Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This section includes a discussion of our results of operations for the three years ended December 31, 2021. This discussion may contain forward-looking statements that anticipate results based on management’s plans that are subject to uncertainty. We discuss in more detail various factors that could cause actual results to differ materially from expectations in Item 1A. Risk Factors . The following discussion should be read considering those disclosures and together with the Consolidated Financial Statements and the notes thereto.
Overview
We are North America’s leading provider of comprehensive waste management environmental services, providing services throughout the United States (“U.S.”) and Canada. We partner with our residential, commercial, industrial and municipal customers and the communities we serve to manage and reduce waste at each stage from collection to disposal, while recovering valuable resources and creating clean, renewable energy. We own or operate the largest network of landfills throughout the U.S. and Canada. In order to make disposal more practical for larger urban markets, where the distance to landfills is typically farther, we manage transfer stations that consolidate, compact and transport waste efficiently and economically. We also use waste to create energy, recovering the gas produced naturally as waste
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decomposes in landfills and using the gas in generators to make electricity or natural gas. Additionally, we are a leading recycler in the U.S. and Canada, handling materials that include paper, cardboard, glass, plastic and metal. Our “Solid Waste” business is operated and managed locally by our subsidiaries that focus on distinct geographic areas and provide collection, transfer, disposal, and recycling and resource recovery services. Consistent with our Company’s long-standing commitment to sustainability and environmental stewardship, we published our 2021 Sustainability Report, which details our people-first commitment to help make the communities in which we live and work safe, resilient and sustainable. The information in this report can be found at https://sustainability.wm.com but it does not constitute a part of, and is not incorporated by reference into, this Annual Report on Form 10-K. For further discussion see section “ Regulation – Emerging Trends in Policy and Regulation – Climate and Sustainability ” in Item 1.
In 2021, our senior management began evaluating, overseeing and managing the financial performance of our Solid Waste operations through two operating segments. Our East Tier primarily consists of geographic areas located in the Eastern U.S., the Great Lakes region and substantially all of Canada. Our West Tier primarily includes geographic areas located in the Western U.S., including the upper Midwest region, and British Columbia, Canada. Each of our Solid Waste operating segments provides integrated environmental services, including collection, transfer, recycling, and disposal. The Company finalized the assessment of our segments during the fourth quarter of 2021. The East and West Tiers are presented in this report and constitute our existing Solid Waste business.
Our Solid Waste operating revenues are primarily generated from fees charged for our collection, transfer, disposal, and recycling and resource recovery services, and from sales of commodities by our recycling and landfill gas-to-energy operations. Revenues from our collection operations are influenced by factors such as collection frequency, type of collection equipment furnished, type and volume or weight of the waste collected, distance to the disposal facility or material recovery facility and our disposal costs. Revenues from our landfill operations consist of tipping fees, which are generally based on the type and weight or volume of waste being disposed of at our disposal facilities. Fees charged at transfer stations are generally based on the weight or volume of waste deposited, taking into account our cost of loading, transporting and disposing of the solid waste at a disposal site. Recycling revenues generally consist of tipping fees and the sale of recycling commodities to third parties. The fees we charge for our services generally include our environmental, fuel surcharge and regulatory recovery fees which are intended to pass through to customers direct and indirect costs incurred. We also provide additional services that are not managed through our Solid Waste business, described under Results of Operations below.
Acquisition of Advanced Disposal Services, Inc. (“Advanced Disposal”)
On October 30, 2020, we completed our acquisition of all outstanding shares of Advanced Disposal for $30.30 per share in cash, pursuant to an Agreement and Plan of Merger dated April 14, 2019, as amended on June 24, 2020. Total enterprise value of the acquisition was $4.6 billion when including approximately $1.8 billion of Advanced Disposal’s net debt. This acquisition grew our footprint and allows us to provide differentiated, sustainable waste management and recycling services to approximately three million new commercial, industrial and residential customers primarily located in the Eastern half of the U.S. The acquisition was funded using a $3.0 billion, 364-day, U.S. revolving credit facility (“364-day revolving credit facility”) and our commercial paper program. In November 2020, we issued $2.5 billion of senior notes and used a portion of the proceeds to repay all outstanding borrowings under the 364-day revolving credit facility at which time it was terminated. As a result of the acquisition we recorded $4.1 billion of net assets including $2.5 billion of goodwill as of December 31, 2020. Post-closing adjustments to our purchase price allocation were not material.
In connection with our acquisition of Advanced Disposal, we and Advanced Disposal entered into an agreement that provided for GFL Environmental to acquire a combination of assets from us and Advanced Disposal to address divestitures required by the U.S. Department of Justice. Immediately following the acquisition, the divestiture transactions were consummated and the Company subsequently received cash proceeds from the sale of $856 million.
See Note 11 and 17 to the Consolidated Financial Statements for more information.
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For the year ended December 31, 2021, we incurred $51 million of integration related costs, and for the year ended December 31, 2020, we incurred $156 million of acquisition and integration related costs, which were primarily classified as “Selling, general and administrative expenses”. The post-closing operating results of Advanced Disposal have been included in our consolidated financial statements, within our existing reportable segments. Post-closing through December 31, 2020, Advanced Disposal recognized $205 million, $142 million and $60 million of revenue, operating expenses and selling, general and administrative expenses, respectively, which are included in our Consolidated Statement of Operations. During 2021, we made significant progress on our integration of Advanced Disposal. The focus of these efforts has been to ensure that we continue to provide uninterrupted service to our customers through the integration of certain customer facing and back office digital platforms.
COVID-19 Update
Throughout the COVID-19 pandemic, the Company has proactively taken steps to put our employees’ and customers’ needs first and we continue to work with the appropriate regulatory agencies to ensure we can provide our essential services safely and efficiently. We continue to operate with a focus on protecting the health and safety of our employees and maintaining business continuity for our customers. These efforts, combined with our disciplined execution in our daily operations, have positioned the Company to prudently manage the challenges presented by COVID-19.
The impacts of COVID-19 on the global economy increased rapidly during the second quarter of 2020, affecting our business in most geographies and across a variety of our customer types. Over the last year, our volumes have been recovering from the sharp decline experienced in April 2020 as a result of COVID-19. The pace of recovery in our volumes accelerated in the second quarter of 2021, and continued in the back-half of 2021 with minimal impact from the resurgence in transmission of recent COVID-19 virus variants as communities and businesses remained open. The portions of our business that had the most pronounced decreases in volume due to the pandemic were our industrial and commercial collection businesses and construction and demolition and special waste volumes at our landfills. As we completed 2021, volumes in each of these lines of business were either on par with pre-pandemic levels or have now surpassed 2019 volumes. We continue to be optimistic about our volume recovery and overall economic recovery from the impacts of the COVID-19 pandemic. However, uncertainty remains with respect to various factors that influence the pace of economic recovery and the potential for future resurgence in transmission of COVID-19 and related business closures due to virus variants or otherwise. Such conditions could adversely impact our volumes and costs in the future.
Business Environment
The waste industry is a comparatively mature and stable industry. However, customers increasingly expect more of their waste materials to be recovered and those waste streams are becoming more complex. In addition, many state and local governments mandate diversion, recycling and waste reduction at the source and prohibit the disposal of certain types of waste at landfills. We monitor these developments to adapt our service offerings. As companies, individuals and communities look for ways to be more sustainable, we promote our comprehensive services that go beyond our core business of collecting and disposing of waste in order to meet their needs. This includes expanding traditional recycling services, increasing organics collection and processing, and expanding our renewable energy projects to meet the evolving needs of our diverse customer base. As the leading waste management environmental services provider in North America, we are taking big, bold steps in an effort to catalyze positive change – change that will impact our Company as well as the communities we serve. Our sustainability agenda includes expanding recycling and focuses on meeting or exceeding specific 2025 and 2038 sustainability goals around people, customers, the environment, and community, which align with eight of the United Nations Sustainable Development Goals.
We encounter intense competition from governmental, quasi-governmental and private service providers based on pricing, and to a much lesser extent, the nature of service offerings, particularly in the residential line of business. Our industry is directly affected by changes in general economic factors, including increases and decreases in consumer spending, business expansions and construction activity. These factors generally correlate to volumes of waste generated and impact our revenue. Negative economic conditions, including the impact of COVID-19, can and have caused customers to reduce their service needs. Such negative economic conditions, in addition to competitor actions, can and have made it more challenging to implement our pricing strategy and negotiate, renew or expand service contracts with acceptable margins. We also encounter competition for acquisitions and growth opportunities. General economic factors
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and the market for consumer goods, in addition to regulatory developments, can also significantly impact commodity prices for the recyclable materials we sell. Significant components of our operating expenses vary directly as we experience changes in revenue due to volume and a heightened pace of inflation. Volume changes can fluctuate dramatically by line of business and volume changes in higher margin businesses, such as what we saw with COVID-19, can impact key financial metrics. We must dynamically manage our cost structure in response to volume changes and cost inflation.
We believe the Company’s industry-leading asset network and strategic focus on investing in our people and our digital platform will give the Company the necessary tools to address the evolving challenges impacting the Company and our industry. In line with our commitment to continuous improvement and a differentiated customer experience, we remain focused on our customer service digitalization initiative to change the way we interact with our customers. Enhancements made through this initiative are intended to seamlessly and digitally connect all the Company’s functions required to service our customers in order to provide the best experience and service. Additionally, in early 2022, we substantially implemented our new enterprise resource planning system which will drive operational and service excellence by empowering our people through a modern, simplified and connected employee experience.
Certain macroeconomic pressures and market disruption, driven in part by the COVID-19 pandemic, intensified during the second half of 2021 and are continuing. The constrained labor market has resulted in increased costs for wage adjustments, overtime hours and training new hires to address frontline employee turnover, increased volume, and operational challenges servicing customers. The COVID-19 pandemic and the constrained labor market have also contributed to significant global supply chain disruption and inflationary pressure for the goods and services we purchase, with a particular impact on our repair and maintenance costs. Supply chain constraints have also caused delayed delivery of fleet, steel containers and other purchases. Aspects of our business rely on third-party transportation providers, and such services have become more limited and expensive. Additionally, we are currently experiencing margin pressures from commodity-driven business impacts, particularly from recycling brokerage rebates and higher fuel prices. The extent and duration of the impact of these labor market, supply chain and transportation challenges are subject to numerous factors, including the continuing impact of the COVID-19 pandemic; size, location and qualifications of the labor pool; behavioral changes; wage and price structures; adoption of new or revised regulations, including vaccine mandates; and broader macroeconomic conditions. As costs increase, we focus on our strategic pricing efforts, as well as operating efficiencies and cost controls, to maintain and grow our earnings and cash flow. With increased pressure from the strong economic recovery, particularly on labor, we remain focused on putting our people first to ensure that they are well positioned to diligently and safely execute our daily operations. We are encouraged by our results in 2021 and remain focused on delivering outstanding customer service, managing our variable costs with changing volumes and investing in technology that will enhance our customers’ experience and reduce our cost to serve.
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Current Year Financial Results
During 2021, we delivered strong revenue and income from operations as we continued to experience higher yield and volume recovery in our landfill, commercial and industrial collection businesses and benefited from the acquisition of Advanced Disposal. However, our income from operations was impacted by constraints on labor availability and inflationary cost pressures, primarily in the second half of 2021. We continue to invest in our people through market wage adjustments, investments in our digital platform and training for new team members. In addition, we are focused on executing on our disciplined pricing programs to drive margin growth in the face of these additional labor cost and inflationary pressures. We also made significant investments in recycling automation technology and customer service digitalization to further support our continued focus on optimizing operational efficiency as well as achieving improved labor productivity for all lines of business. During 2021, the Company allocated $1,904 million of available cash to capital expenditures. We also allocated $2,320 million of available cash to our shareholders during 2021 through dividends and common stock repurchases.
Key elements of our 2021 financial results include:
● Revenues of $17,931 million for 2021 compared with $15,218 million in 2020, an increase of $2,713 million, or 17.8%. The increase is primarily attributable to (i) the acquisition of Advanced Disposal; (ii) record-high increases in the market prices for recycling commodities we sell; (iii) higher yield in our collection and disposal lines of business and (iv) strong volume growth;
● Operating expenses of $11,111 million in 2021, or 62.0% of revenues, compared with $9,341 million, or 61.4% of revenues, in 2020. The $1,770 million increase is primarily attributable to (i) increased volumes from the acquisition of Advanced Disposal; (ii) commodity-driven business impacts, particularly from recycling brokerage rebates and higher fuel prices, which also meaningfully impacted our operating expense as a percentage of revenue; (iii) volume recovery from earlier pandemic lows; (iv) labor cost pressure from frontline employee wage adjustments, increased turnover driving up training costs and higher overtime due to driver shortages and volume growth and (v) inflationary cost pressures, primarily in the second half of 2021;
● Selling, general and administrative expenses of $1,864 million in 2021, or 10.4% of revenues, compared with $1,728 million, or 11.4% of revenues, in 2020. The $136 million increase is primarily attributable to (i) higher incentive compensation costs; (ii) strategic investments in our digital platform and (iii) increased labor, support and integration costs following our acquisition of Advanced Disposal. These cost increases are partially offset by (i) lower consulting, advisory and legal fees associated with our completion of the Advanced Disposal acquisition in 2020 and (ii) a decrease in our provision for bad debts as collections returned to pre-pandemic levels;
● Income from operations of $2,965 million, or 16.5% of revenues, in 2021 compared with $2,434 million, or 16.0% of revenues, in 2020. The improved earnings in the current year are driven by (i) strong operating results in our collection and disposal business; (ii) improved profitability in our recycling business; (iii) lower transaction-related costs following our 2020 acquisition of Advanced Disposal and (iv) improved profitability in our WM Renewable Energy business. The increase in income from operations was partially offset by (i) labor cost pressure from frontline employee wage adjustments, increased turnover driving up training costs and higher overtime due to driver shortages and volume growth; (ii) inflationary cost pressures and (iii) increased depreciation and amortization from our acquisition of Advanced Disposal and increased landfill amortization from higher volumes and revisions in landfill estimates. During 2021, the positive earnings contributions from Advanced Disposal were offset by elevated depreciation and amortization of acquired assets;
● Net income attributable to Waste Management, Inc. was $1,816 million, or $4.29 per diluted share, compared with $1,496 million, or $3.52 per diluted share, in the prior year period. The increase in income from operations discussed above, in addition to lower interest expense, drove an increase in net income which was partially offset by a loss on early extinguishment of debt;
● Net cash provided by operating activities was $4,338 million in 2021, compared with $3,403 million in 2020 with the improvement driven by (i) an increase in earnings; (ii) our acquisition of Advanced Disposal; (iii) lower interest payments; (iv) lower income taxes paid in the current year and (v) favorable changes in our working capital, net of effects of acquisitions and divestitures; and
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● Free cash flow was $2,530 million in 2021, compared with $2,656 million in 2020. The decrease in free cash flow is primarily attributable to higher proceeds from divestitures in 2020 primarily related to assets required to be sold by the U.S. Department of Justice in connection with our acquisition of Advanced Disposal, partially offset by an increase in net cash provided by operating activities discussed above. Free cash flow is a non-GAAP measure of liquidity. Refer to Free Cash Flow below for our definition of free cash flow, additional information about our use of this measure, and a reconciliation to net cash provided by operating activities, which is the most comparable GAAP measure.
Results of Operations
Operating Revenues
Our Solid Waste operating revenues are primarily generated from fees charged for our collection, transfer, disposal, and recycling and resource recovery services, and from sales of commodities by our recycling and landfill gas-to-energy operations. We also provide additional services that are not managed through our Solid Waste business, including both our Strategic Business Solutions (“WMSBS”) and Energy and Environmental Services (“EES”) businesses, recycling brokerage services, landfill gas-to-energy services and certain other expanded service offerings and solutions. The mix of operating revenues from our major lines of business for the year ended December 31 are as follows (in millions):
2021
2020
2019
Commercial
$
4,760
$
4,102
$
4,229
Residential
3,172
2,716
2,613
Industrial
3,210
2,770
2,916
Other collection
533
465
482
Total collection
11,675
10,053
10,240
Landfill
4,153
3,667
3,846
Transfer
2,072
1,855
1,820
Recycling
1,681
1,127
1,040
Other (a)
2,112
1,776
1,758
Intercompany (b)
(3,762)
(3,260)
(3,249)
Total
$
17,931
$
15,218
$
15,455
(a) The “Other” line of business includes (i) certain services provided by our WMSBS business; (ii) our landfill gas-to-energy operations managed by our WM Renewable Energy business; (iii) certain services within our EES business, including our construction and remediation services and our services associated with the disposal of fly ash and (iv) certain other expanded service offerings and solutions. In addition, our “Other” line of business reflects the results of non-operating entities that provide financial assurance and self-insurance support for our Solid Waste business, net of intercompany activity. Revenue attributable to collection, landfill, transfer and recycling services provided by our “Other” businesses has been reflected as a component of the relevant line of business for purposes of presentation in this table.
(b) Intercompany revenues between lines of business are eliminated in the Consolidated Financial Statements included within this report.
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The following table provides details associated with the period-to-period change in revenues and average yield for the year ended December 31 (dollars in millions):
2021 vs. 2020
2020 vs. 2019
As a % of
As a % of
As a % of
As a % of
Related
Total
Related
Total
Amount
Business(a)
Amount
Company(b)
Amount
Business(a)
Amount
Company(b)
Collection and disposal
$
468
3.5
%
$
299
2.2
%
Recycling (c)
537
51.5
75
7.6
Fuel surcharges and other (d)
240
36.9
(151)
(24.7)
Total average yield (e)
$
1,245
8.2
%
$
223
1.5
%
Volume (d)
435
2.8
(692)
(4.5)
Internal revenue growth
1,680
11.0
(469)
(3.0)
Acquisitions
1,032
6.8
248
1.7
Divestitures
(49)
(0.3)
(8)
(0.1)
Foreign currency translation
50
0.3
(8)
(0.1)
Total
$
2,713
17.8
%
$
(237)
(1.5)
%
(a) Calculated by dividing the increase or decrease for the current year by the prior year’s related business revenue adjusted to exclude the impacts of divestitures for the current year.
(b) Calculated by dividing the increase or decrease for the current year by the prior year’s total Company revenue adjusted to exclude the impacts of divestitures for the current year.
(c) Includes combined impact of commodity price variability and changes in fees.
(d) Beginning in 2021, includes changes in our revenue attributable to our WM Renewable Energy business from yield, which is included in Fuel Surcharges and Other, and Volume.
(e) The amounts reported herein represent the changes in our revenue attributable to average yield for the total Company.
The following provides further details about our period-to-period change in revenues:
Average Yield
Collection and Disposal Average Yield — This measure reflects the effect on our revenue from the pricing activities of our collection, transfer and landfill operations, exclusive of volume changes. Revenue growth from collection and disposal average yield includes not only base rate changes and environmental and service fee fluctuations, but also (i) certain average price changes related to the overall mix of services, which are due to the types of services provided; (ii) changes in average price from new and lost business and (iii) price decreases to retain customers.
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The details of our revenue growth from collection and disposal average yield for the year ended December 31 are as follows (dollars in millions):
2021 vs. 2020
2020 vs. 2019
As a % of
As a % of
Related
Related
Amount
Business
Amount
Business
Commercial
$
152
3.9
%
$
91
2.4
%
Industrial
126
4.8
74
2.7
Residential
119
4.5
73
2.9
Total collection
397
4.2
238
2.5
Landfill
42
1.8
32
1.3
Transfer
29
2.9
29
3.0
Total collection and disposal
$
468
3.5
%
$
299
2.2
%
Our overall strategic pricing efforts are focused on recovering as much of the inflationary cost increases we experience in our business as possible by increasing our average unit rate. We experienced strong average yield growth in our collection line of business of 4.2% in 2021, up from 2.5% in 2020, showing our focus on our pricing efforts in this inflationary environment. We are driving improvements in our residential line of business, aligning the price charged for services we provide to our customers with the costs to provide the services, resulting in increased average yield in 2021 of 4.5%, up from 2.9% in 2020. We are also continuing to see growth in our landfill and transfer businesses with our municipal solid waste business experiencing 3.2% average yield growth for 2021 compared to 2.3% in 2020. A significant portion of our revenue is tied to a price escalation index with a lookback provision, which has resulted in a timing lag in our ability to recover increased costs under those contracts during this period of rapid inflation. Separately, for many of our customers we provide services under multi-year contracts that can restrict our ability to increase prices and the timing of such increases. As we enter 2022, many of these contract lookback provisions will begin to capture the recent inflationary cost increases.
Recycling — Recycling revenue increased $537 million and $75 million in 2021 and 2020, respectively, as compared with the prior year periods primarily from higher market prices for recycling commodities. Average market prices for recycling commodities at the Company’s facilities were approximately 115% and 19% higher in 2021 and 2020, respectively, when compared with the prior year periods. Market prices began to increase in 2020 from the unprecedented lows experienced in 2019, largely due to COVID-19 related decreases in the supply of recycled materials. Demand for recycled materials strengthened in the back-half of 2020 and continued in 2021, outpacing supply, driven by the growth in e-commerce, businesses re-opening, and manufacturers committing to use more recycled content in their packaging. We have also maintained our focus on converting to a fee-based pricing model that ensures fees paid by customers address the cost of processing materials and the impact on our cost structure of managing contamination in the recycling stream.
Fuel Surcharges and Other — These fees, which include our fuel surcharge program, yield from our WM Renewable Energy business and other mandated fees, increased $240 million in 2021, as compared with 2020, and decreased $151 million in 2020 as compared with 2019. Fuel surcharge revenues are based on and fluctuate in response to changes in the national average prices for diesel fuel, and also vary with changes in our volume-based revenue activity. Market prices for diesel fuel were almost 30% higher in 2021, when compared with 2020, as diesel fuel prices began to increase towards the end of 2020 and continued to increase throughout 2021. Consistent with the general downturn in oil and gas markets in 2020, market prices for diesel fuel were approximately 16% lower in 2020, as compared to 2019. Additionally, we transitioned certain customers’ pricing away from a fuel surcharge in 2020, reflecting the cost of fuel in the base rates we charge for our services, which further contributed to the decline in 2020 as compared with 2019. Revenue from our WM Renewable Energy business increased in 2021, as compared to 2020, primarily driven by the increase in value for renewable fuel standard credits. The other fees are primarily related to fees and taxes assessed by various state, county and municipal government agencies at our landfills and transfer stations. These amounts have not significantly impacted the change in revenue for the periods presented.
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Volume
Our revenues from volume (excluding volumes from acquisitions and divestitures) increased $435 million, or 2.8%, in 2021, as compared with 2020, and decreased $692 million, or 4.5%, in 2020, as compared with 2019.
Over the last year, our volumes have been recovering from the sharp decline experienced in April 2020 as a result of COVID-19. The pace of recovery in our volumes accelerated in the second quarter of 2021 and continued in the back-half of 2021 with minimal impact from the resurgence in transmission of recent COVID-19 virus variants as communities and businesses remained open. The portions of our business that had the most pronounced decreases in volume due to the pandemic were our industrial and commercial collection businesses and our landfill volumes. As we completed 2021, volumes in each of these lines of business were either on par with pre-pandemic levels or have now surpassed 2019 volumes. We continue to be optimistic about volume recovery and overall economic recovery from the impacts of the COVID-19 pandemic. However, uncertainty remains with respect to various factors that influence the pace of economic recovery and the potential for future resurgence in transmission of COVID-19 and related business closures due to virus variants or otherwise. Such conditions could adversely impact our volumes in the future. In addition, our WMSBS business volume grew from our continued focus on a differentiated service model for national accounts customers.
Acquisitions and Divestitures
Acquisitions and divestitures resulted in a net increase in revenues of $983 million, or 6.5%, and $240 million, or 1.6%, in 2021 and 2020, respectively, as compared with the prior year periods, primarily due to our acquisition of Advanced Disposal.
Operating Expenses
Our operating expenses are comprised of (i) labor and related benefits costs (excluding labor costs associated with maintenance and repairs discussed below), which include salaries and wages, bonuses, related payroll taxes, insurance and benefits costs and the costs associated with contract labor; (ii) transfer and disposal costs, which include tipping fees paid to third-party disposal facilities and transfer stations; (iii) maintenance and repairs costs relating to equipment, vehicles and facilities and related labor costs; (iv) subcontractor costs, which include the costs of independent haulers who transport waste collected by us to disposal facilities and are affected by variables such as volumes, distance and fuel prices; (v) costs of goods sold, which includes the cost to purchase recycling materials for our recycling line of business, including certain rebates paid to suppliers; (vi) fuel costs, net of tax credits for alternative fuel, which represent the costs of fuel to operate our truck fleet and landfill operating equipment; (vii) disposal and franchise fees and taxes, which include landfill taxes, municipal franchise fees, host community fees, contingent landfill lease payments and royalties; (viii) landfill operating costs, which include interest accretion on landfill liabilities, interest accretion on and discount rate adjustments to environmental remediation liabilities and recovery assets, leachate and methane collection and treatment, landfill remediation costs and other landfill site costs; (ix) risk management costs, which include general liability, automobile liability and workers’ compensation claims programs costs and (x) other operating costs, which include gains and losses on sale of assets, telecommunications, equipment and facility lease expenses, property taxes, utilities and supplies. Variations in volumes year-over-year, as discussed above in Operating Revenues , in addition to cost inflation, affect the comparability of the components of our operating expenses.
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The following table summarizes the major components of our operating expenses for the year ended December 31 (dollars in millions and as a percentage of revenues):
2021
2020
2019
Labor and related benefits
$
3,223
18.0
%
$
2,746
18.1
%
$
2,791
18.0
%
Transfer and disposal costs
1,161
6.5
1,135
7.5
1,160
7.5
Maintenance and repairs
1,596
8.9
1,331
8.7
1,355
8.8
Subcontractor costs
1,766
9.9
1,523
10.0
1,532
9.9
Cost of goods sold
936
5.2
553
3.6
553
3.6
Fuel
393
2.2
265
1.7
336
2.2
Disposal and franchise fees and taxes
698
3.9
606
4.0
627
4.1
Landfill operating costs
412
2.3
394
2.6
379
2.4
Risk management
344
1.9
269
1.8
267
1.7
Other
582
3.2
519
3.4
496
3.2
$
11,111
62.0
%
$
9,341
61.4
%
$
9,496
61.4
%
Our operating expenses for 2021 increased, as compared with 2020, primarily due to (i) increased volumes from the acquisition of Advanced Disposal; (ii) commodity-driven business impacts, particularly from recycling brokerage rebates and higher fuel prices; (iii) volume recovery from earlier pandemic lows; (iv) labor cost pressure from frontline employee wage adjustments, increased turnover driving up training costs and higher overtime due to driver shortages and volume growth and (v) inflationary cost pressures, primarily in the second half of 2021. These impacts were partially offset by our continued focus on operating efficiency and efforts to control costs as volumes grow.
Our operating expenses for 2020 decreased, as compared with 2019, primarily due to decreases in our landfill and industrial and commercial collection volumes and our proactive steps to manage our variable costs in response to the volume declines resulting from COVID-19 impacts. The revenue declines due to the COVID-19 pandemic had a greater impact on our higher margin lines of business and negatively impacted operating costs as a percentage of revenues. In addition, our operating expenses as a percentage of revenues was impacted by our acquisition of Advanced Disposal as the acquired business’s operating cost structure was higher than ours and we incurred certain one-time, upfront costs.
Significant items affecting the comparison of operating expenses between reported periods include:
Labor and Related Benefits — The increase in labor and related benefits costs in 2021, as compared with 2020, was largely driven by (i) increased labor and related benefits costs related to our acquisition of Advanced Disposal; (ii) merit and proactive market wage adjustments to hire and retain talent; (iii) volume increases, particularly in our commercial and industrial collection businesses, which when combined with driver shortages and turnover in certain markets, increased overtime and training hours; (iv) higher annual incentive compensation and (v) increases in health and welfare costs attributable to medical care activity generally returning to pre-pandemic levels. The decrease in labor and related benefits costs in 2020, as compared with 2019, was largely driven by decreases in volume in our industrial and commercial collection businesses. Our proactive steps positioned us to optimize our route structure to respond to lower industrial and commercial collection volumes. Additionally, the decrease was attributable to (i) improved efficiency; (ii) lower headcount due to employee attrition coupled with proactive steps to defer hiring due to COVID-19 driven uncertainty and (iii) lower annual incentive compensation. These decreases were offset, in part, by annual merit increases and the addition of employees as a result of our acquisition of Advanced Disposal.
Transfer and Disposal Costs — The increase in transfer and disposal costs in 2021, as compared with 2020, was largely driven by increased volume, which includes the volumes from our acquisition of Advanced Disposal and inflationary cost increases from our third-party haulers. The decrease in transfer and disposal costs in 2020, as compared with 2019, was largely driven by volume declines in our industrial and commercial collection businesses as a result of COVID-19 offset, in part, by additional disposal costs attributable to our acquisition of Advanced Disposal.
Maintenance and Repairs — The increase in maintenance and repairs costs in 2021, as compared with 2020, was largely driven by (i) our acquisition of Advanced Disposal, including intentional investments to bring the acquired fleet to
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our standards; (ii) inflationary cost increases for parts, supplies and third-party services; (iii) additional fleet maintenance driven by commercial and industrial collection volume increases; (iv) labor cost pressure from our technicians, including higher overtime from labor shortages; (v) an increase in container repairs driven by volume increases and delays in normal course capital expenditures for steel containers due to both steel costs and supply chain constraints and (vi) increased building maintenance costs including improvements to facilities. The decrease in maintenance and repairs costs in 2020, as compared with 2019, was largely driven by proactive steps to optimize routes and reduce overtime hours to address the volume declines discussed above. Additionally, the 2019 period was also impacted by a $16 million non-cash charge to write-off certain equipment costs related to our Other segment. This decline in costs was partially offset by intentional investments in the acquired Advanced Disposal fleet and inflationary cost pressures for both our Company and third-party services due to demand for skilled technician labor as well as for parts and supplies.
Subcontractor Costs — The increase in subcontractor costs in 2021, as compared with 2020, was largely driven by (i) inflationary cost increases from third-party haulers and higher volumes; (ii) an increase in volumes in our WMSBS business, which relies more extensively on subcontracted hauling than our collection and disposal business and (iii) the acquisition of Advanced Disposal. The decrease in subcontractor costs in 2020, as compared with 2019, was largely due to COVID-19 driven volume declines in our industrial collection business and projects ending or scaling down during 2020 in our EES business. The decrease was offset, in part, by an increase in business activity in our WMSBS business.
Cost of Goods Sold — The increase in cost of goods sold in 2021, as compared with 2020, was primarily driven by increases in market prices for recycling commodities of approximately 115% and to a lesser extent, higher recycling volumes. Costs in 2020 were flat when compared with 2019 in spite of an increase in commodity prices, largely due to lower recycling volumes as a result of COVID-19. Additionally, a higher percentage of our overall recycled commodity sales in 2020 were targeted at domestic markets, resulting in lower freight costs.
Fuel — The increase in fuel costs in 2021, as compared with 2020, was primarily due to (i) increases of almost 30% in market prices for diesel fuel; (ii) the acquisition of Advanced Disposal and (iii) volume increases in our commercial and industrial collection businesses. The decrease in fuel costs in 2020, as compared with 2019, was primarily due to (i) a decline of approximately 15% in market prices for diesel fuel; (ii) lower costs resulting from the continued conversion of our fleet to natural gas vehicles and (iii) volume declines. The decreases were offset, in part, by (i) lower federal alternative fuel credits and (ii) additional costs attributable to our acquisition of Advanced Disposal.
Disposal and Franchise Fees and Taxes — The increase in disposal and franchise fees and taxes in 2021, as compared with 2020, was primarily driven by (i) landfill volume increases; (ii) disposal rate increases at certain landfills and (iii) additional costs attributable to our acquisition of Advanced Disposal. The decrease in disposal and franchise fees and taxes in 2020, as compared with 2019, was primarily related to lower landfill volumes, largely driven by the impact of COVID-19. The decreases were offset, in part, by additional costs attributable to our acquisition of Advanced Disposal.
Landfill Operating Costs — The increase in landfill operating costs in 2021, as compared with 2020, was primarily due to volume increases, which includes our acquisition of Advanced Disposal and increased testing and monitoring costs. These increases were partially offset by (i) lower leachate management costs, primarily due to the cessation of certain transportation costs in our East Tier segment and (ii) changes in the measurement of our environmental remediation obligations and recovery assets in 2021 and 2020. Our measurement of these balances includes application of a risk-free discount rate, which is based on the rate for U.S. Treasury bonds. In 2021, there was an increase in the discount rate, which resulted in a reduction in the net liability balance and a credit to expense. Conversely, in 2020, there was a decrease in the discount rate, which resulted in an increase in the net liability balance and a charge to expense.
The increase in landfill operating costs in 2020, as compared with 2019, was primarily due to higher leachate management costs compared to the prior year and additional costs attributable to our acquisition of Advanced Disposal. This increase was offset, in part, by decreases attributable to lower volumes at our landfills.
Risk Management — The increase in risk management costs in 2021, as compared with 2020, was primarily due to our acquisition of Advanced Disposal and overall economic recovery, increasing business activity and claim volumes and related costs. Risk management costs were relatively flat in 2020, as compared with 2019.
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Other — Other operating cost increases in 2021, as compared with 2020, were due to our acquisition of Advanced Disposal and increased equipment rental costs attributable, in part, to increased volumes and supply chain constraints slowing normal course fleet and equipment orders. Additionally, during the second half of 2021, additional volumes and inflationary cost pressures drove an increase in various costs. Partially offsetting these was a favorable litigation settlement in 2021. Additionally, net gains on sales of certain assets during each year impacted the comparability of the reported periods.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist of (i) labor and related benefits costs, which include salaries, bonuses, related insurance and benefits, contract labor, payroll taxes and equity-based compensation; (ii) professional fees, which include fees for consulting, legal, audit and tax services; (iii) provision for bad debts, which includes allowances for uncollectible customer accounts and collection fees and (iv) other selling, general and administrative expenses, which include, among other costs, facility-related expenses, voice and data telecommunication, advertising, bank charges, computer costs, travel and entertainment, rentals, postage and printing. In addition, the financial impacts of litigation reserves generally are included in our “Other” selling, general and administrative expenses.
The following table summarizes the major components of our selling, general and administrative expenses for the year ended December 31 (dollars in millions and as a percentage of revenues):
2021
2020
2019
Labor and related benefits
$
1,215
6.8
%
$
1,057
6.9
%
$
1,020
6.6
%
Professional fees
228
1.3
256
1.7
183
1.2
Provision for bad debts
37
0.2
54
0.4
38
0.3
Other
384
2.1
361
2.4
390
2.5
$
1,864
10.4
%
$
1,728
11.4
%
$
1,631
10.6
%
Selling, general and administrative expenses for 2021, as compared with 2020, increased primarily due to (i) higher incentive compensation costs; (ii) strategic investments in our digital platform, including planned investments in a new enterprise resource planning system and investments in customer service digitalization and (iii) increased labor, support and integration costs following our acquisition of Advanced Disposal. Partially offsetting these increases are lower consulting, advisory and legal fees from the 2020 acquisition of Advanced Disposal and improvements in our provision for bad debts as collections returned to pre-pandemic levels. Although our costs increased, the significant revenue increase positioned us to reduce our overall selling, general and administrative expenses as a percentage of revenues when compared with the prior year periods.
Selling, general and administrative expenses for 2020, as compared with 2019, increased due to (i) incremental costs of approximately $150 million incurred in connection with the acquisition and integration of Advanced Disposal; (ii) strategic investments in our digital platform and (iii) an increase in the provision for bad debts due to negative impacts on customer receipts experienced as a result of the COVID-19 pandemic. In addition to the cost increases, selling, general and administrative expenses as a percent of revenue increased in 2020 due to the decline in volume-related revenues.
Significant items affecting the comparison of our selling, general and administrative expenses between reported periods include:
Labor and Related Benefits — The increase in labor and related benefits costs for 2021, as compared with 2020, was primarily due to (i) higher incentive compensation costs; (ii) additional headcount, including from our acquisition of Advanced Disposal; (iii) annual merit increases for our employees; (iv) costs associated with our strategic investments in our digital platform and (v) increases in health and welfare costs attributable to medical care activities generally returning to pre-pandemic levels from the lower level experienced during 2020. The increase in labor and related benefits costs in 2020, as compared with 2019, was largely due to (i) costs incurred in connection with our acquisition of Advanced Disposal, including severance costs and additional headcount; (ii) annual merit increases and (iii) costs associated with
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our strategic investments in our digital platform. These cost increases were offset, in part, by (i) lower annual incentive compensation costs and (ii) proactive steps undertaken to defer hiring and reduce labor related costs.
Professional Fees — Professional fees decreased for 2021, as compared with 2020, primarily due to lower consulting, advisory and legal fees following the completion of our acquisition of Advanced Disposal in 2020, partially offset by increased strategic investments in our digital platform and integration costs related to our acquisition of Advanced Disposal. The increases in professional fees in 2020, as compared with 2019, were primarily driven by consulting, advisory and legal fees incurred in connection with our acquisition and integration of Advanced Disposal and strategic investments in our digital platform.
Provision for Bad Debts — The decrease in provision for bad debts for 2021, as compared with 2020, was primarily due to an overall improvement in customer account collections and decreased collection risk with certain customers. The increase in the provision for bad debts in 2020, as compared with 2019, was primarily due to increased collection risk associated with certain customers as a result of the COVID-19 pandemic.
Other — The increase in other expenses for 2021, as compared with 2020, was primarily driven by costs associated with our acquisition of Advanced Disposal and increased technology infrastructure costs to support our strategic investments in our digital platform. The decrease in other expenses in 2020, as compared with 2019, was primarily due to lower litigation costs and proactive measures taken to reduce discretionary costs, such as travel and entertainment, company-wide. These cost decreases were offset, in part, by increased technology infrastructure costs in 2020 to support strategic investments in our digital platform. We also incurred one-time technology costs in 2020 to transition employees to work-from-home in response to the COVID-19 pandemic.
Depreciation and Amortization Expenses
The following table summarizes the components of our depreciation and amortization expenses for the year ended December 31 (dollars in millions and as a percentage of revenues):
2021
2020
2019
Depreciation of tangible property and equipment
$
1,125
6.2
%
$
996
6.6
%
$
893
5.8
%
Amortization of landfill airspace
731
4.1
568
3.7
575
3.7
Amortization of intangible assets
143
0.8
107
0.7
106
0.7
$
1,999
11.1
%
$
1,671
11.0
%
$
1,574
10.2
%
The increase in depreciation of tangible property and equipment in 2021, as compared with 2020, was related to our acquisition of Advanced Disposal and investments in capital assets, including our fleet, heavy equipment at our landfills and containers to service our customers. The increase in amortization of landfill airspace in 2021, as compared with 2020, was driven by (i) changes in amortization rates driven by revisions in landfill estimates, which includes changes in the anticipated timing of capping, closure and post-closure activities; (ii) our acquisition of Advanced Disposal and (iii) landfill volume increases from the economic recovery. Additionally, 2020 benefited from a decrease in the inflation rate used to estimate capping, closure, and post-closure asset retirement obligations. The increase in amortization of intangible assets in 2021, as compared with 2020, was primarily driven by the amortization of acquired intangible assets related to the acquisition of Advanced Disposal.
The increase in depreciation of tangible property and equipment in 2020, as compared with 2019, was primarily related to (i) investments in capital assets, including our fleet and facilities and (ii) additional depreciation attributable to our acquisition of Advanced Disposal. The decrease in amortization of landfill airspace in 2020, as compared with 2019, was driven by (i) lower volumes at our landfills, primarily as a result of the COVID-19 pandemic, and (ii) a decrease in the inflation rate used to estimate capping, closure and post-closure asset retirement obligations from 2.5% to 2.25% at December 31, 2020. These decreases were offset, in part, by charges to reflect changes in estimated landfill construction costs and our acquisition of Advanced Disposal.
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Our amortization of intangible assets was flat in 2020, as compared with 2019. The increased expense for intangible assets acquired as part of the acquisition of Advanced Disposal was offset, primarily by decreases for certain customer list assets reaching the end of their lives.
Restructuring
During the year ended December 31, 2021, we recognized $8 million of restructuring charges primarily related to our acquisition of Advanced Disposal. During the year ended December 31, 2020, we recognized $9 million of restructuring charges primarily related to modifying our field sales and customer services structures to better support our investment in customer service digitalization, which is discussed above.
(Gain) Loss from Divestitures, Asset Impairments and Unusual Items, Net
The following table summarizes the major components of (gain) loss from divestitures, asset impairments and unusual items, net for the year ended December 31 (in millions):
2021
2020
2019
Gain from divestitures, net
$
(44)
$
(33)
$
—
Asset impairments
8
68
42
Other
20
—
—
$
(16)
$
35
$
42
During the year ended December 31, 2021, we recognized net gains of $16 million primarily consisting of (i) a $35 million pre-tax gain from the recognition of cumulative translation adjustments on the divestiture of certain non-strategic Canadian operations in our East Tier segment and (ii) an $8 million gain from divestitures of certain ancillary operations in our Other segment. These gains were partially offset by (i) a $20 million charge pertaining to reserves for loss contingencies in our Corporate and Other segment and (ii) $8 million of asset impairment charges primarily related to our WM Renewable Energy business within our Other segment.
During the year ended December 31, 2020, we recognized $35 million of net charges primarily related to (i) a $33 million net gain associated with net asset divestitures executed to address requirements of the U.S. Department of Justice in connection with our acquisition of Advanced Disposal, primarily within our West Tier segment; (ii) $41 million of non-cash impairment charges primarily related to two landfills and an oil field waste injection facility in our West Tier segment; (iii) a $20 million non-cash impairment charge in our East Tier segment due to management’s decision to close a landfill once its constructed airspace is filled and abandon any remaining permitted airspace and (iv) $7 million of net charges primarily related to non-cash impairments of certain assets within our WM Renewable Energy business in our Other segment.
During the year ended December 31, 2019, we recognized asset impairments of $42 million, related to (i) $27 million of goodwill impairment charges within our Other segment, of which $17 million related to our EES business, and $10 million related to our LampTracker ® reporting unit and (ii) $15 million of asset impairment charges primarily related to certain solid waste operations in our West Tier segment.
See Note 2 to the Consolidated Financial Statements for additional information related to the accounting policy and analysis involved in identifying and calculating impairments.
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Income from Operations
The following table summarizes income from operations for the year ended December 31 and has been updated to reflect our realigned segments which are discussed further in Note 19 to the Consolidated Financial Statements (dollars in millions):
Period-to-
Period-to-
Period
Period
2021
Change
2020(c)
Change
2019(c)
Solid Waste:
East Tier
$
2,037
$
365
21.8
%
$
1,672
$
(175)
(9.5)
%
$
1,847
West Tier
2,103
303
16.8
1,800
(134)
(6.9)
1,934
Solid Waste
4,140
668
19.2
3,472
(309)
(8.2)
3,781
Other (a)
34
76
*
(42)
116
*
(158)
Corporate and Other (b)
(1,209)
(213)
21.4
(996)
(79)
8.6
(917)
Total
$
2,965
$
531
21.8
%
$
2,434
$
(272)
(10.1)
%
$
2,706
Percentage of revenues
16.5
%
16.0
%
17.5
%
* Percentage change does not provide a meaningful comparison.
(a) “Other” includes (i) elements of our WMSBS business; (ii) elements of our landfill gas-to-energy operations managed by our WM Renewable Energy business and not included in the operations of our reportable segments; (iii) elements of our third-party subcontract and administration revenues managed by our EES business and not included in the operations of our reportable segments; (iv) our recycling brokerage services and (v) certain other expanded service offerings and solutions. In addition, our “Other” segment reflects the results of non-operating entities that provide financial assurance and self-insurance support for our Solid Waste business, net of intercompany activity.
(b) “Corporate and Other” operating results reflect certain costs incurred for various support services that are not allocated to our reportable segments. These support services include, among other things, treasury, legal, digital, tax, insurance, centralized service center processes, other administrative functions and the maintenance of our closed landfills. Income from operations for “Corporate and Other” also includes costs associated with our long-term incentive program.
(c) In the fourth quarter of 2021, we discontinued certain allocations from our Corporate and Other segment to our Solid Waste operating segments and Other segment. Reclassifications have been made to our prior period information for comparability purposes.
Solid Waste — The most significant items affecting the results of operations of our Solid Waste business during the three years ended December 31, 2021 are summarized below:
● Income from operations in our Solid Waste business increased for 2021, as compared with 2020, primarily due to (i) revenue growth in our collection and disposal businesses driven by both yield and volume, as well as the acquisition of Advanced Disposal; (ii) improved profitability in our recycling business from higher market prices for recycling commodities and improved costs at facilities where we have made investments in enhanced technology and equipment and (iii) changes from divestitures, asset impairments and unusual items discussed above in (Gain) Loss from Divestitures, Asset Impairments and Unusual Items, Net . These increases were partially offset by (i) labor cost pressure from frontline employee wage adjustments, increased turnover driving up training costs and higher overtime due to driver shortages and volume growth; (ii) increased landfill amortization from higher volumes and revisions in landfill estimates, including the anticipated timing of capping, closure and post-closure activities at certain landfills and adjustments in 2020 to the inflation rate used to estimate capping, closure, and post-closure asset retirement obligations that benefitted costs in 2020 and (iii) inflationary cost pressures. During 2021, the positive earnings contributions from Advanced Disposal were offset by elevated depreciation and amortization of acquired assets.
● Income from operations for 2020 decreased, as compared with 2019, for the Solid Waste business due to the overall negative impact of the COVID-19 pandemic resulting in revenue declines from lower volumes and higher
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depreciation expense which was primarily related to investments in capital assets, including our fleet and facilities. The declines were partially offset by (i) higher yield in our collection and disposal businesses; (ii) the benefit of resumed fees and price increases; (iii) lower operating costs directly related to our proactive steps taken to manage our variable costs in the lower volume environment and (iv) a net divestiture gain of $33 million associated with the sale of net assets to GFL Environmental, primarily within our West Tier segment.
Additionally, income from operations for our West Tier segment was impacted by $41 million of non-cash asset impairment charges primarily related to two landfills and an oil field waste injection facility. Income from operations for our East Tier segment was impacted by a $20 million non-cash impairment charge related to management’s decision to close a landfill once its constructed airspace is filled and abandon any remaining permitted airspace. Furthermore, in 2019, our West Tier segment benefited from the clean-up efforts of natural disasters primarily in California and similar efforts did not recur in 2020.
Other — The increase in income from operations for 2021, as compared with 2020, was primarily driven by increased market values for renewable energy credits generated by our WM Renewable Energy business.
Income from operations for the Other segment for 2020, as compared with 2019, was favorably impacted primarily by (i) volume increases in our WM Renewable Energy business as a result of a new renewable energy facility coming online; (ii) our WMSBS business as a result of newly executed national account contracts and (iii) our recycling brokerage business.
Corporate and Other — The most significant items affecting the results of operations for Corporate and Other during the three years ended December 31, 2021 are summarized below:
● These costs increased in 2021, as compared with 2020, due to (i) higher incentive compensation costs; (ii) increased labor, support and integration costs following our acquisition of Advanced Disposal; (iii) strategic investments in our digital platform; (iv) increased health and welfare costs attributable to medical care activity generally returning to pre-pandemic levels from the lower levels experienced during 2020 and (v) charges pertaining to reserves for certain loss contingencies during 2021. These increases were partially offset by lower consulting, advisory and legal fees following the completion of our acquisition of Advanced Disposal in the fourth quarter of 2020 and changes in the measurement of our environmental remediation obligations and recovery assets in both 2020 and 2021.
● The costs increased in 2020, as compared with 2019, due to (i) higher consulting, advisory and legal fees associated with our acquisition and integration of Advanced Disposal; (ii) strategic investments in our digital platform; (iii) incremental costs associated with the COVID-19 pandemic and (iv) higher long-term incentive compensation costs. These increased expenses were offset, in part, by (i) lower annual incentive compensation costs and (ii) lower litigation reserves.
Interest Expense, Net
Our interest expense, net was $365 million, $425 million and $411 million in 2021, 2020 and 2019, respectively. The decrease in interest expense, net for 2021 was primarily due to certain refinancing activities, as discussed further below, including (i) the redemption of $3.0 billion of senior notes in July 2020 and the issuance of $2.5 billion of senior notes in November 2020 at lower rates and (ii) the retirement of $1.3 billion of certain high-coupon senior notes and concurrent issuance of $950 million of lower coupon senior notes in May 2021. The decreases were partially offset by decreases in interest income as a result of lower cash and cash equivalents balances in 2021. The increase in interest expense, net for 2020 was primarily attributable to decreases in interest income resulting from lower cash and cash equivalents balances, due to the redemption of $3.0 billion of senior notes with a special mandatory redemption feature (the “SMR Notes”) in July 2020 as discussed below in Loss on Early Extinguishment of Debt, Net . Partially offsetting the decreases in interest income were favorable impacts due to a lower interest rate on our commercial paper borrowings as a result of the favorable interest rate environment in 2020 compared to 2019.
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Loss on Early Extinguishment of Debt, Net
In May 2021, WMI issued $950 million of senior notes, which are discussed further below in Summary of Cash and Cash Equivalents, Restricted Trust and Escrow Accounts and Debt Obligations . Concurrently, we used the net proceeds from the newly issued senior notes of $942 million and available cash on hand to retire $1.3 billion of certain high-coupon senior notes. The loss on early extinguishment of debt for 2021 includes $220 million of charges related to this tender offer, including cash paid of $211 million related to premiums and other third-party costs, and $9 million primarily related to unamortized discounts and debt issuance costs. See Note 6 to the Consolidated Financial Statements for more information related to these transactions.
In July 2020, we recognized a $52 million loss on early extinguishment of debt in our Consolidated Statement of Operations related to the mandatory redemption of the SMR Notes. The loss includes $30 million of premiums paid and $22 million of unamortized discounts and debt issuance costs. Pursuant to the terms of the SMR Notes, we were required to redeem all of such outstanding notes paying debt holders 101% of the aggregate principal amounts of such notes, plus accrued but unpaid interest, as a result of the Advanced Disposal acquisition not being completed by July 14, 2020. Accordingly, the redemption was completed on July 20, 2020 using available cash on hand and, to a lesser extent, commercial paper borrowings. The cash paid included the $3.0 billion principal amount of debt redeemed, $30 million of related premiums and $8 million of accrued interest.
During the fourth quarter of 2020, we repaid the outstanding borrowings under our 364-day revolving credit facility and contemporaneously terminated the facility, at which time we recognized a $2 million loss on early extinguishment of debt in our Consolidated Statement of Operations related to unamortized debt issuance costs.
At the time of acquisition, Advanced Disposal had outstanding $425 million of 5.625% senior notes due November 2024. In November 2020, we redeemed the notes pursuant to an optional redemption feature upon which we recognized a $1 million gain on early extinguishment of debt in our Consolidated Statement of Operations due to the difference in carrying value and redemption price.
In May 2019, WMI issued $4.0 billion of senior notes, including $3.0 billion of SMR Notes. We used $344 million of the proceeds from this offering to retire $257 million principal amount of certain high-coupon senior notes. The cash paid to retire the high-coupon senior notes also included $84 million of related premiums, which are classified as loss on early extinguishment of debt in our Consolidated Statement of Operations, and $3 million of accrued interest.
In the third quarter of 2019, we elected to refund and reissue $99 million of tax-exempt bonds, which resulted in the recognition of a $1 million loss on early extinguishment of debt in our Consolidated Statement of Operations.
Equity in Net Losses of Unconsolidated Entities
We recognized equity in net losses of unconsolidated entities of $36 million, $68 million and $55 million in 2021, 2020 and 2019, respectively. The losses for each period were primarily related to our noncontrolling interests in entities established to invest in and manage low-income housing properties. We generate tax benefits, including tax credits, from the losses incurred from these investments, which are discussed further in Notes 8 and 18 to the Consolidated Financial Statements. In 2020, the entity that held and managed our ownership interest in the refined coal facility sold a majority of its assets resulting in a $7 million non-cash impairment charge at that time. Additionally, the 2019 period includes losses associated with our investment in a refined coal facility.
Other, Net
We recognized other, net income of $5 million in 2021 and 2020, compared to other, net expense of $50 million in 2019. In 2019, we recognized a $52 million non-cash impairment charge related to our minority-owned investment in a waste conversion technology business. We wrote down our investment to its estimated fair value as the result of recent third-party investor’s transactions in these securities. The fair value of our investment was not readily determinable; thus, we determined the fair value utilizing a combination of quoted price inputs for the equity in our investment (Level 2) and certain management assumptions pertaining to investment value (Level 3).
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Income Tax Expense
We recorded income tax expense of $532 million, $397 million and $434 million in 2021, 2020 and 2019, respectively, resulting in effective income tax rates of 22.6%, 20.9% and 20.6% for the years ended December 31, 2021, 2020 and 2019, respectively. The comparability of our income tax expense for the reported periods has been primarily affected by the following:
● Investments Qualifying for Federal Tax Credits — Our low-income housing properties and refined coal facility investments reduced our income tax expense by $74 million, $87 million and $96 million, primarily due to tax credits realized from these investments for the years ended December 31, 2021, 2020 and 2019, respectively. See Note 18 to the Consolidated Financial Statements for additional information related to these unconsolidated variable interest entities;
● Other Federal Tax Credits — During 2021, 2020 and 2019, we recognized federal tax credits in addition to the tax credits realized from our investments in low-income housing properties and the refined coal facility, resulting in a reduction in our income tax expense of $5 million, $7 million and $11 million, respectively;
● Equity-Based Compensation — During 2021, 2020 and 2019, we recognized excess tax benefits related to the vesting or exercise of equity-based compensation awards resulting in a reduction in our income tax expense of $18 million, $27 million and $25 million, respectively;
● State Net Operating Losses and Credits — During 2021, 2020 and 2019, we recognized state net operating losses and credits resulting in a reduction in our income tax expense of $15 million, $12 million and $14 million, respectively;
● Tax Audit Settlements — We file income tax returns in the U.S. and Canada, as well as other state and local jurisdictions. We are currently under audit by various taxing authorities and our audits are in various stages of completion. During the reported periods, we settled various tax audits, which resulted in a reduction in our income tax expense of $13 million, $10 million and $2 million for the years ended December 31, 2021, 2020 and 2019, respectively;
● Adjustments to Accruals and Related Deferred Taxes — Adjustments to our accruals and related deferred taxes primarily due to the filing of our income tax returns, analysis of our deferred tax balances and uncertain tax positions, and changes in state and foreign laws resulted in an increase in our income tax expense of $17 million for the year ended December 31, 2021, and a reduction in our income tax expense of $3 million and $22 million for the years ended December 31, 2020 and 2019, respectively;
● Tax Implications of Divestitures – During 2021, we recognized a pre-tax gain from the recognition of cumulative translation adjustments on the divestiture of certain non-strategic Canadian operations. This gain was not taxable, which resulted in a reduction in our income tax expense of $8 million;
● Non-Deductible Transaction Costs — During 2020 and 2019, we recognized the detrimental tax impact of $27 million and $10 million, respectively, of non-deductible transaction costs related to our acquisition of Advanced Disposal. The tax rules require the capitalization of certain facilitative costs on the acquisition of stock of a company resulting in the applicable costs not being deductible for tax purposes; and
● Tax Implications of Impairments — Portions of the impairment charges recognized during 2019 were not deductible for tax purposes resulting in an increase in income tax expense of $15 million. The non-cash impairment charges recognized during 2021 and 2020 were deductible for tax purposes. See Note 11 to the Consolidated Financial Statements for more information related to our impairment charges.
See Note 8 to the Consolidated Financial Statements for more information related to income taxes.
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Landfill and Environmental Remediation Discussion and Analysis
We owned or operated 255 solid waste landfills and five secure hazardous waste landfills as of December 31, 2021 and 263 solid waste landfills and five secure hazardous waste landfills as of December 31, 2020. For these landfills, the following table reflects changes in capacity, as measured in tons of waste, for the year ended December 31 and remaining airspace, measured in cubic yards of waste, as of December 31 (in millions):
2021
2020
Remaining
Remaining
Permitted
Expansion
Total
Permitted
Expansion
Total
Capacity
Capacity
Capacity
Capacity
Capacity
Capacity
Balance as of beginning of year (in tons)
4,891
191
5,082
4,754
200
4,954
Acquisitions, divestitures, newly permitted landfills and closures
(4)
—
(4)
259
14
273
Changes in expansions pursued (a)
—
105
105
—
21
21
Expansion permits granted (b)
126
(126)
—
44
(44)
—
Amortizable tons received
(124)
—
(124)
(112)
—
(112)
Changes in engineering estimates and other (c)
—
4
4
(54)
—
(54)
Balance as of end of year (in tons)
4,889
174
5,063
4,891
191
5,082
Balance as of end of year (in cubic yards)
4,808
163
4,971
4,828
163
4,991
(a) Amounts reflected here relate to the combined impacts of (i) new expansions pursued; (ii) increases or decreases in the airspace being pursued for ongoing expansion efforts; (iii) adjustments for differences between the airspace being pursued and airspace granted and (iv) decreases due to decisions to no longer pursue expansion permits, if any.
(b) We received expansion permits at seven of our landfills during 2021 and four of our landfills during 2020, demonstrating our continued success in working with municipalities and regulatory agencies to expand the disposal airspace of our existing landfills.
(c) Changes in engineering estimates can result in changes to the estimated available remaining airspace of a landfill or changes in the utilization of such landfill airspace, affecting the number of tons that can be placed in the future. Estimates of the amount of waste that can be placed in the future are reviewed annually by our engineers and are based on a number of factors, including standard engineering techniques and site-specific factors such as current and projected mix of waste type; initial and projected waste density; estimated number of years of life remaining; depth of underlying waste; anticipated access to moisture through precipitation or recirculation of landfill leachate and operating practices. We continually focus on improving the utilization of airspace through efforts that may include recirculating landfill leachate where allowed by permit; optimizing the placement of daily cover materials and increasing initial compaction through improved landfill equipment, operations and training.
The tons received at our landfills for the year ended December 31 are shown below (tons in thousands):
2021
2020
# of
Total
Tons per
# of
Total
Tons per
Sites
Tons
Day
Sites
Tons
Day
Solid waste landfills (a)
255
(b)
124,773
457
263
112,729
413
Hazardous waste landfills
5
610
2
5
676
2
260
125,383
459
268
113,405
415
Solid waste landfills closed, divested or lease or other contractual agreement expired during related year
9
114
5
318
125,497
(c)
113,723
(c)
(a) As of December 31, 2021 and 2020, we had 14 landfills and 17 landfills, respectively, which were not accepting waste.
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(b) In 2021, we (i) executed one new contractual agreement; (ii) divested one landfill; (iii) divested one service agreement; (iv) closed six landfills and (v) closed one landfill operated under contractual agreement.
(c) These amounts include 1.6 million tons and 1.7 million tons as of December 31, 2021 and 2020, respectively, that were received at our landfills but were not amortized as they were used for beneficial purposes and generally were redirected from the permitted airspace to other areas of the landfill. Waste types that are frequently identified for beneficial use include green waste for composting and clean dirt for on-site construction projects.
As of December 31, 2021, we owned or controlled the management of 230 sites with remedial activities, are in closure or have received a certification of closure from the applicable regulatory agency.
Based on remaining permitted airspace as of December 31, 2021 and projected annual disposal volume, the weighted average remaining landfill life for all of our owned or operated landfills is approximately 38 years. Many of our landfills have the potential for expanded airspace beyond what is currently permitted. We monitor the availability of permitted airspace at each of our landfills and evaluate whether to pursue an expansion at a given landfill based on estimated future disposal volume, disposal prices, construction and operating costs, remaining airspace and likelihood of obtaining an expansion permit. We are seeking expansion permits at 15 of our landfills that meet the expansion criteria outlined in the Critical Accounting Estimates and Assumptions — Landfills section below. Although no assurances can be made that all future expansions will be permitted or permitted as designed, the weighted average remaining landfill life for all owned or operated landfills is approximately 39 years when considering remaining permitted airspace, expansion airspace and projected annual disposal volume.
The number of landfills owned or operated as of December 31, 2021, segregated by their estimated operating lives based on remaining permitted and expansion airspace and projected annual disposal volume, was as follows:
# of Landfills
0 to 5 years
28
6 to 10 years
21
11 to 20 years
50
21 to 40 years
61
41+ years
100
Total
260
(a)
(a) Of the 260 landfills, 219 are owned, 29 are operated under lease agreements and 12 are operated under other contractual agreements. For the landfills not owned, we are usually responsible for final capping, closure and post-closure obligations.
Landfill Assets — We capitalize various costs that we incur to prepare a landfill to accept waste. These costs generally include expenditures for land (including the landfill footprint and required landfill buffer property), permitting, excavation, liner material and installation, landfill leachate collection systems, landfill gas collection systems, environmental monitoring equipment for groundwater and landfill gas, directly related engineering, capitalized interest, and on-site road construction and other capital infrastructure costs. The cost basis of our landfill assets also includes estimates of future costs associated with landfill final capping, closure and post-closure activities, which are discussed further below.
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The changes to the cost basis of our landfill assets and accumulated landfill airspace amortization for the year ended December 31, 2021 are reflected in the table below (in millions):
Accumulated
Net Book
Cost Basis of
Landfill Airspace
Value of
Landfill Assets
Amortization
Landfill Assets
December 31, 2020
$
16,842
$
(9,692)
$
7,150
Capital additions
791
—
791
Asset retirement obligations incurred and capitalized
117
—
117
Amortization of landfill airspace
—
(731)
(731)
Foreign currency translation
8
(3)
5
Asset retirements and other adjustments
(24)
36
12
December 31, 2021
$
17,734
$
(10,390)
$
7,344
As of December 31, 2021, we estimate that we will spend approximately $639 million in 2022, and approximately $1.4 billion in 2023 and 2024 combined, for the construction and development of our landfill assets. The specific timing of landfill capital spending is dependent on future events and spending estimates are subject to change due to fluctuations in landfill waste volumes, changes in environmental requirements and other factors impacting landfill operations.
As of December 31, 2021, we had 14 landfills which were not accepting waste. During the year ended December 31, 2021, we performed tests of recoverability for five of these landfills with an aggregate net recorded capitalized landfill asset cost of $297 million, for which the undiscounted expected future cash flows resulting from our probability-weighted estimation approach exceeded the carrying values. We did not perform recoverability tests for the remaining nine landfills as the net recorded capitalized landfill asset cost was not material.
Landfill and Environmental Remediation Liabilities — As we accept waste at our landfills, we incur significant asset retirement obligations, which include liabilities associated with landfill final capping, closure and post-closure activities. These liabilities are accounted for in accordance with authoritative guidance on accounting for asset retirement obligations and are discussed in Note 2 to the Consolidated Financial Statements. We also have liabilities for the remediation of properties that have incurred environmental damage, which generally was caused by operations or for damage caused by conditions that existed before we acquired operations or a site. We recognize environmental remediation liabilities when we determine that the liability is probable and the estimated cost for the likely remedy can be reasonably estimated.
The changes to landfill and environmental remediation liabilities for the year ended December 31, 2021 are reflected in the table below (in millions):
Environmental
Landfill
Remediation
December 31, 2020
$
2,156
$
230
Obligations incurred and capitalized
117
—
Obligations settled
(101)
(22)
Interest accretion
108
3
Revisions in estimates and interest rate assumptions (a)
33
2
Acquisitions, divestitures and other adjustments (b)
13
—
December 31, 2021
$
2,326
$
213
(a) The amount reported for our landfill liabilities includes an increase of $15 million due to a business decision to accelerate the closure timing of a landfill in our West Tier segment, which resulted in the acceleration of the expected timing of capping, closure and post-closure activities. The remaining increase relates to revisions in estimated costs and timing of capping, closure and post-closure liabilities.
(b) The amount reported for our landfill liabilities includes an increase of $13 million related to changes in the fair values assigned to certain acquired Advanced Disposal sites.
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Landfill Operating Costs — The following table summarizes our landfill operating costs for the year ended December 31 (in millions):
2021
2020
2019
Interest accretion on landfill liabilities
$
108
$
103
$
98
Interest accretion on and discount rate adjustments to environmental remediation liabilities and recovery assets
(2)
9
13
Leachate and methane collection and treatment
183
189
173
Landfill remediation costs
6
1
4
Other landfill site costs
117
92
91
Total landfill operating costs
$
412
$
394
$
379
Amortization of Landfill Airspace — Amortization of landfill airspace, which is included as a component of depreciation and amortization expenses, includes the following:
● the amortization of landfill capital costs, including (i) costs that have been incurred and capitalized and (ii) estimated future costs for landfill development and construction required to develop our landfills to their remaining permitted and expansion airspace; and
● the amortization of asset retirement costs arising from landfill final capping, closure and post-closure obligations, including (i) costs that have been incurred and capitalized and (ii) projected asset retirement costs.
Amortization expense is recorded on a units-of-consumption basis, applying cost as a rate per ton. The rate per ton is calculated by dividing each component of the amortizable basis of a landfill (net of accumulated amortization) by the number of tons needed to fill the corresponding asset’s remaining permitted and expansion airspace. Landfill capital costs and closure and post-closure asset retirement costs are generally incurred to support the operation of the landfill over its entire operating life and are, therefore, amortized on a per-ton basis using a landfill’s total permitted and expansion airspace. Final capping asset retirement costs are related to a specific final capping event and are, therefore, amortized on a per-ton basis using each discrete final capping event’s estimated permitted and expansion airspace. Accordingly, each landfill has multiple per-ton amortization rates.
The following table presents our landfill airspace amortization expense on a per-ton basis for the year ended December 31:
2021
2020
2019
Amortization of landfill airspace (in millions)
$
731
$
568
$
575
Tons received, net of redirected waste (in millions)
124
112
121
Average landfill airspace amortization expense per ton
$
5.90
$
5.07
$
4.75
Different per-ton amortization rates are applied at each of our 260 landfills, and per-ton amortization rates vary significantly from one landfill to another due to (i) inconsistencies that often exist in construction costs and provincial, state and local regulatory requirements for landfill development and landfill final capping, closure and post-closure activities and (ii) differences in the cost basis of landfills that we develop versus those that we acquire. Accordingly, our landfill airspace amortization expense measured on a per-ton basis can fluctuate due to changes in the mix of volumes we receive across the Company each year.
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Liquidity and Capital Resources
The Company consistently generates cash flow from operations that meets and exceeds our working capital needs, payment of our dividends, investment in the business through capital expenditures and tuck-in acquisitions, and funding of strategic growth and sustainability investments. We continually monitor our actual and forecasted cash flows, our liquidity and our capital resources, enabling us to plan for our present needs and fund unbudgeted business requirements that may arise during the year. The Company believes that its investment grade credit ratings, large value of unencumbered assets and modest leverage enable it to obtain adequate financing to meet its ongoing capital, operating, strategic and other liquidity requirements.
Summary of Contractual Obligations
The following table summarizes our significant contractual obligations as of December 31, 2021 and the anticipated effect of these obligations on our liquidity in future years (in millions):
2022
2023
2024
2025
2026
Thereafter
Total
Recorded Obligations:
Final capping, closure and post-closure liabilities (a)
$
137
$
171
$
165
$
188
$
133
$
2,477
$
3,271
Debt payments (b)
2,449
651
249
1,278
677
8,275
13,579
Unrecorded Obligations:
Interest on debt (c)
323
290
278
266
247
2,293
3,697
Estimated unconditional purchase obligations (d)
197
182
130
105
95
368
1,077
Anticipated liquidity impact as of December 31, 2021
$
3,106
$
1,294
$
822
$
1,837
$
1,152
$
13,413
$
21,624
(a) Includes liabilities for final capping, closure and post-closure costs recorded in our Consolidated Balance Sheet as of December 31, 2021, without the impact of discounting and inflation. Our recorded liabilities for final capping, closure and post-closure costs will increase as we continue to place additional tons within the permitted airspace at our landfills.
(b) These amounts represent the scheduled principal payments based on their contractual maturities related to our long-term debt and financing leases, excluding interest. Refer to Note 6 to the Consolidated Financial Statements for additional information regarding our debt obligations.
(c) Interest on our fixed-rate debt was calculated based on contractual rates and interest on our variable-rate debt was calculated based on interest rates as of December 31, 2021. As of December 31, 2021, we had $58 million of accrued interest related to our debt obligations.
(d) Our unrecorded obligations represent purchase commitments from which we expect to realize an economic benefit in future periods. We have also made certain guarantees that we do not expect to materially affect our current or future financial position, results of operations or liquidity. See Note 10 to the Consolidated Financial Statements for discussion of the nature and terms of our unconditional purchase obligations and guarantees.
In addition to the above, we also have recorded obligations related to liabilities associated with environmental remediation costs and non-cancelable operating lease obligations, which are discussed further in Notes 3 and 7 to the Consolidated Financial Statements, respectively.
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Summary of Cash and Cash Equivalents, Restricted Trust and Escrow Accounts and Debt Obligations
The following is a summary of our cash and cash equivalents, restricted trust and escrow accounts and debt balances as of December 31 (in millions):
2021
2020
Cash and cash equivalents
$
118
$
553
Restricted trust and escrow accounts:
Insurance reserves
$
305
$
306
Final capping, closure, post-closure and environmental remediation funds
118
114
Other
5
2
Total restricted trust and escrow accounts (a)
$
428
$
422
Debt:
Current portion
$
708
$
551
Long-term portion
12,697
13,259
Total debt
$
13,405
$
13,810
(a)
As of December 31, 2021 and 2020, $80 million and $75 million, respectively, of these account balances was included in other current assets in our Consolidated Balance Sheets.
Cash and cash equivalents — The decrease in cash and cash equivalents during 2021 is primarily due to the use of available cash to retire certain high-coupon senior notes in May 2021, which is discussed above in Loss on Early Extinguishment of Debt, Net .
Debt — We use long-term borrowings in addition to the cash we generate from operations as part of our overall financial strategy to support and grow our business. We primarily use senior notes and tax-exempt bonds to borrow on a long-term basis, but we also use other instruments and facilities, when appropriate. The components of our borrowings as of December 31, 2021 are described in Note 6 to the Consolidated Financial Statements.
As of December 31, 2021, we had $3.1 billion of debt maturing within the next 12 months, including (i) $1.8 billion of short-term borrowings under our commercial paper program (net of related discount on issuance); (ii) $645 million of tax-exempt bonds with term interest rate periods that expire within the next 12 months, which is prior to their scheduled maturities; (iii) $500 million of 2.90% senior notes that mature in September 2022 and (iv) $170 million of other debt with scheduled maturities within the next 12 months, including $71 million of tax-exempt bonds. As of December 31, 2021, we have classified $2.4 billion of debt maturing in the next 12 months as long term because we have the intent and ability to refinance these borrowings on a long-term basis as supported by the forecasted available capacity under our $3.5 billion long-term U.S. and Canadian revolving credit facility (“$3.5 billion revolving credit facility”). The remaining $708 million of debt maturing in the next 12 months is classified as current obligations.
As of December 31, 2021, we also had $54 million of variable-rate tax-exempt bonds with long-term scheduled maturities supported by letters of credit under our $3.5 billion revolving credit facility. The interest rates on our variable rate tax-exempt bonds are reset on a weekly basis through a remarketing process. All recent tax-exempt bond remarketings have successfully placed Company bonds with investors at market-driven rates and we currently expect future remarketings to be successful. However, if the remarketing agent is unable to remarket our bonds, the remarketing agent can put the bonds to us. In the event of a failed remarketing, we have the availability under our $3.5 billion revolving credit facility to fund these bonds until they are remarketed successfully. Accordingly, we have classified the $54 million of variable-rate tax-exempt bonds with maturities of more than one year as long-term in our Consolidated Balance Sheet as of December 31, 2021.
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In May 2021, WMI issued $950 million of senior notes consisting of $475 million of 2.00% senior notes due June 1, 2029 and $475 million of 2.95% senior notes due June 15, 2041. The net proceeds from these debt issuances were $942 million, all of which were used along with available cash on hand, to retire $1.3 billion of certain high-coupon senior notes. The cash paid included the principal amount of the debt retired, $211 million of related premiums and other third-party costs, which are classified as loss on early extinguishment of debt in our Consolidated Statement of Operations, and $15 million of accrued interest. See Note 6 to the Consolidated Financial Statements for more information related to the debt transactions.
We have credit lines in place to support our liquidity and financial assurance needs. The following table summarizes our outstanding letters of credit, categorized by type of facility as of December 31 (in millions):
2021
2020
Revolving credit facility (a)
$
167
$
270
Other letter of credit lines (b)
764
566
$
931
$
836
(a) As of December 31, 2021, we had an unused and available credit capacity of $1.5 billion.
(b) As of December 31, 2021, these other letter of credit lines are uncommitted with terms extending through April 2023.
Guarantor Financial Information
WM Holdings has fully and unconditionally guaranteed all of WMI’s senior indebtedness. WMI has fully and unconditionally guaranteed all of WM Holdings’ senior indebtedness. None of WMI’s other subsidiaries have guaranteed any of WMI’s or WM Holdings’ debt. In lieu of providing separate financial statements for the subsidiary issuer and guarantor (WMI and WM Holdings), we have presented the accompanying supplemental summarized combined balance sheet and income statement information for WMI and WM Holdings on a combined basis after elimination of intercompany transactions between WMI and WM Holdings and amounts related to investments in any subsidiary that is a non-guarantor (in millions):
December 31,
2021
Balance Sheet Information:
Current assets
$
6
Noncurrent assets
13
Current liabilities
590
Noncurrent liabilities:
Advances due to affiliates
18,033
Other noncurrent liabilities
10,778
Year Ended
December 31, 2021
Income Statement Information:
Revenue
$
—
Operating income
—
Net loss
343
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Summary of Cash Flow Activity
The following is a summary of our cash flows for the year ended December 31 (in millions):
2021
2020
2019
Net cash provided by operating activities
$
4,338
$
3,403
$
3,874
Net cash used in investing activities
$
(1,894)
$
(4,847)
$
(2,376)
Net cash (used in) provided by financing activities
$
(2,900)
$
(1,559)
$
1,964
Net Cash Provided by Operating Activities — Our operating cash flows for 2021, as compared with 2020, increased by $935 million primarily as a result of (i) an increase in earnings primarily attributable to our collection, disposal and recycling lines of business; (ii) our acquisition of Advanced Disposal; (iii) lower interest payments in 2021 primarily due to certain refinancing activities and the retirement of high-coupon debt during 2020 reducing our overall interest rates; (iv) lower income taxes paid in 2021 and (v) favorable changes in our working capital, net of effects of acquisitions and divestitures. Our working capital was favorably impacted by process improvements that contributed to a significant improvement in our days-to-collect metrics. These favorable impacts were partially offset by the timing of cash tax benefits received in 2020 associated with federal alternative fuel tax credits.
Our operating cash flows for 2020, as compared with 2019, decreased by $471 million as a result of (i) higher income tax payments related to a taxable gain on the sale of Advanced Disposal assets to GFL Environmental; (ii) increased interest payments and integration related spending due to our acquisition of Advanced Disposal; (iii) payments associated with investments we made in our digital platform and (iv) to a lesser extent, lower earnings on our traditional Solid Waste business primarily caused by the impact of the COVID-19 pandemic. These results were partially offset by cash benefits in 2020 associated with the 2019 federal alternative fuel credits.
Net Cash Used in Investing Activities — The most significant items affecting the comparison of our investing cash flows for the periods presented are summarized below:
● Acquisitions — Our spending on acquisitions was $76 million, $4,088 million and $527 million in 2021, 2020 and 2019, respectively, of which $75 million, $4,085 million and $521 million, respectively, are considered cash used in investing activities. The remaining spend is financing or operating activities related to the timing of contingent consideration paid. Substantially all of these acquisitions are related to our Solid Waste business. Our acquisition spending in 2020 and 2019 is primarily attributable to Advanced Disposal and Petro Waste Environmental LP, respectively. See Note 17 to the Consolidated Financial Statements for additional information. We continue to focus on accretive acquisitions and growth opportunities that will enhance and expand our existing service offerings.
● Capital Expenditures — We used $1,904 million, $1,632 million and $1,818 million for capital expenditures in 2021, 2020 and 2019, respectively. The increase in 2021 is due in part to intentional steps the Company took to accelerate growth capital spending on recycling and renewable energy projects. Additionally, in 2020 we took proactive steps to reduce the amount of capital spending required due to the decrease in volumes as a result of COVID-19. The Company continues to maintain a disciplined focus on capital management to prioritize investments in the long-term growth of our business and for the replacement of aging assets.
● Proceeds from Divestitures — Proceeds from divestitures of businesses and other assets, net of cash divested, were $96 million, $885 million and $49 million in 2021, 2020 and 2019, respectively. In 2021, our proceeds are primarily the result of the sale of certain non-strategic Canadian operations. In 2020, our proceeds included $856 million related to the sale of assets required to be sold by the U.S. Department of Justice in connection with our acquisition of Advanced Disposal. The remaining amounts in 2021, 2020 and 2019 generally related to the sale of fixed assets.
● Other, Net — Our spending within other, net was $11 million, $15 million, and $86 million in 2021, 2020 and 2019, respectively. During 2021, 2020 and 2019, we used $32 million, $14 million and $44 million, respectively, of cash from restricted cash and cash equivalents to invest in available-for-sale securities. Our 2021 cash spend was partially offset by proceeds received from the sale of an equity method investment. We also used $20 million in 2019 to make an initial cash payment associated with a low-income housing investment. In 2019, these items
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were partially offset by cash proceeds from the redemption of our preferred stock received in conjunction with the 2014 sale of our Puerto Rico operations.
Net Cash (Used in) Provided by Financing Activities — The most significant items affecting the comparison of our financing cash flows for the periods presented are summarized below:
● Debt (Repayments) Borrowings — The following summarizes our cash borrowings and repayments of debt for the year ended December 31 (in millions):
2021
2020
2019
Borrowings :
Revolving credit facility
$
—
$
50
$
—
Commercial paper program (a)
6,831
3,630
8,554
364-day revolving credit facility (b)
—
3,000
—
Senior notes
942
2,479
3,971
Canadian senior notes
—
—
373
Tax-exempt bonds
175
261
339
Other debt
—
—
—
$
7,948
$
9,420
$
13,237
Repayments :
Revolving credit facility
$
—
$
(50)
$
(11)
Commercial paper program (a)
(6,872)
(1,822)
(9,555)
364-day revolving credit facility (b)
—
(3,000)
—
Senior notes
(1,289)
(4,000)
(257)
Advanced Disposal senior notes (c)
—
(437)
—
Tax-exempt bonds
(127)
(212)
(204)
Other debt
(116)
(108)
(61)
$
(8,404)
$
(9,629)
$
(10,088)
Net cash (repayments) borrowings
$
(456)
$
(209)
$
3,149
(a) Beginning in 2021, we elected to report these cash flows on a gross basis. Reclassifications have been made to our prior period information for comparability purposes. Borrowings incurred in 2020 were used for the redemption of the SMR Notes and to partially fund our acquisition of Advanced Disposal. Borrowings incurred in 2021 and 2019 were primarily to support acquisitions and for general corporate purposes.
(b) In November 2020, we terminated this facility contemporaneously with repayment of all outstanding borrowings with proceeds from our November 2020 senior notes issuance.
(c) At the time of acquisition, Advanced Disposal had certain outstanding senior notes which were redeemed in 2020 pursuant to an optional redemption feature as further discussed in Note 17 to the Consolidated Financial Statements.
Refer to Note 6 to the Consolidated Financial Statements for additional information related to our debt borrowings and repayments.
● Premiums and Other Paid on Early Extinguishment of Debt — During 2021, we paid premiums and other third-party costs of $211 million to retire certain high-coupon notes as discussed further in Note 6 to the Consolidated Financial Statements. During 2020, we paid premiums of $30 million to redeem $3.0 billion of senior notes that contained a special mandatory redemption feature tied to the timing of the Advanced Disposal acquisition closing. During 2019, we paid premiums of $84 million to retire certain high-coupon senior notes. See Loss on Early Extinguishment of Debt, Net for further discussion.
● Common Stock Repurchase Program — For the periods presented, all share repurchases have been made in accordance with financial plans approved by our Board of Directors. We allocated $1,350 million, $402 million and $244 million of available cash to common stock repurchases during 2021, 2020, and 2019, respectively. See Note 13 to the Consolidated Financial Statements for additional information.
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We announced in December 2021 that the Board of Directors has authorized up to $1.5 billion in future share repurchases. Any future share repurchases will be made at the discretion of management and will depend on factors similar to those considered by the Board of Directors in making dividend declarations and listed below, as well as market conditions.
● Cash Dividends — For the periods presented, all dividends have been declared by our Board of Directors. Cash dividends declared and paid were $970 million in 2021, or $2.30 per common share, $927 million in 2020, or $2.18 per common share, and $876 million in 2019, or $2.05 per common share.
In December 2021, we announced that our Board of Directors expects to increase the quarterly dividend from $0.575 to $0.65 per share for dividends declared in 2022. However, all future dividend declarations are at the discretion of the Board of Directors and depend on various factors, including our net earnings, financial condition, cash required for future business plans, growth and acquisitions and other factors the Board of Directors may deem relevant.
● Exercise of Common Stock Options — The exercise of common stock options generated financing cash inflows of $66 million, $63 million and $67 million during 2021, 2020 and 2019, respectively.
Free Cash Flow
We are presenting free cash flow, which is a non-GAAP measure of liquidity, in our disclosures because we use this measure in the evaluation and management of our business. We define free cash flow as net cash provided by operating activities, less capital expenditures, plus proceeds from divestitures of businesses and other assets, net of cash divested. We believe it is indicative of our ability to pay our quarterly dividends, repurchase common stock, fund acquisitions and other investments and, in the absence of refinancings, to repay our debt obligations. Free cash flow is not intended to replace net cash provided by operating activities, which is the most comparable GAAP measure. We believe free cash flow gives investors useful insight into how we view our liquidity, but the use of free cash flow as a liquidity measure has material limitations because it excludes certain expenditures that are required or that we have committed to, such as declared dividend payments and debt service requirements.
Our calculation of free cash flow and reconciliation to net cash provided by operating activities is shown in the table below for the year ended December 31 (in millions), and may not be calculated the same as similarly-titled measures presented by other companies:
2021
2020
2019
Net cash provided by operating activities
$
4,338
$
3,403
$
3,874
Capital expenditures
(1,904)
(1,632)
(1,818)
Proceeds from divestitures of businesses and other assets, net of cash divested
96
885
49
Free cash flow
$
2,530
$
2,656
$
2,105
Critical Accounting Estimates and Assumptions
In preparing our financial statements, we make numerous estimates and assumptions that affect the accounting for and recognition and disclosure of assets, liabilities, equity, revenues and expenses. We must make these estimates and assumptions because certain information that we use is dependent on future events, cannot be calculated with precision from available data or simply cannot be calculated. In some cases, these estimates are difficult to determine, and we must exercise significant judgment. In preparing our financial statements, the most difficult, subjective and complex estimates and the assumptions that present the greatest amount of uncertainty relate to our accounting for landfills, environmental remediation liabilities, long-lived assets and intangible asset impairments and the fair value of assets and liabilities acquired in business combinations. Each of these items is discussed in additional detail below and in Note 2 to the Consolidated Financial Statements. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our financial statements.
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Landfills
Accounting for landfills requires that significant estimates and assumptions be made regarding (i) the cost to construct and develop each landfill asset; (ii) the estimated fair value of final capping, closure and post-closure asset retirement obligations, which must consider both the expected cost and timing of these activities and (iii) the determination of each landfill’s remaining permitted and expansion airspace.
Landfill Costs — We estimate the total cost to develop each of our landfill sites to its remaining permitted and expansion airspace. This estimate includes such costs as landfill liner material and installation, excavation for airspace, landfill leachate collection systems, landfill gas collection systems, environmental monitoring equipment for groundwater and landfill gas, directly related engineering, capitalized interest, on-site road construction and other capital infrastructure costs. Additionally, landfill development includes all land purchases for the landfill footprint and landfill buffer property. The projection of these landfill costs is dependent, in part, on future events. The remaining amortizable basis of each landfill includes costs to develop a site to its remaining permitted and expansion airspace and includes amounts previously expended and capitalized, net of accumulated airspace amortization, and projections of future purchase and development costs.
Final Capping Costs — We estimate the cost for each final capping event based on the area to be capped and the capping materials and activities required. The estimates also consider when these costs are anticipated to be paid and factor in inflation and discount rates. Our engineering personnel allocate landfill final capping costs to specific final capping events and the capping costs are amortized as waste is disposed of at the landfill. We review these costs annually, or more often if significant facts change. Changes in estimates, such as timing or cost of construction, for final capping events immediately impact the required liability and the corresponding asset. When the change in estimate relates to a fully consumed landfill, the adjustment to the asset must be amortized immediately through expense. When the change in estimate relates to a final capping event at a landfill with remaining airspace, the adjustment to the asset is recognized in income prospectively as a component of landfill airspace amortization.
Closure and Post-Closure Costs — We base our estimates for closure and post-closure costs on our interpretations of permit and regulatory requirements for closure and post-closure monitoring and maintenance. The estimates for landfill closure and post-closure costs also consider when the costs are anticipated to be paid and factor in inflation and discount rates. The possibility of changing legal and regulatory requirements and the forward-looking nature of these types of costs make any estimation or assumption less certain. Changes in estimates for closure and post-closure events immediately impact the required liability and the corresponding asset. When the change in estimate relates to a fully consumed landfill, the adjustment to the asset must be amortized immediately through expense. When the change in estimate relates to a landfill with remaining airspace, the adjustment to the asset is recognized in income prospectively as a component of landfill airspace amortization.
Remaining Permitted Airspace — Our engineers, in consultation with third-party engineering consultants and surveyors, are responsible for determining remaining permitted airspace at our landfills. The remaining permitted airspace is determined by an annual survey, which is used to compare the existing landfill topography to the expected final landfill topography.
Expansion Airspace — We also include currently unpermitted expansion airspace in our estimate of remaining permitted and expansion airspace in certain circumstances. First, to include airspace associated with an expansion effort, we must generally expect the initial expansion permit application to be submitted within one year and the final expansion permit to be received within five years. Second, we must believe that obtaining the expansion permit is likely, considering the following criteria:
● Personnel are actively working on the expansion of an existing landfill, including efforts to obtain land use and local, state or provincial approvals;
● We have a legal right to use or obtain land to be included in the expansion plan;
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● There are no significant known technical, legal, community, business, or political restrictions or similar issues that could negatively affect the success of such expansion; and
● Financial analysis has been completed based on conceptual design, and the results demonstrate that the expansion meets Company criteria for investment.
For unpermitted airspace to be initially included in our estimate of remaining permitted and expansion airspace, the expansion effort must meet all the criteria listed above. These criteria are evaluated by our field-based engineers, accountants, managers and others to identify potential obstacles to obtaining the permits. Once the unpermitted airspace is included, our policy provides that airspace may continue to be included in remaining permitted and expansion airspace even if certain of these criteria are no longer met as long as we continue to believe we will ultimately obtain the permit, based on the facts and circumstances of a specific landfill. In these circumstances, continued inclusion must be approved through a landfill-specific review process that includes approval by our Chief Financial Officer on a quarterly basis.
When we include the expansion airspace in our calculations of remaining permitted and expansion airspace, we also include the projected costs for development, as well as the projected asset retirement costs related to final capping, closure and post-closure of the expansion in the amortization basis of the landfill.
Once the remaining permitted and expansion airspace is determined in cubic yards, an airspace utilization factor (“AUF”) is established to calculate the remaining permitted and expansion capacity in tons. The AUF is established using the measured density obtained from previous annual surveys and is then adjusted to account for future settlement. The amount of settlement that is forecasted will take into account several site-specific factors including current and projected mix of waste type, initial and projected waste density, estimated number of years of life remaining, depth of underlying waste, anticipated access to moisture through precipitation or recirculation of landfill leachate and operating practices. In addition, the initial selection of the AUF is subject to a subsequent multi-level review by our engineering group and the AUF used is reviewed on a periodic basis and revised as necessary. Our historical experience generally indicates that the impact of settlement at a landfill is greater later in the life of the landfill when the waste placed at the landfill approaches its highest point under the permit requirements.
After determining the costs and remaining permitted and expansion capacity at each of our landfills, we determine the per ton rates that will be expensed as waste is received and deposited at the landfill by dividing the costs by the corresponding number of tons. We calculate per ton amortization rates for each landfill for assets associated with each final capping event, for assets related to closure and post-closure activities and for all other costs capitalized or to be capitalized in the future. These rates per ton are updated annually, or more often, as significant facts change.
It is possible that actual results, including the amount of costs incurred, the timing of final capping, closure and post-closure activities, our airspace utilization or the success of our expansion efforts could ultimately turn out to be significantly different from our estimates and assumptions. To the extent that such estimates, or related assumptions, prove to be significantly different than actual results, lower profitability may be experienced due to higher amortization rates or higher expenses; or higher profitability may result if the opposite occurs. Most significantly, if it is determined that expansion capacity should no longer be considered in calculating the recoverability of a landfill asset, we may be required to recognize an asset impairment or incur significantly higher amortization expense. If at any time management makes the decision to abandon the expansion effort, the capitalized costs related to the expansion effort are expensed immediately.
Environmental Remediation Liabilities
A significant portion of our operating costs and capital expenditures could be characterized as costs of environmental protection. The nature of our operations, particularly with respect to the construction, operation and maintenance of our landfills subjects us to an array of laws and regulations relating to the protection of the environment. Under current laws and regulations, we may have liabilities for environmental damage caused by operations, or for damage caused by conditions that existed before we acquired a site. These liabilities include PRP investigations, settlements, and certain legal and consultant fees, as well as costs directly associated with site investigation and clean up, such as materials, external contractor costs and incremental internal costs directly related to the remedy. We provide for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. We routinely
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review and evaluate sites that require remediation and determine our estimated cost for the likely remedy based on a number of estimates and assumptions.
Where it is probable that a liability has been incurred, we estimate costs required to remediate sites based on site-specific facts and circumstances. We routinely review and evaluate sites that require remediation, considering whether we were an owner, operator, transporter, or generator at the site, the amount and type of waste hauled to the site and the number of years we were associated with the site. Next, we review the same type of information with respect to other named and unnamed PRPs. Estimates of the costs for the likely remedy are then either developed using our internal resources or by third-party environmental engineers or other service providers. Internally developed estimates are based on:
● Management’s judgment and experience in remediating our own and unrelated parties’ sites;
● Information available from regulatory agencies as to costs of remediation;
● The number, financial resources and relative degree of responsibility of other PRPs who may be liable for remediation of a specific site; and
● The typical allocation of costs among PRPs, unless the actual allocation has been determined.
Fair Value of Nonfinancial Assets and Liabilities
Significant estimates are made in determining the fair value of long-lived tangible and intangible assets (i.e., property and equipment, intangible assets and goodwill) during the impairment evaluation process. In addition, the majority of assets acquired and liabilities assumed in a business combination are required to be recognized at fair value under the relevant accounting guidance.
Property and Equipment, Including Landfills and Definite-Lived Intangible Assets — We monitor the carrying value of our long-lived assets for potential impairment on an ongoing basis and test the recoverability of such assets generally using significant unobservable (“Level 3”) inputs whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. These events or changes in circumstances, including management decisions pertaining to such assets, are referred to as impairment indicators. If an impairment indicator occurs, we perform a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows. If cash flows cannot be separately and independently identified for a single asset, we will determine whether an impairment has occurred for the group of assets for which we can identify the projected cash flows. If the carrying values are in excess of undiscounted expected future cash flows, we measure any impairment by comparing the fair value of the asset or asset group to its carrying value and the difference is recorded in the period that the impairment indicator occurs. Fair value is generally determined by considering (i) internally developed discounted projected cash flow analysis of the asset or asset group; (ii) actual third-party valuations and/or (iii) information available regarding the current market for similar assets. Estimating future cash flows requires significant judgment and projections may vary from the cash flows eventually realized, which could impact our ability to accurately assess whether an asset has been impaired.
The assessment of impairment indicators and the recoverability of our capitalized costs associated with landfills and related expansion projects require significant judgment due to the unique nature of the waste industry, the highly regulated permitting process and the sensitive estimates involved. During the review of a landfill expansion application, a regulator may initially deny the expansion application although the expansion permit is ultimately granted. In addition, management may periodically divert waste from one landfill to another to conserve remaining permitted landfill airspace, or a landfill may be required to cease accepting waste, prior to receipt of the expansion permit. However, such events occur in the ordinary course of business in the waste industry and do not necessarily result in impairment of our landfill assets because, after consideration of all facts, such events may not affect our belief that we will ultimately obtain the expansion permit. As a result, our tests of recoverability, which generally make use of a probability-weighted cash flow estimation approach, may indicate that no impairment loss should be recorded.
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Indefinite-Lived Intangible Assets, Including Goodwill — At least annually, and more frequently if warranted, we assess the indefinite-lived intangible assets including the goodwill of our reporting units for impairment using Level 3 inputs.
We first perform a qualitative assessment to determine if it was more likely than not that the fair value of a reporting unit was less than its carrying value. If the assessment indicates a possible impairment, we complete a quantitative review, comparing the estimated fair value of a reporting unit to its carrying amount, including goodwill. An impairment charge is recognized if the asset’s estimated fair value was less than its carrying amount. Fair value is typically estimated using an income approach. However, when appropriate, we may also use a market approach. The income approach is based on the long-term projected future cash flows of the reporting units. We discount the estimated cash flows to present value using a weighted average cost of capital that considers factors such as market assumptions, the timing of the cash flows and the risks inherent in those cash flows. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting units’ expected long-term performance considering the economic and market conditions that generally affect our business. The market approach estimates fair value by measuring the aggregate market value of publicly-traded companies with similar characteristics to our business as a multiple of their reported earnings. We then apply that multiple to the reporting units’ earnings to estimate their fair values. We believe that this approach may also be appropriate in certain circumstances because it provides a fair value estimate using valuation inputs from entities with operations and economic characteristics comparable to our reporting units.
Fair value is computed using several factors, including projected future operating results, economic projections, anticipated future cash flows, comparable marketplace data and the cost of capital. There are inherent uncertainties related to these factors and to our judgment in applying them in our analysis. However, we believe our methodology for estimating the fair value of our reporting units is reasonable.
Acquisitions — In accordance with the purchase method of accounting, the purchase price paid for an acquisition is allocated to the assets and liabilities acquired based upon their estimated fair values as of the acquisition date, with the excess of the purchase price over the net assets acquired recorded as goodwill. When we are in the process of valuing all of the assets and liabilities acquired in an acquisition, there can be subsequent adjustments to our estimates of fair value and resulting preliminary purchase price allocation.
See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Gain) Loss from Divestitures, Asset Impairments and Unusual Items, Net .
Off-Balance Sheet Arrangements
We have financial interests in unconsolidated variable interest entities as discussed in Note 18 to the Consolidated Financial Statements. Additionally, we are party to guarantee arrangements with unconsolidated entities as discussed in the Guarantees section of Note 10 to the Consolidated Financial Statements. These arrangements have not materially affected our financial position, results of operations or liquidity during the year ended December 31, 2021, nor are they expected to have a material impact on our future financial position, results of operations or liquidity.
Inflation
Accelerated and pronounced economic pressures, particularly related to inflationary cost pressures on labor and the goods and services we rely upon to deliver service to our customers, had a more significant impact on our cost structure and capital expenditures in 2021. Our overall strategic pricing efforts are focused on recovering as much of the inflationary cost increases we experience in our business as possible by increasing our average unit rate. A significant portion of our revenue is tied to a price escalation index with a lookback provision, which has resulted in a timing lag in our ability to recover increased costs under these contracts during this period of rapid inflation. Separately, for many of our customers we provide services under multi-year contracts that can restrict our ability to increase prices and the timing of such increases. As we enter 2022, many of these contract lookback provisions will begin to capture the recent inflationary cost increases in the price escalation calculation. We are taking proactive steps to recover inflationary cost pressures through the price of our service and by managing our costs through efficiency, labor productivity and investments in technology
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to automate certain aspects of our business in order to mitigate the inflationary cost pressures we have seen in our business. Refer to Item 1A. Risk Factors for further discussion.