weight of the waste accepted, the distance to the disposal facility, the method of transportation used and the cost of disposal.
Many of our landfill and transfer station customers have entered into one to ten year disposal contracts with us, most of which provide for annual indexed price increases.
Our revenues from E&P waste services are primarily generated through the treatment, recovery and disposal of non-hazardous exploration and production waste from vertical and horizontal drilling, hydraulic fracturing, production and clean-up activity, as well as other services.
Our revenues from recycling services result from the sale of recycled commodities, which are generated by offering residential, commercial, industrial and municipal customers recycling services for 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 collected recyclable materials to third parties for processing before resale. In some instances, we utilize a third party to market recycled materials. In certain instances, we issue recycling rebates to municipal or commercial customers, which can be based on the price we receive upon the sale of recycled commodities, a fixed contractual rate or other measures. We also receive rebates when we dispose of recycled commodities at third-party facilities.
Other revenues consist primarily of the sale of methane gas and renewable energy credits generated from our MSW landfills and revenues from intermodal services. Intermodal revenue is primarily generated through providing intermodal services for the rail haul movement of cargo and solid waste containers in the Pacific Northwest through a network of intermodal facilities. The fees received for intermodal services are based on negotiated rates and vary depending on volume commitments by the shipper and destination.
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 (in thousands of U.S. dollars).
Years Ended December 31,
2023
2022
2021
Commercial
$
2,476,891
$
2,176,295
$
1,813,426
Residential
2,125,068
1,891,108
1,673,819
Industrial and construction roll off
1,333,020
1,183,624
954,181
Total collection
5,934,979
5,251,027
4,441,426
Landfill
1,483,397
1,328,942
1,233,499
Transfer
1,198,385
1,026,050
859,113
Recycling
147,039
204,876
205,076
E&P
232,211
210,562
138,707
Intermodal and other
171,721
188,471
152,194
Intercompany
(1,145,781)
(998,069)
(878,654)
Total
$
8,021,951
$
7,211,859
$
6,151,361
Cost of operations includes labor and benefits, tipping fees paid to third-party disposal facilities, vehicle and equipment maintenance, workers’ compensation, vehicle and equipment insurance, insurance and employee group health claims expense, third-party transportation expense, fuel, the cost of materials we purchase for recycling, district and state taxes and host community fees and royalties. Our significant costs of operations in 2023 were labor, employee benefits, third-party disposal and transportation, vehicle, equipment and property maintenance, taxes and fees, risk management and fuel. We use a number of programs to reduce overall cost of operations, including increasing the use of automated routes to reduce labor and workers’ compensation exposure, utilizing comprehensive maintenance and health and safety
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programs, and increasing the use of transfer stations to further enhance internalization rates. We carry insurance for automobile liability, general liability, employer’s liability, environmental liability, cyber liability, employment practices liability and directors’ and officers’ liability as well as for employee group health claims, property and workers’ compensation. If we experience insurance claims or costs above or below our historically evaluated levels, our estimates could be materially affected.
Selling, general and administrative, or SG&A, expense includes management, sales force, clerical and administrative employee compensation and benefits, legal, accounting and other professional services, acquisition expenses, bad debt expense and lease cost for our administrative offices.
Depreciation expense includes depreciation of equipment and fixed assets over their estimated useful lives using the straight-line method. Depletion expense includes depletion of landfill site costs and total future development costs as remaining airspace of the landfill is consumed. Remaining airspace at our landfills includes both permitted and probable expansion airspace. Amortization expense includes the amortization of finite-lived intangible assets, consisting primarily of long-term franchise agreements and contracts, customer lists, permits and other agreements. We use an accelerated or straight-line basis for amortization, depending on the attributes of the related intangibles. Goodwill and indefinite-lived intangible assets, consisting primarily of certain perpetual rights to provide solid waste collection and transportation services in specified territories, are not amortized.
We capitalize some third-party expenditures related to development projects, such as legal and engineering. We expense all third-party and indirect acquisition costs, including third-party legal and engineering expenses, executive and corporate overhead, public relations and other corporate services, as we incur them. We charge against net income any unamortized capitalized expenditures and advances (net of any portion that we believe we may recover, through sale or otherwise) that may become impaired, such as those that relate to any operation that is permanently shut down and any landfill development project that we believe will not be completed. We routinely evaluate all capitalized costs, and expense those related to projects that we believe are not likely to succeed. For example, if we are unsuccessful in our attempts to obtain or defend permits that we are seeking or have been awarded to operate or expand a landfill, we will no longer generate anticipated income from the landfill and we will be required to expense in a future period up to the carrying value of the landfill or expansion project, less the recoverable value of the property and other amounts recovered.
Presentation of Results of Operations, Segment Reporting, and Liquidity and Capital Resources
The following discussion and analysis of our Results of Operations, Segment Reporting, and Liquidity and Capital Resources includes a comparison for the year ended December 31, 2023 to the year ended December 31, 2022. A similar discussion and analysis that compares the year ended December 31, 2022 to the year ended December 31, 2021 can be found in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Exhibit 99.2 of our Form 8-K filed on August 3, 2023.
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Results of Operations
The following table sets forth items in our Consolidated Statements of Net Income in thousands of U.S. dollars and as a percentage of revenues for the periods indicated:
Years Ended December 31,
2023
% of Revenues
2022
% of Revenues
Revenues
$
8,021,951
100.0
%
$
7,211,859
100.0
%
Cost of operations
4,744,513
59.1
4,336,012
60.1
Selling, general and administrative
799,119
10.0
696,467
9.7
Depreciation
845,638
10.5
763,285
10.6
Amortization of intangibles
157,573
2.0
155,675
2.2
Impairments and other operating items
238,796
3.0
18,230
0.2
Operating income
1,236,312
15.4
1,242,190
17.2
Interest expense
(274,642)
(3.4)
(202,331)
(2.8)
Interest income
9,350
0.1
5,950
0.1
Other income, net
12,481
0.2
3,154
0.0
Income tax provision
(220,675)
(2.8)
(212,962)
(2.9)
Net income
762,826
9.5
836,001
11.6
Net income attributable to noncontrolling interests
(26)
(0.0)
(339)
(0.0)
Net income attributable to Waste Connections
$
762,800
9.5
%
$
835,662
11.6
%
Years Ended December 31, 2023 and 2022
Revenues . Total revenues increased $810.1 million, or 11.2%, to $8.022 billion for the year ended December 31, 2023, from $7.212 billion for the year ended December 31, 2022.
Acquisitions closed during, or subsequent to, the year ended December 31, 2022, increased revenues by $410.9 million for the year ended December 31, 2023.
Operations that were divested in 2023 and the full year impact of operations that were divested in 2022, decreased revenues by $3.6 million for the year ended December 31, 2023.
During the year ended December 31, 2023, the net increase in prices charged to our customers at our existing operations was $616.6 million, consisting of $651.1 million of core price increases and decreases in surcharges of $34.5 million.
During the year ended December 31, 2023, we recognized volume losses totaling $137.0 million, due to lower collection and post collection volumes primarily in our Eastern, Canada and Southern segments.
E&P waste revenues at facilities owned during the years ended December 31, 2023 and 2022 increased $17.1 million, due to increases in overall demand for our E&P waste services as a result of increases in drilling and production activity levels in certain basins.
Revenues from sales of recyclable commodities at facilities owned during the years ended December 31, 2023 and 2022 decreased $51.3 million. The decrease is primarily attributable to lower average commodity pricing for old corrugated cardboard, plastics and other paper products as compared to the prior period. Commodity pricing was unfavorable for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. Commodity pricing for the three months ended December 31, 2023 was favorable as compared to the three months ended December 31, 2022.
A decrease in the average Canadian dollar to U.S. dollar currency exchange rate resulted in a decrease in revenues of $33.3 million for the year ended December 31, 2023. The average Canadian dollar to U.S. dollar exchange rates on our Canadian revenues were 0.7410 and 0.7682 for the years ended December 31, 2023 and 2022, respectively.
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Other revenues decreased $9.3 million during the year ended December 31, 2023, due primarily to a $9.4 million decrease in intermodal revenues, as well as a $2.3 million decrease in landfill gas revenues on lower values for renewable energy credits net of higher landfill gas volumes, partially offset by a $2.4 million increase in other non-core revenue sources.
Cost of Operations . Total cost of operations increased $408.5 million, or 9.4%, to $4.745 billion for the year ended December 31, 2023, from $4.336 billion for the year ended December 31, 2022. The increase was primarily the result of $241.0 million of additional operating costs from acquisitions closed during, or subsequent to, the year ended December 31, 2022, and an increase in operating costs at our existing operations of $187.1 million, assuming foreign currency parity, partially offset by a decrease in operating costs of $17.7 million resulting from a lower average foreign currency exchange rate in effect during the current period and a decrease of $1.9 million from operations divested during, or subsequent to, the year ended December 31, 2022.
The increase in operating costs of $187.1 million, assuming foreign currency parity, at our existing operations for the year ended December 31, 2023, consisted of higher labor and recurring incentive compensation expenses of $91.3 million, an increase in risk management expenses of $44.6 million due to higher claim and premium costs, an increase in truck, container, equipment and facility maintenance and repair expenses of $34.2 million, an increase in other facility operating costs of $15.3 million, an increase in taxes on revenues of $14.9 million as the result of increased revenues, an increase in landfill maintenance and leachate costs of $11.7 million and a net increase of other expenses of $7.3 million, partially offset by a decrease in third-party trucking and transportation expenses of $16.3 million due to lower transfer station and intermodal volumes, a decrease in supplemental compensation to non-management personnel of $9.0 million associated with the impact of the COVID-19 pandemic that occurred in the prior year period and a decrease in fuel expense of $6.9 million due to lower diesel and natural gas prices.
Cost of operations as a percentage of revenues decreased 1.0 percentage points to 59.1% for the year ended December 31, 2023, from 60.1% for the year ended December 31, 2022. The decrease as a percentage of revenues was primarily driven by the impact of price-led revenue growth, a 0.6 percentage point decrease in third-party trucking and transportation expenses, a 0.5 percentage point decrease in disposal costs and a 0.4 percentage point decrease in fuel costs due to lower diesel and natural gas prices, partially offset by a 0.5 percentage point increase in risk management expenses.
SG&A . SG&A expenses increased $102.6 million, or 14.7%, to $799.1 million for the year ended December 31, 2023, from $696.5 million for the year ended December 31, 2022. The increase was comprised of an increase of $76.6 million, assuming foreign currency parity, at our existing operations and $28.9 million from acquisitions closed during, or subsequent to, the year ended December 31, 2022, partially offset by a decrease of $2.9 million resulting from a lower average foreign currency exchange rate in effect during the current period.
The increase in SG&A expenses at our existing operations of $76.6 million, assuming foreign currency parity, for the year ended December 31, 2023 was comprised of an increase in administrative payroll expenses of $22.8 million, an increase in incentive compensation expense of $16.5 million, an increase in executive separation costs of $16.1 million, an increase in deferred compensation expenses of $9.9 million as a result of increases in the market value of investments to which employee deferred compensation liability balances are tracked, an increase in equity-based compensation expenses of $8.9 million associated with our annual recurring grants of restricted share units to our personnel, an increase in professional fees of $5.4 million, an increase in software license fees of $5.2 million, a collective increase in travel, meetings and training expenses of $4.5 million and $1.6 million of other net expense increases, partially offset by a decrease in direct acquisition expenses of $14.3 million due to a decrease in acquisition activity in the current period.
SG&A expenses as a percentage of revenues increased 0.3 percentage points to 10.0% for the year ended December 31, 2023, from 9.7% for the year ended December 31, 2022. The increase as a percentage of revenues was primarily attributable to a 0.2 percentage point increase in executive separation costs, a 0.2 percentage point increase in incentive based compensation costs and a 0.1 percentage point increase in deferred compensation expense, partially offset by a 0.2 percentage point decrease in direct acquisition expenses due to a decrease in acquisition activity.
Depreciation . Depreciation expense increased $82.3 million, or 10.8%, to $845.6 million for the year ended December 31, 2023, from $763.3 million for the year ended December 31, 2022. The increase was comprised of an increase in
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depreciation and depletion expense of $56.7 million from acquisitions closed during, or subsequent to, the year ended December 31, 2022, an increase in depreciation expense of $24.4 million from the impact of additions to our fleet and equipment purchased to support our existing operations and $4.5 million of other net increases, partially offset by a decrease of $3.3 million resulting from a lower average foreign currency exchange rate in effect during the current period.
Depreciation expense as a percentage of revenues decreased 0.1 percentage points to 10.5% for the year ended December 31, 2023, from 10.6% for the year ended December 31, 2022. The decrease as a percentage of revenues was primarily attributable to the impact of price driven revenue increases in our solid waste services, partially offset by acquisitions closed during, or subsequent to, the year ended December 31, 2022 having higher depreciation expense as a percentage of revenue than our company average.
Amortization of Intangibles . Amortization of intangibles expense increased $1.9 million, or 1.2%, to $157.6 million for the year ended December 31, 2023, from $155.7 million for the year ended December 31, 2022. The increase was the result of $21.6 million from intangible assets acquired in acquisitions closed during, or subsequent to, the year ended December 31, 2022, partially offset by a decrease of $18.8 million from certain intangible assets becoming fully amortized subsequent to December 31, 2022, and a decrease of $0.9 million resulting from a lower average foreign currency exchange rate in effect during the current period.
Amortization of intangibles expense as a percentage of revenues decreased 0.2 percentage points to 2.0% for the year ended December 31, 2023, from 2.2% for the year ended December 31, 2022. The decrease as a percentage of revenues was attributable to the impact of price-driven revenue increases in our solid waste services.
Impairments and Other Operating Items . Impairments and other operating items increased $220.6 million, to net losses totaling $238.8 million for the year ended December 31, 2023, from net losses totaling $18.2 million for the year ended December 31, 2022.
The net losses of $238.8 million recorded during the year ended December 31, 2023 consisted of $159.5 million of charges to adjust the carrying value of a closure and post-closure liability related to a non-active area of a landfill site, $31.3 million of charges to adjust the carrying value of contingent consideration liabilities associated with acquisitions closed in prior periods, $25.0 million of charges to adjust the carrying value of certain assets impaired as a result of an adjustment to fair market value, $17.3 million of charges to write off the carrying cost of certain contracts that were not, or are not expected to be, renewed prior to the original estimated termination date, $13.2 million of net losses on property and equipment disposal and uninsured damages to an operating facility and $10.6 million lawsuit judgment charges, partially offset by an $8.7 million gain related to insured recoveries for damages to an operating facility, $7.8 million of gains on the disposal of certain non-strategic operating locations and $1.6 million other net adjustments.
The net losses of $18.2 million recorded during the year ended December 31, 2022 consisted of $10.8 million of charges to write off the carrying cost of certain contracts that were not, or are not expected to be, renewed prior to the original estimated termination date and an $8.4 million lawsuit judgment accrual, partially offset by $1.0 million of other net gains.
Operating Income . Operating income decreased $5.9 million, or 0.5%, to $1.236 billion for the year ended December 31, 2023, from $1.242 billion for the year ended December 31, 2022.
The decrease in our operating income for the year ended December 31, 2023 was due primarily to an increase in charges to adjust the carrying value of a closure and post-closure liability related to a non-active area of a landfill site, an increase in charges related to adjustments for contingent consideration liabilities and impairments, lower recyclable commodity pricing and an increase in executive separation costs, partially offset by price increases for our solid waste services, operating income generated from acquisitions closed during, or subsequent to, the year ended December 31, 2022 and an increase in earnings at our E&P waste operations.
Operating income as a percentage of revenues decreased 1.8 percentage points to 15.4% for the year ended December 31, 2023, from 17.2% for the year ended December 31, 2022. The decrease as a percentage of revenues was comprised of a 2.8 percentage point increase in impairments and other operating items and a 0.3 percentage point increase in SG&A
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expenses, partially offset by a 1.0 percentage point decrease in our costs of operations, a 0.2 percentage point decrease in amortization expense and a 0.1 percentage point decrease in depreciation expense.
Interest Expense . Interest expense increased $72.3 million, or 35.7%, to $274.6 million for the year ended December 31, 2023, from $202.3 million for the year ended December 31, 2022. The increase was primarily attributable to an increase of $30.7 million due to a net increase in the average borrowings outstanding under our Credit Agreement and Term Loan Agreement, an increase of $22.7 million from the issuance of $1.250 billion of senior unsecured notes during, or subsequent to, the year ended December 31, 2022, an increase of $15.5 million from higher interest rates on borrowings outstanding under our Credit Agreement and Term Loan Agreement and $3.4 million of other net expense increases.
Interest Income . Interest income increased $3.4 million to $9.4 million for the year ended December 31, 2023, from $6.0 million for the year ended December 31, 2022. The increase was primarily attributable to higher average investment rates in the current period.
Other Income, Net . Other income, net increased $9.3 million, to $12.5 million for the year ended December 31, 2023, from $3.2 million for the year ended December 31, 2022.
Other income of $12.5 million recorded during the year ended December 31, 2023 consisted of $4.3 million from an increase in the value of investments purchased to fund our employee deferred compensation obligations, a $4.2 million reduction to certain accrued liabilities acquired in an acquisition closed in a prior year period, $3.6 million in other net income sources and $0.4 million from an increase in the average foreign currency exchange rate in effect during the comparable reporting period reducing the U.S. dollar consideration required to settle international liabilities.
Other income of $3.2 million recorded during the year ended December 31, 2022 consisted of income from transactions primarily as a result of the impact from changes in foreign currency exchange rates of $7.0 million related to the decrease in the Canadian dollar to the U.S. dollar exchange rate in the period, and $1.4 million of other income, partially offset by $5.2 million from a decline in the value of investments purchased to fund our employee deferred compensation obligations.
Income Tax Provision . Income taxes increased $7.7 million, to $220.7 million for the year ended December 31, 2023, from $213.0 million for the year ended December 31, 2022. Our effective tax rate for the year ended December 31, 2023 was 22.4%. Our effective tax rate for the year ended December 31, 2022 was 20.3%.
The income tax provision for the year ended December 31, 2023 included a benefit of $3.5 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 year ended December 31, 2022 included a benefit of $2.7 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.
Our effective tax rate is dependent upon the proportion of pre-tax income among the jurisdictions where we do business. As such, our effective tax rate will be subject to some variability depending upon the proportional contribution of pre-tax income across jurisdictions in any period.
Segment Reporting
Effective April 1, 2023, we modified our organizational structure under new regional operating segments as the result of continued growth in our business. We now report revenue and segment EBITDA based on the following six geographic solid waste operating segments: Western, Southern, Central, Eastern, Canada and MidSouth. A small number of operating locations have been reallocated from the Western segment to the Central segment, the previous Eastern segment has been bifurcated into two smaller geographies now referred to as the Eastern segment and MidSouth segment, and a small number of operating locations have been reallocated from the Southern segment to the MidSouth segment. Our six geographic solid waste operating segments comprise our reportable segments. Each operating segment is responsible for managing
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several vertically integrated operations, which are comprised of districts. While certain corporate or regional overhead expense allocations may affect comparability on a period-over-period basis, the segment information presented herein reflects the realignment of these regions.
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, other income (expense) and loss on early extinguishment of debt. 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.
Summarized financial information for our reportable segments are shown in the following tables in thousands of U.S. dollars and as a percentage of total segment revenue for the periods indicated:
Years Ended
EBITDA
Depreciation and
December 31, 2023
Revenue
EBITDA
Margin
Amortization
Western
$
1,669,289
$
483,205
28.9
%
$
199,426
Southern
1,642,274
518,002
31.5
%
179,948
Central
1,440,157
512,283
35.6
%
169,370
Eastern
1,380,233
353,061
25.6
%
207,909
Canada
995,842
390,664
39.2
%
121,326
MidSouth
894,156
246,136
27.5
%
117,397
Corporate (a)
—
(25,032)
—
7,835
$
8,021,951
$
2,478,319
30.9
%
$
1,003,211
Years Ended
EBITDA
Depreciation and
December 31, 2022
Revenue
EBITDA
Margin
Amortization
Western
$
1,428,031
$
424,935
29.8
%
$
155,882
Southern
1,494,439
466,519
31.2
%
175,614
Central
1,288,348
446,315
34.6
%
156,895
Eastern
1,233,695
281,522
22.8
%
190,480
Canada
940,624
349,403
37.1
%
118,388
MidSouth
826,722
235,705
28.5
%
112,866
Corporate (a)
—
(25,019)
—
8,835
$
7,211,859
$
2,179,380
30.2
%
$
918,960
(a)
The majority of Corporate expenses are allocated to the six 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 six 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 17 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.
Significant changes in revenue, EBITDA and depreciation, depletion and amortization for our reportable segments for the year ended December 31, 2023, compared to the year ended December 31, 2022, are discussed below.
Western
Revenue increased $241.3 million to $1.669 billion for 2023, from $1.428 billion for 2022, due to contributions from acquisitions, price increases and increases in residential and commercial collection volumes, partially offset by decreased
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roll off and post-collection volumes, lower intermodal revenue and a decrease in the price of recyclable commodities as compared to the prior year period.
EBITDA increased $58.3 million to $483.2 million, or a 28.9% EBITDA margin for 2023, from $424.9 million, or a 29.8% EBITDA margin for 2022. The decrease in our EBITDA margin was due to an increase in risk management expenses due to higher claim and premium costs, an increase in allocated corporate overhead, higher labor costs due primarily to wage increases and increases in other operating costs, partially offset by lower trucking costs.
Depreciation, depletion and amortization expense increased $43.5 million, to $199.4 million for 2023, from $155.9 million for 2022, due to assets acquired in acquisitions and additions to our fleet and equipment.
Southern
Revenue increased $147.8 million to $1.642 billion for 2023, from $1.494 billion for 2022, due to solid waste price increases, contributions from acquisitions, increased E&P waste revenues attributable to increases in the demand for our E&P waste services and increased landfill volumes, partially offset by lower residential collection volumes due to the purposeful non-renewal of collection contracts during the current and prior year periods and other decreases in residential volumes, lower transfer station volumes and a decrease in recyclable commodity prices as compared to the prior year period.
EBITDA increased $51.5 million to $518.0 million, or a 31.5% EBITDA margin for 2023, from $466.5 million, or a 31.2% EBITDA margin for 2022. The increase in our EBITDA margin was due to price-led increases in solid waste revenue, the impact of acquisitions having higher EBITDA margins than our segment average, lower trucking costs related to lower transfer station volumes, the purposeful non-renewal of certain residential contracts and increased earnings at our E&P waste operations, partially offset by an increase in risk management expenses due to higher claim and premium costs, higher labor costs due to wage increases, the operational impact of temporary volume limitations at a landfill that occurred in the three months ended December 31, 2023 and increased leachate expense.
Depreciation, depletion and amortization expense increased $4.3 million, to $179.9 million for 2023, from $175.6 million for 2022, due to assets acquired in acquisitions, partially offset by a reduction in amortization expense associated with the loss of certain residential service contracts.
Central
Revenue increased $151.8 million to $1.440 billion for 2023, from $1.288 billion for 2022, due to price increases and contributions from acquisitions, partially offset by lower residential revenues and a decrease in the value of recyclable commodities compared to the prior year period.
EBITDA increased $66.0 million to $512.3 million, or a 35.6% EBITDA margin for 2023, from $446.3 million, or a 34.6% EBITDA margin for 2022. The increase in our EBITDA margin was due to the benefits from price-led increases in revenue and lower benefits costs, partially offset by an increase in risk management expenses due to higher claim and premium costs, a decrease in the value of recyclable commodities as compared to the prior year periods and an increase in allocated corporate overhead.
Depreciation, depletion and amortization expense increased $12.5 million, to $169.4 million for 2023, from $156.9 million for 2022, due to assets acquired in acquisitions and additions to our fleet and equipment as compared to the prior year periods.
Eastern
Revenue increased $146.5 million to $1.380 billion for 2023, from $1.234 billion for 2022, due to price increases and contributions from acquisitions, partially offset by decreased post-collection volumes, decreased residential and commercial service revenues, lower roll off volumes and a decrease in the value of recyclable commodities compared to the prior year period.
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EBITDA increased $71.6 million to $353.1 million, or a 25.6% EBITDA margin for 2023, from $281.5 million, or a 22.8% EBITDA margin for 2022. The increase in our EBITDA margin was due primarily to price-led increases in revenue, lower benefits costs, a decrease in trucking and disposal expenses as a result of purposefully lost volumes, lower diesel costs due to a decline in average fuel prices and a decrease in truck, container, equipment and facility maintenance and repair expenses, partially offset by higher labor costs, the impact of acquisitions having lower EBITDA margins than our segment average, an increase in risk management expenses due to higher claim and premium costs and lower recycle commodity revenues, net of lower rebates, driven by lower average commodity pricing.
Depreciation, depletion and amortization expense increased $17.4 million, to $207.9 million for 2023, from $190.5 million for 2022, due to assets acquired in acquisitions and additions to our fleet and equipment, partially offset by a reduction in amortization expense associated with the loss of certain residential service contracts.
Canada
Revenue increased $55.2 million to $995.8 million for 2023, from $940.6 million for 2022, due to price increases, contributions from acquisitions, and an increase in landfill volumes, partially offset by a decrease in the average foreign currency exchange rate in effect during the comparable reporting periods, a decrease in residential collection volumes and lower prices for recyclable commodities as compared to the prior year period.
EBITDA increased $41.3 million to $390.7 million, or a 39.2% EBITDA margin for 2023, from $349.4 million, or a 37.1% EBITDA margin for 2022. The increase in our EBITDA margin was due to price-led increases in revenue, decreases in diesel and natural gas costs due to a decline in average fuel prices, lower labor expenses and a decrease in trucking costs, partially offset by lower recycle commodity revenues, net of lower rebates, driven by lower average commodity pricing, an increase in risk management expenses due to higher claim and premium costs, an increase in truck, container, equipment and facility maintenance and repair expenses and an increase in allocated corporate expense as compared to the prior year period.
Depreciation, depletion and amortization expense increased $2.9 million, to $121.3 million for 2023, from $118.4 million for 2022, due to assets acquired in acquisitions, partially offset by a decrease in the average foreign currency exchange rate in effect during the comparable reporting periods.
MidSouth
Revenue increased $67.5 million to $894.2 million for 2023, from $826.7 million for 2022, due to price increases partially offset by a decrease in the value of recyclable commodities compared to the prior year periods.
EBITDA increased $10.4 million to $246.1 million, or a 27.5% EBITDA margin for 2023, from $235.7 million, or a 28.5% EBITDA margin for 2022. The decrease in our EBITDA margin was due primarily to an increase in risk management expenses due to higher claim and premium costs, an increase in allocated corporate overhead and benefits expense, lower recycle commodity revenues and an increase in recycle processing costs driven by lower average commodity pricing, partially offset by price-led revenue growth, lower disposal costs due to increased internalization in certain markets and decreases in diesel and natural gas costs due to a decline in average fuel prices.
Depreciation, depletion and amortization expense increased $4.5 million, to $117.4 million for 2023, from $112.9 million for 2022, due to additions to our fleet and equipment, higher depletion expense due to higher landfill development costs increasing our per ton landfill depletion rates and increased landfill volumes.
Corporate
EBITDA remained flat as compared to 2022 with a loss of $25.0 million for both periods. As compared to prior year, expense increases included higher incentive compensation costs, an increase in executive separation expenses, increased deferred compensation expenses, increased equity-based compensation expense associated with our annual recurring grants of restricted share units to our personnel, increased administrative payroll costs primarily driven by wage increases and additional headcount to support continued growth, higher professional fees driven by legal costs, increased costs due
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to increased travel and meetings and increased expenses associated with information systems and applications, partially offset by increased allocation of costs to our operating segments driven by overall higher corporate expenses, lower direct acquisition expenses associated with a decrease in acquisition activity in the current year period, and lower compensation to non-management personnel associated with the impact of the COVID-19 pandemic that occurred in the first three months of 2022 that did not reoccur in the current year period.
Liquidity and Capital Resources
The following table sets forth certain cash flow information for the years ended December 31, 2023 and 2022 (in thousands of U.S. dollars):
2023
2022
Net cash provided by operating activities
$
2,126,817
$
2,022,492
Net cash used in investing activities
(1,581,079)
(3,087,171)
Net cash provided by (used in) financing activities
(544,405)
1,028,463
Effect of exchange rate changes on cash, cash equivalents and restricted cash
1,341
(2,035)
Net increase (decrease) in cash, cash equivalents and restricted cash
2,674
(38,251)
Cash, cash equivalents and restricted cash at beginning of year
181,364
219,615
Cash, cash equivalents and restricted cash at end of year
$
184,038
$
181,364
Operating Activities Cash Flows
Net cash provided by operating activities increased $104.3 million to $2.127 billion for the year ended December 31, 2023, from net cash provided by operating activities of $2.022 billion for the year ended December 31, 2022. The significant components of the increase included the following:
1) Increase in earnings — Our increase in net cash provided by operating activities was favorably impacted by $241.3 million from an increase in net income, excluding depreciation, amortization of intangibles, share-based compensation, adjustments to closure and post-closure liabilities, 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 during, or subsequent to, the year ended December 31, 2022, a decrease in compensation to non-management personnel associated with the impact of the COVID-19 pandemic that occurred in the year ended December 31, 2022 that did not reoccur in the current period and an increase in earnings at our E&P waste operations.
2) Accounts receivable — Our increase in net cash provided by operating activities was favorably impacted by $79.9 million from accounts receivable as changes in accounts receivable resulted in a decrease to operating cash flows of $20.6 million for the year ended December 31, 2023, compared to a decrease to operating cash flows of $100.5 million for the year ended December 31, 2022. The decreases for the years ended December 31, 2023 and 2022 were due to increases in revenue, which remained as outstanding receivables at the end of the period.
3) Prepaid expenses — Our increase in net cash provided by operating activities was favorably impacted by $11.0 million from prepaid expenses as changes in prepaid expenses resulted in an increase to operating cash flows of $10.3 million for the year ended December 31, 2023, compared to a decrease to operating cash flows of $0.7 million for the year ended December 31, 2022. The increase for the year ended December 31, 2023 was due primarily to decreased prepaid income tax payments, partially offset by a net decrease in prepaids related to insurance claim and premium payments. The decrease for the year ended December 31, 2022 was due primarily to increases from payments of annual insurance premiums, payments of annual information system licenses and higher parts and fuel inventory, partially offset by a decrease in prepaid income tax payments.
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4) Accounts payable and accrued liabilities — Our increase in net cash provided by operating activities was unfavorably impacted by $110.7 million from accounts payable and accrued liabilities as changes in accounts payable and accrued liabilities resulted in an increase to operating cash flows of $54.1 million for the year ended December 31, 2023, compared to an increase to operating cash flows of $164.8 million for the year ended December 31, 2022. The increase for the year ended December 31, 2023 was due primarily to an increase in accrued insurance costs, an increase in accrued compensation costs, an increase in accrued interest due to the timing of interest payments, an increase in property taxes attributable to payment timing and an increase in outstanding obligations to vendors, partially offset by a decrease from the timing of tax payments. The increase for the year ended December 31, 2022 was due primarily to increases in operating expenses during the period which remained as outstanding obligations at December 31, 2022, the timing of processing year-end payments to vendors for capital expenditures and increased accrued interest due to the timing of interest payments for our senior unsecured notes issued subsequent to December 31, 2021, partially offset by the payment of deferred payroll taxes.
5) Deferred income taxes — Our increase in net cash provided by operating activities was unfavorably impacted by $87.2 million from deferred income taxes as changes in deferred income taxes resulted in an increase to operating cash flows of $6.3 million for the year ended December 31, 2023, compared to an increase to operating cash flows of $93.5 million for the year ended December 31, 2022. The increase for the year ended December 31, 2023 was primarily due to accelerated tax depreciation from capital expenditures. The increase for the year ended December 31, 2022 was primarily attributable to tax benefits resulting from the divestiture of certain non-strategic E&P disposal operating locations.
6) Deferred revenue — Our increase in net cash provided by operating activities was unfavorably impacted by $15.7 million from deferred revenue as changes in deferred revenue resulted in an increase to operating cash flows of $26.5 million for the year ended December 31, 2023, compared to an increase to operating cash flows of $42.2 million for the year ended December 31, 2022. For both comparative periods, deferred revenue increased due to price increases on our advanced billed residential and commercial collection services.
7) Closure and post closure expenditures – Our increase in net cash provided by operating activities was unfavorably impacted by $20.6 million from an increase in payments for closure and post closure activities as changes in expenditures for these items resulted in a decrease to operating cash flows of $39.4 million for the year ended December 31, 2023, compared to a decrease in operating cash flows of $18.9 million for the year ended December 31, 2022. The increase in expenditures as compared to the prior year period was due primarily to additional costs incurred in relation to an Elevated Temperature Landfill event at a landfill.
At December 31, 2023, we had a working capital deficit of $546.1 million, including cash and equivalents of $78.4 million. Our working capital deficit increased $151.1 million from a working capital deficit of $395.0 million at December 31, 2022 including cash and equivalents of $78.6 million, due primarily to an increase in the short-term portion of closure and post closure accruals, an increase in contingent consideration liabilities, an increase in deferred revenues, an increase in accrued insurance costs and a decrease in prepaid income tax, partially offset by an increase in accounts receivables as a result of increases in revenue and decreases in accounts payable and accrued liabilities driven by the timing of payments for obligations to vendors. 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 $1.506 billion to $1.581 billion for the year ended December 31, 2023, from $3.087 billion for the year ended December 31, 2022. The significant components of the decrease included the following:
1) A decrease in cash paid for acquisitions of $1.530 billion; and
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2) A decrease in capital expenditures at operations owned in the comparable periods of $15.8 million due to decreases in land and facility expenditures and landfill site costs, partially offset by increased truck and equipment purchases; less
3) An increase in capital expenditures at operations acquired during the comparative periods of $37.1 million due to increased expenditures for landfill site costs, trucks, containers and equipment.
Financing Activities Cash Flows
Net cash used in financing activities increased $1.573 billion to $544.4 million for the year ended December 31, 2023, from net cash provided by financing activities of $1.028 billion for the year ended December 31, 2022. The significant components of the increase included the following:
1) An increase from the net change in long-term borrowings of $1.975 billion in which long-term borrowings decreased $230.6 million during the year ended December 31, 2023 and increased $1.745 billion during the year ended December 31, 2022;
2) An increase from higher cash dividends paid of $27.6 million due primarily to an increase in our average quarterly dividend rate for the year ended December 31, 2023 to $0.263 per share, from $0.236 per share for the year ended December 31, 2022; and
3) An increase in tax withholdings related to net share settlements of equity-based compensation of $12.7 million due to an increase in the value of equity-based compensation awards vesting; less
4) A decrease from lower payments to repurchase our common shares of $425.0 million that occurred in the year ended December 31, 2022; and
5) A decrease from lower payments related to the issuance of debt of $13.3 million that occurred during the year ended December 31, 2022.
On July 25, 2023, 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 12,881,534 of our common shares during the period of August 10, 2023 to August 9, 2024 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, any share buyback taxes applicable and overall market conditions. All common shares purchased under the NCIB will be immediately cancelled following their repurchase. Information regarding our NCIB plan can be found under the section Normal Course Issuer Bid in Note 14, “Shareholders’ Equity,” of our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K and is incorporated herein by reference.
The Board of Directors of the Company authorized the initiation of a quarterly cash dividend in October 2010 and has increased it on an annual basis. In October 2023, we announced that our Board of Directors increased our regular quarterly cash dividend by $0.03, from $0.255 to $0.285 per share. Cash dividends of $270.6 million and $243.0 million were paid during the years ended December 31, 2023 and 2022, respectively. We cannot assure as to the amounts or timing of future dividends.
We made $934.0 million in capital expenditures for property and equipment during the year ended December 31, 2023, and we expect to make total capital expenditures for property and equipment of $1.15 billion in 2024, including approximately $150 million associated with renewable natural gas facilities. We intend to fund our planned 2024 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
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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.
We have a revolving credit and term loan agreement (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Credit Agreement”) with Bank of America, N.A., acting through its Canada Branch, as the global agent, the swing line lender and a letter of credit issuer, Bank of America, N.A., as the U.S. Agent and a letter of credit issuer, the other lenders named therein (the “Lenders”) and any other financial institutions from time to time party thereto. There are no subsidiary guarantors under the Credit Agreement. The Credit Agreement has a scheduled maturity date of July 30, 2026, which may be extended further upon agreement by Lenders holding at least 50% of the commitments and credit extensions outstanding, with respect to their respective commitments and credit extensions outstanding. Any Lender that does not agree to an extension of the maturity date shall not be so extended with respect to their commitments and credit extensions.
As of December 31, 2023, $650.0 million under the term loan and $453.2 million under the revolving credit facility were outstanding under the Credit Agreement, exclusive of outstanding standby letters of credit of $39.7 million. We also had $102.2 million of letters of credit issued and outstanding at December 31, 2023 under a facility other than the Credit Agreement. We did not have any amounts outstanding under our master note purchase agreements.
Pursuant to the terms and conditions of a Master Note Purchase Agreement dated as of June 1, 2016 (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “2016 NPA”) between us and certain accredited institutional investors, we issued senior unsecured notes (the “2016 Private Placement Notes”) consisting of (i) $150.0 million of senior notes due June 1, 2021 (the “June 2021 Private Placement Notes”), (ii) $200.0 million of senior notes due June 1, 2023, (iii) $150.0 million of senior notes due April 20, 2024, (iv) $400.0 million of senior notes due June 1, 2026 and (v) $250.0 million of senior notes due April 20, 2027.
Pursuant to the terms and conditions of a Master Note Purchase Agreement dated as of July 15, 2008 (as amended, restated, amended and restated, assumed, supplemented or otherwise modified from time to time, the “2008 NPA”) between us and certain accredited institutional investors, we issued senior unsecured notes (the “2008 Private Placement Notes” and together with the 2016 Private Placement Notes, the “Private Placement Notes”) consisting of (i) $100.0 million of senior notes due April 1, 2021 (the “April 2021 Private Placement Notes” and together with the June 2021 Private Placement Notes, the “2021 Private Placement Notes”), (ii) $125.0 million of senior notes due August 20, 2022 and (iii) $375.0 million of senior notes due August 20, 2025.
We repaid at maturity the 2021 Private Placement Notes and repaid the other Private Placement Notes in connection with the Offering (defined below) in September 2021.
On November 16, 2018, we completed an underwritten public offering of $500.0 million aggregate principal amount of our 4.25% Senior Notes due December 1, 2028 (the “2028 Senior Notes”). The 2028 Senior Notes were issued under the Indenture, dated as of November 16, 2018 (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Indenture”), by and between the Company and U.S. Bank National Association, as trustee (the “Trustee”), as supplemented through the First Supplemental Indenture, dated as of November 16, 2018.
On April 16, 2019, we completed an underwritten public offering of $500.0 million aggregate principal amount of our 3.50% Senior Notes due May 1, 2029 (the “2029 Senior Notes”). The 2029 Senior Notes were issued under the Indenture, as supplemented through the Second Supplemental Indenture, dated as of April 16, 2019.
On January 23, 2020, we completed an underwritten public offering of $600.0 million aggregate principal amount of 2.60% Senior Notes due February 1, 2030 (the “2030 Senior Notes”). The 2030 Senior Notes were issued under the Indenture, as supplemented through the Third Supplemental Indenture, dated as of January 23, 2020.
On March 13, 2020, we completed an underwritten public offering of $500.0 million aggregate principal amount of 3.05% Senior Notes due April 1, 2050 (the “2050 Senior Notes”). The 2050 Senior Notes were issued under the Indenture, as supplemented through the Fourth Supplemental Indenture, dated as of March 13, 2020.
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On September 20, 2021, we completed an underwritten public offering (the “Offering”) of $650.0 million aggregate principal amount of 2.20% Senior Notes due January 15, 2032 (the “2032 Senior Notes”) and $850.0 million aggregate principal amount of 2.95% Senior Notes due January 15, 2052 (the “2052 Senior Notes”). The 2032 Senior Notes and the 2052 Senior Notes were issued under the Indenture, as supplemented through the Fifth Supplemental Indenture, dated as of September 20, 2021.
In connection with the Offering, we exercised our right to repay the $1.500 billion of Private Placement Notes then outstanding governed by the 2008 NPA and the 2016 NPA. We repaid the Private Placement Notes then outstanding, including the $110.6 million make-whole premium, with the net proceeds from the Offering and borrowings under the revolving credit facility provided under our Credit Agreement. We recorded $115.3 million to Loss on early extinguishment of debt during the year ended December 31, 2021 due to the repayment of the Private Placement Notes and associated make-whole premium and related fees.
On March 9, 2022, we completed an underwritten public offering of $500.0 million aggregate principal amount of 3.20% Senior Notes due June 1, 2032 (the “New 2032 Senior Notes”). The New 2032 Senior Notes were issued under the Indenture, as supplemented through the Sixth Supplemental Indenture, dated as of March 9, 2022.
On August 18, 2022, we completed an underwritten public offering of $750.0 million aggregate principal amount of 4.20% Senior Notes due January 15, 2033 (the “2033 Senior Notes” and, together with the 2028 Senior Notes, the 2029 Senior Notes, the 2030 Senior Notes, the 2032 Senior Notes, the New 2032 Senior Notes, the 2050 Senior Notes and the 2052 Senior Notes, the “Senior Notes”). The 2033 Senior Notes were issued under the Indenture, as supplemented through the Seventh Supplemental Indenture, dated as of August 18, 2022.
We pay interest on the Senior Notes semi-annually in arrears. The Senior Notes are our senior unsecured obligations, ranking equally in right of payment with our existing and future unsubordinated debt and senior to any of our future subordinated debt. The Senior Notes are not guaranteed by any of our subsidiaries.
On October 31, 2022, we, as borrower, Bank of America, N.A., as administrative agent, and the other lenders from time to time party thereto (the “New TL Lenders”) entered into that certain Term Loan Agreement (as amended, restated, supplemented or otherwise modified from time to time, the “Term Loan Agreement”), pursuant to which the New TL Lenders made loans to us in an aggregate stated principal amount of $800.0 million. We used substantially all of the proceeds of borrowings under the Term Loan Agreement to repay revolving borrowings under the Credit Agreement. Amounts borrowed under the Term Loan Agreement and repaid or prepaid may not be reborrowed. The Term Loan Agreement has a scheduled maturity date of July 30, 2026.
See Note 11 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for further details on the debt agreements.
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Contractual Obligations
As of December 31, 2023, 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
$
6,812,053
$
26,462
$
1,917,301
$
510,089
$
4,358,201
Cash interest payments
$
2,266,543
$
262,256
$
491,009
$
313,828
$
1,199,450
Contingent consideration
$
131,310
$
94,996
$
3,224
$
3,224
$
29,866
Operating leases
$
347,590
$
42,776
$
71,139
$
60,688
$
172,987
Final capping, closure and post-closure
$
2,328,665
$
103,663
$
73,377
$
55,402
$
2,096,223
Long-term debt payments include:
1) $453.2 million in principal payments due July 2026 related to our revolving credit facility under our Credit Agreement. Advances are available under the Credit Agreement in U.S. dollars and Canadian dollars and bear interest at fluctuating rates (See Note 11). At December 31, 2023, $240.0 million of the outstanding borrowings drawn under the revolving credit facility were in U.S. Term SOFR rate loans, bearing interest at a total rate ranging from 6.46% to 6.50% on such date. At December 31, 2023, $28.0 million of the outstanding borrowings drawn under the revolving credit facility were in U.S. base rate loans, bearing interest at a total rate of 8.50% on such date. At December 31, 2023, $15.1 million of the outstanding borrowings drawn under the revolving credit facility were in Canadian prime rate loans, bearing interest at a total rate of 7.20% on such date. At December 31, 2023, $170.1 million of the outstanding borrowings drawn under the revolving credit facility were in Canadian-based bankers’ acceptances, bearing interest at a total rate ranging from 6.40% to 6.46% on such date.
2) $650.0 million in principal payments due July 2026 related to our term loan under our Credit Agreement. Outstanding amounts on the term loan can be either base rate loans or Term SOFR loans. At December 31, 2023, all amounts outstanding under the term loan were in Term SOFR loans which bear interest at the Term SOFR rate plus the applicable margin (for a total rate of 6.50% on such date).
3) $800.0 million in principal payments due July 2026 related to our term loan under our Term Loan Agreement. Outstanding amounts on the term loan can be either base rate loans or Term SOFR loans. At December 31, 2023, all amounts outstanding under the term loan were in Term SOFR loans which bear interest at the Term SOFR rate plus the applicable margin (for a total rate of 6.44% on such date).
4) $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%.
5) $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%.
6) $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%.
7) $650.0 million in principal payments due 2032 related to our 2032 Senior Notes. The 2032 Senior Notes bear interest at a rate of 2.20%.
8) $500.0 million in principal payments due 2032 related to our New 2032 Senior Notes. The New 2032 Senior Notes bear interest at a rate of 3.20%.
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9) $750.0 million in principal payments due 2033 related to our 2033 Senior Notes. The 2033 Senior Notes bear interest at a rate of 4.20%.
10) $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%.
11) $850.0 million in principal payments due 2052 related to our 2052 Senior Notes. The 2052 Senior Notes bear interest at a rate of 2.95%.
12) $48.8 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 December 31, 2023, and have maturity dates ranging from 2024 to 2036.
13) $10.0 million in principal payments related to our financing leases. Our financing leases bear interest at rates between 1.89% and 5.07% at December 31, 2023, and have expiration dates ranging from 2026 to 2029.
The following assumptions were made in calculating cash interest payments:
1) We calculated cash interest payments on the Credit Agreement using the Term SOFR rate plus the applicable Term SOFR 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 December 31, 2023. We assumed the Credit Agreement is paid off when it matures in July 2026.
2) We calculated cash interest payments on the Term Loan Agreement using the Term SOFR rate plus the applicable Term SOFR margin at December 31, 2023. We assumed the Term Loan Agreement is paid off when it matures in July 2026.
3) We calculated cash interest payments on our interest rate swaps using the stated interest rate in the swap agreement less the Term SOFR rate through the earlier expiration of the term of the swaps or the term of the credit facility.
Contingent consideration payments include $115.0 million recorded as liabilities in our consolidated financial statements at December 31, 2023, and $16.3 million of future interest accretion on the recorded obligations.
We are party to operating lease agreements and finance leases as discussed in Note 7 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. 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
$
175,743
$
139,459
$
34,576
$
1,242
$
466
(1) We are party to unconditional purchase obligations as discussed in Note 13 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. 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 December 31, 2023, our unconditional purchase obligations consisted of multiple fixed-price fuel purchase contracts under which we have 56.8 million gallons remaining to be purchased for a total of $175.7 million. The current fuel purchase contracts expire on or before September 30, 2029. These arrangements have not materially affected our financial position, results of operations or liquidity during the year ended December
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31, 2023, nor are they expected to have a material impact on our future financial position, results of operations or liquidity.
We have obtained standby letters of credit as discussed in Note 11 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K and financial surety bonds as discussed in Note 13 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. These standby letters of credit and financial surety bonds are generally obtained to support our financial assurance needs and landfill and E&P waste operations. These arrangements have not materially affected our financial position, results of operations or liquidity during the year ended December 31, 2023, 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.
New Accounting Pronouncements
See Note 2 to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K for a description of the new accounting standards that are applicable to us.
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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 liquidity measure in the solid waste industry. We calculate 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 periodic distributions to noncontrolling interests. We further adjust this calculation to exclude the effects of items management believes impact the ability to evaluate the liquidity of our business operations. 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 years ended December 31, 2023, 2022 and 2021, are calculated as follows (amounts in thousands of U.S. dollars):
Years Ended December 31,
2023
2022
2021
Net cash provided by operating activities
$
2,126,817
$
2,022,492
$
1,698,229
Less: Change in book overdraft
(790)
(1,076)
(367)
Plus: Proceeds from disposal of assets
31,581
30,676
42,768
Less: Capital expenditures for property and equipment
(934,000)
(912,677)
(744,315)
Adjustments:
Payment of contingent consideration recorded in earnings (a)
—
2,982
520
Cash received for divestitures (b)
(6,194)
(5,671)
(17,118)
Transaction-related expenses (c)
5,519
30,825
30,771
Executive separation costs (d)
1,686
—
—
Pre-existing Progressive Waste share-based grants (e)
1,285
286
397
Tax effect (f)
(1,772)
(2,993)
(1,287)
Adjusted free cash flow
$
1,224,132
$
1,164,844
$
1,009,598
(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 elimination of cash received in conjunction with the divestiture of certain operations.
(c) Reflects the addback of acquisition-related transaction costs and, in 2022, the settlement of an acquired tax liability.
(d) Reflects the cash component of severance expense associated with an executive departure.
(e)
Reflects the cash settlement of pre-existing Progressive Waste share-based awards during the period.
(f) The aggregate tax effect of footnotes (a) through (e) 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, plus loss on early extinguishment of debt. 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 years ended December 31, 2023, 2022 and 2021, are calculated as follows (amounts in thousands of U.S. dollars):
Years Ended December 31,
2023
2022
2021
Net income attributable to Waste Connections
$
762,800
$
835,662
$
618,047
Plus: Net income attributable to noncontrolling interests
26
339
442
Plus: Income tax provision
220,675
212,962
152,253
Plus: Interest expense
274,642
202,331
162,796
Less: Interest income
(9,350)
(5,950)
(2,916)
Plus: Depreciation and amortization
1,003,211
918,960
813,009
Plus: Closure and post-closure accretion
19,605
16,253
14,497
Plus: Impairments and other operating items
238,796
18,230
32,316
Less: Other income, net
(12,481)
(3,154)
(6,285)
Plus: Loss on early extinguishment of debt
—
—
115,288
Adjustments:
Plus: Transaction-related expenses (a)
10,653
24,933
11,318
Plus (less): Fair value changes to equity awards (b)
(1,726)
86
8,393
Plus: Executive separation costs (c)
16,105
—
—
Adjusted EBITDA
$
2,522,956
$
2,220,652
$
1,919,158
(a) Reflects the addback of acquisition-related transaction costs.
(b) Reflects fair value accounting changes associated with certain equity awards .
(c) Reflects the cash and non-cash components of severance expense associated with an executive departure.
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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 valuation measures 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 years ended December 31, 2023, 2022 and 2021, are calculated as follows (amounts in thousands of U.S. dollars, except per share amounts):
Years Ended December 31,
2023
2022
2021
Reported net income attributable to Waste Connections
$
762,800
$
835,662
$
618,047
Adjustments:
Amortization of intangibles (a)
157,573
155,675
139,279
Impairments and other operating items (b)
238,796
18,230
32,316
Transaction-related expenses (c)
10,653
24,933
11,318
Fair value changes to equity awards (d)
(1,726)
86
8,393
Loss on early extinguishment of debt (e)
—
—
115,288
Executive separation costs (f)
16,105
—
—
Tax effect (g)
(102,948)
(49,312)
(78,041)
Adjusted net income attributable to Waste Connections
$
1,081,253
$
985,274
$
846,600
Diluted earnings per common share attributable to Waste Connections’ common shareholders:
Reported net income
$
2.95
$
3.24
$
2.36
Adjusted net income
$
4.19
$
3.82
$
3.23
(a)
Reflects the elimination of the non-cash amortization of acquisition-related intangible assets.
(b)
Reflects adjustments for 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)
Reflects the make-whole premium and related fees associated with the early termination of $1.5 billion in senior notes.
(f)
Reflects the cash and non-cash components of severance expense associated with an executive departure.
(g)
The aggregate tax effect of the adjustments in footnotes (a) through (f) is calculated based on the applied tax rates for the respective periods.
Leverage Ratio
The Leverage Ratio is calculated by dividing our Consolidated Total Funded Debt by Consolidated EBITDA (each as defined substantially identically in our Credit Agreement and Term Loan Agreement). The Leverage Ratio is based on EBITDA, a non-GAAP financial measure. We present this ratio because it is used for the purposes of calculating financial covenants under our Credit Agreement and Term Loan Agreement. Management also uses this ratio as one of the principal measures to evaluate and monitor the indebtedness of the Company relative to its ability to generate income to service such debt. The Leverage Ratio is not a substitute for, and should be used in conjunction with, GAAP financial ratios. Other companies may calculate leverage ratios differently.
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Inflation
In the current environment, we have seen inflationary pressures resulting from higher fuel, materials and labor costs in certain markets and higher resulting third-party costs in areas such as brokerage, repairs and construction. 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 certain of our contracts 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.