Waste Management 2006 Annual Report Download - page 101

•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-year period. These maintenance and monitoring costs are accrued as an asset retirement obligation as
airspace is consumed over the life of the landfill with a corresponding increase in the landfill asset. Post-
closure obligations are accrued over the life of the landfill based on estimates of the discounted cash flows
associated with performing post-closure activities.
We develop our estimates of these obligations using input from our operations personnel, engineers and
accountants. Our estimates are based on our interpretation of current requirements and proposed regulatory changes
and are intended to approximate fair value under the provisions of SFAS No. 143. Absent quoted market prices, the
estimate of fair value should be based on the best available information, including the results of present value
techniques. In many cases, we contract with third parties to fulfill our obligations for final capping, closure and post-
closure. We use historical experience, professional engineering judgment and quoted and actual prices paid for
similar work to determine the fair value of these obligations. We are required to recognize these obligations at
market prices whether we plan to contract with third parties or perform the work ourselves. In those instances where
we perform the work with internal resources, the incremental profit margin realized is recognized as a component of
operating income when the work is performed.
Additionally, an estimate of fair value should also include the price that marketplace participants are able to
receive for bearing the uncertainties inherent in these cash flows. However, when using discounted cash flow
techniques, reliable estimates of market premiums may not be obtainable. In the waste industry, there is generally
not a market for selling the responsibility for final capping, closure and post-closure obligations independent of
selling the landfill in its entirety. Accordingly, we do not believe that it is possible to develop a methodology to
reliably estimate a market risk premium. We have excluded any such market risk premium from our determination
of expected cash flows for landfill asset retirement obligations.
Once we have determined the final capping, closure and post-closure costs, we inflate those costs to the
expected time of payment and discount those expected future costs back to present value. During the years ended
December 31, 2006 and 2005, we inflated these costs in current dollars until the expected time of payment using an
inflation rate of 2.5%. We discount these costs to present value using the credit-adjusted, risk-free rate effective at
the time an obligation is incurred consistent with the expected cash flow approach. Any changes in expectations that
result in an upward revision to the estimated cash flows are treated as a new liability and discounted at the current
rate while downward revisions are discounted at the historical weighted-average rate of the recorded obligation. As
a result, the credit-adjusted, risk-free discount rate used to calculate the present value of an obligation is specific to
each individual asset retirement obligation. The weighted-average rate applicable to our asset retirement obliga-
tions at December 31, 2006 is between 6.00% and 7.25%, the range of the credit-adjusted, risk-free discount rates
effective since adopting SFAS No. 143 in 2003.
We record the estimated fair value of final capping, closure and post-closure liabilities for our landfills based
on the capacity consumed through the current period. The fair value of final capping obligations is developed based
on our estimates of the airspace consumed to date for each final capping event and the expected timing of each final
capping event. The fair value of closure and post-closure obligations is developed based on our estimates of the
airspace consumed to date for the entire landfill and the expected timing of each closure and post-closure activity.
Because these obligations are measured at estimated fair value using present value techniques, changes in the
estimated cost or timing of future final capping, closure and post-closure activities could result in a material change
in these liabilities, related assets and results of operations. We assess the appropriateness of the estimates used to
develop our recorded balances annually, or more often if significant facts change.
Changes in inflation rates or the estimated costs, timing or extent of future final capping and closure and post-
closure activities typically result in both (i) a current adjustment to the recorded liability and landfill asset; and (ii) a
change in liability and asset amounts to be recorded prospectively over either the remaining capacity of the related
discrete final capping event or the remaining permitted and expansion airspace (as defined below) of the landfill.
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WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)