Waste Management 2007 Annual Report Download - page 106

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expended within a few years of the debt issuance. When the debt matures, we repay our obligation with cash on hand
and the debt repayments are included as a financing activity in the Statement of Cash Flows.
Debt service funds — Funds are held in trust to meet future principal and interest payments required under
certain of our tax-exempt project bonds.
Derivative financial instruments
We use derivative financial instruments to manage our risk associated with fluctuations in interest rates,
commodity prices and foreign currency exchange rates. We use interest rate swaps to maintain a strategic portion of
our debt obligations at variable, market-driven interest rates. In prior periods, we have entered into interest rate
derivatives in anticipation of our senior note issuances to effectively lock in a fixed interest rate. We have entered
into commodity derivatives, including swaps and options, to mitigate some of the risk associated with our WMRA
Group’s transactions, which can be significantly affected by market prices for recyclable commodities. Foreign
currency exchange rate derivatives are often used to hedge our exposure to changes in exchange rates for anticipated
cash transactions between WM Holdings and its Canadian subsidiaries.
We obtain current valuations of our interest rate hedging instruments from third-party pricing models to
account for the fair value of outstanding interest rate derivatives. We estimate the future prices of commodity fiber
products based upon traded exchange market prices and broker price quotations to derive the current fair value of
commodity derivatives. The fair value of our foreign currency exchange rate derivatives is based on quoted market
prices. The estimated fair values of derivatives used to hedge risks fluctuate over time and should be viewed in
relation to the underlying hedged transaction and the overall management of our exposure to fluctuations in the
underlying risks. The fair value of derivatives is included in other current assets, other long-term assets, accrued
liabilities or other long-term liabilities, as appropriate. Any ineffectiveness present in either fair value or cash flow
hedges is recognized immediately in earnings without offset. There was no significant ineffectiveness in 2007, 2006
or 2005.
•Cash flow hedges — The effective portion of those derivatives designated as cash flow hedges for
accounting purposes is recorded in “Accumulated other comprehensive income” within the equity section
of our Consolidated Balance Sheets. Upon termination, the associated balance in other comprehensive
income is amortized to earnings as the hedged cash flows occur.
•Fair value hedges — The offsetting amounts for those derivatives designated as fair value hedges for
accounting purposes are recorded as adjustments to the carrying values of the hedged items. Upon
termination, this carrying value adjustment is amortized to earnings over the remaining life of the hedged
item.
As of December 31, 2007, 2006 and 2005, the net fair value and earnings impact of our commodity and foreign
currency derivatives were immaterial to our financial position and results of operations. As further discussed in
Note 7, our use of interest rate derivatives to manage our fixed to floating rate position has had a material impact on
our operating cash flows, carrying value of debt and interest expense during these periods.
Self-insurance reserves and recoveries
We have retained a significant portion of the risks related to our health and welfare, automobile, general
liability and workers’ compensation insurance programs. The exposure for unpaid claims and associated expenses,
including incurred but not reported losses, generally is estimated with the assistance of external actuaries and by
factoring in pending claims and historical trends and data. The gross estimated liability associated with settling
unpaid claims is included in “Accrued liabilities” in our Consolidated Balance Sheets if expected to be settled
within one year, or otherwise is included in long-term “Other liabilities.” 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.
71
WASTE MANAGEMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)