Waste Management 2011 Annual Report Download - page 122

Operating Expenses
Our operating expenses include (i) labor and related benefits (excluding labor costs associated with
maintenance and repairs discussed below), which include salaries and wages, bonuses, related payroll taxes,
insurance and benefits costs and the costs associated with contract labor; (ii) transfer and disposal costs, which
include tipping fees paid to third-party disposal facilities and transfer stations; (iii) maintenance and repairs
relating to equipment, vehicles and facilities and related labor costs; (iv) subcontractor costs, which include the
costs of independent haulers who transport waste collected by us to disposal facilities and are affected by
variables such as volumes, distance and fuel prices; (v) costs of goods sold, which are primarily rebates paid to
suppliers associated with recycling commodities; (vi) fuel costs, which represent the costs of fuel and oil to
operate our truck fleet and landfill operating equipment; (vii) disposal and franchise fees and taxes, which
include landfill taxes, municipal franchise fees, host community fees and royalties; (viii) landfill operating costs,
which include interest accretion on landfill liabilities, interest accretion on and discount rate adjustments to
environmental remediation liabilities and recovery assets, leachate and methane collection and treatment, landfill
remediation costs and other landfill site costs; (ix) risk management costs, which include auto liability, workers’
compensation, general liability and insurance and claim costs; and (x) other operating costs, which include,
among other costs, equipment and facility rent, property taxes, utilities and supplies.
Our operating expenses increased $717 million, or 9.2%, when comparing 2011 with 2010 and increased
$583 million, or 8.1%, when comparing 2010 with 2009. Operating expenses as a percentage of revenues were
63.8% in 2011, 62.5% in 2010 and 61.4% in 2009. The increases in our operating expenses during the years
ended December 31, 2011 and 2010 can largely be attributed to the following:
Higher market prices for recyclable commodities — In both 2011 and 2010, increased market prices for
recyclable commodities was the main driver of the increase in cost of goods sold, as presented in the table
below, primarily due to customer recycling rebates, which also resulted in increased revenues and earnings.
For the first nine months of 2011, our overall commodity prices increased approximately 26% as compared
with the first nine months of the prior year. However, during the fourth quarter of 2011, we saw a decline of
approximately 8% in commodity prices due to higher supply and lower demand. During 2010, market prices
for recyclable commodities increased significantly from the near-historic lows experienced in late 2008 and
early 2009, reflecting a 57% increase in 2010 as compared with 2009. Increases in cost of goods sold
accounted for 41% and 49% of the year-over-year increases in total operating expenses during 2011 and
2010, respectively.
Fuel cost increases — Higher market prices for fuel caused increases in both our direct fuel costs and
our subcontractor costs in both 2011 and 2010. On average, diesel fuel prices increased 29% in 2011 and
21% in 2010 as compared with the respective prior years. Diesel fuel prices averaged $3.85, $2.99 and
$2.46 per gallon for 2011, 2010 and 2009, respectively. We believe the total impact of fuel cost increases,
when considering both the impact to our direct fuel costs and an estimate of the impact to our subcontractor
costs, accounted for approximately 23% and 17% of the total year-over-year increase in operating expenses
during 2011 and 2010, respectively. Increased revenues attributable to our fuel surcharge offset the
unfavorable impact of higher fuel costs in 2011 and partially offset the unfavorable impact of higher fuel
costs in 2010.
Acquisitions and growth initiatives — In both 2011 and 2010, we experienced cost increases
attributable to recently acquired businesses and our various growth and business development initiatives.
We estimate that these cost increases, which affected each of the operating cost categories identified in the
table below, accounted for approximately 42% and 17% of our $717 million and $583 million increases in
operating expenses during 2011 and 2010, respectively. Recent acquisitions included the purchase of
Oakleaf and a number of collection and recycling operations. In particular, the acquisition of Oakleaf
increased operating costs by $213 million in the current year, primarily impacting subcontractor costs and,
to a lesser extent, the cost of goods sold and other categories. The increase in operating expenses resulting
from acquired businesses was more than offset by increased revenues from acquired businesses.
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