Waste Management 2006 Annual Report Download - page 70

and increased volumes in our Southern and Western Groups; (ii) increases in the cost of lubes and oils and
(iii) increases in the labor costs associated with our maintenance and repairs.
Subcontractor costs — Throughout 2006 and 2005 we experienced increases in subcontractor costs due to
higher diesel fuel prices, which drive the fuel surcharges we pay to third-party subcontractors. Subcontractor cost
increases attributable to higher fuel costs were offset by the revenue generated from our fuel surcharge program,
which is reflected as fuel yield increases within Operating Revenues. Additionally, in 2006, the increase in our
subcontractor costs due to higher fuel costs was partially offset by a decrease attributable to our divestiture of under-
performing and non-strategic operations and decreases in volumes.
In 2005, we also incurred additional transportation costs due to increased volumes in subcontracted work,
particularly in our National Accounts organization and our Western Group. This cost increase was partially offset by
a year-over-year decline in the utilization of subcontractors to assist in providing hurricane related services, which
were particularly significant during 2004.
Cost of goods sold — These costs are primarily for rebates paid to our recycling suppliers, which are driven by
the market prices of recyclable commodities. In 2006, we experienced lower market prices for recyclable
commodities and reduced recycling volumes.
Additionally, in 2006, the decrease in costs of goods sold was partially due to completion of the construction of
an integrated waste facility in Canada in early 2006. The increase in cost of goods sold in 2005 was partially due to
costs incurred to construct this integrated waste facility. Also in 2005, we experienced lower market prices for
recyclable commodities than in prior years. This decrease in pricing was more than offset by increased recycling
volumes in 2005 due to several new brokerage contracts and acquisitions.
Fuel — We experienced an estimated average increase of $0.31 per gallon for 2006 as compared with 2005
and of $0.59 per gallon for 2005 as compared with 2004. While our fuel surcharge is designed to recover the cost
increases incurred as a result of higher fuel prices, increased fuel costs continue to negatively affect our operating
margin percentages. Revenues generated by our fuel surcharge program are reflected as fuel yield increases within
Operating Revenues.
Disposal and franchise fees and taxes — In 2006, these costs have remained relatively flat primarily as a result
of decreases associated with divestitures and general volume declines, partially offset by increases in rates for
mandated fees and taxes in certain markets. In 2005, these cost increases were the result of increased volumes and
increased rates for mandated fees and taxes. Certain of these cost increases are passed through to our customers, and
have been reflected as fee yield increases within Operating Revenues.
Landfill operating costs — For 2006 and 2005, these cost increases have generally been related to higher site
maintenance, leachate collection, monitoring and testing, and closure and post-closure expenses.
Risk management — Over the last two years, we have been increasingly successful in reducing these costs
largely due to reduced workers’ compensation costs, which can be attributed to our continued focus on safety and
reduced accident and injury 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 help with the cleanup efforts; (ii) higher
rental expense in 2005; and (iii) a decrease related to the deconsolidation of a variable interest entity in early 2006.
In addition to the 2005 items noted above, the increase in our other operating costs when comparing 2005 with
2004 can be attributed to (i) a year-over-year decrease in the realization of gains on sales of assets; (ii) costs incurred
during 2005 attributable to labor strikes in New Jersey and Canada; and (iii) an increase in costs generated by the
variable interest entity discussed above.
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