TEXT-Fitch affirms Waste Management 'BBB' rating
Aug 15 - Fitch Ratings has affirmed the Issuer Default Rating (IDR) of Waste Management, Inc. (WM) at 'BBB'. The Rating Outlook is Stable. A full rating list is shown below. The ratings apply to WM's $2 billion unsecured credit facility and to roughly $6.2 billion of senior unsecured notes. The ratings are supported by the company's strong free cash flow, the predictable nature of the industry, and WM's position as the largest integrated waste services company in the U.S. WM continues to maintain good financial flexibility, with adequate cash and revolver availability and a manageable debt maturity schedule. Leverage as of June 30, 2012 was 2.9x, a slight increase from 2.7x a year ago, but still considered appropriate for the rating given WM's steady cash flow generation. WM recently announced restructuring actions aimed at removing a layer of management and consolidating some back office functions. Fitch views the initiative favorably, as an improvement in cost structure should help move EBITDA margins closer to peers in the industry. The actions will reduce WM's total number of operating areas from 22 down to 17 and eliminate its four geographic regions. WM expects to incur pre-tax charges of $50-60 million in the third quarter related to employee separation costs. In total, the company will cut 700 positions, all in management and back-office roles. Cost savings are expected to improve operating margins by 100bps in 2013. This is part of a larger plan to cut costs by up to 200-300 bps by 2015. The waste services operating environment remains mixed. Tough competition and weak municipal finances represent headwinds for pricing. Despite the competition, most players in the industry are maintaining discipline with core prices continuing to rise, albeit at a slow pace. Stabilizing volumes have led WM to state that they could be more aggressive on pricing in the back half of the year, though any margin improvements would not be expected until at least 2013. Waste volumes appeared to bottom near the end of 2011, having seen modest increases in the first two quarters of 2012. This is the first notable rise in volume since 2005. The largest improvements have come from higher levels of industrial and special waste, which are coming off of recession lows. Fitch expects waste volumes for the year to be roughly flat with 2011, as growth in the back half of the year could be constrained by the weak economic environment. In spite of the mixed operating environment, WM continues to generate steady operating results. Margins have fallen over the past 18 months, primarily due to the integration of Oakleaf and higher materials costs. Margins are expected to remain pressured through the rest of 2012 because of weak commodities prices. However, ongoing cost cutting and efficiency initiatives are expected to produce noticeable improvements within the next two to three years. Free cash flows are consistently positive and predictable. Fitch expects the company to generate between $200-300 million in free cash in 2012, down from $508 million in 2011. Lower FCF forecasts incorporate an increased dividend, higher cash taxes, and higher capital expenditures related to the purchase of compressed natural gas (CNG) trucks. FCF could increase beyond 2012 as capital expenditures moderate. WM's cash deployment priorities include acquisitions of tuck-in waste collection companies and recycling assets. Absent attractive acquisitions, the company looks to return cash to shareholders. WM spent $831 million on acquisitions in 2011, including the $432 purchase of Oakleaf. Future debt-funded acquisitions are possible. Fitch views the company as having cushion within the rating to withstand modest incremental borrowing. The company has steadily increased dividend payments over the years including a 4.4% increase in December 2011. Fitch expects payouts to continue to rise incrementally going forward. WM did not buy back shares in the first half of the year, choosing instead to front-load capital expenditures, mainly aimed at buying additional CNG trucks. Share repurchases could resume in the near term depending on acquisition and capital expenditure activity. Liquidity remains more than adequate. As of June 30, 2012, WM had a cash balance of $237 million supplemented by roughly $700 million in availability under its revolver. Upcoming debt maturities are manageable. The company has $400 million in senior notes maturing in November 2012, which are expected to be refinanced. Given the current low interest rate environment, the company should be able to replace the current notes with an issuance at a significantly lower rate. After the November maturity, the company has no major maturities until 2014. What could trigger a rating action: Positive: Future developments that may, individually or collectively, lead to a positive rating action include: --A sustained reduction in leverage to near or below 2.5x; --Cost reduction initiatives or a significant improvement in the market environment which result in notable improvements to operating margins and free cash flow. Negative: Future developments that may, individually or collectively, lead to a negative rating action include: --A material increase in leverage to fund shareholder returns; --A large, debt-funded acquisition. Fitch has affirmed the ratings as follows: Waste Management, Inc. --IDR at 'BBB', --Senior unsecured credit facility at 'BBB', --Senior unsecured debt at 'BBB'.
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