Waste nections(WCN) - 2022 Q4 - Annual Report

Part I Business Waste Connections is a leading North American solid waste services company focused on secondary markets, growth through acquisitions, and decentralized operations - Waste Connections is the third largest solid waste services provider in North America, operating in 43 U.S. states and six Canadian provinces and also provides non-hazardous exploration and production (E&P) waste services[9] - The company's operating strategy focuses on secondary and rural markets to achieve high market share, control the waste stream through exclusive contracts, optimize asset positioning, provide vertically integrated services, and manage on a decentralized basis[11][12][13] Acquisition Activity (2020-2022) | Year | Number of Acquisitions | Net Fair Value of Consideration | | :--- | :--- | :--- | | 2022 | 24 | $2.334 billion | | 2021 | 30 | $1.069 billion | | 2020 | 21 | $481.6 million | Human Capital The company prioritizes employee development, safety, and diversity, with over 22,000 employees and significant investments in training and wages Workforce Demographics (as of Dec 31, 2022) | Metric | Value | | :--- | :--- | | Total Active Employees | 22,109 | | - U.S. Employees | 18,799 | | - Canada Employees | 3,310 | | Commercial Truck Drivers | 10,866 | | Mechanics | 1,815 | | Employees under Collective Bargaining | ~15% | | Ethnic Minorities | 40% | | Women | 17% | | Armed Services Veterans | 8% | - The company has incurred over $50 million in incremental COVID-19-related costs through the end of 2022, including supplemental pay for frontline employees, and proactively raised its minimum wage target to $17 per hour in the U.S. (CAD $17 in Canada) in 2022[36][37] - Safety is a core value, with a 'Drive to ZERO' goal for incidents; in 2022, approximately 60% of operating locations had zero safety-related incidents or reduced incident frequency, and the Total Recordable Incident Rate (TRIR) remains below industry averages[38][40] - The company promotes a 'Servant Leadership' culture and invests heavily in training; in 2022, approximately 72% of all employees participated in training, and the number of sessions offered increased by over 40% from the prior year[43][49] Sustainability/Environmental Social and Governance (ESG) The company commits $500 million to ESG targets, focusing on environmental impact reduction, safety, and employee engagement, with executive compensation linked to these goals - The company has committed $500 million to advance long-term, aspirational ESG targets established in 2020[61] - ESG targets include reducing environmental impact, enhancing employee safety, and improving engagement; in 2022, targets were expanded to include reductions in absolute emissions and emissions intensity[62] - Since 2021, the company has incorporated its ESG targets into executive compensation metrics to align leadership incentives with sustainability goals[62] Waste Services The company offers comprehensive waste services, including collection, transfer, recycling, and disposal at 100 landfills with significant remaining capacity, alongside E&P waste management Landfill Portfolio (as of Dec 31, 2022) | Landfill Type | Owned/Operated Count | | :--- | :--- | | Municipal Solid Waste (MSW) | 75 | | E&P Waste Only | 9 | | Non-MSW (e.g., C&D) | 16 | | Total | 100 | - The average remaining life for owned and operated landfills is estimated to be approximately 31 years based on permitted capacity, and 35 years when considering probable expansion capacity[68][69][71] Landfill Airspace Changes (in thousands of tons) | | 2022 | 2021 | | :--- | :--- | :--- | | Beginning Balance (Permitted + Probable Expansion) | 1,687,476 | 1,541,645 | | Acquired landfills | 92,270 | 41,374 | | Airspace consumed | (47,229) | (46,632) | | Ending Balance (Permitted + Probable Expansion) | 1,721,211 | 1,687,476 | - The company has landfill gas recovery systems at 55 of its landfills, converting methane into clean energy sources like electricity or pipeline-quality natural gas[77] Competition The company faces intense competition in both municipal solid waste and E&P waste sectors from large public, regional, and public sector operators, primarily on price and service quality - Key competitors in the municipal solid waste (MSW) industry include Waste Management, Inc., Republic Services, Inc., and GFL Environmental, Inc., along with numerous regional and local companies[81] - Competition for collection, transfer, and disposal is based on price and service quality; the company also competes with public sector operators who may have financial advantages like access to tax revenues[81] - In the E&P waste market, competition comes from smaller regional companies and larger public and private firms such as Waste Management, Inc., Republic Services, Inc., and Clean Harbors, Inc.[84] Regulation The company's operations are subject to extensive and evolving environmental, health, and safety regulations in the U.S. and Canada, including emerging rules on climate change and PFAS, potentially increasing costs - Operations are subject to extensive environmental, health, and safety laws in the U.S. and Canada, administered by agencies like the EPA and Environment and Climate Change Canada, which require permits and govern discharges, waste handling, and cleanup responsibilities[87][88][89] - Key U.S. regulations include the Resource Conservation and Recovery Act (RCRA) for waste management, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA or "Superfund") for cleanup liability, the Clean Water Act for discharges, and the Clean Air Act for air emissions[95][100][108] - The company faces evolving regulations related to climate change and greenhouse gas (GHG) emissions, including Canada's Greenhouse Gas Pollution Pricing Act and various EPA rules, which could increase operating costs for both the company and its E&P customers[136][137][138] - Emerging contaminants, particularly per- and polyfluoroalkyl substances (PFAS), are under increasing regulatory scrutiny; potential designation as hazardous substances under CERCLA and other regulations could significantly increase future cleanup liabilities and compliance costs[144][149][154] Risk Factors The company faces significant risks from intense competition, economic downturns, regulatory changes, operational hazards, and financial exposures including debt and acquisition integration challenges - The company faces significant competition from large national companies, regional players, and government service providers, which could affect its ability to win or retain contracts and maintain pricing[212][213] - Growth through acquisitions is a key strategy, but competition for candidates and market conditions may limit opportunities; integrating acquired businesses presents challenges and may not always achieve anticipated financial objectives[215][229] - Financial results are vulnerable to economic conditions, including inflation and recessions, which can decrease waste generation, increase pricing pressure, and negatively impact recycled commodity prices[271][272][275] - The business is subject to extensive and evolving environmental, health, and safety laws; changes in regulations, particularly regarding climate change (GHG emissions) and emerging contaminants (PFAS), could significantly increase operating costs and liabilities[291][295] - The company's indebtedness of approximately $6.963 billion as of year-end 2022 could increase vulnerability to adverse economic conditions and expose it to interest rate risk, potentially limiting financial flexibility[250][251] Unresolved Staff Comments There are no unresolved staff comments - None[304] Properties As of December 31, 2022, the company owned or operated a vast network of 359 collection operations, 209 transfer stations, 100 landfills, 79 recycling facilities, and 22 E&P injection wells across North America Key Properties Owned or Operated (as of Dec 31, 2022) | Facility Type | Count | | :--- | :--- | | Solid waste collection operations | 359 | | Transfer stations | 209 (157 owned, 52 operated) | | MSW landfills | 75 (63 owned, 12 operated) | | E&P waste landfills | 9 | | Non-MSW landfills | 16 | | Recycling operations | 79 | | E&P liquid waste injection wells | 22 | Legal Proceedings Information on legal proceedings is incorporated by reference from Note 13 to the consolidated financial statements - Details on legal proceedings are located in Note 13 of the consolidated financial statements[308] Mine Safety Disclosure There is no mine safety disclosure to report - None[309] Part II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Waste Connections' common shares trade on NYSE and TSX, with a regular dividend and active share repurchase program, demonstrating strong historical stock performance - The company's common shares trade on the NYSE and TSX under the symbol 'WCN'[312] - A regular quarterly cash dividend of $0.255 per common share was approved on February 15, 2023[313] - The company renewed its Normal Course Issuer Bid (NCIB) to purchase up to 12,859,066 common shares from August 10, 2022, to August 9, 2023[314] Five-Year Cumulative Total Shareholder Returns (Indexed) | Company / Index | Dec 2017 | Dec 2018 | Dec 2019 | Dec 2020 | Dec 2021 | Dec 2022 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Waste Connections, Inc. | $100 | $105.47 | $129.93 | $147.93 | $197.93 | $193.93 | | S&P 500 Index | $100 | $95.62 | $125.72 | $148.85 | $191.58 | $156.88 | | S&P/TSX 60 Index | $100 | $84.78 | $108.88 | $116.99 | $151.09 | $132.06 | | Dow Jones U.S. Waste & Disposal Services Index | $100 | $100.11 | $135.25 | $144.12 | $201.48 | $190.59 | Reserved This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, revenues grew 17.2% to $7.212 billion, driven by acquisitions and pricing, with net income up 35.2% and adjusted EBITDA up 15.7%, despite margin compression and increased leverage from acquisition spending 2022 vs. 2021 Financial Performance | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Revenues | $7.212 billion | $6.151 billion | +17.2% | | Net Income (attributable to WCN) | $835.7 million | $618.0 million | +35.2% | | Adjusted EBITDA | $2.221 billion | $1.919 billion | +15.7% | | Adjusted EBITDA Margin | 30.8% | 31.2% | -40 bps | | Adjusted Free Cash Flow | $1.165 billion | $1.010 billion | +15.3% | - The 17.2% revenue growth in 2022 was primarily driven by acquisitions (contributing $552.0 million), solid waste pricing growth of 9.2%, and a 1.2% increase from higher E&P waste activity[340] - The company returned $668.0 million to shareholders in 2022, consisting of $243.0 million in cash dividends and $425.0 million in share repurchases[345] - The company's leverage ratio (Total Debt to EBITDA) increased from 2.50x at year-end 2021 to 2.93x at year-end 2022, primarily due to debt-funded acquisition spending[346] Results of Operations In 2022, revenues increased 17.2% to $7.212 billion, driven by acquisitions and pricing, while operating income grew 19.5% to $1.242 billion, improving the operating margin to 17.2% despite higher costs of operations Consolidated Statements of Net Income Highlights (in thousands) | | 2022 | % of Rev | 2021 | % of Rev | | :--- | :--- | :--- | :--- | :--- | | Revenues | $7,211,859 | 100.0% | $6,151,361 | 100.0% | | Cost of operations | 4,336,012 | 60.1% | 3,654,074 | 59.4% | | Selling, general and administrative | 696,467 | 9.7% | 612,337 | 10.0% | | Operating income | 1,242,190 | 17.2% | 1,039,625 | 16.9% | | Net income attributable to Waste Connections | $835,662 | 11.6% | $618,047 | 10.0% | - Revenue growth in 2022 was primarily driven by acquisitions ($563.1 million net), price increases and surcharges ($541.7 million), and increased E&P waste revenues ($75.8 million)[383][384][386] - Cost of Operations as a percentage of revenue increased by 0.7 percentage points to 60.1%, mainly due to higher fuel expense, increased third-party transportation costs, and the impact of acquisitions with lower operating margins[394] - Operating income margin improved by 0.3 percentage points to 17.2%, benefiting from lower SG&A, depreciation, and impairment expenses as a percentage of revenue, which offset the increase in cost of operations[409] Segment Reporting In 2022, all five geographic segments reported revenue growth, with varying EBITDA margin performance influenced by factors like E&P activity, acquisitions, and operating costs Segment Revenue and EBITDA (2022) | Segment | Revenue (in millions) | EBITDA (in millions) | EBITDA Margin | | :--- | :--- | :--- | :--- | | Eastern | $1,890.7 | $486.6 | 25.7% | | Southern | $1,667.8 | $497.8 | 29.9% | | Western | $1,484.6 | $445.9 | 30.0% | | Central | $1,228.1 | $424.6 | 34.6% | | Canada | $940.6 | $349.4 | 37.1% | - The Southern segment's EBITDA margin increased from 27.3% in 2021 to 29.9% in 2022, driven by higher earnings in E&P operations and price-led revenue growth[432] - The Canada segment's EBITDA margin decreased from 39.7% in 2021 to 37.1% in 2022, primarily due to acquisitions with lower margins and increased fuel and disposal expenses[442] Liquidity and Capital Resources In 2022, operating cash flow increased to $2.022 billion, but investing activities surged to $3.087 billion due to acquisitions and capital expenditures, leading to increased long-term debt of $6.963 billion Cash Flow Summary (in millions) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $2,022.5 | $1,698.2 | | Net cash used in investing activities | $(3,087.2) | $(1,693.5) | | Net cash provided by (used in) financing activities | $1,028.5 | $(499.5) | - The increase in cash used in investing activities was driven by a $1.246 billion increase in cash paid for acquisitions and a $168.4 million increase in capital expenditures[449][344] - As of December 31, 2022, the company had total long-term debt of $6.963 billion and contractual obligations including interest payments, leases, and landfill closure costs[473] - The company plans for total capital expenditures of approximately $895 million in 2023, to be funded by cash on hand, internally generated funds, and borrowings[454] Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rates, commodity prices, and foreign currency, with specific sensitivities outlined for unhedged debt, fuel, and recycled commodity price changes - The company uses interest rate swaps to fix the rate on a portion of its variable-rate debt; as of December 31, 2022, five swaps were outstanding with notional amounts totaling $950 million[497] - A one percentage point increase in interest rates on the $1.115 billion of unhedged variable-rate debt as of year-end 2022 would decrease annual pre-tax income by approximately $11.1 million[502][503] - A $0.10 per gallon increase in the price of unhedged diesel fuel would decrease pre-tax income by approximately $4.7 million in 2023[505] - A 10% decrease in average recycled commodity prices from 2022 levels would have reduced revenues by an estimated $19.7 million[506] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements for 2020-2022, along with the independent auditor's report from Grant Thornton LLP, highlighting key audit matters like landfill accounting and intangible asset valuation - The independent auditor's report from Grant Thornton LLP provides an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting as of December 31, 2022[513][514] - Critical audit matters identified by the auditor include the significant judgments and estimates involved in landfill accounting (closure and post-closure liabilities) and the valuation of intangible assets acquired in business combinations[517][518][521] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accountants on accounting and financial disclosure - None[791] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2022, with no material changes in the fourth quarter - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[792] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022; this assessment was audited by Grant Thornton LLP, which issued an unqualified opinion[794][795] Other Information There is no other information to report - None[797] Disclosure Regarding Foreign Jurisdictions That Prevent Inspections There is no disclosure regarding foreign jurisdictions that prevent inspections - None[798] Part III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's 2023 Management Information Circular and Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement[799] Executive Compensation Information for this item is incorporated by reference from the company's 2023 Management Information Circular and Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement[802] Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters Information for this item is incorporated by reference from the company's 2023 Management Information Circular and Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement[803] Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's 2023 Management Information Circular and Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement[804] Principal Accounting Fees and Services Information for this item is incorporated by reference from the company's 2023 Management Information Circular and Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement[807] Part IV Exhibits and Financial Statement Schedules This section lists exhibits filed with the Form 10-K, including corporate governance documents, debt agreements, and Financial Statement Schedule II - This section contains a list of all exhibits filed with the Form 10-K and includes Schedule II – Valuation and Qualifying Accounts[808] Form 10-K Summary There is no Form 10-K summary provided - None[815]