UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended September 30, 2015
OR
For the transition period from to
Commission file number 000-23211
CASELLA WASTE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Registrant’s telephone number, including area code: (802) 775-0325
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in rule 12b-2 of the Exchange Act. (Check One):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of October 15, 2015:
Class A common stock, $0.01 par value per share:
Class B common stock, $0.01 par value per share:
PART I.
CASELLA WASTE SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
CURRENT ASSETS:
Cash and cash equivalents
Restricted cash
Accounts receivable - trade, net of allowance for doubtful accounts of $1,037 and $2,153, respectively
Refundable income taxes
Prepaid expenses
Inventory
Deferred income taxes
Other current assets
Total current assets
Property, plant and equipment, net of accumulated depreciation and amortization of $776,806 and $736,839, respectively
Goodwill
Intangible assets, net
Restricted assets
Cost method investments
Other non-current assets
Total assets
2
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except for share and per share data)
CURRENT LIABILITIES:
Current maturities of long-term debt and capital leases
Accounts payable
Accrued payroll and related expenses
Accrued interest
Current accrued capping, closure and post-closure costs
Other accrued liabilities
Total current liabilities
Long-term debt and capital leases, less current portion
Accrued capping, closure and post-closure costs, less current portion
Other long-term liabilities
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ DEFICIT:
Casella Waste Systems, Inc. stockholders’ deficit:
Class A common stock, $0.01 par value per share; 100,000,000 shares authorized; 39,978,000 and 39,587,000 shares issued and outstanding, respectively
Class B common stock, $0.01 par value per share; 1,000,000 shares authorized; 988,000 shares issued and outstanding, 10 votes per share, respectively
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive (loss) income
Total Casella Waste Systems, Inc. stockholders’ deficit
Noncontrolling interests
Total stockholders’ deficit
Total liabilities and stockholders’ deficit
The accompanying notes are an integral part of these consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except for per share data)
Revenues
Operating expenses:
Cost of operations
General and administration
Depreciation and amortization
Divestiture transactions
Development project charge
Severance and reorganization costs
Environmental remediation charge
Expense from divestiture, acquisition and financing costs
Gain on settlement of acquisition related contingent consideration
Operating income
Other expense (income):
Interest income
Interest expense
Loss on debt extinguishment
Loss (gain) on derivative instruments
Income from equity method investments
Loss on sale of equity method investment
Other income
Other expense, net
Income (loss) before income taxes
Provision for income taxes
Net income (loss)
Less: Net (loss) income attributable to noncontrolling interests
Net income (loss) attributable to common stockholders
Basic earnings per share attributable to common stockholders:
Weighted average common shares outstanding
Basic earnings per common share
Diluted earnings per share attributable to common stockholders:
Diluted earnings per common share
4
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)
Other comprehensive income, net of tax:
Unrealized (loss) gain resulting from changes in fair value of marketable securities, net of tax
Other comprehensive (loss) income, net of tax
Comprehensive income (loss)
Less: Comprehensive (loss) income attributable to noncontrolling interests
Comprehensive income (loss) attributable to common stockholders
5
CONSOLIDATED STATEMENT OF
STOCKHOLDERS’ DEFICIT
Balance, December 31, 2014
Net (loss) income
Other comprehensive loss
Issuances of Class A common stock
Stock-based compensation
Distribution to noncontrolling interest holder
Excess tax benefit on the vesting of share based awards
Balance, September 30, 2015
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash Flows from Operating Activities:
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Gain on sale of property and equipment
Depletion of landfill operating lease obligations
Interest accretion on landfill and environmental remediation liabilities
Amortization of discount on long-term debt
Loss on derivative instruments
Changes in assets and liabilities, net of effects of acquisitions and divestitures:
Accounts receivable
Prepaid expenses, inventories and other assets
Accrued expenses and other liabilities
Net cash provided by operating activities
Cash Flows from Investing Activities:
Acquisitions, net of cash acquired
Acquisition related additions to property, plant and equipment
Additions to property, plant and equipment
Payments on landfill operating lease contracts
Proceeds from divestiture transactions
Proceeds from sale of property and equipment
Proceeds from sale of equity method investment
Proceeds from property insurance settlement
Payments related to investments
Net cash used in investing activities
Cash Flows from Financing Activities:
Proceeds from long-term borrowings
Principal payments on long-term debt
Change in restricted cash
Payments of financing costs
Payment of redemption premium on long-term debt
Proceeds from the exercise of share based awards
Net cash (used in) provided by financing activities
Discontinued Operations:
Net cash provided by investing activities
Net cash provided by discontinued operations
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
7
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest
Income taxes, net of refunds
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
Receivable due from noncontrolling interest holder
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Casella Waste Systems, Inc. (“Parent”), and its consolidated subsidiaries (collectively, “we”, “us” or “our”), is a regional, vertically-integrated solid waste services company that provides collection, transfer, disposal, landfill, landfill gas-to-energy, recycling and organics services in the northeastern United States. We market recyclable metals, aluminum, plastics, paper and corrugated cardboard, which have been processed at our recycling facilities, as well as recyclables purchased from third-parties. We manage our solid waste operations on a geographic basis through two regional operating segments, the Eastern and Western regions, each of which provides a full range of solid waste services, and our larger-scale recycling and commodity brokerage operations through our Recycling segment. Organics services, ancillary operations, major account and industrial services, discontinued operations and earnings from equity method investees are included in our Other segment.
The accompanying unaudited consolidated financial statements, which include the accounts of the Parent, our wholly-owned subsidiaries and any partially owned entities over which we have a controlling financial interest, have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). All significant intercompany accounts and transactions are eliminated in consolidation. Investments in entities in which we do not have a controlling financial interest are accounted for under either the equity method or the cost method of accounting, as appropriate. Our significant accounting policies are more fully discussed in Item 8 of our Transition Report on Form 10-KT for the transition period ended December 31, 2014, which was filed with the SEC on February 27, 2015.
Preparation of our consolidated financial statements in accordance with GAAP requires management to make certain estimates and assumptions. These estimates and assumptions affect the accounting for and recognition and disclosure of assets, liabilities, equity, revenues and expenses. We must make these estimates and assumptions because certain information that we use is dependent on future events, cannot be calculated with a high degree of precision given the available data, or simply cannot be readily calculated. In the opinion of management, these consolidated financial statements include all adjustments, which include normal recurring and nonrecurring adjustments, necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. The results for the three and nine months ended September 30, 2015 may not be indicative of the results for any other interim period or the entire fiscal year. The consolidated financial statements presented herein should be read in conjunction with our audited consolidated financial statements included in our Transition Report on Form 10-KT for the transition period ended December 31, 2014.
Subsequent Events
We have evaluated subsequent events or transactions that have occurred after the consolidated balance sheet date of September 30, 2015, but prior to the filing of the consolidated financial statements with the SEC on this Quarterly Report on Form 10-Q. We have determined that there are no subsequent events that require recognition or disclosure in this Quarterly Report on Form 10-Q.
New Accounting Pronouncements Pending Adoption
Business Combinations
In September 2015, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update for the accounting of measurement-period adjustments in business combinations. The update provides that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined as if the accounting had been completed at the acquisition date. This includes the acquirer presenting separately on the face of the income statement or disclosing in the notes thereto the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This guidance is effective for annual reporting periods, and interim periods within those reporting periods, beginning after December 15, 2015, with early adoption permitted. We expect that this guidance will have no impact on our consolidated financial position or results of operations upon adoption.
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Debt Issuance Costs
In April 2015, the FASB issued an accounting standards update for the presentation of debt issuance costs. The update provides that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability. This guidance is effective on a retrospective basis for annual reporting periods, and interim periods within those reporting periods, beginning after December 15, 2015, with early adoption permitted. This guidance will impact the balance sheet presentation of our debt issuance costs and related debt liabilities upon adoption.
Consolidation
In February 2015, the FASB issued an accounting standards update for the requirements of consolidation. The update provides changes to the analysis that an entity must perform to determine whether it should consolidate certain types of legal entities because in certain situations deconsolidated financial statements are necessary to better analyze the reporting entity’s economic and operational results. This guidance is effective for annual reporting periods, and interim periods within those reporting periods, beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We are currently assessing the potential impact this guidance may have on our consolidated financial statements as a result of adopting this standard.
Extraordinary and Unusual Items
In January 2015, the FASB issued an accounting standards update that eliminates the GAAP concept of extraordinary items. The update provides for the elimination of the requirements to consider whether an underlying event or transaction is extraordinary, but retains the presentation and disclosure guidance for items that are unusual in nature or occur infrequently and expands upon it to include items that are both unusual in nature and infrequently occurring. This guidance is effective prospectively or retrospectively for annual reporting periods, and interim periods within those reporting periods, beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We expect that this guidance will have no impact on our consolidated financial position or results of operations upon adoption.
Revenue Recognition
In May 2014, the FASB issued an accounting standards update for the recognition of revenue, which supersedes existing revenue recognition requirements and most industry-specific guidance. The update provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is effective for annual reporting periods, and interim reporting periods within those reporting periods, beginning after December 15, 2017 under either full or modified retrospective adoption. Early application is permitted only as of annual reporting periods, and interim reporting periods within those reporting periods, beginning after December 15, 2016. We are currently assessing the potential impact this guidance may have on our consolidated financial statements as a result of adopting this standard.
Adoption of New Accounting Pronouncements
Discontinued Operations
In April 2014, the FASB issued an accounting standards update for the requirements of reporting discontinued operations. The update provides that an entity or a group of components of an entity is required to be reported in discontinued operations once the component of an entity meets the held for sale criteria, is disposed of by sale, or is disposed of other than by sale only if the disposal represents a strategic shift that has, or will have, a major effect on an entity’s operations and financial results. The update also requires that additional disclosures about discontinued operations be made. This guidance is effective prospectively for annual reporting periods, and interim reporting periods within those reporting periods, beginning after December 15, 2014. We adopted this guidance effective January 1, 2015 with no impact on our consolidated financial position or results of operations.
10
The following table shows the activity and balances related to goodwill from December 31, 2014 through September 30, 2015:
Eastern region
Western region
Recycling
Other
Total
Intangible assets as of September 30, 2015 and December 31, 2014 consisted of the following:
Intangible assets
Less accumulated amortization
Intangible amortization expense was $595 and $1,977 during the three and nine months ended September 30, 2015, respectively, as compared to $737 and $2,231 during the three and nine months ended September 30, 2014, respectively.
Estimated Future Amortization Expense as of September 30, 2015:
For the fiscal year ending December 31, 2015
For the fiscal year ending December 31, 2016
For the fiscal year ending December 31, 2017
For the fiscal year ending December 31, 2018
For the fiscal year ending December 31, 2019
Thereafter
11
Accrued final capping, closure and post-closure costs include the current and non-current portion of costs associated with obligations for final capping, closure and post-closure of our landfills. We estimate our future final capping, closure and post-closure costs in order to determine the final capping, closure and post-closure expense per ton of waste placed into each landfill. The anticipated timeframe for paying these costs varies based on the remaining useful life of each landfill, as well as the duration of the post-closure monitoring period. The changes to accrued final capping, closure and post-closure liabilities for the nine months ended September 30, 2015 and 2014 are as follows:
Beginning balance
Obligations incurred
Revisions in estimates (1)
Accretion expense
Obligations settled (2)
Ending balance
Long-term debt and capital leases as of September 30, 2015 and December 31, 2014 consisted of the following:
Senior Secured Asset-Based Revolving Credit Facility:
Due February 2020; bearing interest at LIBOR plus 2.25%
Senior Secured Revolving Credit Facility:
Due March 2016; bore interest at LIBOR plus 3.75%
Tax-Exempt Bonds:
New York State Environmental Facilities Corporation Solid Waste Disposal Revenue Bonds Series 2014; senior unsecured due December 2044 - fixed rate interest period through 2019, bearing interest at 3.75%
Finance Authority of Maine Solid Waste Disposal Revenue Bonds Series 2005R-2; senior unsecured due January 2025 - fixed rate interest period through 2017, bearing interest at 6.25%
Finance Authority of Maine Solid Waste Disposal Revenue Bonds Series 2015; senior unsecured due August 2035 - fixed rate interest period through 2025, bearing interest at 5.125%
Vermont Economic Development Authority Solid Waste Disposal Long-Term Revenue Bonds Series 2013; senior unsecured due April 2036 - fixed rate interest period through 2018, bearing interest at 4.75%
Business Finance Authority of the State of New Hampshire Solid Waste Disposal Revenue Bonds Series 2013; senior unsecured due April 2029 - fixed rate interest period through 2019, bearing interest at 4.00%
Finance Authority of Maine Solid Waste Disposal Revenue Bonds Series 2005R-1; letter of credit backed due January 2025 - variable rate interest period through 2017, bearing interest at SIFMA Index
Other:
Capital leases maturing through April 2023, bearing interest at up to 7.70%
Notes payable maturing through April 2017, bearing interest at up to 6.00%
Senior Subordinated Notes:
Due February 2019; bearing interest at 7.75% (including unamortized discount of $1,486 and $1,319)
Less—current maturities of long-term debt
12
Financing Activities
FAME Bonds 2015
In August 2015, we completed a financing transaction involving the issuance by the Finance Authority of Maine of $15,000 aggregate principal amount of Finance Authority of Maine Solid Waste Disposal Revenue Bonds Series 2015 (“FAME Bonds 2015”). We borrowed the proceeds of the offering of the FAME Bonds 2015 to finance or refinance the costs of certain of our solid waste landfill facilities and solid waste collection, organics and transfer, recycling and hauling facilities, and to pay for the costs of the issuance of the FAME Bonds 2015. As of September 30, 2015, we had $4,500 of restricted cash reserved for repayment of certain capital projects in the State of Maine as a result of this financing.
As of September 30, 2015, we had outstanding $15,000 aggregate principal amount of FAME Bonds 2015. The FAME Bonds 2015, which are unsecured and guaranteed jointly and severally, fully and unconditionally by all of our significant wholly-owned subsidiaries, accrue interest at 5.125% per annum through July 31, 2025, at which time they may be converted from a fixed rate to a variable rate, and interest is payable on February 1 and August 1 of each year. An additional $15,000 aggregate principal amount of FAME Bonds 2015 may be offered under the same indenture in the future. The FAME Bonds 2015 mature on August 1, 2035.
ABL Facility and Senior Subordinated Notes
In February 2015, we issued an additional $60,000 aggregate principal amount of 7.75% senior subordinated notes due February 15, 2019 (“2019 Notes”). The additional 2019 Notes, which are fungible with and issued under the same indenture as the $325,000 2019 Notes previously issued, were issued at a discount of approximately $476 to be accreted over the remaining term of the 2019 Notes. On February 27, 2015, we used the net proceeds from this issuance, together with the initial borrowings under our new senior secured asset-based revolving credit and letter of credit facility (“ABL Facility”), to refinance our senior revolving credit and letter of credit facility that was due March 18, 2016 (“Senior Credit Facility”).
Our ABL Facility consists of a revolving credit facility with loans thereunder being available up to an aggregate principal amount of $190,000, subject to availability under a borrowing base formula as defined in the ABL Facility agreement. We have the right to request, at our discretion, an increase in the amount of loans under the ABL Facility by an aggregate amount of $100,000, subject to the terms and conditions set forth in the ABL Facility agreement. Interest accrues at LIBOR plus between 1.75% and 2.50%, subject to the terms of the ABL Facility agreement and is set at LIBOR plus 2.25% as of September 30, 2015. The ABL Facility matures on February 26, 2020. If we fail to refinance the 2019 Notes on or before November 16, 2018, the maturity date for the ABL Facility shall be November 16, 2018. The ABL Facility is guaranteed jointly and severally, fully and unconditionally by all of our significant wholly-owned subsidiaries. As of September 30, 2015, our borrowing availability under the ABL Facility was $57,252 and was calculated as a borrowing base of $147,115, less revolver borrowings of $62,900, less outstanding irrevocable letters of credit totaling $26,963, at which date no amount had been drawn.
The ABL Facility requires us to maintain a certain minimum consolidated EBITDA measured at the end of each fiscal quarter. Additionally, if borrowing availability does not meet certain thresholds as defined in the ABL Facility agreement, the ABL Facility requires us to meet additional covenants, including, without limitation:
An event of default under any of our debt agreements could permit some of our lenders, including the lenders under the ABL Facility, to declare all amounts borrowed from them to be immediately due and payable, together with accrued and unpaid interest, or, in the case of the ABL Facility, terminate the commitment to make further credit extensions thereunder, which could, in turn, trigger cross-defaults under other debt obligations. If we were unable to repay debt to our lenders, or were otherwise in default under any provision governing our outstanding debt obligations, our secured lenders could proceed against us and against the collateral securing that debt.
In conjunction with the refinancing of our Senior Credit Facility in February 2015, we were also required to settle an obligation associated with an interest rate derivative agreement held with a creditor to our Senior Credit Facility. In February 2015, we made a cash payment of $830 to settle our obligation associated with this interest rate swap.
13
Loss on Debt Extinguishment
Senior Subordinated Notes
In September 2015, we repurchased and permanently retired $9,700 aggregate principal amount of 2019 Notes at a repurchase price of $101.25 in order to maximize interest savings by paying down our most expensive debt. As a result of the repurchase, we recorded a charge of $345 in the three months ended September 30, 2015 as a loss on debt extinguishment related to the purchase premium, as well as the non-cash write-off of deferred financing costs and unamortized original issue discount in proportion with the settlement amount. As of September 30, 2015, we had outstanding $375,300 aggregate principal amount of 2019 Notes, which will mature on February 15, 2019.
Senior Credit Facility
As a result of the refinancing of the Senior Credit Facility in February 2015, we recorded a charge of $521 in the nine months ended September 30, 2015 as a loss on debt extinguishment related to the write-off of deferred financing costs in connection with changes to the borrowing capacity from the Senior Credit Facility to the ABL Facility. The remaining unamortized deferred financing costs of the Senior Credit Facility, along with fees paid to the creditor and third-party costs incurred for the ABL Facility, are to be amortized over the term of the ABL Facility.
Legal Proceedings
In the ordinary course of our business and as a result of the extensive governmental regulation of the solid waste industry, we are subject to various judicial and administrative proceedings involving state and local agencies. In these proceedings, an agency may seek to impose fines or to revoke or deny renewal of an operating permit held by us. From time to time, we may also be subject to actions brought by special interest or other groups, adjacent landowners or residents in connection with the permitting and licensing of landfills and transfer stations, or alleging environmental damage or violations of the permits and licenses pursuant to which we operate. In addition, we have been named defendants in various claims and suits pending for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the ordinary operation of a waste management business.
In accordance with FASB Accounting Standards Codification (“ASC”) 450-20, we accrue for legal proceedings when losses become probable and reasonably estimable. As of the end of each applicable reporting period, we review each of our legal proceedings to determine whether it is probable, reasonably possible or remote that a liability has been incurred and, if it is at least reasonably possible, whether a range of loss can be reasonably estimated under the provisions of FASB ASC 450-20. In instances where we determine that a loss is probable and we can reasonably estimate a range of loss we may incur with respect to such a matter, we record an accrual for the amount within the range that constitutes our best estimate of the possible loss. If we are able to reasonably estimate a range, but no amount within the range appears to be a better estimate than any other, we record an accrual in the amount that is the low end of such range. When a loss is reasonably possible, but not probable, we will not record an accrual, but we will disclose our estimate of the possible range of loss where such estimate can be made in accordance with FASB ASC 450-20.
Greenwood Street Landfill, Worcester, Massachusetts
On July 2, 2014, we received a draft Administrative Consent Order with Penalty and Notice of Noncompliance (“Draft Order”) from the Massachusetts Department of Environmental Protection (“MADEP”) alleging that a subsidiary, NEWS of Worcester, LLC, had completed substantive closure of a portion of the Greenwood Street Landfill in Worcester, Massachusetts in 2010, at an elevation exceeding the applicable permit condition. While we neither admitted nor denied the allegations in the Draft Order, a final Administrative Consent Order with Penalty and Notice of Noncompliance was executed on March 20, 2015 (“Final Order”), and we agreed to pay a civil administrative penalty in a total amount of $172. MADEP agreed that $129 of that amount could be paid as a Supplemental Environmental Project for work being done by the Massachusetts Audubon Society at the Broad Meadow Brook Conservation Center & Wildlife Sanctuary in Worcester, Massachusetts, scheduled to be paid in full within a year of execution of the Final Order.
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Environmental Remediation Liability
We are subject to liability for environmental damage, including personal injury and property damage, that our solid waste, recycling and power generation facilities may cause to neighboring property owners, particularly as a result of the contamination of drinking water sources or soil, possibly including damage resulting from conditions that existed before we acquired the facilities. We may also be subject to liability for similar claims arising from off-site environmental contamination caused by pollutants or hazardous substances if we or our predecessors arrange or arranged to transport, treat or dispose of those materials. The following matter represents our outstanding material claim.
Potsdam Environmental Remediation Liability
On December 20, 2000, the State of New York Department of Environmental Conservation (“DEC”) issued an Order on Consent (“Order”) which named Waste-Stream, Inc. (“WSI”), our subsidiary, General Motors Corporation (“GM”) and Niagara Mohawk Power Corporation (“NiMo”) as Respondents. The Order required that the Respondents undertake certain work on a 25-acre scrap yard and solid waste transfer station owned by WSI in Potsdam, New York, including the preparation of a Remedial Investigation and Feasibility Study (“Study”). A draft of the Study was submitted to the DEC in January 2009 (followed by a final report in May 2009). The Study estimated that the undiscounted costs associated with implementing the preferred remedies would be approximately $10,219. On February 28, 2011, the DEC issued a Proposed Remedial Action Plan for the site and accepted public comments on the proposed remedy through March 29, 2011. We submitted comments to the DEC on this matter. In April 2011, the DEC issued the final Record of Decision (“ROD”) for the site. The ROD was subsequently rescinded by the DEC for failure to respond to all submitted comments. The preliminary ROD, however, estimated that the present cost associated with implementing the preferred remedies would be approximately $12,130. The DEC issued the final ROD in June 2011 with proposed remedies consistent with its earlier ROD. An Order on Consent and Administrative Settlement naming WSI and NiMo as Respondents was executed by the Respondents and DEC with an effective date of October 25, 2013. It is unlikely that any significant expenditures relating to onsite remediation will be incurred until the fiscal year ending December 31, 2016. WSI is jointly and severally liable with the other Respondents for the total cost to remediate.
In September 2011, the DEC settled its environmental claim against the estate of the former GM (known as “Motors Liquidation Trust”) for future remediation costs relating to the WSI site for face value of $3,000. In addition, in November 2011 we settled our own claim against the Motors Liquidation Trust for face value of $100. These claims will be paid by GM in warrants to obtain stock of the reorganized GM. GM has issued warrants to us beginning in May 2013 and at this time there is no way to accurately estimate when the remainder of these claims will be paid. We have not assumed that any future proceeds from the sale of securities received in payment of these claims will reduce our exposure.
We have recorded an environmental remediation liability associated with the Potsdam site based on incurred costs to date and estimated costs to complete the remediation in other accrued liabilities and other long-term liabilities. Our expenditures could be significantly higher if costs exceed estimates. We inflate the estimated costs in current dollars to the expected time of payment and discount the total cost to present value using a risk free interest rate of 1.7%. The changes to the environmental remediation liability associated with the Potsdam environmental remediation liability for the nine months ended September 30, 2015 and 2014 are as follows:
Obligations settled
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Stock Based Compensation
Shares Available For Issuance
In the fiscal year ended April 30, 2007, we adopted the 2006 Stock Incentive Plan (“2006 Plan”). The 2006 Plan was amended in the fiscal year ended April 30, 2010. Under the 2006 Plan, we may grant awards up to an aggregate amount of shares equal to the sum of: (i) 2,475 shares of Class A common stock (subject to adjustment in the event of stock splits and other similar events), plus (ii) such additional number of shares of Class A common stock as were subject to options granted under our 1993 Incentive Stock Option Plan, 1994 Non-statutory Stock Option Plan, 1996 Option Plan, and 1997 Stock Option Plan (“Prior Plans”), which were not actually issued under the Prior Plans because such options expire or otherwise result in shares not being issued. As of September 30, 2015, there were 1,129 Class A common stock equivalents available for future grant under the 2006 Plan, inclusive of additional Class A common stock equivalents that were previously issued under our terminated plans and have become available for grant because such awards expired or otherwise resulted in shares not being issued. The 2006 Plan is terminated by its terms on October 9, 2016 and accordingly we expect to implement a new stock incentive plan which would be recommended to stockholders for approval at the 2016 Annual Meeting of Stockholders.
Stock Options
Stock options under the 2006 Plan are granted at a price equal to the prevailing fair market value of our Class A common stock at the date of grant. Generally, stock options granted have a term not to exceed ten years and vest over a one to four year period from the date of grant.
A summary of stock option activity for the nine months ended September 30, 2015 is as follows:
Outstanding, December 31, 2014
Granted
Exercised
Forfeited
Outstanding, September 30, 2015
Exercisable, September 30, 2015
Expected to vest, September 30, 2015
Stock-based compensation expense for stock options was $161 and $478 during the three and nine months ended September 30, 2015, respectively, as compared to $148 and $363 during the three and nine months ended September 30, 2014, respectively.
As of September 30, 2015, total unrecognized stock-based compensation expense related to outstanding stock options was $612, which will be recognized over a weighted average period of 0.9 years.
Other Stock Awards
We grant restricted stock awards, restricted stock units and performance stock units under the 2006 Plan at a price equal to the fair market value of our Class A common stock at the date of grant. Restricted stock awards granted to non-employee directors vest incrementally over a three year period beginning on the first anniversary of the date of grant. Restricted stock units vest incrementally over an identified service period beginning on the grant date based on continued employment. Performance stock units vest on the third fiscal year-end following the grant date and are based on our attainment of a targeted average return on net assets as of the vesting date.
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A summary of restricted stock, restricted stock unit and performance stock unit activity for the nine months ended September 30, 2015 is as follows:
Class A Common Stock Vested
Stock-based compensation expense related to restricted stock and restricted stock units was $706 and $1,785 during the three and nine months ended September 30, 2015, respectively, as compared to $464 and $1,322 during the three and nine months ended September 30, 2014, respectively. Stock-based compensation expense related to restricted stock and restricted stock units during the three and nine months ended September 30, 2015 includes $270 of incremental compensation expense resulting from the modification of restricted stock awards associated with the retirement of two members of our Board of Directors.
During the three and nine months ended September 30, 2015, the total fair value of other stock awards vested was $275 and $1,988, respectively.
As of September 30, 2015, total unrecognized compensation expense related to outstanding restricted stock and restricted stock units was $2,851, which will be recognized over a weighted average period of 1.9 years.
We also recorded $24 and $62 of stock-based compensation expense related to our Employee Stock Purchase Plan during the three and nine months ended September 30, 2015, respectively, as compared to $16 and $56 during the three and nine months ended September 30, 2014, respectively.
Accumulated Other Comprehensive Income (Loss)
The change in the balance of accumulated other comprehensive income (loss), which is included as a component of our stockholders’ deficit, for the nine months ended September 30, 2015 is as follows:
Balance as of December 31, 2014
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other comprehensive income (loss)
Net current-period other comprehensive loss
Balance as of September 30, 2015
Recent Stockholder Events
On April 7, 2015, JCP Investment Partnership, LP notified us of its intention to nominate Brett W. Frazier, James C. Pappas and Joseph B. Swinbank for election as directors at our 2015 Annual Meeting of Stockholders in opposition to the three candidates that will be recommended for election by our Board of Directors. According to Amendment No. 2 to the Schedule 13D
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filed with the SEC by JCP Investment Partnership, LP, JCP Single-Asset Partnership, LP, JCP Investment Partners, LP, JCP Investment Holdings, LLC, JCP Investment Management, LLC and James C. Pappas (collectively, the “JCP Group”) on September 10, 2015, the JCP Group beneficially owns approximately 5.7% of our outstanding Class A common stock. On September 29, 2015, the JCP Group filed its definitive proxy statement and definitive proxy card with the SEC with respect to its intended solicitation of proxies from our stockholders for the election of its two proposed nominees to our Board of Directors at our 2015 Annual Meeting of Stockholders. In its definitive proxy statement, the JCP Group indicated that it had dropped Mr. Swinbank from the slate of proposed nominees and that it was seeking to replace two members of our Board of Directors.
The following table sets forth the numerator and denominator used in the computation of basic and diluted earnings per share (“EPS”):
Numerator:
Denominator:
Number of shares outstanding, end of period:
Class A common stock
Class B common stock
Unvested restricted stock
Effect of weighted average shares outstanding during period
Weighted average number of common shares used in basic EPS
Impact of potentially dilutive securities:
Dilutive effect of options and restricted stock units
Weighted average number of common shares used in diluted EPS
Antidilutive potentially issuable shares not included in the diluted EPS calculations
We use a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. These tiers include: Level 1, defined as quoted market prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; and Level 3, defined as unobservable inputs that are not corroborated by market data.
We use valuation techniques that maximize the use of market prices and observable inputs and minimize the use of unobservable inputs. In measuring the fair value of our financial assets and liabilities, we rely on market data or assumptions which we believe market participants would use in pricing an asset or a liability.
Assets and Liabilities Accounted for at Fair Value on a Recurring Basis
Our financial instruments include cash and cash equivalents, restricted investments held in trust on deposit with various banks as collateral for our obligations relative to our landfill final capping, closure and post-closure costs, restricted cash reserved to finance certain capital projects, trade receivables, interest rate derivatives, trade payables and long-term debt. The carrying values of cash and cash equivalents, trade receivables and trade payables approximate their respective fair values due to their short-term nature. The fair value of restricted investments held in trust and escrow accounts is included as restricted assets in the Level 1 tier below, along with restricted cash reserved for repayment of certain capital projects.
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The fair value of the interest rate derivative, included in the Level 2 tier below, is calculated based on the three month LIBOR yield curve that is observable at commonly quoted intervals for the full term of the interest rate swap, adjusted by the credit risk of us and our counter-party based on the observable credit default swap rate.
As of September 30, 2015 our assets and liabilities measured at fair value on a recurring basis included the following:
Assets:
Restricted assets - capital projects
Restricted assets - landfill closure
Liabilities:
Interest rate derivative
As of December 31, 2014 our assets and liabilities measured at fair value on a recurring basis included the following:
Interest rate derivatives
Fair Value of Debt
As of September 30, 2015, the fair value of our fixed rate debt, including our 2019 Notes, Finance Authority of Maine Solid Waste Disposal Revenue Bonds Series 2005R-2 (“FAME Bonds 2005R-2”), FAME Bonds 2015, Vermont Economic Development Authority Solid Waste Disposal Long-Term Revenue Bonds Series 2013 (“Vermont Bonds”), New York State Environmental Facilities Corporation Solid Waste Disposal Revenue Bonds Series 2014 (“New York Bonds”) and Solid Waste Disposal Revenue Bonds Series 2013 issued by the Business Finance Authority of New Hampshire (“New Hampshire Bonds”) was approximately $460,707 and the carrying value was $463,700. The fair value of the 2019 Notes are considered to be Level 1 within the fair value hierarchy as the fair value is based off of a quoted market price in an active market. The fair value of the FAME Bonds 2005R-2, the FAME Bonds 2015, the Vermont Bonds, the New York Bonds and the New Hampshire Bonds is considered to be Level 2 within the fair value hierarchy as the fair value is determined using market approach pricing that utilizes pricing models and pricing systems, mathematical tools and judgment to determine the evaluated price for the security based on the market information of each of the bonds or securities with similar characteristics.
Although we have determined the estimated fair value amounts of the FAME Bonds 2005R-2, the FAME Bonds 2015, the Vermont Bonds, the New York Bonds and the New Hampshire Bonds using available market information and commonly accepted valuation methodologies, a change in available market information, and/or the use of different assumptions and/or estimation methodologies could have a material effect on the estimated fair values. These amounts have not been revalued,
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and current estimates of fair value could differ significantly from the amounts presented. As of September 30, 2015, the fair value of our ABL Facility approximated its carrying value of $62,900 based on current borrowing rates for similar types of borrowing arrangements, or Level 2 inputs. The carrying value of our remaining material variable rate debt, the Finance Authority of Maine Solid Waste Disposal Revenue Bonds Series 2005R-1, approximates fair value because the interest rate for the debt instrument is based on a market index that approximates current market rates for instruments with similar risk and maturities.
Sale of Business
In May 2015, we divested of a business, which included the sale of certain assets associated with various waste collection routes in the Western region, for total consideration of $872, resulting in a gain of $677 in the nine months ended September 30, 2015.
Maine Energy
In the fiscal year ended April 30, 2013, we executed a purchase and sale agreement with the City of Biddeford, Maine, pursuant to which we agreed to sell the real property of Maine Energy Recovery Company, LP (“Maine Energy”) to the City of Biddeford. We agreed to sell Maine Energy for an undiscounted purchase consideration of $6,650, which is being paid to us in equal installments over twenty-one years. The transaction closed in November 2012. In December 2012, we ceased operations of the Maine Energy facility and initiated the decommissioning, demolition and site remediation process in accordance with the provisions of the agreement. We have completed the demolition process, and have nearly completed site remediation under the auspices and in accordance with work plans approved by the Maine Department of Environmental Protection and the U.S. Environmental Protection Agency. The time for completion of this project has been consensually extended by us and the City of Biddeford, and we expect to complete this project and transfer ownership of the real property to the City of Biddeford during the fall of 2015. In consideration of the fact that the project is substantially complete and based on incurred costs to date and estimates regarding the remaining costs to fulfill our obligation under the agreement, we reversed a reserve of $1,157 of excess costs to complete the divestiture in the nine months ended September 30, 2015. As of September 30, 2015, we have accrued $87 in other accrued liabilities for the estimated remaining costs to fulfill our obligation under the agreement.
CARES and Related Transaction
Casella-Altela Regional Environmental Services, LLC (“CARES”) is a joint venture that owned and operated a water and leachate treatment facility for the natural gas drilling industry in Pennsylvania. Our joint venture partner in CARES is Altela, Inc. (“Altela”). We held an ownership interest in CARES of 51% and, in accordance with FASB ASC 810-10-15, we consolidated the assets, liabilities and results of operations of CARES into our consolidated financial statements due to our controlling financial interest in the joint venture.
In the fiscal year ended April 30, 2014, we determined that assets of the CARES water treatment facility were no longer operational or were not operating within product performance parameters. As a result, we initiated a plan to abandon and shut down the operations of CARES. It was determined that the carrying value of the assets of CARES was no longer recoverable and, as a result, the carrying value of the asset group was assessed for impairment and impaired in the quarter ended June 30, 2014. As a result, we recorded an impairment charge of $7,455 in the nine months ended September 30, 2014 to the asset group of CARES in the Western region.
We executed a purchase and sale agreement on February 9, 2015 pursuant to which we and Altela agreed to sell certain assets of the CARES water treatment facility to an unrelated third-party. We sold these assets of CARES for purchase consideration of $3,500, resulting in a gain of $2,850 in the nine months ended September 30, 2015, 49% of which was attributable to Altela, the noncontrolling interest holder. As of September 30, 2015, we were proceeding with the dissolution of CARES in accordance with the CARES Limited Liability Company Agreement.
In connection with this transaction, we also sold certain of our equipment and real estate to the same unrelated third-party for total consideration of $1,050, resulting in a gain of $928 in the nine months ended September 30, 2015.
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We report selected information about operating segments in a manner consistent with that used for internal management reporting. We classify our solid waste operations on a geographic basis through regional operating segments. Revenues associated with our solid waste operations are derived mainly from solid waste collection and disposal, landfill, landfill gas-to-energy, transfer and recycling services in the northeastern United States. Our revenues in the Recycling segment are derived from municipalities and customers in the form of processing fees, tipping fees and commodity sales. Organics services, ancillary operations, major account and industrial services, discontinued operations, and earnings from equity method investees are included in our Other segment.
Three Months Ended September 30, 2015
Segment
Eastern
Western
Eliminations
Three Months Ended September 30, 2014
Nine Months Ended September 30, 2015
Nine Months Ended September 30, 2014
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Amounts of our total revenue attributable to services provided for the three and nine months ended September 30, 2015 and 2014 are as follows:
Collection
Disposal
Power generation
Processing
Solid waste operations
Organics
Customer solutions
Total revenues
Our 2019 Notes are guaranteed jointly and severally, fully and unconditionally, by our significant wholly-owned subsidiaries. The Parent is the issuer and a non-guarantor of the 2019 Notes and the Parent has no independent assets or operations. The information which follows presents the condensed consolidating financial position as of September 30, 2015 and December 31, 2014, the consolidating results of operations and comprehensive income (loss) for the three and nine months ended September 30, 2015 and 2014, and the condensed consolidating statements of cash flows for the nine months ended September 30, 2015 and 2014 of (a) the Parent company only, (b) the combined guarantors (“Guarantors”), each of which is 100% wholly-owned by the Parent, (c) the combined non-guarantors (“Non-Guarantors”), (d) eliminating entries and (e) the consolidated total.
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CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2015
ASSETS
Accounts receivable - trade, net
Property, plant and equipment, net
Investments in subsidiaries
Intercompany receivable
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Long-term debt and capital leases, less current maturities
STOCKHOLDERS’ (DEFICIT) EQUITY:
Casella Waste Systems, Inc. stockholders (deficit)’ equity
Total stockholders’ (deficit) equity
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AS OF DECEMBER 31, 2014
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CONSOLIDATING STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2015
Operating income (loss)
Other expense (income), net:
(Income) loss on derivative instruments
(Income) loss from consolidated entities
Other expense (income), net
Provision (benefit) for income taxes
Less: Net income (loss) attributable to noncontrolling interests
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THREE MONTHS ENDED SEPTEMBER 30, 2014
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NINE MONTHS ENDED SEPTEMBER 30, 2015
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NINE MONTHS ENDED SEPTEMBER 30, 2014
(Income) loss from equity method investments
(Gain) loss on sale of equity method investment
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CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) resulting from changes in fair value of marketable securities
Other comprehensive income (loss), net of tax
Less: Comprehensive income (loss) attributable to noncontrolling interests
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Unrealized gain (loss) resulting from changes in fair value of marketable securities, net of tax
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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Net cash provided by (used in) operating activities
Net cash provided by (used in) investing activities
Distributions to noncontrolling interest holder
Intercompany borrowings
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
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Net cash provided by (used in) discontinued operations
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our unaudited consolidated financial statements and notes thereto included under Item 1. In addition, reference should be made to our audited consolidated financial statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in our Transition Report on Form 10-KT for the transition period ended December 31, 2014 filed with the Securities and Exchange Commission (“SEC”) on February 27, 2015.
This Quarterly Report on Form 10-Q and, in particular, this Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended (“Exchange Act”), including:
In addition, any statements contained in or incorporated by reference into this report that are not statements of historical fact should be considered forward-looking statements. You can identify these forward-looking statements by the use of the words “believes”, “expects”, “anticipates”, “plans”, “may”, “would”, “intends”, “estimates” and other similar expressions, whether in the negative or affirmative. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industry and markets in which we operate, as well as management’s beliefs and assumptions, and should be read in conjunction with our consolidated financial statements and notes thereto. We cannot guarantee that we actually will achieve the plans, intentions or expectations disclosed in the forward-looking statements made. The occurrence of the events described and the achievement of the expected results depends on many events, some or all of which are not predictable or within our control. Actual results may differ materially from those set forth in the forward-looking statements.
There are a number of important risks and uncertainties that could cause our actual results to differ materially from those indicated by such forward-looking statements. These risks and uncertainties include, without limitation, those detailed in Item 1A, “Risk Factors” in our Transition Report on Form 10-KT for the transition period ended December 31, 2014 and, as applicable, those included under Part II, Item 1A of this Quarterly Report on Form 10-Q. We explicitly disclaim any obligation to update any forward-looking statements whether as a result of new information, future events or otherwise, except as otherwise required by the federal securities laws.
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Company Overview
Founded in 1975 with a single truck, Casella Waste Systems, Inc., and its consolidated subsidiaries, (collectively, “we”, “us” or “our”), is a regional, vertically-integrated solid waste services company. We provide resource management expertise and services to residential, commercial, municipal and industrial customers, primarily in the areas of solid waste collection and disposal, transfer, recycling and organics services. We provide integrated solid waste services in six states: Vermont, New Hampshire, New York, Massachusetts, Maine and Pennsylvania, with our headquarters located in Rutland, Vermont. We manage our solid waste operations on a geographic basis through two regional operating segments, the Eastern and Western regions, each of which provides a full range of solid waste services, and our larger-scale recycling and commodity brokerage operations through our Recycling segment. Organics services, ancillary operations, major account and industrial services, discontinued operations, and earnings from equity method investees are included in our Other segment.
As of October 15, 2015, we owned and/or operated 34 solid waste collection operations, 44 transfer stations, 18 recycling facilities, nine Subtitle D landfills, four landfill gas-to-energy facilities and one landfill permitted to accept construction and demolition (“C&D”) materials.
Results of Operations
The following table summarizes our revenues and operating expenses for the three and nine months ended September 30, 2015 and 2014 (dollars in millions and as a percentage of revenue):
We manage our solid waste operations, which include a full range of solid waste services, on a geographic basis through two regional operating segments, which we designate as the Eastern and Western regions. Revenues in our Eastern and Western regions consist primarily of fees charged to customers for solid waste collection and disposal, landfill, landfill gas-to-energy, transfer and recycling services. We derive a substantial portion of our collection revenues from commercial, industrial and municipal services that are generally performed under service agreements or pursuant to contracts with municipalities. The majority of our residential collection services are performed on a subscription basis with individual households. Landfill and transfer customers are charged a tipping fee on a per ton basis for disposing of their solid waste at our disposal facilities and transfer stations. We also generate and sell electricity at certain of our landfill facilities. In addition, revenues from our Recycling segment consist of revenues derived from municipalities and customers in the form of processing fees, tipping fees and commodity sales.
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Our revenues are shown net of inter-company eliminations. The table below shows revenues (dollars in millions) attributable to services provided for the three and nine months ended September 30, 2015 and 2014:
Our revenues increased $4.3 million, or 3.0%, and $14.1 million, or 3.6%, during the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014. The following table provides details associated with the period-to-period changes in revenues (dollars in millions) attributable to services provided:
Solid Waste Operations:
Price
Volume
Commodity price & volume
Acquisitions & divestitures
Closed landfill
Fuel and oil recovery fee
Total solid waste
Recycling Operations:
Commodity price
Commodity volume
Total recycling
Solid waste revenues
Price.
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Volume.
Commodity price & volume.
Acquisitions and divestitures.
Closed landfill.
Fuel and oil recovery fee.
Organics revenues
Customer Solutions revenues
Recycling revenues
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Operating Expenses
Cost of Operations
Cost of operations includes labor costs, tipping fees paid to third-party disposal facilities, fuel costs, maintenance and repair costs of vehicles and equipment, workers’ compensation and vehicle insurance costs, the cost of purchasing materials to be recycled, third-party transportation costs, district and state taxes, host community fees and royalties. Cost of operations also includes accretion expense related to final capping, closure and post-closure obligations, leachate treatment and disposal costs and depletion of landfill operating lease obligations.
Our cost of operations increased $1.5 million, decreasing 1.0% as a percentage of revenues, and $4.4 million, decreasing 1.4% as a percentage of revenues, for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014.
The period-to-period changes in cost of operations can be primarily attributed to the following:
General and Administration
General and administration expenses include management, clerical and administrative compensation and overhead, professional services and costs associated with marketing, sales force and community relations efforts.
Our general and administration expenses increased $0.2 million, decreasing 0.2% as a percentage of revenues, and increased $3.1 million, increasing 0.4% as a percentage of revenues, for the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014.
The period-to-period changes in general and administration expenses can be primarily attributed to the following:
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Depreciation and Amortization
Depreciation and amortization includes (i) depreciation of property and equipment, including assets recorded for capital leases, on a straight-line basis over the estimated useful life of the assets; (ii) amortization of landfill costs, including those incurred and all estimated future costs for landfill development, construction and asset retirement costs arising from closure and post-closure, on a units-of-consumption method as landfill airspace is consumed over the total estimated remaining capacity of a site, which includes both permitted capacity and unpermitted expansion capacity that meets our criteria for amortization purposes; (iii) amortization of landfill asset retirement costs arising from final capping obligations on a units-of-consumption method as airspace is consumed over the estimated capacity associated with each final capping event; and (iv) amortization of intangible assets with a definite life, using either a economic benefit provided approach or a straight-line basis over the definitive terms of the related agreements.
The table below summarizes the components of depreciation and amortization expense for the three and nine months ended September 30, 2015 and 2014 (dollars in millions and as a percentage of revenues):
Depreciation expense
Landfill amortization expense
Other amortization expense
The changes in the components of depreciation and amortization expense when comparing the three and nine months ended September 30, 2015 to the same periods in 2014 can largely be attributed to the following:
Divestiture Transactions
Sale of Business. In May 2015, we divested a business, which included the sale of certain assets associated with various waste collection routes in the Western region, for total consideration of $0.9 million, resulting in a gain of $0.7 million in the nine months ended September 30, 2015.
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Maine Energy. In the fiscal year ended April 30, 2013, we executed a purchase and sale agreement with the City of Biddeford, Maine, pursuant to which we agreed to sell the real property of Maine Energy Recovery Company, LP (“Maine Energy”) to the City of Biddeford. We agreed to sell Maine Energy for an undiscounted purchase consideration of $6.7 million, which is being paid to us in equal installments over twenty-one years. The transaction closed in November 2012. In December 2012, we ceased operations of the Maine Energy facility and initiated the decommissioning, demolition and site remediation process in accordance with the provisions of the agreement. We have completed the demolition process, and have nearly completed site remediation under the auspices and in accordance with work plans approved by the Maine Department of Environmental Protection and the U.S. Environmental Protection Agency. The time for completion of this project has been consensually extended by us and the City of Biddeford, and we expect to complete this project and transfer ownership of the real property to the City of Biddeford during the fall of 2015. In consideration of the fact that the project is substantially complete and based on incurred costs to date and estimates regarding the remaining costs to fulfill our obligation under the agreement, we reversed a reserve of $1.1 million of excess costs to complete the divestiture in the nine months ended September 30, 2015. As of September 30, 2015, we have accrued $0.1 million in other accrued liabilities for the estimated remaining costs to fulfill our obligation under the agreement.
CARES and Related Transaction. CARES is a joint venture that owned and operated a water and leachate treatment facility for the natural gas drilling industry in Pennsylvania. Our joint venture partner in CARES is Altela, Inc. (“Altela”). We held an ownership interest in CARES of 51% and, in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 810-10-15, we consolidated the assets, liabilities and results of operations of CARES into our consolidated financial statements due to our controlling financial interest in the joint venture.
In the fiscal year ended April 30, 2014, we determined that assets of the CARES water treatment facility were no longer operational or were not operating within product performance parameters. As a result, we initiated a plan to abandon and shut down the operations of CARES. It was determined that the carrying value of the assets of CARES was no longer recoverable and, as a result, the carrying value of the asset group was assessed for impairment and impaired in the quarter ended June 30, 2014. As a result, we recorded an impairment charge of $7.5 million in the nine months ended September 30, 2014 to the asset group of CARES in the Western region.
We executed a purchase and sale agreement on February 9, 2015 pursuant to which we and Altela agreed to sell certain assets of the CARES water treatment facility to an unrelated third-party. We sold these assets of CARES for purchase consideration of $3.5 million, resulting in a gain of $2.9 million in the nine months ended September 30, 2015, 49% of which was attributable to Altela, the noncontrolling interest holder. As of September 30, 2015, we were proceeding with the dissolution of CARES in accordance with the CARES Limited Liability Company Agreement.
In connection with this transaction, we also sold certain of our equipment and real estate to the same unrelated third-party for total consideration of $1.1 million, resulting in a gain of $0.9 million in the nine months ended September 30, 2015.
Development Project Charge
In the nine months ended September 30, 2014, we recorded a charge of $1.4 million for deferred costs associated with a gas pipeline development project in Maine no longer deemed viable.
As of September 30, 2015 and December 31, 2014, we had no deferred costs associated with development projects included in our consolidated balance sheets.
Severance and Reorganization Costs
In the nine months ended September 30, 2014, we recorded charges of $0.4 million for severance costs associated with various planned reorganization efforts.
Gain on Settlement of Acquisition Related Contingent Consideration
In March 2014, we recovered a portion of the purchase price holdback amount we had previously paid and were relieved of any potential contingent consideration obligation associated with the acquisition of an industrial service management business. As a result, we recorded a $1.1 million gain on settlement of acquisition related contingent consideration in the nine months ended September 30, 2014.
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Other Expenses
Interest Expense, net
Our interest expense, net increased $0.6 million and $1.7 million when comparing the three and nine months ended September 30, 2015 to the same periods in 2014 due to higher average debt balances combined with changes to our capitalization structure associated with various tax exempt debt borrowings, the issuance of additional 7.75% senior subordinated notes due February 15, 2019 (“2019 Notes”) and the refinancing of our senior revolving credit and letter of credit facility that was due March 18, 2016 (“Senior Credit Facility”).
Senior Subordinated Notes. In September 2015, we repurchased and permanently retired $9.7 million aggregate principal amount of 2019 Notes at a repurchase price of $101.25 in order to maximize interest savings by paying down our most expensive debt. As a result of the repurchase, we recorded a charge of $0.3 million in the three months ended September 30, 2015 as a loss on debt extinguishment related to the purchase premium, as well as the non-cash write-off of deferred financing costs and unamortized original issue discount in proportion with the settlement amount.
Senior Credit Facility. As a result of the refinancing of the Senior Credit Facility in February 2015, we recorded a charge of $0.5 million in the nine months ended September 30, 2015 as a loss on debt extinguishment related to the write-off of deferred financing costs in connection with changes to the borrowing capacity from the Senior Credit Facility to our new senior secured asset-based revolving credit and letter of credit facility (“ABL Facility”). The remaining unamortized deferred financing costs of the Senior Credit Facility, along with fees paid to the creditor and third-party costs incurred for the ABL Facility are to be amortized over the term of the ABL Facility.
Loss on Derivative Instruments
We are party to an interest rate derivative agreement for an interest rate swap that is not considered to be an effective cash flow hedge. We recognize the change in fair value of the interest rate swap along with any cash settlements through earnings as a (gain) or loss on derivative instruments.
Loss on Sale of Equity Method Investment
In December 2013, we sold our 50% membership interest in US GreenFiber LLC (“GreenFiber). As a result of the sale of our 50% membership interest in GreenFiber, we recorded a gain on sale of equity method investment of $0.8 million in December 2013. This included a working capital adjustment to the purchase price that was finalized upon closing the transaction in January 2014. As a result of the change in working capital adjustment, we recorded a loss on sale of equity method investment of $0.2 million in the nine months ended September 30, 2014.
Provision for Income Taxes
Our provision for income taxes remained unchanged at $0.2 million and $1.1 million when comparing each of the three and nine months ended September 30, 2015, respectively, to the same periods in 2014. The provisions for income taxes for the nine months ended September 30, 2015 and September 30, 2014 include $0.6 million and $0.9 million, respectively, of deferred tax provisions due mainly to the increase in the deferred tax liability for indefinite lived assets. Since we cannot determine when the deferred tax liability related to indefinite lived assets will reverse, this amount cannot be used as a future source of taxable income against which to benefit deferred tax assets.
During the fiscal year ended April 30, 2013, we reached a settlement with the State of New York in connection with the State of New York’s audit of our tax returns for the years 2004-2010. The State of New York had alleged that we were not permitted to file a single combined corporation franchise tax return with our subsidiaries. The settlement represented less than 8.0% of the total cumulative liability, and we settled in order to minimize the out-of-pocket costs related to ongoing litigation. Subsequent to the settlement of that audit, the State of New York began an audit of 2011-2013 and raised the same issue. We continue to believe that our position related to the filing of our State of New York tax returns was correct, and, based on the prior settlement and subsequent favorable litigation related to similar issues, we concluded at December 31, 2014 that no reserve would be required for our State of New York filings.
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During the nine months ended September 30, 2015, we determined based on discussions with the State of New York that we would be willing to settle the subsequent years’ audits on a basis similar to the prior settlement. As a result of these discussions and a net unfavorable reversal of a portion of other positions due to the expiration of the statute of limitations, we recorded an increase in our reserve for uncertain tax positions of $0.4 million in the nine months ended September 30, 2015. During the three months ended September 30, 2015, the reserve for uncertain tax positions was reduced by $0.2 million due to settlement with the State of New York on this same matter in the quarter.
Segment Reporting
The table below shows, for the periods indicated, revenues and operating income (loss) (in millions) based on our operating segments:
Eastern Region
Our Eastern region revenues increased $4.0 million, or 9.5%, and $10.2 million, or 9.0%, during the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014.
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The following table provides details associated with the period-to-period changes in revenues (dollars in millions):
Fuel oil and recovery fee
Eastern region operating income increased $2.1 million and $8.7 million during the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014. This improvement is largely attributable to revenue growth outlined above and the following cost changes:
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Western Region
Our Western region revenues increased $1.9 million, or 3.1%, and $5.0 million, or 3.0%, during the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014.
Commodity price and volume.
Western region operating income remained consistent and increased $11.5 million during the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014. These improvements are largely attributable to revenue growth outlined above and the following cost changes:
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Recycling revenues decreased $0.6 million and $1.2 million during the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014. The decreases in recycling revenues were the result of unfavorable commodity prices in the market more than offsetting increases associated with higher commodity volumes.
Recycling operating income decreased $0.1 million and $0.9 million during the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014 as operating results were negatively impacted by unfavorable commodity prices, higher hauling and labor costs and increased facility maintenance activities.
Revenues decreased $1.0 million and increased $0.2 million during the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014 largely as a result of higher volumes associated with organic business growth within our Customer Solutions business, partially offset by lower commodity volumes and a decline in our floating rate fuel and oil recovery fee in response to lower diesel fuel index prices on which the surcharge is based within our Organics business.
Operating income increased by $0.1 million and $1.4 million during the three and nine months ended September 30, 2015, respectively, as compared to the same periods in 2014 based on the operating performance of our Customer Solutions business. Profitability in the Customer Solutions business improved as we continued to gain leverage on higher revenues and lower general and administration costs.
Liquidity and Capital Resources
We continually monitor our actual and forecasted cash flows, our liquidity and our capital requirements in order to properly manage our cash needs based on the capital intensive nature of our business. Our capital requirements include acquisitions, fixed asset purchases (including capital expenditures for vehicles), debt servicing, landfill development and cell construction, as well as site and cell closure. We generally meet our liquidity needs from operating cash flows and borrowings from a revolving credit facility.
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The following is a summary of our cash and cash equivalents, restricted assets and debt balances as of September 30, 2015 and December 31, 2014 (in millions):
Restricted assets:
Capital projects
Landfill closure
Total restricted assets
Long-term debt:
Current portion
Long-term portion
Total long-term debt
Summary of Cash Flow Activity
The following table summarizes our cash flows for the nine months ended September 30, 2015 and 2014 (in millions):
Net cash provided by operating activities. Cash flows from operating activities increased by $3.2 million during the nine months ended September 30, 2015, as compared to the same period in 2014.
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The following is a summary of our operating cash flows for the nine months ended September 30, 2015 and 2014 (in millions):
Adjusted net income before changes in assets and liabilities, net
Changes in assets and liabilities, net
The $3.2 million increase in our operating cash flows is primarily associated with the following:
Net cash used in investing activities. Cash flows used in investing activities decreased by $17.8 million during the nine months ended September 30, 2015, as compared to the same period in 2014.
The most significant items affecting the change in our investing cash flows are summarized below:
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Net cash (used in) provided by financing activities. Cash flows from financing activities decreased $21.3 million during the nine months ended September 30, 2015, as compared to the same period in 2014.
Outstanding Long-Term Debt
Asset-Based Lending Facility
The ABL Facility consists of a revolving credit facility with loans thereunder being available up to an aggregate principal amount of $190.0 million, subject to availability under a borrowing base formula as defined in the ABL Facility agreement. We have the right to request, at our discretion, an increase in the amount of loans under the ABL facility by an aggregate amount of $100.0 million, subject to the terms and conditions set forth in the ABL Facility agreement. Interest accrues at LIBOR plus between 1.75% and 2.50%, subject to the terms of the ABL Facility agreement and is set at LIBOR plus 2.25% as of September 30, 2015. The ABL Facility matures on February 26, 2020. If we fail to refinance the 2019 Notes on or before November 16, 2018, the maturity date of the ABL Facility shall be November 16, 2018. The ABL Facility is guaranteed jointly and severally, fully and unconditionally by all of our significant wholly-owned subsidiaries.
The ABL Facility agreement requires us to maintain minimum consolidated EBITDA for the twelve months preceding the measurement date measured at the end of each fiscal quarter. As of September 30, 2015, we were in compliance with the minimum consolidated EBITDA financial covenant contained in the ABL Facility agreement as follows (in millions):
Asset-Based Revolving Credit Facility Financial Covenants
Minimum consolidated EBITDA (1)
Minimum consolidated EBITDA is based on operating results for the twelve months preceding the measurement date, September 30, 2015. Based on the minimum consolidated EBITDA, our consolidated leverage ratio, as defined in the ABL Facility, was 4.98 as of September 30, 2015. The consolidated leverage ratio is used to set pricing according to the ABL Facility agreement and there is not a financial covenant associated with this ratio.
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Changes in assets and liabilities, net of effects of acquisitions and divestitures
Stock based compensation, net of excess tax benefit
Impairment of investment
Interest expense, less discount on long-term debt
Provision for income taxes, net of deferred taxes
EBITDA adjustment as allowed by the ABL Facility agreement
Other adjustments as allowed by senior credit facility agreement
Minimum consolidated EBITDA
If the borrowing availability is less than a minimum availability threshold determined in accordance with the ABL Facility agreement, we are then subject to additional financial ratio covenants. As of September 30, 2015, our borrowing availability was greater than the minimum availability threshold as follows (in millions):
Availability (2)
As of September 30, 2015, our additional financial ratio covenants, as defined in the ABL Facility agreement (if they would have been applicable) were as follows:
Asset-Based Revolving Credit Facility Financial Ratio Covenants
Minimum fixed charge coverage ratio
Maximum consolidated first lien leverage ratio
Based on the seasonality of our business, operating results in the late fall, winter and early spring months are generally lower than the remainder of our fiscal year. Given the cash flow impact that this seasonality, the capital intensive nature of our business and the timing of debt payments has on our business, we typically incur higher debt borrowings from the ABL Facility in order to meet our liquidity needs during these times. Consequently, our availability and performance against our financial covenants tighten during these times as well.
In addition to the financial covenants described above, the ABL Facility agreement also contains a number of important customary affirmative and negative covenants which restrict, among other things, our ability to sell assets, incur additional debt, create liens, make investments, and pay dividends. As of September 30, 2015, we were in compliance with all covenants under the ABL Facility agreement. We do not believe that these restrictions impact our ability to meet future liquidity needs.
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Tax-Exempt Financings
New York Bonds. As of September 30, 2015, we had outstanding $25.0 million aggregate principal amount of New York State Environmental Facilities Corporation Solid Waste Disposal Revenue Bonds Series 2014 (“New York Bonds”). The New York Bonds, which are unsecured and guaranteed jointly and severally, fully and unconditionally by all of our significant wholly-owned subsidiaries, accrue interest at 3.75% per annum through December 1, 2019, at which time they may be converted from a fixed rate to a variable rate, and interest is payable on June 1 and December 1 of each year. An additional $15.0 million aggregate principal amount of New York Bonds may be offered under the same indenture in the future. The New York Bonds mature on December 1, 2044. We borrowed the proceeds of the New York Bonds to repay borrowings under our Senior Credit Facility for qualifying property, plant and equipment assets purchased in the state of New York.
Maine Bonds. As of September 30, 2015, we had outstanding $21.4 million aggregate principal amount of Finance Authority of Maine Solid Waste Disposal Revenue Bonds Series 2005R-2 (“FAME Bonds 2005R-2”). The FAME Bonds 2005R-2, which are unsecured and guaranteed jointly and severally, fully and unconditionally by all of our significant wholly-owned subsidiaries, accrue interest at 6.25% per annum through January 31, 2017, at which time they may be converted from a fixed to a variable rate, and interest is payable semiannually in arrears on February 1 and August 1 of each year. The FAME Bonds 2005R-2 mature on January 1, 2025.
As of September 30, 2015, we had outstanding $3.6 million aggregate principal amount of Finance Authority of Maine Solid Waste Disposal Revenue Bonds Series 2005R-1 (“FAME Bonds 2005R-1”). The FAME Bonds 2005R-1 are variable rate bonds secured by a letter of credit issued by our administrative agent bank and interest is payable semiannually in arrears on February 1 and August 1 of each year. The FAME Bonds 2005R-1 mature on January 1, 2025. We borrowed the proceeds of the FAME Bonds 2005R-1 and 2005R-2 to pay for certain costs relating to the following: landfill development and construction; the acquisition of vehicles, containers and related equipment for solid waste collection and transportation services; improvements to existing solid waste disposal, hauling, transfer station and other facilities; other infrastructure improvements; and the acquisition of machinery and equipment for solid waste disposal operations owned and operated by us, or a related party, all located in Maine.
In August 2015, we completed a financing transaction involving $15.0 million aggregate principal amount of FAME Bonds 2015. We borrowed the proceeds of the offering of the FAME Bonds 2015 to finance or refinance the costs of certain of our solid waste landfill facilities and solid waste collection, organics and transfer, recycling and hauling facilities, and to pay for the costs of the issuance of the FAME Bonds 2015. As of September 30, 2015, we had $4.5 million of restricted cash reserved for repayment of certain capital projects in the State of Maine as a result of this financing.
As of September 30, 2015, we had outstanding $15.0 million aggregate principal amount of FAME Bonds 2015. The FAME Bonds 2015, which are unsecured and guaranteed jointly and severally, fully and unconditionally by all of our significant wholly-owned subsidiaries, accrue interest at 5.125% per annum through August 1, 2025, at which time they may be converted from a fixed to a variable rate, and interest is payable semiannually in arrears on February 1 and August 1 of each year. An additional $15.0 million aggregate principal amount of FAME Bonds 2015 may be offered under the same indenture in the future. The FAME Bonds 2015 mature on August 1, 2035.
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Vermont Bonds. As of September 30, 2015, we had outstanding $16.0 million aggregate principal amount Vermont Economic Development Authority Solid Waste Disposal Long-Term Revenue Bonds Series 2013 (“Vermont Bonds”). The Vermont Bonds, which are unsecured and guaranteed jointly and severally, fully and unconditionally by all of our significant wholly-owned subsidiaries, accrue interest at 4.75% per annum through April 1, 2018, at which time they may be converted from a fixed rate to a variable rate, and interest is payable semiannually in arrears on April 1 and October 1 of each year. The Vermont Bonds mature on April 1, 2036. We borrowed the proceeds of the Vermont Bonds to repay borrowings under our Senior Credit Facility for qualifying property, plant and equipment assets purchased in the state of Vermont.
New Hampshire Bonds. As of September 30, 2015, we had outstanding $11.0 million aggregate principal amount of Solid Waste Disposal Revenue Bonds, Series 2013 issued by the Business Finance Authority of New Hampshire (“New Hampshire Bonds”). The New Hampshire Bonds, which are unsecured and guaranteed jointly and severally, fully and unconditionally by all of our significant wholly-owned subsidiaries, accrue interest at 4.00% per annum through October 1, 2019, at which time they may be converted from a fixed rate to a variable rate, and interest is payable in arrears on April 1 and October 1 of each year. The New Hampshire Bonds mature on April 1, 2029. We borrowed the proceeds of the New Hampshire Bonds to repay borrowings under our Senior Credit Facility for qualifying property, plant and equipment assets purchased in the state of New Hampshire.
In February 2015, we issued an additional $60.0 million aggregate principal amount of 2019 Notes. The additional 2019 Notes, which are both fungible and issued under the same indenture as the $325.0 million 2019 Notes previously issued, were issued at a discount of $0.5 million to be accreted over the remaining term of the 2019 Notes. We used the net proceeds from this issuance, together with the initial borrowings under our new ABL Facility, to refinance our Senior Credit Facility in the quarter ended March 31, 2015.
In conjunction with the refinancing of our Senior Credit Facility in February 2015, we were also required to settle an obligation associated with an interest rate derivative agreement held with a creditor to our Senior Credit Facility. In the quarter ended March 31, 2015, we made a cash payment of $0.8 million to settle our obligation associated with this interest rate swap.
In September 2015, we repurchased and permanently retired $9.7 million aggregate principal amount of 2019 Notes at a repurchase price of $101.25 in order to maximize interest savings by paying down our most expensive debt. After taking this transaction into account, as of September 30, 2015 we had outstanding $375.3 million aggregate principal amount of 2019 Notes, which will mature on February 15, 2019. The 2019 Notes accrue interest at the rate of 7.75% per annum and interest is payable semiannually in arrears on February 15 and August 15 of each year. The 2019 Notes are fully and unconditionally guaranteed on a senior subordinated basis by substantially all of our existing and future domestic restricted subsidiaries that guarantee our ABL Facility.
The indenture governing the 2019 Notes contains certain negative covenants which restrict, among other things, our ability to sell assets, make investments in joint ventures, pay dividends, repurchase stock, incur debt, grant liens and issue preferred stock. As of September 30, 2015, we were in compliance with all covenants under the indenture governing the 2019 Notes, and we do not believe that these restrictions impact our ability to meet future liquidity needs except that they may impact our ability to increase our investments in non-wholly owned entities, including the joint ventures to which we are already party.
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Hedging
Our strategy to hedge against fluctuations in variable interest rates may involve entering into interest rate derivative agreements to hedge against adverse movements in interest rates. We may also use a variety of strategies to mitigate the impact of fluctuations in commodity prices including entering into fixed price contracts and entering into hedges which mitigate the variability in cash flows generated from the sales of recycled paper at floating prices, resulting in a fixed price being received from these sales. As of September 30, 2015, we were not party to any hedging agreements. For further discussion on commodity price volatility, see “Item 7A – Quantitative and Qualitative Disclosures about Market Risk – Commodity Price Volatility” below.
Shelf Registration
We have filed a universal shelf registration statement with the SEC pursuant to which we may from time to time issue securities in an amount of up to $190.0 million, after giving consideration to the $60.0 million aggregate principal amount of additional 2019 Notes we issued in February 2015 pursuant to this registration statement.
Inflation
Although inflationary increases in costs have affected our historical operating margins, we believe that inflation generally has not had a significant impact on our operations. Consistent with industry practice, most of our contracts provide for a pass-through of certain costs to our customers, including increases in landfill tipping fees and, in some cases, fuel costs. To mitigate the impact of inflation on our operations, we have implemented a number of operating efficiency programs that seek to improve productivity and reduce our cost of service. We have also implemented a fuel and oil recovery fee, which is designed to recover escalating fuel price fluctuations above an expected floor. We therefore believe we should be able to implement operating efficiencies and price increases sufficient to offset most cost increases resulting from inflation. However, competitive factors may require us to absorb at least a portion of these cost increases. Additionally, management’s estimates associated with inflation have had and will continue to have, an impact on our accounting for landfill and environmental remediation liabilities.
Regional Economic Conditions
Our business is primarily located in the northeastern United States. Therefore, our business, financial condition and results of operations are susceptible to downturns in the general economy in this geographic region and other factors affecting the region, such as state regulations and severe weather conditions. We are unable to forecast or determine the timing and/or the future impact of a sustained economic slowdown.
Seasonality and Severe Weather
Our transfer and disposal revenues historically have been higher in the late spring, summer and early fall months. This seasonality reflects lower volumes of waste in the late fall, winter and early spring months because:
Because certain of our operating and fixed costs remain constant throughout the fiscal year, operating income is therefore impacted by a similar seasonality. In addition, particularly harsh weather conditions typically result in increased operating costs.
Our operations can also be adversely affected by periods of inclement or severe weather, which could increase our operating costs associated with the collection and disposal of waste, delay the collection and disposal of waste, reduce the volume of waste delivered to our disposal sites, increase the volume of waste collected under our existing contracts (without corresponding compensation), decrease the throughput and operating efficiency of our materials recycling facilities, or delay construction or expansion of our landfill sites and other facilities. Our operations can also be favorably affected by severe weather, which could increase the volume of waste in situations where we are able to charge for our additional services provided.
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Our Recycling segment experiences increased volumes of fiber in November and December due to increased newspaper advertising and retail activity during the holiday season.
Limitations on Ownership of Notes
Pursuant to Section 2.19 of the indenture governing the 2019 Notes and the provisions of the FAME Bonds 2015, FAME Bonds 2005R-2, New Hampshire Bonds, New York Bonds and Vermont Bonds, no beneficial holder of the 2019 Notes, FAME Bonds 2015, FAME Bonds 2005R-2, New Hampshire Bonds, New York Bonds and/or Vermont Bonds is permitted to knowingly acquire 2019 Notes, FAME Bonds 2015, FAME Bonds 2005R-2, New Hampshire Bonds, New York Bonds and/or Vermont Bonds if such person would own 10% or more of the consolidated debt for which relevant subsidiaries of ours are obligated (and must dispose of 2019 Notes, FAME Bonds 2015, FAME Bonds 2005R-2, New Hampshire Bonds, New York Bonds and/or Vermont Bonds or other debt of ours to the extent such person becomes aware of exceeding such threshold), if such ownership would require consent of any regulatory authority under applicable law or regulation governing solid waste operators and such consent has not been obtained. We will furnish to the holders of the 2019 Notes, FAME Bonds 2015, FAME Bonds 2005R-2, New Hampshire Bonds, New York Bonds and Vermont Bonds, in each quarterly and annual report, the dollar amount of our debt that would serve as the threshold for evaluating a beneficial holder’s compliance with these ownership restrictions. As of September 30, 2015, that dollar amount was $52.7 million.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities, as applicable, at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, which are based on historical experience and on various other factors that are believed to be reasonable under the circumstances. The results of their evaluation form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions and circumstances. Our significant accounting policies are more fully discussed in Item 8 of our Transition Report on Form 10-KT for the transition period ended December 31, 2014.
For a description of the new accounting standards adopted that may affect us, see Note 2, Accounting Pronouncements, to our consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q.
Interest Rate Volatility
We had interest rate risk relating to approximately $66.5 million of long-term debt as of September 30, 2015. The weighted average interest rate on the variable rate portion of long-term debt was approximately 2.6% as of September 30, 2015. Should the average interest rate on the variable rate portion of long-term debt change by 100 basis points, our quarterly interest expense would increase or decrease by approximately $0.2 million.
The remainder of our long-term debt is at fixed rates and not subject to interest rate risk.
Commodity Price Volatility
Through our Recycling operation, we market a variety of materials, including fibers such as old corrugated cardboard and old newsprint, plastics, glass, ferrous and aluminum metals. We may use a number of strategies to mitigate impacts from commodity price fluctuations, such as indexed purchases, floor prices, fixed price agreements, revenue share arrangements and a sustainability recycling adjustment fee charged to our collection customers. We do not use financial instruments for trading purposes and are not a party to any leveraged derivatives.
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If commodity prices were to have changed by 10% on July 1, 2015, the impact on our operating income in the three months ended September 30, 2015 is estimated by management to have been approximately $0.2 million based on the observed impact of commodity price changes on operating income margin. Our sensitivity to changes in commodity prices is complex because each customer contract is unique relative to revenue sharing, tipping or processing fees and other arrangements. The above operating income impact may not be indicative of future operating results and actual results may vary materially.
a) Evaluation of disclosure controls and procedures. Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2015. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2015, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
b) Changes in internal controls over financial reporting. No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II.
Information regarding our legal proceedings can be found under the “Legal Proceedings” and “Environmental Remediation Liability” sections of Note 6, Commitments and Contingencies, to our consolidated financial statements included under Part I, Item 1 of this Quarterly Report on Form 10-Q.
Our business is subject to a number of risks, including those identified in Item 1A, “Risk Factors” of our Transition Report on Form 10-KT for the transition period ended December 31, 2014, that could have a material effect on our business, results of operations, financial condition and/or liquidity and that could cause our operating results to vary significantly from period to period. As of September 30, 2015, there have been no material changes to the risk factors disclosed in our Transition Report on Form 10-KT for the transition period ended December 31, 2014, except as set forth in the following paragraph. We may disclose additional changes to our risk factors or disclose additional factors from time to time in our future filings with the SEC.
Proxy contests threatened or commenced against us could be disruptive and costly and the possibility that activist shareholders may wage proxy contests or gain representation on our Board of Directors could cause uncertainty about the strategic direction of our business.
On April 7, 2015, JCP Investment Partnership, LP notified us of its intention to nominate Brett W. Frazier, James C. Pappas and Joseph B. Swinbank for election as directors at our 2015 Annual Meeting of Stockholders in opposition to the three candidates that will be recommended for election by our Board of Directors. According to Amendment No. 2 to the Schedule 13D filed with the SEC by the JCP Group on September 10, 2015, the JCP Group beneficially owns approximately 5.7% of our outstanding Class A common stock. On September 29, 2015, the JCP Group filed its definitive proxy statement and definitive proxy card with the SEC with respect to its intended solicitation of proxies from our stockholders for the election of its two proposed nominees to our Board of Directors at our 2015 Annual Meeting of Stockholders. In its definitive proxy statement, the JCP Group indicated that it had dropped Mr. Swinbank from the slate of proposed nominees and that it was seeking to replace two members of the Board of Directors.
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If the JCP Group continues to pursue a proxy contest or other actions at the 2015 Annual Meeting of Stockholders to elect directors other than those recommended by our Board of Directors, or takes other actions that contest or conflict with our strategic direction, any such actions could have an adverse effect on us because:
For additional information concerning the above matters, please refer to the information under the caption “Background of the Contested Solicitation” in our definitive proxy statement filed with the SEC on September 22, 2015.
The exhibits that are filed as part of this Quarterly Report on Form 10-Q or that are incorporated by reference herein are set forth in the Exhibit Index hereto.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Christopher B. Heald
Christopher B. Heald
Vice President and Chief Accounting Officer
(Principal Accounting Officer)
/s/ Edmond R. Coletta
Edmond R. Coletta
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
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Exhibit Index
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