Waste Management 2006 Annual Report Download - page 119

Download and view the complete annual report

Please find page 119 of the 2006 Waste Management annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 164

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154
  • 155
  • 156
  • 157
  • 158
  • 159
  • 160
  • 161
  • 162
  • 163
  • 164

discussed above, our effective tax rate and equity losses associated with our investments in these unconsolidated
entities for the year ended December 31, 2006 include the effects of a partial phase-out of Section 45K credits
generated during 2006. Although we currently project that we will not be able to recognize 36% of the tax credits
generated during 2006, we have been required to fund 100% of our pro-rata portion of the Facilities’ losses and
production costs for 2006 operations. Amounts paid to the Facilities for which we do not ultimately realize a tax
benefit are refundable to us, subject to certain limitations. Our 2006 effective tax rate and equity losses also reflect
the impact of the temporary suspension of operations at the Facilities, which occurred from May 2006 to late
September 2006. The operations of the Facilities were suspended in order to minimize operating losses as a result of
the expected phase-out of tax credits generated during 2006. For quarterly periods that the Facilities’ operations are
producing below established production levels, our obligations associated with funding the entities’ operations may
be deferred for a period of up to four quarters.
The following table summarizes the impact of our investments in the Facilities on our Consolidated Statements
of Operations (in millions):
2006 2005 2004
Years Ended December 31,
Equity in net losses of unconsolidated entities(a) .................... $(41) $(112) $(102)
Interest expense............................................. (4) (7) (8)
Loss before income taxes(a).................................... (45) (119) (110)
Provision for (benefit from) income taxes(b) ....................... (64) (145) (131)
Net income ................................................ $19 $ 26 $ 21
(a) For the year ended December 31, 2006, our “Equity in net losses of unconsolidated entities” includes (i) the
recognition of expense for our estimate of contractual obligations associated with the Facilities’ operations
during 2006 based on a 36% phase-out of Section 45K credits and the temporary suspension of operations
discussed above, which was partially offset by (ii) a cumulative adjustment necessary to appropriately reflect
our life-to-date obligations to fund the costs of operating the Facilities and the value of our investment. This
cumulative adjustment was recorded during the second quarter of 2006. We have determined that the
recognition of the cumulative adjustment was not material to our financial statements presented herein.
(b) The benefit from income taxes attributable to the Facilities includes tax credits of $47 million, $99 million and
$88 million for the years ended December 31, 2006, 2005 and 2004, respectively.
The equity losses and associated tax benefits would not have been incurred if we had not acquired the minority
ownership interests in the Facilities. If the tax credits generated by the Facilities were no longer allowable under
Section 45K of the Internal Revenue Code, we 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 include benefits of $24 million,
$34 million, and $32 million for the years ended December 31, 2006, 2005 and 2004, respectively, from tax credits
generated by our landfill gas-to-energy projects. The tax benefits from our landfills were reduced in 2006 due to the
estimated phase-out of 36% of Section 45K credits.
Tax audit settlements — During 2006 we completed the IRS audit for the years 2002 and 2003. The settlement
of the IRS audit, as well as other state and foreign tax audit matters, resulted in a reduction in income tax expense
(excluding the effects of related interest income) of $149 million, or $0.27 per diluted share, for 2006. Our
2006 income also increased by $14 million, or $9 million net of tax, principally due to interest income from these
settlements. The IRS audits for the tax years 1989 to 2001 were completed during 2005, resulting in net tax benefits
of $398 million, or $0.70 per diluted share. During 2004, we realized $101 million in tax benefits, or $0.17 per
85
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)