TEXT-S&P rates Waste Management senior unsecured notes 'BBB'

Wed Sep 5, 2012 3:35pm EDT

Overview
     -- Houston-based Waste Management Inc. is issuing $500 million in
senior unsecured notes in order to refinance existing debt.
     -- We assigned our 'BBB' rating to the new issue.
     -- We also affirmed our existing ratings on Waste Management, including 
the 'BBB' corporate credit rating.
     -- The stable outlook indicates our expectation that the company will 
maintain credit quality despite weak pricing and volume trends.

Rating Action
On Sept. 5, 2012, Standard & Poor's Ratings Services assigned its 'BBB' rating 
to Waste Management Inc.'s proposed $500 million of senior unsecured notes due 
2022. In addition, we affirmed our ratings on Waste Management, including the 
'BBB' corporate credit rating. The outlook is stable.

Rationale
The ratings on Houston-based Waste Management Inc. reflect the company's 
"strong" business risk profile, highlighted by its competitive market position 
as the largest solid waste management company in the U.S. and Canada, along 
with its "significant" financial risk profile. Standard & Poor's Ratings 
Services expects that the company will maintain good liquidity and will 
continue to adhere to moderate financial policies and balanced capital 
allocation from its sizable free cash flow. 

Waste Management provides integrated services to residential, municipal, 
commercial, and industrial customers. The company has a nearly 25% share of 
the roughly $54 billion domestic nonhazardous solid waste market. Although the 
U.S. solid waste industry is mature and competitive, its overall risk 
characteristics are favorable. The essential nature of the services provided, 
relatively strong and reliable cash flows, and above-average profit margins, 
as well as considerable resilience to economic swings in the residential and 
light commercial segments, all support the credit quality of industry 
participants.

Waste Management's strong EBITDA margin, which was 25% as of June 30, 2012, 
reflects favorable industry dynamics and the company's pricing discipline, 
although its ability to maintain price hikes has slightly diminished in the 
past couple of years. During the 2008-2009 recession, Waste Management was 
able to raise prices to partially offset the volume declines related to the 
loss of low-margin customers and the slowdown in residential construction. 
Price gains in the company's core collection and disposal business averaged 
roughly 2.5% in 2009, but these gains have since declined to roughly 1.8% and 
1.6% in 2010 and 2011, respectively. Pricing increased less than 1% in each of 
the first two quarters of 2012, as competition in residential, municipal, and 
commercial contract activity limited pricing in the first half of the year. 
Adjustments related to the consumer price index (CPI) take effect in the 
second half, which may help pricing somewhat.

Waste Management's financial risk profile is "significant". Debt totaled $11.5 
billion as of June 30, 2012. The company's debt balance is not likely to 
change significantly following the completion of the proposed notes issuance. 
We expect the company to use proceeds to refinance $400 million of 6.375% 
senior notes due November 2012, as well as to refinance tax-exempt revenue 
bonds outstanding. We adjust total debt upward by $1.7 billion to account for 
the capitalization of operating leases, asset-retirement liabilities at 
landfills (final capping, closure, and postclosure for a 30-year period), 
environmental remediation obligations, and self-insurance liabilities on a 
tax-effected basis. 

Waste Management intends to continue its acquisition activity. The company 
bought waste logistics services company Oakleaf Global Holdings Inc. in July 
2011 for $425 million and made additional investments in Canadian recycling 
assets in the first quarter of 2012. Waste Management's funds from operations 
(FFO)-to-total debt was 23% as of June 30, 2012. We anticipate this ratio, 
which has averaged 25% since 2006, will remain in the 20% to 30% range--an 
appropriate level for the ratings given the company's strong business risk 
profile. It's maintained debt to capital at its targeted level of roughly 60% 
for the past few years, and we do not expect further material debt reduction. 
In 2010, the company resumed its share-repurchase program, which resulted in 
$501 million of cash outlays in 2010 and $575 million in 2011. Although the 
company has not made any share repurchases through the first six months of 
2012, we expect some share repurchases in the back half of the year, though 
they would not likely exceed the authorized $500 million.

Liquidity
Our short-term rating on Waste Management is 'A-2', and we classify its 
liquidity as "adequate". We base our liquidity assessment on the following 
factors and assumptions:

     -- The company has good relationships with its banks, in our assessment, 
and has a good standing in the credit markets. 
     -- We expect liquidity sources (including cash, FFO, and credit facility 
availability) over the next 12 to 18 months to exceed uses by more than 1.3x.
     -- Even if EBITDA declines by 30%, we believe net sources would be 
sufficient to cover cash needs, and that compliance with the credit facility's 
total debt-to-EBITDA financial covenant could also survive a 20% drop.

Waste Management benefits from its sizable internally generated funds, 
substantial availability under the revolving credit facility, and excess cash. 
As of June 30, 2012, it had $237 million in cash and equivalents and roughly 
$700 million available under its $2.0 billion revolving credit facility 
maturing in May 2016. LOCs are the primary use of the revolving facility.

We expect the company's 2012 capital-allocation program to allocate most, if 
not all, of its free cash flow to cash dividends, acquisitions and 
investments, and common stock repurchases. We believe acquisitions will likely 
exceed divestitures as the company searches for value-priced assets. We expect 
capital expenditures to increase to roughly $1.5 billion due to added 
growth-related spending. The company's working capital needs are minimal.

Debt maturities should be manageable, at $455 million per year on average from 
2013-2016. We expect that the company will be able to refinance significant 
debt maturities based on its current credit risk profile and its demonstrated 
access to the capital markets.

Key financial covenants within its credit agreement include a maximum total 
debt-to-EBITDA ratio of 3.50x and a minimum EBIT to interest coverage ratio of 
2.75x. As of June 30, 2012, the company had an EBITDA cushion of 13% and an 
EBIT cushion of 28% against the respective covenants.

Outlook
The outlook is stable. Despite our expectations for limited price gains and 
flat volumes in 2012, Waste Management's competence in providing essential 
services, along with its leading market position and geographic and customer 
diversity, should enable the company to maintain FFO-to-total debt of 20% to 
30%--a level we consider appropriate for the rating.

We could lower the ratings if acquisitions or share repurchases result in the 
deterioration of the financial risk profile, so that FFO to debt is 
consistently less than 20%--this could happen if revenues remain flat in 2012 
from the current trailing-12-month level while margins decline by one 
percentage point to 24% and remain there without any debt reduction.

Given the company's indicated preference of using cash flow to finance 
shareholder rewards and acquisitions instead of to reduce debt, we believe 
that Waste Management's financial risk profile is likely to remain 
significant. Therefore, an upgrade is unlikely at this time.

Related Criteria And Research
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011

Ratings List
Ratings Affirmed

Waste Management Inc.
 Corporate credit rating          BBB/Stable/A-2     

Waste Management Inc./Waste Management Holdings Inc.
 Senior unsecured                 BBB                

New Rating

Waste Management Inc.
 $500 million senior unsecured
 due 2022                         BBB