Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This section includes a discussion of our results of operations for the three years ended December 31, 2019. This discussion may contain forward-looking statements that anticipate results based on management’s plans that are subject to uncertainty. We discuss in more detail various factors that could cause actual results to differ materially from expectations in Item 1A. Risk Factors. The following discussion should be read considering those disclosures and together with the Consolidated Financial Statements and the notes thereto.

Overview

We are North America’s leading provider of comprehensive waste management environmental services. We partner with our residential, commercial, industrial and municipal customers and the communities we serve to manage and reduce waste at each stage from collection to disposal, while recovering valuable resources and creating clean, renewable energy. We own or operate the largest network of landfills in North America. In order to make disposal more practical for larger urban markets, where the distance to landfills is typically farther, we manage transfer stations that consolidate, compact and transport waste efficiently and economically. We also use waste to create energy, recovering the gas produced naturally as waste decomposes in landfills and using the gas in generators to make electricity. Additionally, we are a leading recycler in North America, handling materials that include paper, cardboard, glass, plastic and metal. Our “Solid Waste” business is operated and managed locally by our subsidiaries that focus on distinct geographic areas and provides collection, transfer, disposal, and recycling and resource recovery services. Through our subsidiaries, we are also a leading developer, operator and owner of landfill gas-to-energy facilities in the U.S.

Our Solid Waste operating revenues are primarily generated from fees charged for our collection, transfer, disposal, and recycling and resource recovery services, and from sales of commodities by our recycling and landfill gas-to-energy operations. Revenues from our collection operations are influenced by factors such as collection frequency, type of

collection equipment furnished, type and volume or weight of the waste collected, distance to the disposal facility or material recovery facility and our disposal costs. Revenues from our landfill operations consist of tipping fees, which are generally based on the type and weight or volume of waste being disposed of at our disposal facilities. Fees charged at transfer stations are generally based on the weight or volume of waste deposited, taking into account our cost of loading, transporting and disposing of the solid waste at a disposal site. Recycling revenues generally consist of tipping fees and the sale of recycling commodities to third parties. The fees we charge for our services generally include our environmental fee, fuel surcharge and regulatory recovery fee which are intended to pass through to customers direct and indirect costs incurred. We also provide additional services that are not managed through our Solid Waste business, described under Results of Operations below.

Business Environment

The waste industry is a comparatively mature and stable industry. However, customers increasingly expect more of their waste materials to be recovered and those waste streams are becoming more complex. In addition, many state and local governments mandate diversion, recycling and waste reduction at the source and prohibit the disposal of certain types of waste at landfills. We monitor these developments to adapt our services offerings. As companies, individuals and communities look for ways to be more sustainable, we promote our comprehensive services that go beyond our core business of collecting and disposing of waste in order to meet their needs.

Despite some industry consolidation in recent years, we encounter intense competition from governmental, quasi-governmental and private service providers based on pricing, service quality, customer experience and breadth of service offerings. Our industry is directly affected by changes in general economic factors, including increases and decreases in consumer spending, business expansions and construction starts. These factors generally correlate to volumes of waste generated and impact our revenue. Negative economic conditions, in addition to competitor actions, can make it more challenging to negotiate, renew or expand service contracts with acceptable margins and in addition, customers may reduce their service needs. We also encounter competition for acquisitions and growth opportunities. General economic factors and the market for consumer goods, in addition to regulatory developments, can also significantly impact commodity prices for the recyclable materials we sell. Our operating expenses are directly impacted by volume levels; as volume levels shift, due to economic and other factors, we must manage our network capacity and cost structure accordingly.

In 2019, we have benefited from a generally favorable macro-economic environment, including steady spending by consumers and businesses, which have led to volume and gross margin growth. We experienced growth in our collection and disposal lines of business, particularly in the segments of our business driven by the consumer portion of the economy. Volume growth is also the result of proactive efforts taken to work with our customers as their needs expand to identify service upgrade opportunities. Overall in 2019, our landfill volumes were favorably impacted by growth in our municipal solid waste business, clean-up efforts from natural disasters in California during 2019 and event-driven projects. The portion of our business driven by the industrial segment of the economy, such as special waste, continues to show growth, although the pace of growth is starting to moderate as large industrial customers take a more cautious approach to awarding work for special projects. Additionally, we continued our focus on developing a sustainable recycling business model that meets customers’ environmental needs, but is also economically sustainable. Given pressures on the business from lower market values for recycled commodities and higher contamination fees, we have been working to improve its financial returns by driving a fee-based pricing model that addresses the cost of processing materials and the impact on our costs of contamination. These efforts provided significant value to our 2019 results, though that value was more than offset by continued declines in market prices for recycled commodities. We will continue to take steps necessary to improve long-term profitability of our recycling line of business.

Overall, the Company’s operations performed well in 2019. We expect the Company’s industry-leading asset network and strategic focuses on investing in people, technology and growth to drive continued growth in the year ahead.

Current Year Financial Results

During 2019, we continued to produce strong operating results from our collection and disposal business, driven by favorable market conditions and our focus on delivering an outstanding customer experience and continuous improvement. The Company continued its commitment to supporting both organic and inorganic growth during 2019, allocating $1,818 million of available cash to capital expenditures and $527 million to the acquisition of solid waste businesses, of which $6 million was recorded as cash flow from financing activities related to the timing of contingent consideration paid. We also allocated $1,124 million to our shareholders during 2019 through dividends and common stock repurchases.

Key items of our 2019 financial results include:

	●	Revenues of $15,455 million for 2019 compared with $14,914 million in 2018, an increase of $541 million, or 3.6%. The increase is primarily attributable to (i) higher yield and volumes in our collection and disposal business and (ii) acquisitions, net of divestitures, partially offset by lower market prices for recycling commodities;

	●	Operating expenses of $9,496 million in 2019, or 61.4% of revenues, compared with $9,249 million, or 62.0% of revenues, in 2018. The $247 million increase is primarily attributable to higher volumes and cost inflation in the current year period, partially offset by (i) decreased cost of goods sold primarily due to lower market prices for recycling commodities and (ii) the favorable impact of a year-over-year increase in federal natural gas fuel credits;

	●	Selling, general and administrative expenses of $1,631 million in 2019, or 10.6% of revenues, compared with $1,453 million, or 9.7% of revenues, in 2018. This increase of $178 million is primarily attributable to (i) higher costs associated with planned investments in our people and technology; (ii) increased acquisition-related costs and (iii) litigation reserves;

	●	Income from operations of $2,706 million, or 17.5% of revenues, in 2019 compared with $2,789 million, or 18.7% of revenues, in 2018. Although 2019 benefited from strong operating results, primarily in our collection and disposal business, and the favorable impact of a year-over-year increase in federal natural gas fuel credits, cost inflation across various cost categories, costs associated with investments in our people and technology, acquisition-related costs and goodwill impairments drove a reduction in income from operations as compared with 2018. Additionally, 2018 was favorably impacted by net gains associated with the sale of certain collection and disposal operations and certain ancillary operations, partially offset by the impairment of a landfill;

	●	Net income attributable to Waste Management, Inc. was $1,670 million, or $3.91 per diluted share, compared with $1,925 million, or $4.45 per diluted share, in the prior year period. In addition to the decrease in income from operations, the current year was impacted by (i) increased depreciation and amortization expense related to new collection fleet and increased landfill volume; (ii) an $85 million loss on early extinguishment of debt; (iii) a $52 million impairment charge related to our minority-owned investment in a waste conversion technology business that was not deductible for tax purposes and (iv) a $27 million impairment of goodwill. Additionally, the prior year period was favorably impacted by net gains associated with the sale of operations discussed above;

	●	Net cash provided by operating activities was $3,874 million compared with $3,570 million in the prior year period; and

	●	Free cash flow was $2,105 million compared with $2,084 million in the prior year period. The increase in cash flow provided by operating activities noted above was offset by an increase in capital expenditures resulting from our intentional focus on accelerating certain collection fleet and landfill spending to support the Company’s strong collection and disposal growth and lower proceeds from divestitures, which resulted in free cash flow being $21 million higher on a year-over-year basis. Free cash flow is a non-GAAP measure of liquidity. Refer to Free Cash Flow within Liquidity and Capital Resources for our definition of free cash flow, additional information about our use of this measure, and a reconciliation to net cash provided by operating activities, which is the most comparable GAAP measure.

Results of Operations

Operating Revenues

Our operating revenues set forth below are primarily generated from fees charged for our collection, transfer, disposal, and recycling and resource recovery services, and from sales of commodities by our recycling and landfill gas-to-energy operations. We also provide additional services that are not managed through our Solid Waste business, including both our WMSBS and EES organizations, recycling brokerage services, landfill gas-to-energy services and certain other expanded service offerings and solutions.

The mix of operating revenues from our major lines of business is reflected in the table below for the years ended December 31 (in millions):

​	​	​	​	​	​	​	​	​	​	​
​			2019			2018			2017
Commercial	​	​	$	4,229	​	$	3,972	​	$	3,714
Residential	​	​		2,613	​		2,529	​		2,528
Industrial	​	​		2,916	​		2,773	​		2,583
Other collection	​	​		482	​		450	​		439
Total collection	​	​		10,240	​		9,724	​		9,264
Landfill	​	​		3,846	​		3,560	​		3,370
Transfer	​	​		1,820	​		1,711	​		1,591
Recycling	​	​		1,040	​		1,293	​		1,432
Other (a)	​	​		1,758	​		1,736	​		1,713
Intercompany (b)	​	​		(3,249)	​		(3,110)	​		(2,885)
Total	​	​	$	15,455	​	$	14,914	​	$	14,485

(a)

The “Other” line of business includes (i) our WMSBS organization; (ii) our landfill gas-to-energy operations; (iii) certain services within our EES organization, including our construction and remediation services and our services associated with the disposal of fly ash and (iv) certain other expanded service offerings and solutions. In addition, our “Other” line of business reflects the results of non-operating entities that provide financial assurance and self-insurance support, net of intercompany activity. Activity related to collection, landfill, transfer and recycling has been reclassified to the appropriate line of business for purposes of presentation.

(b)	Intercompany revenues between lines of business are eliminated in the Consolidated Financial Statements included within this report.

The following table provides details associated with the period-to-period change in revenues and average yield for the years ended December 31 (dollars in millions):

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	2019 vs. 2018											​	​	2018 vs. 2017
​	​	​	​	​	As a % of	​	​	​	​	​	As a % of		​	​	​	​	As a % of		​	​	​	​	As a % of
​	​	​	​	​	Related	​	​	​	​	​	Total		​	​	​	​	Related		​	​	​	​	Total
​		Amount			Business(a)			Amount			Company(b)	​		Amount			Business(a)			Amount			Company(b)	​
Collection and disposal	​	$	364	​	2.8	%	​	​	​	​	​	​	​	$	291	​	2.3	%	​	​	​	​	​	​
Recycling commodities (c)	​		(248)	​	(20.0)	​	​		​	​	​	​	​		(273)	​	(19.1)	​	​		​	​	​	​
Fuel surcharges and mandated fees	​		(22)	​	(3.5)	​	​		​	​	​	​	​		111	​	21.3	​	​		​	​	​	​
Total average yield (d)	​		​	​	​	​	​	$	94	​	0.6	%	​		​	​	​	​	​	$	129	​	0.9	%
Volume	​		​	​	​	​	​		346	​	2.3	​	​		​	​	​	​	​		478	​	3.3	​
Internal revenue growth	​	​	​	​	​	​	​	​	440	​	2.9	​	​	​	​	​	​	​	​	​	607	​	4.2	​
Acquisitions	​	​	​	​	​	​	​	​	222	​	1.5	​	​	​	​	​	​	​	​	​	199	​	1.4	​
Divestitures	​	​	​	​	​	​	​	​	(104)	​	(0.7)	​	​	​	​	​	​	​	​	​	(133)	​	(0.9)	​
Foreign currency translation and other	​	​	​	​	​	​	​	​	(17)	​	(0.1)	​	​	​	​	​	​	​	​	​	(244)	​	(1.7)	​
Total	​	​	​	​	​	​	​	$	541	​	3.6	%	​	​	​	​	​	​	​	$	429	​	3.0	%

(a)	Calculated by dividing the increase or decrease for the current year by the prior year’s related business revenue adjusted to exclude the impacts of divestitures for the current year.

(b)	Calculated by dividing the increase or decrease for the current year by the prior year’s total Company revenue adjusted to exclude the impacts of divestitures for the current year.

(c)	Includes net impact of commodity price variability and changes in fees.

(d)	The amounts reported herein represent the changes in our revenue attributable to average yield for the total Company.

The following provides further details about our period-to-period change in revenues:

Average Yield

Collection and Disposal Average Yield — This measure reflects the effect on our revenue from the pricing activities of our collection, transfer and landfill operations, exclusive of volume changes. Revenue growth from collection and disposal average yield includes not only base rate changes and environmental and service fee increases, but also (i) certain average price changes related to the overall mix of services, which are due to the types of services provided; (ii) changes in average price from new and lost business and (iii) price decreases to retain customers.

The details of our revenue growth from collection and disposal average yield for the years ended December 31 are as follows (dollars in millions):

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​		2019 vs. 2018					2018 vs. 2017				​
​	​	​	​	​	​	As a % of		​	​	​	As a % of	​
​	​	​	​	​	​	Related		​	​	​	Related	​
​		​	Amount			Business		Amount			Business
Commercial	​	​	$	109	​	3.0	%	$	99	​	2.9	%
Industrial	​	​		103	​	4.0	​		107	​	4.4	​
Residential	​	​		81	​	3.3	​		47	​	1.9	​
Total collection	​	​		293	​	3.3	​		253	​	2.9	​
Landfill	​	​		44	​	2.0	​		22	​	1.1	​
Transfer	​	​		27	​	2.9	​		16	​	1.9	​
Total collection and disposal	​	​	$	364	​	2.8	%	$	291	​	2.3	%

​

Our strategic pricing efforts focus on ensuring we overcome inflationary cost pressures and grow margins. This strategy has been most successful in our collection line of business for both 2019 and 2018. We are also experiencing solid growth in our landfill and transfer businesses, with our municipal solid waste business experiencing 3.8% and 2.2% average yield growth for the years ended December 31, 2019 and 2018, respectively, as compared with the prior year periods.

Recycling Commodities — Decreases in the market prices for recycling commodities resulted in revenue declines of $248 million and $273 million for the years ended December 31, 2019 and 2018, respectively, as compared with the prior year periods. We partially offset our revenue decline by assessing fees to cover the higher costs of handling contaminated recycling materials. Average market prices for recycling commodities at the Company’s facilities were 35% lower in 2019 compared to 2018 and 40% lower in 2018 compared to 2017. We have seen a decreased demand from paper mills around the world which had driven prices to historical low averages. There are several domestic mill projects anticipated to start during 2020 that we expect will add additional capacity and more local demand for recycled materials. However, we do not expect material changes in market prices for recycling commodities as a result of this additional capacity. The cardboard packaging industry has been impacted by slower global demand, retail store closures and e-commerce packaging efficiency. We will continue to take steps necessary to improve long-term profitability of our recycling line of business.

Fuel Surcharges and Mandated Fees — These fees, which are predominantly generated by our fuel surcharge program, declined $22 million for 2019 and increased $111 million for 2018, as compared with the prior year periods. These revenues are based on and fluctuate in response to changes in the national average prices for diesel fuel. Market prices for diesel fuel decreased approximately 4% and increased 20% for the years ended December 31, 2019 and 2018, respectively, compared with the prior year periods. The decline in fuel surcharges for 2019 was partially offset by an increase in mandated fees. The mandated fees are primarily related to fees and taxes assessed by various state, county and municipal government agencies at our landfills and transfer stations.

Volume

Our revenues from volume increased $346 million, or 2.3%, and $478 million, or 3.3%, for the years ended December 31, 2019 and 2018, respectively, as compared with the prior year periods, excluding volumes from acquisitions and divestitures.

We experienced higher volumes throughout 2019 and 2018 due to our focus on customer service and disciplined growth, combined with favorable market conditions in our collection and disposal business. We have experienced significant volume growth with existing customers, particularly in our commercial collection business as a result of proactive efforts taken to work with our customers as their needs expand to identify service upgrade opportunities. Our event-driven projects in our special waste business and growth in our municipal solid waste business contributed to our landfill volume growth in both 2019 and 2018. Additionally, a large contract executed in the second half of 2017 increased volume at our transfer stations for 2018, with incremental volume additions during 2018 that favorably impacted our volumes in 2019. Furthermore, our WMSBS organization experienced favorable volume growth in both 2019 and 2018.

The clean-up efforts of natural disasters throughout the U.S. in the first half of 2019 also contributed to volume growth in 2019. However, volume decline from our recycling brokerage services negatively impacted our volume growth in 2019. Additionally, a volume increase from our recycling brokerage services affected the comparability of volumes for 2018 and 2017.

Foreign Currency Translation and Other

Fluctuations in foreign currency affect revenues from our Canadian operations. Additionally, 2018 was unfavorably impacted by a revenue decline associated with the adoption of ASU 2014-09.

Operating Expenses

Our operating expenses are comprised of (i) labor and related benefits costs (excluding labor costs associated with maintenance and repairs discussed below), which include salaries and wages, bonuses, related payroll taxes, insurance and benefits costs and the costs associated with contract labor; (ii) transfer and disposal costs, which include tipping fees paid to third-party disposal facilities and transfer stations; (iii) maintenance and repairs costs relating to equipment, vehicles and facilities and related labor costs; (iv) subcontractor costs, which include the costs of independent haulers who transport waste collected by us to disposal facilities and are affected by variables such as volumes, distance and fuel prices; (v) costs of goods sold, which includes the cost to purchase recycling materials for our recycling line of business, including certain rebates paid to suppliers; (vi) fuel costs, which represent the costs of fuel and oil to operate our truck fleet and landfill operating equipment; (vii) disposal and franchise fees and taxes, which include landfill taxes, municipal franchise fees, host community fees, contingent landfill lease payments and royalties; (viii) landfill operating costs, which include interest accretion on landfill liabilities, interest accretion on and discount rate adjustments to environmental remediation liabilities and recovery assets, leachate and methane collection and treatment, landfill remediation costs and other landfill site costs; (ix) risk management costs, which include general liability, automobile liability and workers’ compensation claims programs costs and (x) other operating costs, which include gains and losses on sale of assets, telecommunications, equipment and facility lease expenses, property taxes, utilities and supplies. Variations in volumes year-over-year, as discussed above in Operating Revenues, in addition to cost inflation, affect the comparability of the components of our operating expenses.

The following table summarizes the major components of our operating expenses for the years ended December 31 (dollars in millions and as a percentage of revenues):

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​		2019				​		2018				​		2017				​
Labor and related benefits	​	$	2,791		18.0	%	​	$	2,703		18.1	%	​	$	2,500		17.2	%
Transfer and disposal costs	​		1,160	​	7.5	​	​		1,105	​	7.4	​	​		996	​	6.9	​
Maintenance and repairs	​		1,355	​	8.8	​	​		1,255	​	8.4	​	​		1,170	​	8.1	​
Subcontractor costs	​		1,532	​	9.9	​	​		1,375	​	9.2	​	​		1,236	​	8.5	​
Cost of goods sold	​		553	​	3.6	​	​		783	​	5.3	​	​		969	​	6.7	​
Fuel	​		336	​	2.2	​	​		409	​	2.7	​	​		375	​	2.6	​
Disposal and franchise fees and taxes	​		627	​	4.1	​	​		598	​	4.0	​	​		753	​	5.2	​
Landfill operating costs	​		379	​	2.4	​	​		331	​	2.2	​	​		328	​	2.3	​
Risk management	​		267	​	1.7	​	​		235	​	1.6	​	​		219	​	1.5	​
Other	​		496	​	3.2	​	​		455	​	3.1	​	​		475	​	3.3	​
​	​	$	9,496	​	61.4	%	​	$	9,249	​	62.0	%	​	$	9,021	​	62.3	%

​

Significant items affecting the comparison of operating expenses between reported periods include:

Labor and Related Benefits — The increase in labor and related benefits costs in 2019 as compared with 2018 was driven by (i) volume growth in our collection and disposal business; (ii) merit increases and (iii) cost inflation noted above. These cost increases were offset, in part, by lower bonus costs related to a one-time plan established in early 2018 targeted at improving employee retention. The increase in labor and related benefits costs in 2018 as compared with 2017 was driven by (i) volume growth in our collection line of business; (ii) the one-time bonus plan established in early 2018 and (iii) merit increases.

Transfer and Disposal Costs — The increase in transfer and disposal costs in 2019 as compared with 2018, and 2018 as compared with 2017, was driven by overall volume growth in our collection and disposal business and, to a lesser extent, cost inflation.

Maintenance and Repairs — The increase in maintenance and repairs costs in 2019 as compared with 2018 was largely driven by (i) cost inflation noted above which primarily impacted labor, parts, third-party services, tires and building costs and (ii) a $16 million non-cash charge to write off certain equipment costs related to our Other segment.

The increase in maintenance and repairs costs in 2018 as compared with 2017 was primarily driven by (i) higher labor costs from volume growth and cost inflation and (ii) higher third-party service and parts costs.

Subcontractor Costs — The increase in subcontractor costs in 2019 as compared to 2018 was primarily driven by (i) volume growth in our collection and disposal business, largely attributable to a significant contract executed in the second half of 2017 that generated incremental volumes in 2019; (ii) volume growth in our WMSBS and EES organizations and (iii) cost inflation related to capacity constraints of our subcontractors in certain markets. The increase in 2018 as compared to 2017 was driven primarily by volume growth in our collection and disposal business.

Cost of Goods Sold — The decrease in cost of goods sold in 2019 as compared with 2018 was primarily driven by lower market prices for recycling commodities and by lower costs due to the sale of certain ancillary operations in the second quarter of 2018. The decrease in cost of goods sold in 2018 as compared with 2017 was primarily driven by (i) lower market prices for recycling commodities and (ii) a change in accounting for certain customer rebates due to the adoption of ASU 2014-09 in 2018.

Fuel — The decrease in fuel costs in 2019 as compared with 2018 was due to (i) recognition of a $70 million benefit from the extension of federal natural gas fuel credits in 2019 compared to $28 million in 2018; (ii) lower costs resulting from the continued conversion of our fleet to natural gas vehicles and (iii) lower market prices for diesel fuel. The increase in fuel costs in 2018 as compared with 2017 was due to higher market prices for diesel fuel, partially offset by the recognition of a $28 million benefit from the extension of federal natural gas fuel credits.

Disposal and Franchise Fees and Taxes — The increase in disposal and franchise fees and taxes in 2019 as compared with 2018 was primarily related to higher volumes in our landfill line of business. The decrease in disposal and franchise fees and taxes in 2018 as compared with 2017 was driven by the adoption of ASU 2014-09 in 2018; specifically, certain franchise fees were treated as disposal fees and taxes in the prior year periods and beginning in 2018, were treated as a reduction in operating revenues in the current year period.

Landfill Operating Costs — The increase in landfill operating costs in 2019 as compared with 2018 was primarily due to higher leachate management costs driven largely by inclement weather in certain parts of North America and increased ongoing site maintenance costs. Additionally, 2019 was impacted by a decrease in the risk-free discount rate used in the measurement of our environmental remediation obligations and recovery assets due to a decrease in U.S. treasury rates. See Note 4 to the Consolidated Financial Statements for additional information.

Risk Management — The increase in risk management costs in 2019 as compared with 2018 was primarily due to an increase in claims expense as a result of growth in the business and cost inflation. The increase in risk management costs in 2018 as compared with 2017 was primarily due to an increase in claims expense.

Other — Net gains on sales of certain assets in 2018 impacted the comparability of the reported periods.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses consist of (i) labor and related benefits costs, which include salaries, bonuses, related insurance and benefits, contract labor, payroll taxes and equity-based compensation; (ii) professional fees, which include fees for consulting, legal, audit and tax services; (iii) provision for bad debts, which includes allowances for uncollectible customer accounts and collection fees and (iv) other selling, general and administrative expenses, which include, among other costs, facility-related expenses, voice and data telecommunication, advertising, bank charges, computer costs, travel and entertainment, rentals, postage and printing. In addition, the financial impacts of litigation reserves generally are included in our “Other” selling, general and administrative expenses.

The following table summarizes the major components of our selling, general and administrative expenses for the years ended December 31 (dollars in millions and as a percentage of revenues):

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​		2019				​		2018				​		2017				​
Labor and related benefits	​	$	1,020		6.6	%	​	$	957		6.4	%	​	$	1,000		6.9	%
Professional fees	​		183	​	1.2	​	​		113	​	0.8	​	​		102	​	0.7	​
Provision for bad debts	​		38	​	0.3	​	​		53	​	0.3	​	​		42	​	0.3	​
Other	​		390	​	2.5	​	​		330	​	2.2	​	​		324	​	2.2	​
​	​	$	1,631	​	10.6	%	​	$	1,453	​	9.7	%	​	$	1,468	​	10.1	%

​

Significant items affecting the comparison of our selling, general and administrative expenses between reported periods include:

Labor and Related Benefits — The increase in labor and related benefits costs in 2019 compared with 2018 was primarily due to (i) an increase in headcount, merit increases and higher incentive compensation and (ii) increased contract labor costs driven by our planned investments in technology. The decrease in labor and related benefits costs in 2018 compared with 2017 was primarily due to (i) lower incentive compensation accruals in 2018 and (ii) severance costs for former executives incurred in 2017, which were partially offset by merit increases and a one-time bonus plan established in early 2018 targeted at improving employee retention.

Professional Fees — The increase in professional fees in 2019 compared with 2018 was primarily driven by higher consulting fees related to our strategic investments in operating, customer facing and back-office technologies, as well as costs incurred in preparation for our pending acquisition of Advanced Disposal Services, Inc. (“Advanced Disposal”). The increase in professional fees in 2018 compared with 2017 was primarily due to the investments we are making in technology and higher legal fees.

Provision for Bad Debts — The decrease in provision for bad debts in 2019 compared with 2018 was due to (i) collection of certain fully reserved receivables and (ii) higher prior year bad debt expense associated with the bankruptcy of a strategic customer. The increase in provision of bad debts in 2018 compared with 2017 was primarily due to increased revenues and the bankruptcy of a strategic customer.

Other — The increase in other expenses in 2019 compared with 2018 was principally driven by higher litigation reserves and increased infrastructure costs associated with our investments in technology. The increase in other expenses in 2018 compared with 2017 was primarily due to higher litigation reserves in 2018, which were partially offset by lower costs associated with advertising and travel and entertainment as we continued to focus on controlling costs.

Depreciation and Amortization Expenses

The following table summarizes the components of our depreciation and amortization expenses for the years ended December 31 (dollars in millions and as a percentage of revenues):

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​		2019				​		2018				​		2017
Depreciation of tangible property and equipment	​	$	893		5.8	%	​	$	838		5.6	%	​	$	783		5.4	%
Amortization of landfill airspace	​		575	​	3.7	​	​		538	​	3.6	​	​		497	​	3.4	​
Amortization of intangible assets	​		106	​	0.7	​	​		101	​	0.7	​	​		96	​	0.7	​
​	​	$	1,574	​	10.2	%	​	$	1,477	​	9.9	%	​	$	1,376	​	9.5	%

​

The increase in depreciation of tangible property and equipment during the reported periods was primarily related to higher capital expenditures due to an intentional focus on accelerating certain fleet and landfill spending to support the Company’s strong collection and disposal growth. The increase in amortization of landfill airspace during the reported periods was driven by higher volumes at our landfills and changes in landfill estimates.

(Gain) Loss from Divestitures, Asset Impairments and Unusual Items, Net

The following table summarizes the major components of (gain) loss from divestitures, asset impairments and unusual items, net for the years ended December 31 (in millions):

​	​	​	​	​	​	​	​	​	​
​		2019			2018			2017
(Gain) loss from divestitures	​	$	—	​	$	(96)	​	$	(38)
Asset impairments	​		42	​		38	​		41
Other	​		—	​		—	​		(19)
​	​	$	42	​	$	(58)	​	$	(16)

​

During the year ended December 31, 2019, we recognized asset impairments of $42 million, related to (i) $27 million of goodwill impairment charges, as discussed further in Note 6, of which $17 million related to our EES organization and $10 million related to our LampTracker® reporting unit and (ii) $15 million of asset impairment charges primarily related to certain solid waste operations.

During the year ended December 31, 2018, we recognized net gains of $58 million, primarily related to (i) a $52 million gain associated with the sale of certain collection and disposal operations in Tier 1 and (ii) net gains of $44 million substantially all from divestitures of certain ancillary operations. These gains were partially offset by (i) a $30 million charge to impair a landfill in Tier 3 based on an internally developed discounted projected cash flow analysis, taking into account continued volume decreases and revised capping cost estimates and (ii) $8 million of impairment charges primarily related to our LampTracker® reporting unit.

During the year ended December 31, 2017, we recognized net gains of $16 million, primarily related to (i) gains of $31 million from the sale of certain oil and gas producing properties and (ii) a $30 million reduction in post-closing, performance-based contingent consideration obligations associated with an acquired business in our EES organization. These gains were partially offset by (i) $34 million of goodwill impairment charges primarily related to our EES organization; (ii) $11 million of charges to adjust our subsidiary’s estimated potential share of an environmental remediation liability and related costs for a closed site in Harris County, Texas, as discussed in Note 11 to the Consolidated Financial Statements and (iii) $7 million of charges to write down certain renewable energy assets.

See Note 3 to the Consolidated Financial Statements for additional information related to the accounting policy and analysis involved in identifying and calculating impairments.

Income from Operations

The following table summarizes income from operations for the years ended December 31 and has been updated to reflect our realigned segments which are discussed further in Note 20 to the Consolidated Financial Statements (dollars in millions):

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	​	​	​	Period-to-					​	​	​	Period-to-				​	​	​	​
​	​	​	​	​	Period					​	​	​	Period				​	​	​	​
​		2019			Change					2018			Change					2017		​
Solid Waste:		​			​				​	​			​				​	​	​
Tier 1	​	$	1,682	​	$	63		3.9	%	$	1,619	​	$	113		7.5	%	$	1,506	​
Tier 2	​		854	​		70		8.9	​		784	​		7		0.9	​		777	​
Tier 3	​		1,136	​		144		14.5	​		992	​		(14)		(1.4)	​		1,006	​
Solid Waste	​		3,672	​		277		8.2	​		3,395	​		106		3.2	​		3,289	​
Other (a)	​		(203)	​		(137)		*	​		(66)	​		2		(2.9)	​		(68)	​
Corporate and Other (b)	​	​	(763)	​	​	(223)	​	41.3	​	​	(540)	​	​	45	​	(7.7)	​	​	(585)	​
Total	​	$	2,706	​	$	(83)		(3.0)	%	$	2,789	​	$	153		5.8	%	$	2,636	​
Percentage of revenues	​	​	17.5	%	​	​		​	​	​	18.7	%	​	​		​	​	​	18.2	%

• Percentage change does not provide a meaningful comparison.

(a)

“Other” includes (i) our WMSBS organization; (ii) those elements of our landfill gas-to-energy operations and third-party subcontract and administration revenues managed by our EES and WM Renewable Energy organizations that are not included in the operations of our reportable segments; (iii) our recycling brokerage services and (iv) certain other expanded service offerings and solutions. In addition, our “Other” segment reflects the results of non-operating entities that provide financial assurance and self-insurance support for our Solid Waste business, net of intercompany activity.

(b)

Corporate operating results reflect certain costs incurred for various support services that are not allocated to our reportable segments. These support services include, among other things, treasury, legal, information technology, tax, insurance, centralized service center processes, other administrative functions and the maintenance of our closed landfills. “Corporate and Other” also includes costs associated with our long-term incentive program and any administrative expenses or revisions to our estimated obligations associated with divested operations.

Solid Waste — The most significant items affecting the results of operations of our Solid Waste business during the three years ended December 31, 2019 are summarized below:

The following items affected both comparable periods:

	●	Income from operations for our collection and disposal business continued to see strong operating results, primarily driven by (i) internal revenue growth; (ii) acquisitions and divestitures and (iii) decreased fuel costs due in part to a year-over-year increase in federal natural gas fuel credits.

However, the following items negatively impacted our results from operations and resulted in lower income from operations in 2019 when compared with 2018:

	●	(i) higher operating costs, driven by increased volumes, higher depreciation related to new collection fleet and higher labor, maintenance and repair costs; (ii) lower recycling commodity prices and (iii) asset impairments. The 2018 period was favorably impacted by net gains associated with the sale of certain collection and disposal operations in our Tier 1 segment, partially offset by the impairment of a landfill in our Tier 3 segment.

In addition, the following items affected 2018 when compared with 2017:

	●	Our income from operations for our Solid Waste business benefited from certain federal natural gas fuel credits in the first quarter of 2018 and was negatively impacted by (i) lower market prices for recycling commodities; (ii) higher operating costs, including a one-time bonus plan established in early 2018 targeted at improving

		employee retention and (iii) increased depreciation and amortization expenses to support growth of our business. During 2018, Tier 1 also benefited from net gains associated with the sale of certain collection and disposal operations and Tier 3 was negatively impacted by an impairment of a landfill.

Other — In 2019 compared with 2018, lower income from operations is a result of (i) net gains from divestitures of certain ancillary operations in the prior year period of $44 million; (ii) $27 million of goodwill impairment charges, of which $17 million related to our EES organization and $10 million related to our LampTracker® reporting unit; (iii) lower commodity prices in 2019 associated with our WM Renewable Energy organization; (iv) a $16 million non-cash charge to write off certain equipment costs in 2019 and (v) an increase in claims expense as a result of growth in the business and cost inflation. In 2018 compared with 2017, our Other segment benefited from net gains from divestitures of certain ancillary operations and improved results in our EES and WM Renewable Energy organizations, partially offset by higher risk management costs. Our 2017 results were also favorably affected by a reduction in contingent consideration obligations in our EES organization.

Corporate and Other — The most significant items affecting the results of operations for Corporate and Other during the three years ended December 31, 2019 are summarized below:

The following items affected 2019 when compared with 2018:

	●	The decrease in income from operations was driven by increased expenses as a result of (i) higher consulting fees, largely due to the investments we are making in operating, customer facing and back-office technologies; (ii) higher litigation reserves; (iii) preparation for our pending acquisition of Advanced Disposal and (iv) a decrease in the risk-free discount rate used in the measurement of our environmental remediation obligations and recovery assets in 2019. Additionally, we recognized higher incentive compensation costs during 2019.

In addition, the following items affected 2018 when compared with 2017:

	●	Decreased expenses in 2018 as a result of lower incentive compensation costs and severance costs for former executives incurred in 2017, and to a lesser extent, charges in 2017 to adjust our subsidiary’s estimated potential share of an environmental remediation liability and related costs for a closed site in Harris County, Texas. These decreases were offset, in part, by higher professional fees primarily due to investments in technology.

Interest Expense, Net

Our interest expense, net was $411 million, $374 million and $363 million in 2019, 2018 and 2017, respectively. The increase in 2019 is primarily attributable to our May 2019 issuance of $4.0 billion senior notes, partially offset by related increases in interest income as a result of higher cash and cash equivalents balances. These items are discussed further below in Liquidity and Capital Resources.

Loss on Early Extinguishment of Debt

In May 2019, WM issued $4.0 billion of senior notes, which are discussed further below in Summary of Cash and Cash Equivalents, Restricted Trust and Escrow Accounts and Debt Obligations. Concurrently, we used $344 million of the net proceeds from the newly issued senior notes to retire $257 million of certain high-coupon senior notes. The cash paid includes the principal amount of the debt retired, $84 million of related premiums, which are classified as loss on early extinguishment of debt in our Consolidated Statement of Operations, and $3 million of accrued interest. The principal amount of senior notes redeemed within each series was as follows:

​

	●	$304 million of WM Holdings 7.10% senior notes due 2026, of which $56 million were tendered;

	●	$395 million of WM 7.00% senior notes due 2028, of which $64 million were tendered;

	●	$139 million of WM 7.375% senior notes due 2029, of which $58 million were tendered;

	●	$210 million of WM 7.75% senior notes due 2032, of which $57 million were tendered; and

	●	$274 million of WM 6.125% senior notes due 2039, of which $22 million were tendered.

​

In the third quarter of 2019, we elected to refund and reissue $99 million of tax-exempt bonds, which resulted in the recognition of a $1 million loss on early extinguishment of debt in our Consolidated Statement of Operations.

Equity in Net Losses of Unconsolidated Entities

We recognized equity in net losses of unconsolidated entities of $55 million, $41 million and $68 million in 2019, 2018 and 2017, respectively. The losses for each period are primarily related to our noncontrolling interests in entities established to invest in and manage low-income housing properties and a refined coal facility. We generate tax benefits, including tax credits, from the losses incurred from these investments, which are discussed further in Note 9 to the Consolidated Financial Statements. The amount in 2017 includes impairment charges of $29 million to write down equity method investments in waste diversion technology companies to their estimated fair values.

Other, Net

We recognized other, net expense of $50 million and $8 million in 2019 and 2017, respectively, compared to other, net income of $2 million in 2018. In 2019, we recognized a $52 million impairment charge related to our minority-owned investment in a waste conversion technology business. We wrote down our investment to its estimated fair value as the result of recent third-party investor’s transactions in securities of this business. The fair value of our investment was not readily determinable; thus, we determined the fair value utilizing a combination of quoted price inputs for the equity in our investment (Level 2) and certain management assumptions pertaining to investment value (Level 3). The expense for 2017 was impacted by impairment charges of $11 million related to other-than-temporary declines in the value of minority-owned investments in waste diversion technology companies.

Income Tax Expense

We recorded income tax expense of $434 million, $453 million and $242 million in 2019, 2018 and 2017 respectively, resulting in effective income tax rates of 20.6%, 19.0% and 11.0% for the years ended December 31, 2019, 2018 and 2017, respectively. The comparability of our income tax expense for the reported periods has been primarily affected by the following:

	●	Investments Qualifying for Federal Tax Credits – Our low-income housing properties and refined coal facility investments reduced our income tax expense by $96 million, $57 million and $51 million, primarily due to tax credits realized from these investments for the years ended December 31, 2019, 2018 and 2017, respectively. See Note 19 for additional information related to these unconsolidated variable interest entities.

	●	Equity-Based Compensation — During 2019, 2018 and 2017, we recognized excess tax benefits related to the vesting or exercise of equity-based compensation awards resulting in a reduction in our income tax expense of $25 million, $17 million and $37 million, respectively.

	●	Adjustments to Accruals and Deferred Taxes — Adjustments to our accruals and deferred taxes due to the filing of our income tax returns, analysis of our deferred tax balances and changes in state and foreign laws resulted in a reduction in our income tax expense of $22 million, $52 million and $5 million for the years ended December 31, 2019, 2018 and 2017, respectively.

	●	Tax Audit Settlements — We file income tax returns in the U.S. and Canada, as well as other state and local jurisdictions. We are currently under audit by various taxing authorities and our audits are in various stages of completion. During the reported periods, we settled various tax audits, which resulted in a reduction in our income tax expense of $2 million, $40 million and $2 million for the years ended December 31, 2019, 2018 and 2017, respectively.

	●	Enactment of Tax Reform — In accordance with applicable accounting guidance, the Company recognized the provisional tax impacts and subsequent measurement period adjustments related to the remeasurement of our deferred income tax assets and liabilities and the one-time, mandatory transition tax on deemed repatriation of previously tax-deferred and unremitted foreign earnings, resulting in a reduction in our income tax expense of $12 million and $529 million for the years ended December 31, 2018 and 2017, respectively.

See Note 9 to the Consolidated Financial Statements for more information related to income taxes.

Landfill and Environmental Remediation Discussion and Analysis

We owned or operated 244 solid waste landfills and five secure hazardous waste landfills as of December 31, 2019 and 247 solid waste and five secure hazardous waste landfills as of December 31, 2018. For these landfills, the following table reflects changes in capacity, as measured in tons of waste, for the years ended December 31 and remaining airspace, measured in cubic yards of waste, as of December 31 (in millions):

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	2019					​	2018
​	​	Remaining	​	​	​	​	​	Remaining	​	​	​	​
​	​	Permitted	​	Expansion	​	Total	​	Permitted	​	Expansion	​	Total
​	​	Capacity	​	Capacity	​	Capacity	​	Capacity	​	Capacity	​	Capacity
Balance as of beginning of year (in tons)	​	4,762	​	220	​	4,982	​	4,799	​	186	​	4,985
Acquisitions, divestitures, newly permitted landfills and closures		27		—		27		5		—		5
Changes in expansions pursued (a)		—		36		36		—		72		72
Expansion permits granted (b)		57		(57)		—		42		(42)		—
Tons received		(121)		—		(121)		(116)		—		(116)
Changes in engineering estimates and other (c)		29		1		30		32		4		36
Balance as of end of year (in tons)		4,754		200		4,954		4,762		220		4,982
Balance as of end of year (in cubic yards)		4,694		166		4,860		4,735		194		4,929

(a)	Amounts reflected here relate to the combined impacts of (i) new expansions pursued; (ii) increases or decreases in the airspace being pursued for ongoing expansion efforts; (iii) adjustments for differences between the airspace being pursued and airspace granted and (iv) decreases due to decisions to no longer pursue expansion permits, if any.

(b)	We received expansion permits at seven of our landfills during 2019 and six of our landfills during 2018, demonstrating our continued success in working with municipalities and regulatory agencies to expand the disposal airspace of our existing landfills.

(c)

Changes in engineering estimates can result in changes to the estimated available remaining airspace of a landfill or changes in the utilization of such landfill airspace, affecting the number of tons that can be placed in the future. Estimates of the amount of waste that can be placed in the future are reviewed annually by our engineers and are based on a number of factors, including standard engineering techniques and site-specific factors such as current and projected mix of waste type; initial and projected waste density; estimated number of years of life remaining; depth of underlying waste; anticipated access to moisture through precipitation or recirculation of landfill leachate and operating practices. We continually focus on improving the utilization of airspace through efforts that may include recirculating landfill leachate where allowed by permit; optimizing the placement of daily cover materials and increasing initial compaction through improved landfill equipment, operations and training.

The tons received at our landfills for the years ended December 31 are shown below (tons in thousands):

​	​	​	​	​	​	​	​	​	​	​	​	​
​	​	2019					​	2018
​		# of		Total		Tons per		# of		Total		Tons per
​		Sites		Tons		Day		Sites		Tons		Day
Solid waste landfills		244	(a)	120,556		443		247		115,972		426
Hazardous waste landfills		5		703		3		5		739		3
​		249		121,259		446		252		116,711		429
Solid waste landfills closed, divested or contract expired during related year		8		692				1		424
​				121,951	(b)					117,135	(b)

(a)	In 2019, we acquired five landfills, we closed one landfill and seven landfills under contract either closed or the contract expired.

(b)

These amounts include 1.3 million tons and 1.5 million tons as of December 31, 2019 and 2018, respectively, that were received at our landfills but were used for beneficial purposes and generally were redirected from the permitted airspace to other areas of the landfill. Waste types that are frequently identified for beneficial use include green waste for composting and clean dirt for on-site construction projects.

When a landfill we own or operate receives certification of closure from the applicable regulatory agency, we generally transfer the management of the site, including any remediation activities, to our environmental legacy management group. As of December 31, 2019, our environmental legacy management group managed 212 closed landfills.

Based on remaining permitted airspace as of December 31, 2019 and projected annual disposal volume, the weighted average remaining landfill life for all of our owned or operated landfills is approximately 39 years. Many of our landfills have the potential for expanded airspace beyond what is currently permitted. We monitor the availability of permitted airspace at each of our landfills and evaluate whether to pursue an expansion at a given landfill based on estimated future disposal volume, disposal prices, construction and operating costs, remaining airspace and likelihood of obtaining an expansion permit. We are seeking expansion permits at 15 of our landfills that meet the expansion criteria outlined in the Critical Accounting Estimates and Assumptions — Landfills section below. Although no assurances can be made that all future expansions will be permitted or permitted as designed, the weighted average remaining landfill life for all owned or operated landfills is approximately 41 years when considering remaining permitted airspace, expansion airspace and projected annual disposal volume.

The number of landfills owned or operated as of December 31, 2019, segregated by their estimated operating lives based on remaining permitted and expansion airspace and projected annual disposal volume, was as follows:

​	​	​	​
​		# of Landfills	​
0 to 5 years		27	​
6 to 10 years		16	​
11 to 20 years		39	​
21 to 40 years		65	​
41+ years		102	​
Total		249	(a)

(a)	Of the 249 landfills, 207 are owned, 32 are operated under lease agreements and 10 are operated under other contractual agreements. For the landfills not owned, we are usually responsible for final capping, closure and post-closure obligations.

As of December 31, 2019, we have 14 landfills which are not currently accepting waste. During the year ended December 31, 2019, we performed tests of recoverability for five of these landfills with an aggregate net recorded capitalized landfill asset cost of $272 million, for which the undiscounted expected future cash flows resulting from our probability-weighted estimation approach exceeded the carrying values. We did not perform recoverability tests for the remaining nine landfills as the net recorded capitalized landfill asset cost was not material.

Landfill Assets — We capitalize various costs that we incur to prepare a landfill to accept waste. These costs generally include expenditures for land (including the landfill footprint and required landfill buffer property), permitting, excavation, liner material and installation, landfill leachate collection systems, landfill gas collection systems, environmental monitoring equipment for groundwater and landfill gas, directly related engineering, capitalized interest, and on-site road construction and other capital infrastructure costs. The cost basis of our landfill assets also includes estimates of future costs associated with landfill final capping, closure and post-closure activities, which are discussed further below.

The changes to the cost basis of our landfill assets and accumulated landfill airspace amortization for the year ended December 31, 2019 are reflected in the table below (in millions):

​	​	​	​	​	​	​	​	​	​
​		​	​		Accumulated			​	​
​	​	Cost Basis of		​	Landfill Airspace		​	​	​
​		Landfill Assets			Amortization			Landfill Assets
December 31, 2018	​	$	15,240	​	$	(9,157)	​	$	6,083
Capital additions	​		656	​		—	​		656
Asset retirement obligations incurred and capitalized	​		72	​		—	​		72
Acquisitions	​		289	​		—	​		289
Amortization of landfill airspace	​		—	​		(575)	​		(575)
Foreign currency translation	​		52	​		(22)	​		30
Asset retirements and other adjustments	​		(399)	​		428	​		29
December 31, 2019	​	$	15,910	​	$	(9,326)	​	$	6,584

​

As of December 31, 2019, we estimate that we will spend approximately $600 million in 2020, and approximately $1.3 billion in 2021 and 2022 combined, for the construction and development of our landfill assets. The specific timing of landfill capital spending is dependent on future events and spending estimates are subject to change due to fluctuations in landfill waste volumes, changes in environmental requirements and other factors impacting landfill operations.

Landfill and Environmental Remediation Liabilities — As we accept waste at our landfills, we incur significant asset retirement obligations, which include liabilities associated with landfill final capping, closure and post-closure activities. These liabilities are accounted for in accordance with authoritative guidance on accounting for asset retirement obligations and are discussed in Note 3 to the Consolidated Financial Statements. We also have liabilities for the remediation of properties that have incurred environmental damage, which generally was caused by operations or for damage caused by conditions that existed before we acquired operations or a site. We recognize environmental remediation liabilities when we determine that the liability is probable and the estimated cost for the likely remedy can be reasonably estimated.

The changes to landfill and environmental remediation liabilities for the year ended December 31, 2019 are reflected in the table below (in millions):

​	​	​	​	​	​	​
​	​	​	​	​	Environmental
​		Landfill			Remediation
December 31, 2018	​	$	1,760	​	$	237
Obligations incurred and capitalized	​		72			—
Obligations settled	​		(113)			(22)
Interest accretion	​		98			4
Revisions in estimates and interest rate assumptions (a) (b)	​		33			21
Acquisitions, divestitures and other adjustments	​		5			—
December 31, 2019	​	$	1,855	​	$	240

(a)	The amount reported for our landfill liabilities includes revisions in estimates resulting primarily from changes in the timing and amount of costs as well as changes in estimates of remaining airspace.

(b)	The amount reported for our environmental remediation liabilities includes an increase of $11 million due to a decrease in the risk-free discount rate used to measure our liabilities from 2.75% at December 31, 2018 to 1.75% at December 31, 2019.

Landfill Operating Costs — The following table summarizes our landfill operating costs for the years ended December 31 (in millions):

​	​	​	​	​	​	​	​	​	​
​		2019			2018			2017
Interest accretion on landfill liabilities	​	$	98	​	$	95	​	$	92
Interest accretion on and discount rate adjustments to environmental remediation liabilities and recovery assets	​		13	​		(2)	​		3
Leachate and methane collection and treatment	​		173	​		150	​		143
Landfill remediation costs	​		4	​		13	​		14
Other landfill site costs	​		91	​		75	​		76
Total landfill operating costs	​	$	379	​	$	331	​	$	328

​

Amortization of Landfill Airspace — Amortization of landfill airspace, which is included as a component of depreciation and amortization expenses, includes the following:

	●	the amortization of landfill capital costs, including (i) costs that have been incurred and capitalized and (ii) estimated future costs for landfill development and construction required to develop our landfills to their remaining permitted and expansion airspace; and

	●	the amortization of asset retirement costs arising from landfill final capping, closure and post-closure obligations, including (i) costs that have been incurred and capitalized and (ii) projected asset retirement costs.

Amortization expense is recorded on a units-of-consumption basis, applying cost as a rate per ton. The rate per ton is calculated by dividing each component of the amortizable basis of a landfill (net of accumulated amortization) by the number of tons needed to fill the corresponding asset’s remaining permitted and expansion airspace. Landfill capital costs and closure and post-closure asset retirement costs are generally incurred to support the operation of the landfill over its entire operating life and are, therefore, amortized on a per-ton basis using a landfill’s total permitted and expansion airspace. Final capping asset retirement costs are related to a specific final capping event and are, therefore, amortized on a per-ton basis using each discrete final capping event’s estimated permitted and expansion airspace. Accordingly, each landfill has multiple per-ton amortization rates.

The following table presents our landfill airspace amortization expense on a per-ton basis for the years ended December 31:

​	​	​	​	​	​	​	​	​	​
​		2019			2018			2017
Amortization of landfill airspace (in millions)	​	$	575	​	$	538	​	$	497
Tons received, net of redirected waste (in millions)	​		121	​		116	​		112
Average landfill airspace amortization expense per ton	​	$	4.75	​	$	4.64	​	$	4.44

​

Different per-ton amortization rates are applied at each of our 249 landfills, and per-ton amortization rates vary significantly from one landfill to another due to (i) inconsistencies that often exist in construction costs and provincial, state and local regulatory requirements for landfill development and landfill final capping, closure and post-closure activities and (ii) differences in the cost basis of landfills that we develop versus those that we acquire. Accordingly, our landfill airspace amortization expense measured on a per-ton basis can fluctuate due to changes in the mix of volumes we receive across the Company each year.

Liquidity and Capital Resources

The Company consistently generates cash flow from operations that meets and exceeds its working capital needs, the payments of its dividend and investment in the business through capital expenditures and acquisitions. We continually monitor our actual and forecasted cash flows, our liquidity and our capital resources, enabling us to plan for our present needs and fund unbudgeted business activities that may arise during the year as a result of changing business conditions or new opportunities. The Company believes that its investment grade credit ratings, large value of unencumbered assets

and modest leverage enable it to obtain adequate financing to meet its ongoing capital, operating and other liquidity requirements.

Summary of Cash and Cash Equivalents, Restricted Trust and Escrow Accounts and Debt Obligations

The following is a summary of our cash and cash equivalents, restricted trust and escrow accounts and debt balances as of December 31 (in millions):

​	​	​	​	​	​	​
​		2019			2018
Cash and cash equivalents	​	$	3,561	​	$	61
Restricted trust and escrow accounts:	​			​		​
Insurance reserves (a)	​	$	270	​	$	252
Final capping, closure, post-closure and environmental remediation funds	​	​	109	​	​	103
Other	​		4	​		11
Total restricted trust and escrow accounts	​	$	383	​	$	366
Debt:	​			​
Current portion	​	$	218	​	$	432
Long-term portion	​		13,280	​		9,594
Total debt	​	$	13,498	​	$	10,026

(a)	Includes $70 million as of December 31, 2019 and 2018 in other current assets in our Consolidated Balance Sheets.

Cash and cash equivalents — Cash and cash equivalents at December 31, 2019 primarily include proceeds from the May 2019 issuance of senior notes and our September 2019 issuance of Canadian senior notes. These items are discussed further below and in Note 7 to the Consolidated Financial Statements.

Debt — We use long-term borrowings in addition to the cash we generate from operations as part of our overall financial strategy to support and grow our business. We primarily use senior notes and tax-exempt bonds to borrow on a long-term basis, but we also use other instruments and facilities, when appropriate. The components of our borrowings as of December 31, 2019 are described in Note 7 to the Consolidated Financial Statements.

As of December 31, 2019, we had $1.5 billion of debt maturing within the next 12 months, including (i) $600 million of 4.75% senior notes that mature in June 2020; (ii) $669 million of tax-exempt bonds with term interest rate periods that expire within the next 12 months, which is prior to their scheduled maturities, and (iii) $218 million of other debt with scheduled maturities within the next 12 months, including $112 million of tax-exempt bonds. As of December 31, 2019, we have classified $1.3 billion of debt maturing in the next 12 months as long-term because we have the intent and ability to refinance these borrowings on a long-term basis as supported by the forecasted available capacity under our $3.5 billion long-term U.S. and Canadian revolving credit facility (“$3.5 billion revolving credit facility”), as discussed below. The remaining $218 million of debt maturing in the next 12 months is classified as current obligations.

As of December 31, 2019, we also have $169 million of variable-rate tax-exempt bonds that are supported by letters of credit under our $3.5 billion revolving credit facility, of which $15 million mature within the next 12 months. The interest rates on our variable-rate tax-exempt bonds are generally reset on either a daily or weekly basis through a remarketing process. All recent tax-exempt bond remarketings have successfully placed Company bonds with investors at market-driven rates and we currently expect future remarketings to be successful. However, if the remarketing agent is unable to remarket our bonds, the remarketing agent can put the bonds to us. In the event of a failed remarketing, we have the availability under our $3.5 billion revolving credit facility to fund these bonds until they are remarketed successfully. Accordingly, we have classified $154 million of these borrowings as long-term in our Consolidated Balance Sheet as of December 31, 2019.

In May 2019, WM issued $4.0 billion of senior notes consisting of:

​

	●	$750 million of 2.95% senior notes due June 15, 2024;

	●	$750 million of 3.20% senior notes due June 15, 2026;

	●	$1.0 billion of 3.45% senior notes due June 15, 2029;

	●	$500 million of 4.00% senior notes due July 15, 2039; and

	●	$1.0 billion of 4.15% senior notes due July 15, 2049.

​

The net proceeds from these debt issuances were $3.97 billion. Concurrently, we used $344 million of the net proceeds from the newly issued senior notes to retire $257 million of certain high-coupon senior notes. The cash paid includes the principal amount of the debt retired, $84 million of related premiums and $3 million of accrued interest as discussed above in Loss on Early Extinguishment of Debt. We used a portion of the proceeds to repay our commercial paper borrowings. We intend to use the remaining net proceeds to pay a portion of the consideration related to our pending acquisition of Advanced Disposal, which is discussed in Pending Acquisition below, and for general corporate purposes. The newly-issued senior notes due 2024, 2026, 2029 and 2039 include a special mandatory redemption feature, which provides that if the acquisition of Advanced Disposal is not completed on or prior to July 14, 2020, or if, prior to such date, the Merger Agreement is terminated for any reason, we will be required to redeem all of such outstanding notes equal to 101% of the aggregate principal amounts of such notes, plus accrued but unpaid interest.

​

In September 2019, Waste Management of Canada Corporation, an indirect wholly-owned subsidiary of WM, issued C$500 million, or $377 million, of 2.6% senior notes due September 23, 2026, all of which are fully and unconditionally guaranteed on a senior unsecured basis by WM and WM Holdings. The net proceeds from the debt issuance were C$496 million, or $373 million, which we intend to use for general corporate purposes.

​

See Note 7 to the Consolidated Financial Statements for more information related to the debt transactions.

​

We have credit facilities in place to support our liquidity and financial assurance needs. The following table summarizes our outstanding letters of credit, categorized by type of facility as of December 31 (in millions):

​	​	​	​	​	​	​
​		2019			2018
Revolving credit facility (a)	​	$	412	​	$	587
Other letter of credit facilities (b)	​		532	​		556
​	​	$	944	​	$	1,143

(a)	As of December 31, 2019, we had an unused and available credit capacity of $3.1 billion.

(b)	As of December 31, 2019, these other letter of credit facilities are both committed and uncommitted with terms extending through April 2021.

Refinancing of Revolving Credit Facility

In November 2019, we entered into the $3.5 billion revolving credit facility, which amended and restated our prior long-term U.S. and Canadian revolving credit facility. Amendments to the credit agreement included (i) increasing total capacity under the facility from $2.75 billion to $3.5 billion; (ii) increasing the accordion feature that may be used to increase total capacity in future periods from $750 million to $1.0 billion and (iii) extending the term through November 2024. The agreement provides the Company with two one-year extension options. Waste Management of Canada Corporation and WM Quebec Inc., each an indirect wholly-owned subsidiary of WM, are borrowers under the $3.5 billion revolving credit facility, and the agreement permits borrowing in Canadian dollars up to the U.S. dollar equivalent of $375 million, with such borrowings to be repaid in Canadian dollars. WM Holdings, a wholly-owned subsidiary of WM, guarantees all the obligations under the $3.5 billion revolving credit facility.

Summary of Cash Flow Activity

The following is a summary of our cash flows for the years ended December 31 (in millions):

​	​	​	​	​	​	​	​	​	​
​		2019			2018			2017
Net cash provided by operating activities	​	$	3,874	​	$	3,570	​	$	3,180
Net cash used in investing activities	​	$	(2,376)	​	$	(2,169)	​	$	(1,620)
Net cash provided by (used in) financing activities	​	$	1,964	​	$	(1,508)	​	$	(1,361)

​

Net Cash Provided by Operating Activities — Our operating cash flows increased by $304 million for the year ended December 31, 2019, as compared with the prior year period, as a result of (i) higher cash-based earnings in the current year period primarily associated with our collection and disposal business; (ii) lower bonus payments in the current year; (iii) lower income tax payments of $57 million in the current year and (iv) net favorable changes in our operating assets and liabilities, net of effects of acquisitions and divestitures, offset slightly by higher interest payments in the current year period primarily due to our May 2019 issuance of senior notes.

Our operating cash flows increased by $390 million for the year ended December 31, 2018, as compared with the prior year period, as a result of (i) higher earnings primarily associated with our collection and disposal business and (ii) lower income tax payments of $213 million, driven by enactment of tax reform and timing of income tax payments partially offset by lower earnings from our recycling line of business.

Net Cash Used in Investing Activities — The most significant items affecting the comparison of our investing cash flows for the periods presented are summarized below:

	●	Acquisitions — Our spending on acquisitions was $527 million, $466 million and $200 million in 2019, 2018 and 2017, respectively, of which $521 million, $460 million and $198 million, respectively, are considered cash used in investing activities. The remaining spend is either cash used in a financing or an operating activity related to the timing of contingent consideration paid. Substantially all of these acquisitions are related to our Solid Waste business. Our acquisition spending in 2019 is primarily attributable to Petro Waste Environmental LP. See Note 18 to the Consolidated Financial Statements for additional information. We continue to focus on accretive acquisitions and growth opportunities that will enhance and expand our existing service offerings.

	●	Capital Expenditures — We used $1,818 million, $1,694 million and $1,509 million for capital expenditures in 2019, 2018 and 2017, respectively. The increase is primarily due to an intentional focus on accelerating certain collection fleet and landfill spending to support the Company’s strong collection and disposal growth.

	●	Proceeds from Divestitures — Proceeds from divestitures of businesses and other assets (net of cash divested) were $49 million, $208 million and $99 million in 2019, 2018 and 2017, respectively. In 2019, 2018 and 2017, $8 million, $153 million and $62 million of these divestitures, respectively, were made as part of our continuous focus on improving or divesting certain non-strategic or underperforming operations, with the remaining amounts generally related to the sale of fixed assets.

	●	Other, Net — Our spending within other, net was $86 million, $223 million, and $12 million in 2019, 2018 and 2017, respectively. Cash used for other investing activities for the year ended December 31, 2019 was primarily related to (i) changes in our investments portfolio associated with a wholly-owned insurance captive from restricted cash and cash equivalents to available-for-sale securities and (ii) an initial cash payment for low-income housing investments, which is discussed further in Note 9 to the Consolidated Financial Statements. These items were partially offset by cash proceeds from the redemption of our preferred stock received in conjunction with the 2014 sale of our Puerto Rico operations, which is discussed in Note 17 to the Consolidated Financial Statements. The increase in 2018 was primarily due to changes in our investments portfolio associated with our wholly-owned insurance captive from restricted cash and cash equivalents to available-for-sale securities. See Note 17 to the Consolidated Financial Statements for additional information.

Net Cash Provided by (Used in) Financing Activities — The most significant items affecting the comparison of our financing cash flows for the periods presented are summarized below:

	●	Debt Borrowings (Repayments) — The following summarizes our cash borrowings and repayments of debt (excluding our commercial paper program discussed below) for the years ended December 31 (in millions):

​	​	​	​	​	​	​	​	​	​
​		2019			2018			2017
Borrowings:		​		​	​		​	​
Revolving credit facility (a)		$	—	​	$	119	​	$	302
Canadian term loan and revolving credit facility			—	​		8	​		9
Senior notes	​	​	3,971	​	​	—	​	​	745
Canadian senior notes	​	​	373	​	​	—	​	​	—
Tax-exempt bonds	​	​	339	​	​	185	​	​	299
Other debt			—	​		47	​		124
​		$	4,683	​	$	359	​	$	1,479
Repayments:				​			​
Revolving credit facility (a)		$	(11)	​	$	(108)	​	$	(728)
Canadian term loan and revolving credit facility			—	​		(117)	​		(146)
Senior notes	​	​	(257)	​	​	—	​	​	(590)
Tax-exempt bonds			(204)	​		(167)	​		(251)
Other debt			(61)	​		(107)	​		(192)
​		$	(533)	​	$	(499)	​	$	(1,907)
Net cash borrowings (repayments)	​	$	4,150	​	$	(140)	​	$	(428)

​

​	​
(a)	Our revolving credit facility was amended and restated in November 2019.

Refer to Note 7 to the Consolidated Financial Statements for additional information related to our debt borrowings and repayments.

	●	Premiums Paid on Early Extinguishment of Debt — During the year ended December 31, 2019, we paid premiums of $84 million to retire certain high-coupon senior notes. See Note 7 to the Consolidated Financial Statements for further discussion of this debt transaction.

	●	Commercial Paper Program — During 2019, we had net cash repayments of $1,001 million compared to net cash borrowings of $453 million and $513 million (net of the related discounts on issuance) during 2018 and 2017, respectively, under our commercial paper program. We repaid the outstanding balance with proceeds from the May 2019 issuance of senior notes discussed above. Borrowings were primarily to support acquisitions, new business opportunities and for general corporate purposes.

	●	Common Stock Repurchase Program — For the periods presented, all share repurchases have been made in accordance with financial plans approved by our Board of Directors. We repurchased $244 million, $1,008 million (including $4 million paid in January 2019) and $750 million of our common stock during 2019, 2018 and 2017, respectively. As a result of the pending acquisition of Advanced Disposal discussed in Pending Acquisition below, we limited our 2019 share repurchases to an amount sufficient to offset dilution impacts from our stock-based compensation plans. See Note 14 to the Consolidated Financial Statements for additional information.

In December 2019, we publicly confirmed that the Company has $1.32 billion remaining on its existing Board of Directors’ authorization to repurchase shares of the Company’s common stock. Any future share repurchases will be made at the discretion of management and will depend on factors similar to those considered by the Board of Directors in making dividend declarations.

	●	Cash Dividends — For the periods presented, all dividends have been declared by our Board of Directors.

We paid aggregate cash dividends of $876 million, $802 million and $750 million during 2019, 2018 and 2017, respectively. The increase in dividend payments is due to our quarterly per share dividend increasing from $0.425

in 2017 to $0.465 in 2018 and to $0.5125 in 2019 and has been offset, in part, by a reduction in our common stock outstanding as a result of our common stock repurchase program.

In December 2019, we announced that our Board of Directors expects to increase the quarterly dividend from $0.5125 to $0.545 per share for dividends declared in 2020. However, all future dividend declarations are at the discretion of the Board of Directors and depend on various factors, including our net earnings, financial condition, cash required for future business plans, growth and acquisitions and other factors the Board of Directors may deem relevant.

	●	Proceeds from the Exercise of Common Stock Options — The exercise of common stock options generated financing cash inflows of $67 million, $52 million and $95 million during 2019, 2018 and 2017, respectively. The year-over-year changes are generally due to the number of stock options exercised and the exercise price of those options.

Free Cash Flow

We are presenting free cash flow, which is a non-GAAP measure of liquidity, in our disclosures because we use this measure in the evaluation and management of our business. We define free cash flow as net cash provided by operating activities, less capital expenditures, plus proceeds from divestitures of businesses and other assets (net of cash divested). We believe it is indicative of our ability to pay our quarterly dividends, repurchase common stock, fund acquisitions and other investments and, in the absence of refinancings, to repay our debt obligations. Free cash flow is not intended to replace net cash provided by operating activities, which is the most comparable GAAP measure. We believe free cash flow gives investors useful insight into how we view our liquidity, but the use of free cash flow as a liquidity measure has material limitations because it excludes certain expenditures that are required or that we have committed to, such as declared dividend payments and debt service requirements.

Our calculation of free cash flow and reconciliation to net cash provided by operating activities is shown in the table below for the years ended December 31 (in millions), and may not be calculated the same as similarly-titled measures presented by other companies:

​	​	​	​	​	​	​	​	​	​
​		2019			2018			2017
Net cash provided by operating activities	​	$	3,874	​	$	3,570	​	$	3,180
Capital expenditures	​		(1,818)	​		(1,694)	​		(1,509)
Proceeds from divestitures of businesses and other assets (net of cash divested)	​		49	​		208	​		99
Free cash flow	​	$	2,105	​	$	2,084	​	$	1,770

​

​

Summary of Contractual Obligations

The following table summarizes our contractual obligations as of December 31, 2019 and the anticipated effect of these obligations on our liquidity in future years (in millions):

​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​	​
​		2020			2021			2022			2023			2024			Thereafter			Total
Recorded Obligations:		​			​			​			​			​			​			​
Expected environmental liabilities: (a)		​			​			​			​			​			​			​
Final capping, closure and post-closure	​	$	138	​	$	161	​	$	114	​	$	96	​	$	133	​	$	2,587	​	$	3,229
Environmental remediation	​		27	​		33	​		44	​		34	​		22	​		72	​		232
Non-cancelable operating lease obligations	​		63	​		58	​		57	​		51	​		40	​		359	​		628
​	​	​	228	​	​	252	​	​	215	​	​	181	​	​	195	​	​	3,018	​	​	4,089
Debt payments (b) (c) (d)	​		823	​		629	​		660	​		646	​		1,220	​		9,701	​		13,679
Unrecorded Obligations: (e)	​			​			​			​			​			​			​		​
Interest on debt (f)	​		472	​		439	​		425	​		399	​		371	​		3,446	​		5,552
Estimated unconditional purchase obligations (g)	​		156	​		143	​		65	​		57	​		47	​		379	​		847
Anticipated liquidity impact as of December 31, 2019	​	$	1,679	​	$	1,463	​	$	1,365	​	$	1,283	​	$	1,833	​	$	16,544	​	$	24,167

(a)

Environmental liabilities include final capping, closure, post-closure and environmental remediation costs recorded in our Consolidated Balance Sheet as of December 31, 2019, without the impact of discounting and inflation. Our recorded environmental liabilities for final capping, closure and post-closure will increase as we continue to place additional tons within the permitted airspace at our landfills.

(b)	These amounts represent the scheduled principal payments related to our long-term debt and financing leases, excluding interest.

(c)

Our debt obligations as of December 31, 2019 include $669 million of tax-exempt bonds with term interest rate periods that expire within the next 12 months. If the remarketings of our bonds are unsuccessful, then the bonds can be put to us, requiring immediate repayment. We have classified the anticipated cash flows for these contractual obligations based on the scheduled maturity of the borrowings for purposes of this disclosure. For additional information regarding the classification of these borrowings in our Consolidated Balance Sheet as of December 31, 2019, refer to Note 7 to the Consolidated Financial Statements.

(d)	Our recorded debt obligations include non-cash adjustments associated with debt issuance costs, discounts, premiums and fair value adjustments attributable to terminated interest rate derivatives. These amounts have been excluded as they will not impact our liquidity in future periods.

(e)

Our unrecorded obligations represent operating lease obligations and purchase commitments from which we expect to realize an economic benefit in future periods and interest payable on our debt. We have also made certain guarantees, as discussed in Note 11 to the Consolidated Financial Statements, that we do not expect to materially affect our current or future financial position, results of operations or liquidity.

(f)	Interest on our fixed-rate debt was calculated based on contractual rates and interest on our variable-rate debt was calculated based on interest rates as of December 31, 2019. As of December 31, 2019, we had $122 million of accrued interest related to our debt obligations.

(g)

Our unconditional purchase obligations are for various contractual obligations that we generally incur in the ordinary course of our business. Certain of our obligations are quantity driven. For contracts that require us to purchase minimum quantities of goods or services, we have estimated our future minimum obligations based on the current market values of the underlying products or services or contractually stated amounts. Accordingly, the amounts reported in the table are subject to change and actual cash flow obligations in the near future may be different. See Note 11 to the Consolidated Financial Statements for discussion of the nature and terms of our unconditional purchase obligations.

Pending Acquisition

On April 14, 2019, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) to acquire all outstanding shares of Advanced Disposal for $33.15 per share in cash, representing a total enterprise value of $4.9 billion when including approximately $1.9 billion of Advanced Disposal’s net debt. Advanced Disposal’s solid waste network includes 95 collection operations, 73 transfer stations, 41 owned or operated landfills and 22 owned or operated recycling facilities. On June 28, 2019, Advanced Disposal announced that 85.9% of the outstanding shares of its common stock entitled to vote were voted in favor of the proposal to adopt the Merger Agreement at a special meeting of stockholders held that day. We anticipate that we will obtain antitrust regulatory approval by the end of March 2020 and close the Advanced Disposal transaction soon thereafter.

Critical Accounting Estimates and Assumptions

In preparing our financial statements, we make numerous estimates and assumptions that 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 precision from available data or simply cannot be calculated. In some cases, these estimates are difficult to determine, and we must exercise significant judgment. In preparing our financial statements, the most difficult, subjective and complex estimates and the assumptions that present the greatest amount of uncertainty relate to our accounting for landfills, environmental remediation liabilities, long-lived asset impairments and reserves associated with our insured and self-insured claims. Each of these items is discussed in additional detail below and in Note 3 to the Consolidated Financial Statements. Actual results could differ materially from the estimates and assumptions that we use in the preparation of our financial statements.

Landfills

Accounting for landfills requires that significant estimates and assumptions be made regarding (i) the cost to construct and develop each landfill asset; (ii) the estimated fair value of final capping, closure and post-closure asset retirement obligations, which must consider both the expected cost and timing of these activities; (iii) the determination of each landfill’s remaining permitted and expansion airspace and (iv) the airspace associated with each final capping event.

Landfill Costs — We estimate the total cost to develop each of our landfill sites to its remaining permitted and expansion airspace. This estimate includes such costs as landfill liner material and installation, excavation for airspace, landfill leachate collection systems, landfill gas collection systems, environmental monitoring equipment for groundwater and landfill gas, directly related engineering, capitalized interest, on-site road construction and other capital infrastructure costs. Additionally, landfill development includes all land purchases for the landfill footprint and required landfill buffer property. The projection of these landfill costs is dependent, in part, on future events. The remaining amortizable basis of each landfill includes costs to develop a site to its remaining permitted and expansion airspace and includes amounts previously expended and capitalized, net of accumulated airspace amortization, and projections of future purchase and development costs.

Final Capping Costs — We estimate the cost for each final capping event based on the area to be capped and the capping materials and activities required. The estimates also consider when these costs are anticipated to be paid and factor in inflation and discount rates. Our engineering personnel allocate landfill final capping costs to specific final capping events. The landfill airspace associated with each final capping event is then quantified and the final capping costs for each event are amortized over the related airspace associated with the event as waste is disposed of at the landfill. We review these costs annually, or more often if significant facts change. Changes in estimates, such as timing or cost of construction, for final capping events immediately impact the required liability and the corresponding asset. When the change in estimate relates to a fully consumed asset, the adjustment to the asset must be amortized immediately through expense. When the change in estimate relates to a final capping event that has not been fully consumed, the adjustment to the asset is recognized in income prospectively as a component of landfill airspace amortization.

Closure and Post-Closure Costs — We base our estimates for closure and post-closure costs on our interpretations of permit and regulatory requirements for closure and post-closure monitoring and maintenance. The estimates for landfill

closure and post-closure costs also consider when the costs are anticipated to be paid and factor in inflation and discount rates. The possibility of changing legal and regulatory requirements and the forward-looking nature of these types of costs make any estimation or assumption less certain. Changes in estimates for closure and post-closure events immediately impact the required liability and the corresponding asset. When the change in estimate relates to a fully consumed asset, the adjustment to the asset must be amortized immediately through expense. When the change in estimate relates to a landfill asset that has not been fully consumed, the adjustment to the asset is recognized in income prospectively as a component of landfill airspace amortization.

Remaining Permitted Airspace — Our engineers, in consultation with third-party engineering consultants and surveyors, are responsible for determining remaining permitted airspace at our landfills. The remaining permitted airspace is determined by an annual survey, which is used to compare the existing landfill topography to the expected final landfill topography.

Expansion Airspace — We also include currently unpermitted expansion airspace in our estimate of remaining permitted and expansion airspace in certain circumstances. First, to include airspace associated with an expansion effort, we must generally expect the initial expansion permit application to be submitted within one year and the final expansion permit to be received within five years. Second, we must believe that obtaining the expansion permit is likely, considering the following criteria:

	●	Personnel are actively working on the expansion of an existing landfill, including efforts to obtain land use and local, state or provincial approvals;

	●	We have a legal right to use or obtain land to be included in the expansion plan;

	●	There are no significant known technical, legal, community, business, or political restrictions or similar issues that could negatively affect the success of such expansion; and

	●	Financial analysis has been completed based on conceptual design, and the results demonstrate that the expansion meets Company criteria for investment.

For unpermitted airspace to be initially included in our estimate of remaining permitted and expansion airspace, the expansion effort must meet all the criteria listed above. These criteria are evaluated by our field-based engineers, accountants, managers and others to identify potential obstacles to obtaining the permits. Once the unpermitted airspace is included, our policy provides that airspace may continue to be included in remaining permitted and expansion airspace even if certain of these criteria are no longer met as long as we continue to believe we will ultimately obtain the permit, based on the facts and circumstances of a specific landfill. In these circumstances, continued inclusion must be approved through a landfill-specific review process that includes approval by our Chief Financial Officer on a quarterly basis.

When we include the expansion airspace in our calculations of remaining permitted and expansion airspace, we also include the projected costs for development, as well as the projected asset retirement costs related to final capping, closure and post-closure of the expansion in the amortization basis of the landfill.

Once the remaining permitted and expansion airspace is determined in cubic yards, an airspace utilization factor (“AUF”) is established to calculate the remaining permitted and expansion capacity in tons. The AUF is established using the measured density obtained from previous annual surveys and is then adjusted to account for future settlement. The amount of settlement that is forecasted will take into account several site-specific factors including current and projected mix of waste type, initial and projected waste density, estimated number of years of life remaining, depth of underlying waste, anticipated access to moisture through precipitation or recirculation of landfill leachate and operating practices. In addition, the initial selection of the AUF is subject to a subsequent multi-level review by our engineering group and the AUF used is reviewed on a periodic basis and revised as necessary. Our historical experience generally indicates that the impact of settlement at a landfill is greater later in the life of the landfill when the waste placed at the landfill approaches its highest point under the permit requirements.

After determining the costs and remaining permitted and expansion capacity at each of our landfills, we determine the per ton rates that will be expensed as waste is received and deposited at the landfill by dividing the costs by the

corresponding number of tons. We calculate per ton amortization rates for each landfill for assets associated with each final capping event, for assets related to closure and post-closure activities and for all other costs capitalized or to be capitalized in the future. These rates per ton are updated annually, or more often, as significant facts change.

It is possible that actual results, including the amount of costs incurred, the timing of final capping, closure and post-closure activities, our airspace utilization or the success of our expansion efforts could ultimately turn out to be significantly different from our estimates and assumptions. To the extent that such estimates, or related assumptions, prove to be significantly different than actual results, lower profitability may be experienced due to higher amortization rates or higher expenses; or higher profitability may result if the opposite occurs. Most significantly, if it is determined that expansion capacity should no longer be considered in calculating the recoverability of a landfill asset, we may be required to recognize an asset impairment or incur significantly higher amortization expense. If at any time management makes the decision to abandon the expansion effort, the capitalized costs related to the expansion effort are expensed immediately.

Environmental Remediation Liabilities

A significant portion of our operating costs and capital expenditures could be characterized as costs of environmental protection. The nature of our operations, particularly with respect to the construction, operation and maintenance of our landfills subjects us to an array of laws and regulations relating to the protection of the environment. Under current laws and regulations, we may have liabilities for environmental damage caused by operations, or for damage caused by conditions that existed before we acquired a site. These liabilities include PRP investigations, settlements, and certain legal and consultant fees, as well as costs directly associated with site investigation and clean up, such as materials, external contractor costs and incremental internal costs directly related to the remedy. We provide for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. We routinely review and evaluate sites that require remediation and determine our estimated cost for the likely remedy based on a number of estimates and assumptions.

Where it is probable that a liability has been incurred, we estimate costs required to remediate sites based on site-specific facts and circumstances. We routinely review and evaluate sites that require remediation, considering whether we were an owner, operator, transporter, or generator at the site, the amount and type of waste hauled to the site and the number of years we were associated with the site. Next, we review the same type of information with respect to other named and unnamed PRPs. Estimates of the costs for the likely remedy are then either developed using our internal resources or by third-party environmental engineers or other service providers. Internally developed estimates are based on:

	●	Management’s judgment and experience in remediating our own and unrelated parties’ sites;

	●	Information available from regulatory agencies as to costs of remediation;

	●	The number, financial resources and relative degree of responsibility of other PRPs who may be liable for remediation of a specific site; and

	●	The typical allocation of costs among PRPs, unless the actual allocation has been determined.

Long-Lived Asset Impairments

We assess our long-lived assets for impairment as required under the applicable accounting standards. If necessary, impairments are recorded in (gain) loss from divestitures, asset impairments and unusual items, net in our Consolidated Statement of Operations.

Property and Equipment, Including Landfills and Definite-Lived Intangible Assets — We monitor the carrying value of our long-lived assets for potential impairment on an ongoing basis and test the recoverability of such assets generally using significant unobservable (“Level 3”) inputs whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. These events or changes in circumstances, including management decisions pertaining to such assets, are referred to as impairment indicators. If an impairment indicator occurs, we perform a test of recoverability by comparing the carrying value of the asset or asset group to its undiscounted expected future cash flows.

If cash flows cannot be separately and independently identified for a single asset, we will determine whether an impairment has occurred for the group of assets for which we can identify the projected cash flows. If the carrying values are in excess of undiscounted expected future cash flows, we measure any impairment by comparing the fair value of the asset or asset group to its carrying value and the difference is recorded in the period that the impairment indicator occurs. Fair value is generally determined by considering (i) internally developed discounted projected cash flow analysis of the asset or asset group; (ii) actual third-party valuations and/or (iii) information available regarding the current market for similar assets. Estimating future cash flows requires significant judgment and projections may vary from the cash flows eventually realized, which could impact our ability to accurately assess whether an asset has been impaired.

The assessment of impairment indicators and the recoverability of our capitalized costs associated with landfills and related expansion projects require significant judgment due to the unique nature of the waste industry, the highly regulated permitting process and the sensitive estimates involved. During the review of a landfill expansion application, a regulator may initially deny the expansion application although the expansion permit is ultimately granted. In addition, management may periodically divert waste from one landfill to another to conserve remaining permitted landfill airspace, or a landfill may be required to cease accepting waste, prior to receipt of the expansion permit. However, such events occur in the ordinary course of business in the waste industry and do not necessarily result in impairment of our landfill assets because, after consideration of all facts, such events may not affect our belief that we will ultimately obtain the expansion permit. As a result, our tests of recoverability, which generally make use of a probability-weighted cash flow estimation approach, may indicate that no impairment loss should be recorded.

Indefinite-Lived Intangible Assets, Including Goodwill — At least annually, and more frequently if warranted, we assess the indefinite-lived intangible assets including the goodwill of our reporting units for impairment using Level 3 inputs.

We first performed a qualitative assessment to determine if it was more likely than not that the fair value of a reporting unit was less than its carrying value. If the assessment indicated a possible impairment, we completed a quantitative review, comparing the estimated fair value of a reporting unit to its carrying amount, including goodwill. An impairment charge was recognized if the asset’s estimated fair value was less than its carrying amount. Fair value is typically estimated using an income approach. However, when appropriate, we may also use a market approach. The income approach is based on the long-term projected future cash flows of the reporting units. We discount the estimated cash flows to present value using a weighted average cost of capital that considers factors such as market assumptions, the timing of the cash flows and the risks inherent in those cash flows. We believe that this approach is appropriate because it provides a fair value estimate based upon the reporting units’ expected long-term performance considering the economic and market conditions that generally affect our business. The market approach estimates fair value by measuring the aggregate market value of publicly-traded companies with similar characteristics to our business as a multiple of their reported earnings. We then apply that multiple to the reporting units’ earnings to estimate their fair values. We believe that this approach may also be appropriate in certain circumstances because it provides a fair value estimate using valuation inputs from entities with operations and economic characteristics comparable to our reporting units.

Fair value is computed using several factors, including projected future operating results, economic projections, anticipated future cash flows, comparable marketplace data and the cost of capital. There are inherent uncertainties related to these factors and to our judgment in applying them in our analysis. However, we believe our methodology for estimating the fair value of our reporting units is reasonable.

See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — (Gain) Loss from Divestitures, Asset Impairments and Unusual Items, Net and Note 6 to the Consolidated Financial Statements for information related to goodwill impairments recognized during the reported periods.

Insured and Self-Insured Claims

We have retained a significant portion of the risks related to our health and welfare, general liability, automobile liability and workers’ compensation claims programs. The exposure for unpaid claims and associated expenses, including incurred but not reported losses, are based on an actuarial valuations and internal estimates. The accruals for these liabilities

could be revised if future occurrences or loss developments significantly differ from our assumptions used. Estimated recoveries associated with our insured claims are recorded as assets when we believe that the receipt of such amounts is probable.

We use a wholly-owned insurance captive to insure the deductibles for our general liability, automobile liability and workers’ compensation claims programs. We continue to maintain conventional insurance policies with third-party insurers. In addition to certain business and operating benefits of having a wholly-owned insurance captive, we expect to receive certain cash flow benefits related to the timing of tax deductions related to these claims. WM will pay an annual premium to the insurance captive, typically in the first quarter of the year, for the estimated losses based on the external actuarial analysis. These premiums are held in a restricted escrow account to be used solely for paying insurance claims, resulting in a transfer of risk from WM to the insurance captive and are allocated between current and long-term assets in our Consolidated Balance Sheets depending on timing on the use of funds.

Off-Balance Sheet Arrangements

We have financial interests in unconsolidated variable interest entities as discussed in Note 19 to the Consolidated Financial Statements. Additionally, we are party to guarantee arrangements with unconsolidated entities as discussed in the Guarantees section of Note 11 to the Consolidated Financial Statements. These arrangements have not materially affected our financial position, results of operations or liquidity during the year ended December 31, 2019, nor are they expected to have a material impact on our future financial position, results of operations or liquidity.

Inflation

While inflationary increases in costs can affect our income from operations margins, we believe that inflation generally has not had, and in the near future is not expected to have, any material adverse effect on our results of operations. However, as of December 31, 2019, approximately 30% of our collection revenues are generated under long-term agreements with price adjustments based on various indices intended to measure inflation. 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.