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
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
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
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'.