Waste Management 2006 Annual Report Download - page 77

Interest Expense
The increase in interest expense in 2006 and 2005 is generally related to higher market interest rates, which
have resulted in a decrease in the benefit of our interest rate swaps and an increase in the interest rates of our variable
rate debt. The increase in our interest expense in 2006 due to higher market interest rates was partially offset by the
impact of a decrease in our outstanding debt, which is due to our repayment of borrowings throughout the year.
We use interest rate derivative contracts to manage our exposure to changes in market interest rates. The
combined impact of active and terminated interest rate swap agreements resulted in a net interest expense increase
of $4 million for 2006 and net interest expense reductions of $39 million and $90 million for 2005 and 2004,
respectively. The significant decline in the benefit recognized as a result of our active interest rate swap agreements
is attributable to the increase in short-term market interest rates. Our periodic interest obligations under our active
interest rate swap agreements are based on a spread from the three-month LIBOR, which has increased from 2.56%
at December 31, 2004 to 4.54% at December 31, 2005 and to 5.36% at December 31, 2006. Included in the
$4 million net increase in interest expense realized in 2006 for terminated and active interest rate swap agreements
is a $41 million reduction in interest expense related to the amortization of terminated swaps. Our terminated
interest rate swaps are expected to reduce interest expense by $37 million in 2007, $33 million in 2008 and
$19 million in 2009.
In addition, we have $652 million of tax-exempt borrowings remarketed either daily or weekly to effectively
maintain a variable yield. The interest rates of these borrowings increased over the last two years due to higher
market rates.
Interest Income
The increase in interest income when comparing 2006 with 2005 is due to an increase in our investments in
variable rate demand notes and auction rate securities throughout the year. Interest income for 2006 and 2004
includes interest income of $14 million and $46 million, respectively, realized on tax refunds received from the IRS
for the settlement of several federal audits.
Equity in Net Losses of Unconsolidated Entities
In the first and second quarters of 2004, we acquired an equity interest in two coal-based synthetic fuel
production facilities. The activities of these facilities drive our “Equity in net losses of unconsolidated entities”. The
significant decrease in the equity losses attributable to these facilities when comparing 2006 with prior years is due
to (i) the estimated effect of a 36% phase-out of Section 45K (formerly Section 29) credits generated during 2006 on
our contractual obligations associated with funding the facilities’ losses as a result of a substantial increase in
market prices of crude oil; (ii) the suspension of operations at the facilities from May to September of 2006; and
(iii) 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. The increase in these losses from 2004 to 2005 is due to the
timing of our initial investments in 2004.
These equity losses are more than offset by the tax benefit realized as a result of these investments. The impact
of these facilities on our provision for taxes is discussed 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 of our
implementation of FIN 46(R). Our minority interest expense for 2006, 2005 and 2004 is primarily related to the
other members’ equity interest in the earnings of these entities. Additional information related to these investments
is included in Note 19 to the Consolidated Financial Statements.
Other, net
Our other income and expense is primarily attributable to the impact of foreign currency translation on our
Canadian operations.
43