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WASTE MANAGEMENT, INC. 2006 ANNUAL REPORT

Table of contents

  • Page 1
    WASTE MANAGEMENT, INC. 2006 ANNUAL REPORT

  • Page 2
    ..., the company served nearly 20 million municipal, commercial, industrial, and residential customers through a network of 379 collection operations, 342 transfer stations, 283 active landfill disposal sites, 17 waste-to-energy plants, 116 recycling plants and 104 beneficial-use landfill gas projects.

  • Page 3
    IN THE DEDICATION OF OUR PEOPLE. 1

  • Page 4
    IN THE WAY WE SERVE NEARLY 20 MILLION CUSTOMERS. 2

  • Page 5
    IN THOUSANDS OF COMMUNITIES WHERE WE WORK TO MAKE A DIFFERENCE. 3

  • Page 6
    IN THE WAYS WE RESPECT AND PROTECT THE ENVIRONMENT. 4

  • Page 7
    IN THE VALUE WE RETURN TO OUR SHAREHOLDERS. 5

  • Page 8
    ... in 2006 in managing these assets more productively paid off in big ways: We saved more than a million hours in labor. We reduced our operating costs, in spite of higher fuel prices. And we saved millions of dollars by keeping our trucks in better working order and in service more of the time. 6

  • Page 9
    ... customer service personnel. Having the best data is another way we are changing the playing field. None of these is as critical to our success as people. In 2006, we developed a process that will make engaging people through leadership a core competency at Waste Management. We want to be a company...

  • Page 10
    ... success. It is our people. Every person in every position throughout our organization plays a role in serving our customers, keeping communities clean, helping businesses function, and protecting the environment. Together, this team of nearly 50,000 employees drives our success and defines Green at...

  • Page 11
    ... qualified people wanting to work for Waste Management. We also saw dramatic improvement in safety performance and morale in this market area. Based on the remarkable success in Florida, we developed a scalable performance leadership program and launched additional pilots in select markets. A system...

  • Page 12
    ..., Profiles in Diversity Journal. In addition, Waste Management was one of only three companies to receive the Corporate ONE Award presented by the Michigan Minority Business Development Council. It stands to reason that a company that values its people is a company that cares about their safety...

  • Page 13
    ... and Puerto Rico. Waste Management collects approximately 83 million tons of solid waste per year through 379 collection operations, providing services that range from residential trash pickup and curbside recycling to comprehensive environmental solutions for large companies with multiple locations...

  • Page 14
    Nearly 20 million valued relationships. As Waste Management sharpens its focus on customer service, we find this one thing to be true: Simply satisfying our nearly 20 million customers won't satisfy us. To reach our strategic goal of being the waste services provider of choice, we know that it takes...

  • Page 15
    ... we developed a new customer service center model that standardizes best practices in the recruitment and hiring of customer service representatives, training, performance metrics, call center operating processes, and the implementation of new telephony technology. Our integrated information systems...

  • Page 16
    ... and recycling into a total waste strategy. Working closely with customers, we help determine their root sources and causes of waste and pollution, and then develop a multifaceted strategy that can provide a complete closed loop-from collecting the waste to providing landfill gas for use as power in...

  • Page 17
    ... paper, cardboard, glass, plastics, metals, and electronics. Waste Management provides cost-efficient, environmentally sound recycling programs for municipalities, businesses, and households across the U.S. and Canada. It was the first major solid waste company to focus on residential single-stream...

  • Page 18
    Making connections. Building community. One of Waste Management's strategic goals is to be regarded as a trusted and valued community partner. We start by proving ourselves to be a trusted and valued business partner, providing services that are essential to every community. 16

  • Page 19
    ...of the communities surrounding these sites. As the leading provider of waste services in North America, Waste Management provides innovative services that we believe are changing the world's perception of a landfill. Through our collection and disposal processes, we remove waste, recycle it, extract...

  • Page 20
    ... and environmental steward. We also want to serve our neighbors in ways that go beyond business relationships. In 2006, we developed the Waste Management Community Partners Volunteer Program to encourage and support employee participation in the communities where we live and work. As a company and...

  • Page 21
    ... same time, the technology speeds the production of landfill gas, a renewable energy source. Waste Management has 14 Next Generation TechnologySM projects in the U.S. and Canada, and continues to work with the EPA and other groups to develop the engineering knowledge base and operational expertise...

  • Page 22
    ... of waste is inseparable from environmental responsibility. In both areas, Waste Management sets the industry standards. In Waste Management's Social Responsibility Report, CEO David Steiner asks, "Where does our responsibility as a company end and our responsibility as members of the community and...

  • Page 23
    ... waste directly to produce energy. Our waste-to-energy subsidiary, Wheelabrator Technologies, uses trash as fuel to generate electrical power through its 17 waste-to-energy plants, which have the capacity to process up to 24,000 tons of waste per day. Waste Management's power plants use landfill gas...

  • Page 24
    ... fuels, Waste Management's landfill gas and waste-to-energy projects save the equivalent of more than 14 million barrels of oil annually, enough to power more than one million homes. In addition to producing a renewable energy resource, our landfills provide more than 17,000 acres of protected land...

  • Page 25
    .... As the first solid waste company to participate in the registry, we will track, report, and certify our California greenhouse gas emissions annually. In 2006, the Los Angeles Business Journal named Waste Management the city's Top Environmental Firm in its annual Book of Lists that ranks all market...

  • Page 26
    ...new ways to divert waste from the landfill. • Already the leading coast-to-coast provider of electronics recycling services, in 2006 we pioneered programs to recycle and dispose of additional types of products. • Every year, hundreds of thousands of printer cartridges and 140 million cell phones...

  • Page 27
    ... gas for use as a clean, reliable fuel resource. In nearly two decades of working with businesses and public utilities, Waste Management has developed more than 100 beneficial-use landfill gas projects. We currently supply enough gas to create more than 470 megawatts of green energy that could power...

  • Page 28
    For our shareholders, our employees, and our customers. At Waste Management, it is our underlying principle and overarching belief that success means serving all of our strategic stakeholders-the customers we engage, the people we employ, the communities where we operate, the environment we're ...

  • Page 29
    ...the cost of parts and supplies increased by 5 percent. Increasing productivity in our routes and labor enabled us to cut nearly one million hours from the time it takes to serve our customers. We also reduced customer service interruptions, or breakdowns due to equipment problems, saving the company...

  • Page 30
    ... pricing initiatives, already in use in collection operations, to include landfills, transfer stations, and recycling facilities. Consistently, we find that improved pricing is contributing significantly to improved margins. With the understanding that revenue for revenue's sake is not as important...

  • Page 31
    ... financial, environmental, and social performance of the leading sustainability-driven companies worldwide. Only 58 U.S.-based companies are included in the index that assesses issues such as corporate governance, risk management, branding, climate change, supply chain standards, and labor practices...

  • Page 32
    ...further improve our business. Specifically, we will continue to use technology to serve our customers in better and more efficient ways. We will become better leaders, engage our employees, and attract and retain the best talent in the industry. We will improve our processes to optimize productivity...

  • Page 33
    ... Texas (Address of principal executive offices) 77002 (Zip code) Registrant's telephone number, including area code: (713) 512-6200 Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Exchange on Which Registered Common Stock, $.01 par value Act. Act. New York...

  • Page 34
    ...of the Registrant ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...Certain Relationships and Related Transactions ...Principal Accounting Fees and Services ...PART IV Exhibits and Financial Statement Schedules ... 19 22 23...

  • Page 35
    ... Services to Waste Management, Inc. Like WMI, WM Holdings is a holding company and all operations are conducted by subsidiaries. Our principal executive offices are located at 1001 Fannin Street, Suite 4000, Houston, Texas 77002. Our telephone number at that address is (713) 512-6200. Our website...

  • Page 36
    .... Cost Control We remain committed to finding the best practices throughout our organization and standardizing those practices and processes throughout the Company. In 2006, we were able to reduce our operating expenses for the first time in several years, demonstrating the progress we are making...

  • Page 37
    ... waste services to commercial, industrial, municipal and residential customers throughout the United States, Puerto Rico and Canada. Our core business includes collection, transfer, recycling, disposal and waste-to-energy services. We manage and evaluate our operations through six operating Groups...

  • Page 38
    ... and constructing final capping of the landfill. These operations are carefully planned to maintain sanitary conditions, to maximize the use of the airspace and to prepare the site so it can ultimately be used for other purposes. All solid waste management companies must have access to a disposal...

  • Page 39
    ...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...

  • Page 40
    ... third-party waste haulers. The solid waste is then consolidated and compacted to reduce the volume and increase the density of the waste and transported by transfer trucks or by rail to disposal sites. Access to transfer stations is often critical to third-party haulers who do not operate their...

  • Page 41
    ... tons per day. Our IPPs convert various waste and conventional fuels into steam, which is either sold or used to generate electricity. The plants burn wood waste, anthracite coal waste (culm), tires, landfill gas and natural gas. These facilities are integral to the solid waste industry, disposing...

  • Page 42
    ... significant commercial and industrial collection or waste disposal. We compete for disposal business on the basis of tipping fees, geographic location and quality of operations. Our ability to obtain disposal business may be limited in areas where other companies own or operate their own landfills...

  • Page 43
    ... in surety bonds or insurance policies for our closure and post-closure requirements, waste collection contracts and other business related obligations. (b) We hold non-controlling financial interests in two entities that we use to obtain financial assurance. Our contractual agreements with these...

  • Page 44
    .... There are costs associated with siting, design, operations, monitoring, site maintenance, corrective actions, financial assurance, and facility closure and post-closure obligations. In connection with our acquisition, development or expansion of a disposal facility or transfer station, we 10

  • Page 45
    ... affecting our business are summarized below: • The Resource Conservation and Recovery Act of 1976, as amended ("RCRA"), regulates handling, transporting and disposing of hazardous and non-hazardous wastes and delegates authority to states to develop programs to ensure the safe disposal of solid...

  • Page 46
    ... the EPA to review and revise the MACT standards applicable to municipal waste-to-energy facilities every five years. • The Occupational Safety and Health Act of 1970, as amended, establishes certain employer responsibilities, including maintenance of a workplace free of recognized hazards likely...

  • Page 47
    ... America, the industry consists of large national waste management companies, and local and regional companies of varying sizes and financial resources. We compete with these companies as well as with counties and municipalities that maintain their own waste collection and disposal operations. These...

  • Page 48
    ...adverse effect on our financial condition, results of operations and cash flows. In the ordinary course of our business, we have in the past, and may in the future, become involved in a variety of legal and administrative proceedings relating to land use and environmental laws and regulations. These...

  • Page 49
    ... business. A large number of complex laws, rules, orders and interpretations govern environmental protection, health, safety, land use, zoning, transportation and related matters. Among other things, they may restrict our operations and adversely affect our financial condition, results of operations...

  • Page 50
    ... and independent power production plant operations. The marketing and sales of energy related products by our landfill gas and waste-to-energy operations are generally pursuant to long-term sales agreements. Therefore, market fluctuations do not have a significant effect on these operations in the...

  • Page 51
    ... for landfill disposal and waste-to-energy services. Efforts by labor unions to organize our employees could increase our operating expenses. Labor unions constantly make attempts to organize our employees, and these efforts will likely continue in the future. Certain groups of our employees have...

  • Page 52
    ... by Group regarding the 247 landfills owned or operated through lease agreements and a count, by Group, of contracted disposal sites as of December 31, 2006: Landfills Total Acreage(a) Permitted Acreage(b) Expansion Acreage(c) Contracted Disposal Sites Eastern ...Midwest...Southern ...Western...

  • Page 53
    ...'s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Our common stock is traded on the New York Stock Exchange ("NYSE") under the symbol "WMI." The following table sets forth the range of the high and low per share sales prices for our common stock as reported on...

  • Page 54
    ... $50 $0 2001 2002 2003 12/31/01 2004 12/31/02 12/31/03 2005 12/31/04 12/31/05 2006 12/31/06 Waste Management, Inc. S&P 500 Index Dow Jones Waste & Disposal Services Index $100 $100 $100 $72 $78 $79 $ 93 $100 $104 $ 96 $111 $108 $100 $117 $115 $125 $135 $141 20

  • Page 55
    ... common stock for $1,072 million. All of the repurchases were made pursuant to our capital allocation program. The following table summarizes our fourth quarter 2006 share repurchase activity: Issuer Purchases of Equity Securities Total Number of Shares Purchased as Part of Publicly Announced Plans...

  • Page 56
    ... previous annual reports we filed with the SEC. This information should be read together with those Consolidated Financial Statements and the notes thereto. The adoption of new accounting pronouncements, changes in certain accounting policies and certain reclassifications impact the comparability of...

  • Page 57
    ..., we began recording all mandatory fees and taxes that create direct obligations for us as operating expenses and recording revenue when the fees and taxes are billed to our customers. In prior years, certain of these costs had been treated as pass-through costs for financial reporting purposes. In...

  • Page 58
    ...10.4%. The increase in selling, general and administrative expenses is due largely to higher bonus expense as a result of the significant improvement in the Company's performance, non-capitalizable costs incurred to support the development of our revenue management system and a $20 million charge to...

  • Page 59
    ...to the Consolidated Financial Statements. As a result of the acceleration of the vesting of stock options and the replacement of future awards of stock options with other forms of equity awards, the adoption of SFAS No. 123(R) on January 1, 2006 did not significantly affect our accounting for equity...

  • Page 60
    ..., 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 landfill...

  • Page 61
    ... within the normal application and processing time periods for approvals in the jurisdiction in which the landfill is located; • We have a legal right to use or obtain land to be included in the expansion plan; • There are no significant known technical, legal, community, business, or political...

  • Page 62
    ... 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 cost for the likely remedy are then either developed using our internal resources or by third-party environmental engineers or other service...

  • Page 63
    ...listed above require significant judgment and understanding of the waste industry when applied to landfill development or expansion projects. For example, a regulator may initially deny a landfill expansion permit application though the expansion permit is ultimately granted. In addition, management...

  • Page 64
    ... for the respective Consolidated Statement of Operations line items: Period-to-Period Change Years Ended Years Ended December 31, December 31, 2005 vs. 2004 2006 vs. 2005 Operating revenues ...$289 Costs and expenses: Operating ...Selling, general and administrative...Depreciation and amortization...

  • Page 65
    ...billion in 2004. We manage and evaluate our operations primarily through our Eastern, Midwest, Southern, Western, Wheelabrator (which includes our waste-to-energy facilities and independent power production plants, or IPPs) and Recycling Groups. These six operating Groups are our reportable segments...

  • Page 66
    ...monthly or semi-monthly. Fees charged at transfer stations are generally based on the volume of waste deposited, taking into account our cost of loading, transporting and disposing of the solid waste at a disposal site, and are normally billed monthly. Our Wheelabrator revenues are based on the type...

  • Page 67
    ..., construction and demolition revenue growth from yield was the most significant in the West and South and municipal solid waste revenue growth from yield was provided by the East, South and Midwest. In 2005, our transfer business in the East and municipal solid waste landfill disposal operations in...

  • Page 68
    ... 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 relating to equipment, vehicles and facilities and related labor costs...

  • Page 69
    ... costs, general increases in health care and benefits costs, increased costs attributable to contract labor and increased payroll taxes. Transfer and disposal costs - In 2006 and 2005 the costs incurred by our collection operations to dispose of waste at third-party transfer stations or landfills...

  • Page 70
    ... rates. Other operating expenses - The lower costs in 2006 as compared with 2005 can be attributed to (i) Hurricane Katrina related support costs in 2005, particularly in Louisiana, where we built Camp Waste Management to house and feed hundreds of our employees who worked in the New Orleans area to...

  • Page 71
    ... by $20 million for non-capitalizable costs incurred to support the planned implementation of our new revenue management system. This increase and other significant changes in our selling, general and administrative expenses are summarized below. Labor and related benefits - In both 2006 and 2005...

  • Page 72
    ... we are operating under the most advantageous structure. These reviews have highlighted efficiencies and cost savings we could capture by restructuring. The most significant cost savings we have obtained through our restructurings have been attributable to the labor and related benefits component of...

  • Page 73
    ... third quarter of 2005, we concluded our assessment of potential revenue management system options. As a result, we entered into agreements with a new software vendor for the license, implementation and maintenance of certain of its applications software, including waste and recycling functionality...

  • Page 74
    ... for each line of business in 2006, but was driven primarily by our collection operations, where we experienced substantial revenue growth in every geographic operating Group for the second consecutive year. The operating results of the Groups have also benefited from our focus on cost control and...

  • Page 75
    ...of costs related primarily to a strike in the New York City area. The Group incurred similar costs during the first quarter of 2005 for a labor strike in New Jersey, which decreased operating income for the year ended December 31, 2005 by approximately $9 million. Midwest - Positively affecting 2005...

  • Page 76
    ... were (i) non-cash employee compensation costs associated with current year changes in equity-based compensation; (ii) inflation in employee health care costs; (iii) salary and wage annual merit increases; (iv) costs for sales and marketing programs; and (v) costs at Corporate associated with our...

  • Page 77
    ... below within Provision for (Benefit from) Income Taxes. Additional information related to these investments is included in Note 8 to the Consolidated Financial Statements. Minority Interest On December 31, 2003, we consolidated two special purpose type variable interest entities as a result...

  • Page 78
    ...and 19 to the Consolidated Financial Statements for further discussion. Liquidity and Capital Resources General We have consistently generated cash flows from operations in excess of our reinvestment needs. However, we operate in a capital-intensive business and continued access to various financing...

  • Page 79
    ... changing business conditions or new opportunities. In addition to our working capital needs for the general and administrative costs of our ongoing operations, we have cash requirements for: (i) the construction and expansion of our landfills; (ii) additions to and maintenance of our trucking fleet...

  • Page 80
    .... We have used each of these facilities to support letters of credit that we issue to support our insurance programs, certain tax-exempt bond issuances, municipal and governmental waste management contracts, closure and post-closure obligations and disposal site or transfer station operating permits...

  • Page 81
    ... debt issuances were deposited directly into a trust fund and may only be used for the specific purpose for which the money was raised, which is generally the construction of collection and disposal facilities and for the equipment necessary to provide waste management services. Accordingly, the...

  • Page 82
    ... created and implemented new processes to assist our Market Areas with collections. The increases in our receivables balances, and resulting uses of cash in the Consolidated Statements of Cash Flows, in 2005 and 2004 were primarily related to increased revenues. However, the significant year-over...

  • Page 83
    ... to 2005 is largely attributable to the sale of one of our landfills in Ontario, Canada. Capital expenditures were $1,180 million in 2005, which is $78 million less than we invested in capital in 2004. Net Cash Used in Financing Activities - The most significant changes in our financing cash flows...

  • Page 84
    ... on January 1, 2006 resulted in the classification of tax savings provided by equity-based compensation as a financing cash inflow rather than an operating cash inflow beginning in the first quarter of 2006. This change in accounting increased cash flows from financing activities by $45 million in...

  • Page 85
    ... 10 to the Consolidated Financial Statements, that we do not expect to materially affect our current or future financial position, results of operations or liquidity. (e) In December 2006, we entered into a plan under SEC Rule 10b5-1 to effect market purchases of our common stock. The $70 million...

  • Page 86
    ... Note 10 to the Consolidated Financial Statements. Our third-party guarantee arrangements are generally established to support our financial assurance needs and landfill operations. These arrangements have not materially affected our financial position, results of operations or liquidity during the...

  • Page 87
    ... for future capital expenditures and closure, post-closure and environmental remediation activities at our disposal facilities and are, therefore, invested in high quality, liquid instruments including money market accounts and U.S. government agency debt securities. Because of the short terms to...

  • Page 88
    ...TO CONSOLIDATED FINANCIAL STATEMENTS Page Management's Report on Internal Control Over Financial Reporting ...Report of Independent Registered Public Accounting Firm...Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting ...Consolidated Balance Sheets...

  • Page 89
    ... reliability of the preparation and presentation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States; and (iii) the safeguarding of assets from unauthorized use or disposition. We conducted an evaluation of...

  • Page 90
    ... REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of Waste Management, Inc. We have audited the accompanying consolidated balance sheets of Waste Management, Inc. (the "Company") as of December 31, 2006 and 2005, and the related consolidated statements of operations...

  • Page 91
    ...also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Waste Management, Inc. as of December 2006 and 2005, and the related consolidated statements of operations, stockholders' equity and cash flows for...

  • Page 92
    WASTE MANAGEMENT, INC. CONSOLIDATED BALANCE SHEETS (In millions, except share and par value amounts) December 31, 2006 2005 ASSETS Current assets: Cash and cash equivalents ...$ 614 Accounts receivable, net of allowance for doubtful accounts of $51 and $61, respectively ...1,650 Other receivables ...

  • Page 93
    WASTE MANAGEMENT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except per share amounts) Years Ended December 31, 2006 2005 2004 Operating revenues...Costs and expenses: Operating ...Selling, general and administrative ...Depreciation and amortization ...Restructuring ...(Income) ...

  • Page 94
    WASTE MANAGEMENT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) Years Ended December 31, 2006 2005 2004 Cash flows from operating activities: Net income ...Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting ...

  • Page 95
    WASTE MANAGEMENT, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In millions, except shares in thousands) Accumulated Restricted Other Stock Comprehensive Additional Common Stock Treasury Stock Comprehensive Unearned Income Paid-In Retained Compensation Shares Amounts Income (Loss) Shares ...

  • Page 96
    ... collection, transfer, recycling, disposal and waste-to-energy services. In providing these services, we actively pursue projects and initiatives that we believe make a positive difference for our environment, including recovering and processing the methane gas produced naturally by landfills into...

  • Page 97
    ...NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The most significant difference between the fair value approaches prescribed by SFAS No. 123 and SFAS No. 123(R) and the intrinsic value method prescribed by APB No. 25 relates to the recognition of compensation expense for stock option awards...

  • Page 98
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Development and Compensation Committee approved a substantial change in the form of awards that we grant. Beginning in 2005, annual stock option grants were replaced with either (i) grants of restricted stock units and ...

  • Page 99
    ...significant judgment. In preparing our financial statements, the most difficult, subjective and complex estimates and the assumptions that deal with the greatest amount of uncertainty relate to our accounting for landfills, environmental remediation liabilities, asset impairments, and self-insurance...

  • Page 100
    ...the construction of the final portion of methane gas collection systems (when required), demobilization and routine maintenance costs. These are costs incurred after the site ceases to accept waste, but before the landfill is certified as closed by the applicable state regulatory agency. These costs...

  • Page 101
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) • Post-Closure - Involves the maintenance and monitoring of a landfill site that has been certified closed by the applicable regulatory agency. Generally, we are required to maintain and monitor landfill sites for a 30...

  • Page 102
    ...closure costs; (iii) projections of future purchase and development costs required to develop the landfill site to its remaining permitted and expansion capacity; and (iv) projected asset retirement costs related to landfill final capping, closure and postclosure activities. Amortization is recorded...

  • Page 103
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) • There are no significant known technical, legal, community, business, or political restrictions or similar issues that could impair the success of such expansion; • Financial analysis has been completed, and the ...

  • Page 104
    ... a discounted basis than the $268 million recorded in the Consolidated Financial Statements as of December 31, 2006. Estimating our degree of responsibility for remediation of a particular site is inherently difficult and determining the method and ultimate cost of remediation requires that a number...

  • Page 105
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) recorded a $6 million reduction in "Operating" expenses during the first quarter of 2006 and a corresponding decrease in environmental remediation liabilities. For remedial liabilities that have been discounted, we ...

  • Page 106
    ... our Consolidated Balance Sheets. We continue to review our classification of assets held-for-sale to ensure they meet our held-for-sale criteria. Discontinued operations Quarterly, we analyze our operations that have been divested or classified as held-for-sale in order to determine if they qualify...

  • Page 107
    ...assets and amortized using our landfill amortization policy) and other contracts. Other intangible assets are recorded at cost and are amortized using either a 150% declining balance approach or on a straight-line basis as we determine appropriate. Customer contracts and customer lists are generally...

  • Page 108
    ... of industrial revenue bonds for the construction of collection and disposal facilities and for equipment necessary to provide waste management services. Proceeds from these arrangements are directly deposited into trust accounts, and we do not have the ability to use the funds in regular operating...

  • Page 109
    ...." Estimated insurance recoveries related to recorded liabilities are reflected as current "Other receivables" or long-term "Other assets" in our Consolidated Balance Sheets when we believe that the receipt of such amounts is probable. Foreign currency We have significant operations in Canada. The...

  • Page 110
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) the balance sheet date. Revenues and expenses are translated to U.S. dollars using the average exchange rate during the period. The resulting translation difference is reflected as a component of comprehensive income. ...

  • Page 111
    .... This dividend payment was reflected as "Cash dividends" in our Consolidated Statement of Cash Flows for the year ended December 31, 2006. 4. Landfill and Environmental Remediation Liabilities Liabilities for landfill and environmental remediation costs are presented in the table below (in millions...

  • Page 112
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Anticipated payments of currently identified environmental remediation liabilities for the next five years and thereafter as measured in current dollars are reflected below (in millions): 2007 2008 2009 2010 2011 ...

  • Page 113
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Our other intangible assets as of December 31, 2006 and 2005 were comprised of the following (in millions): Customer Contracts and Customer Lists Covenants Not-toCompete Licenses, Permits and Other Total December 31, ...

  • Page 114
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) October 2009. We also have a $350 million letter of credit facility that matures in December 2008 and three letter of credit and term loan agreements for an aggregate of $295 million maturing at various points from 2008 ...

  • Page 115
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) construction and development, equipment, vehicles and facilities in support of our operations. Proceeds from bond issues are held in trust until such time as we incur qualified expenditures, at which time we are ...

  • Page 116
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Debt Covenants Our revolving credit facility and certain other financing agreements contain financial covenants. The most restrictive of these financial covenants are contained in our revolving credit facility. The ...

  • Page 117
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Fair value hedge accounting for interest rate swap contracts increased the carrying value of debt instruments by $19 million as of December 31, 2006 and $47 million as of December 31, 2005. The following table summarizes...

  • Page 118
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Provision for income taxes The provision for taxes on income before cumulative effect of change in accounting principle consisted of the following (in millions): Years Ended December 31, 2006 2005 2004 Current: Federal ...

  • Page 119
    ... could cease making payments in the period in which that determination is made and not incur additional losses. The tax credits generated by our landfills are provided by our Renewable Energy Program, under which we develop, operate and promote the beneficial use of landfill gas. Our recorded taxes...

  • Page 120
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) diluted share, related to audit settlements as well as $46 million in interest income, or $28 million net of tax, as a result of those settlements. The reduction in ...

  • Page 121
    ...tax assets due to changes in state NOL and credit carryforwards. 9. Employee Benefit Plans Defined contribution plans - Our Waste Management Retirement Savings Plan ("Savings Plan") covers employees (except those working subject to collective bargaining agreements, which do not provide for coverage...

  • Page 122
    ... - We have obtained letters of credit, performance bonds and insurance policies, and have established trust funds and issued financial guarantees to support tax-exempt bonds, contracts, performance of landfill closure and post-closure requirements, environmental remediation, and other obligations...

  • Page 123
    ... In December 2006, we entered into a plan under SEC Rule 10b5-1 to effect market purchases of our common stock during the first quarter of 2007. See Note 14 for additional information related to this agreement. • Fuel Supply - We have purchase agreements expiring at various dates through 2010 that...

  • Page 124
    ... MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) the terms and conditions of long-term contracts. Our purchase agreements have been established based on the plants' anticipated fuel supply needs to meet the demands of our customers under these long-term electricity sale...

  • Page 125
    ... with 75 locations listed on the EPA's National Priorities List ("NPL"). Of the 75 sites at which claims have been made against us, 16 are sites we own. Each of the NPL sites we own were initially developed by others as land disposal facilities. At each of these facilities, we are working in...

  • Page 126
    ... waste generators and other waste transportation and disposal companies and seek to allocate or recover costs associated with site investigation and remediation, which costs could be substantial and could have a material adverse effect on our consolidated financial statements. At some of the sites...

  • Page 127
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) From time to time, we pay fines or penalties in environmental proceedings relating primarily to waste treatment, storage or disposal facilities. As of December 31, 2006, there were four proceedings involving our ...

  • Page 128
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) actions or proceedings that may be brought against its former or current officers, directors and employees in the future. We are involved in routine civil litigation and governmental proceedings, including litigation ...

  • Page 129
    ... $1 million of the related accrual remained for employee severance and benefit costs. The length of time we are obligated to make severance payments varies, with the longest obligation continuing through the third quarter of 2007. The following table summarizes the total costs recorded to date for...

  • Page 130
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Income) expense from divestitures - We recognized $44 million of net gains on divestitures during the year ended December 31, 2006, which were direct results of the execution of our plan to review under-performing or ...

  • Page 131
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) result of the divestiture of operations. With the exception of our divestiture of the Ontario, Canada landfill, our divestitures during 2005 were direct results of the execution of our plan to review under-performing or ...

  • Page 132
    ... the weighted average daily market price of our common stock during the valuation period times the number of shares we repurchased, or $16 million. We elected to make the required settlement payment in cash. In December 2006, we entered into a plan under SEC Rule 10b5-1 to effect market purchases of...

  • Page 133
    ... TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) are at the discretion of the Board of Directors, and depend on various factors, including our net earnings, financial condition, cash required for future prospects and other factors the Board may deem relevant. 15. Stock-Based Compensation Employee...

  • Page 134
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) with either (i) grants of restricted stock units and performance share units or (ii) an enhanced cash compensation award. Stock option grants in connection with new hires and promotions were replaced with grants of ...

  • Page 135
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) A summary of our performance share units is presented in the table below (units in thousands): Years Ended December 31, 2006 2005 2004 Weighted Weighted Weighted Average Average Average Fair Fair Fair Value Value Units ...

  • Page 136
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (a) The aggregate intrinsic value of stock options exercised during the years ended December 31, 2006, 2005 and 2004 was $112 million, $41 million and $90 million, respectively. (b) Stock options exercisable as of ...

  • Page 137
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The following table reconciles the number of common shares outstanding at December 31 of each year to the number of weighted average basic common shares outstanding and the number of weighted average diluted common ...

  • Page 138
    ... is estimated using discounted cash flow analysis, based on rates we would currently pay for similar types of instruments. 18. Business Combinations and Divestitures Purchase Acquisitions We continue to pursue the acquisition of businesses that are accretive to our solid waste operations. We have...

  • Page 139
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) leases, we will be required to make payments to the LLCs for the difference between fair market rents and the scheduled renewal rents. As of December 31, 2006, our Consolidated Balance Sheet includes $366 million of net ...

  • Page 140
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Canadian operations has been allocated to the Eastern, Midwest and Western Groups to provide financial information that consistently reflects our current approach to managing our operations. Our third quarter 2005 ...

  • Page 141
    ...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 longterm incentive program and managing our international and non-solid waste divested operations...

  • Page 142
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (e) For those items included in the determination of income from operations, the accounting policies of the segments are the same as those described in Note 3. (f) The operating results of our reportable segments ...

  • Page 143
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The table below shows the total revenues by principal line of business (in millions): Years Ended December 31, 2006 2005 2004 Collection ...Landfill ...Transfer...Wheelabrator ...Recycling and other(a) ...Intercompany...

  • Page 144
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) our first quarter also often reflect higher repair and maintenance expenses because we rely on the slower winter months, when electrical demand is generally lower, to perform scheduled maintenance at our waste-to-energy ...

  • Page 145
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (e) As discussed in Note 8, the Company qualifies for Section 45K tax credits as a result of methane gas projects at its landfills and its investments in two coal-based synthetic fuel production facilities. The credits ...

  • Page 146
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 22. Condensed Consolidating Financial Statements 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...

  • Page 147
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) CONDENSED CONSOLIDATING BALANCE SHEETS - (Continued) December 31, 2005 WMI WM Holdings Non-Guarantor Subsidiaries Eliminations Consolidated... debt ...$ - $ 303 $ 219 Accounts payable and other current liabilities ...202 26...

  • Page 148
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS WMI WM Holdings Non-Guarantor Subsidiaries Eliminations Consolidated Year Ended December 31, 2006 Operating revenues ...Costs and expenses ...Income from operations ......

  • Page 149
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS WM Holdings NonGuarantor Subsidiaries WMI Eliminations Consolidated Year Ended December 31, 2006 Cash flows from operating activities: Net income ...Equity in earnings...

  • Page 150
    WASTE MANAGEMENT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) NonGuarantor Subsidiaries WMI WM Holdings Eliminations Consolidated Cash flows from financing activities: New borrowings ...Debt repayments ...Common stock repurchases ...Cash dividends ...Exercise of common stock ...

  • Page 151
    ... will be effective for the Company beginning January 1, 2008. We are currently in the process of assessing the provisions of SFAS No. 157 and determining how this framework for measuring fair value will affect our current accounting policies and procedures and our financial statements. We have not...

  • Page 152
    ... report on management's assessment of the effectiveness of our internal control over financial reporting can also be found in Item 8, Financial Statements and Supplementary Data, of this report. Item 9B. Other Information. At the meeting of the Management Development and Compensation Committee of...

  • Page 153
    ...forth under the caption "Executive Compensation" in the 2007 Proxy Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Equity Compensation Plan Table The following table provides information as of...

  • Page 154
    ... by, or may be issued to, any of our directors or executive officers. The Broad-Based Employee Plan allows for the granting of stock options, appreciation rights and stock bonuses to employees on such terms and conditions as the Compensation Committee may decide; provided, that the exercise price of...

  • Page 155
    PART IV Item 15. Exhibits and Financial Statement Schedules (a)(1) Consolidated Financial Statements: Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2006 and 2005 Consolidated Statements of Operations for the years ended December 31, 2006, ...

  • Page 156
    ... Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. WASTE MANAGEMENT, INC. By: /s/ DAVID P. STEINER David P. Steiner Chief Executive Officer and Director Date: February...

  • Page 157
    ... listed in Item 15(a)(2) of this Form 10-K. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated...

  • Page 158
    ...to operations held for sale, and reclasses among reserve accounts. (B) Includes reserves for doubtful accounts receivable and notes receivable. (C) Included in accrued liabilities in our Consolidated Balance Sheets. These accruals represent employee severance and benefit costs and transitional costs...

  • Page 159
    ... - 1997 Employee Stock Purchase Plan [Incorporated by reference to Appendix C-1 to the Proxy Statement for the 2006 Annual Meeting of Stockholders]. - Waste Management, Inc. 409A Deferral Savings Plan. - $2.4 Billion Revolving Credit Agreement by and among Waste Management, Inc. and Waste Management...

  • Page 160
    ... Corporation (as Borrower), Waste Management, Inc. and Waste Management Holdings, Inc. (as Guarantors), BNP Paribas Securities Corp. and Scotia Capital (as Lead Arrangers and Book Runners) and Bank of Nova Scotia (as Administrative Agent) and the Lenders from time to time party to the Agreement...

  • Page 161
    ... pictured, left to right) THOMAS I. MORGAN (C, N) Retired President and Chief Executive Officer Hughes Supply, Inc. PATRICK W. GROSS (A, N) Chairman The Lovell Group PASTORA SAN JUAN CAFFERTY (C, N) Professor Emerita School of Social Service Administration University of Chicago STEVEN G. ROTHMEIER...

  • Page 162
    ... Executive Officer LAWRENCE O'DONNELL, III President and Chief Operating Officer DAVID A. AARDSMA Senior Vice President, Sales and Marketing LYNN M. CADDELL Senior Vice President and Chief Information Officer BARRY H. CALDWELL Senior Vice President, Government Affairs and Corporate Communications...

  • Page 163
    ... Investor Relations at the corporate address or call (713) 512-6574. ANNUAL MEETING The annual meeting of the shareholders of the Company is scheduled to be held at 11:00 a.m. on May 4, 2007, at: The Maury Myers Conference Center Waste Management, Inc. 1021 Main Street Houston, Texas 77002 WEB SITE...

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    1001 Fannin, Suite 4000 • Houston, Texas 77002 www.wm.com