AR September 2006

It has been the talk of the solid waste industry for the past year. Now talk is turning into action with solid waste companies starting to raise landfill prices.

What is the competition going to do? That is the question that everyone was watching according to John Skinner, executive director and chief executive officer of the Solid Waste Association of North America, based in Silver Spring, Maryland.

Houston-based Waste Management Inc. started raising landfill prices and then other solid waste companies followed by increasing landfill prices by two to three percent above fuel surcharges that were already in place, Skinner said. “All of the companies now are looking at price increases, pretty much across the country.”

Solid waste companies in aggregate are reporting price growth from the landfill part of the business in the three to four percent range, said Corey Greendale, an analyst with First Analysis Corp. in Chicago. The major companies are all taking part. “It’s something they have been talking about for awhile. It seems to actually be coming to fruition now,” Greendale said. But the increases vary a lot throughout the country, with some raising landfill prices in the upper single digits or even low double digits.

Landfills are an important part of the business at the major companies, but it is not the largest portion of revenue, Greendale said. “The benefit comes in the long run as it pushes landfill prices out into the market,” Greendale said. “That’s another higher cost that the smaller independent and the competition are having to face along with higher fuel costs and higher interest rates.” Often this translates into higher collection prices.

Greendale said that he expects higher landfill prices to stick. The three biggest companies, Waste Management, Phoenix-based Allied Waste Industries Inc., and Fort Lauderdale-based Republic Services Inc., control two-thirds of the landfill capacity in the United States. “If they’re moving on price, you already got a big portion of the market moving,” Greendale said. “With fuel costs going up, everyone is used to kind of an inflationary cost environment right now. I think the goal is to pass it along to customers.”

Greendale said tipping fees have been flat for a long time. “You can’t raise prices by some ridiculous amount. But as long as you are in that mid-single digit range, the companies are not seeing a lot of loss of volume as the result of raising prices.”

Increases in asset swaps across the solid waste industry has lead to more major waste haulers owning landfills closer to their own routes, said Stewart Scharf, an analyst with Standard & Poor’s in New York. “With other smaller players needing to dispose their waste at a reasonable distance, landfill pricing is beginning to pick up, so to speak.”

Republic Services has recently raised its landfill prices an average of five to seven percent in Michigan and Colorado. “The company is focusing a lot more now on landfill pricing and has been aggressive in leading the disposal market in these states,” Scharf said. Higher prices will be further out in some other markets due to contractual relationships with landfills. “Although I believe it will be a gradual process, landfill pricing is a trend likely to gain momentum over the next two years,” Scharf said.

Republic Services reported an 8.5 percent increase in revenue in the second quarter ended June 30, 2006. The increase consisted of 4.9 percent from price and 3.6 percent from volume. Revenue totaled $779.8 million compared to $718.6 million last year. Net income totaled $70.8 million compared to $64.4 million last year.

Allied Waste reported second quarter revenue of $1.54 billion, up from $1.4 billion. Net income during the second quarter totaled $28 million compared to $39 million last year. Refinancing costs impacted net income in the latest quarter.

Waste Management reported revenue of $3.41 billion compared to $3.29 billion last year. Net income totaled $417 million compared to $527 million last year. Waste Management reported that several one-time items impacted last year’s net income.

Price growth was strong at all the companies, said Leone Young, an analyst with Citigroup Inc. in New York. Young credited a solid economic environment.

“We remain positive on the solid waste industry, given the late-cycle, defensive nature of the business,” Young said in a report. “Despite another increase in fuel costs, which have continued to drive fuel surcharges, we are hearing that industry players, both public and private, are continuing to push through core pricing as well, and that pricing discipline remains intact, with the majors harder to play off each other,” Young said.

“With regard to landfill pricing, we are hearing of a number of initiatives to raise it in various marketplaces. That it is still sporadic, with imperfect results, does not disturb us; we are just happy to see the attempts being made. This is how collection pricing began, and we believe the trend and consistency will strengthen over time.”

Pricing initiatives by independents are likely to be less sophisticated and more ad hoc than at the majors, making it far less likely for smaller companies to take market share, Young said. “For the second quarter in a row, we are starting to hear the independents complain about rising tip fee costs, which is music to our ears.”

While beneficial to the major waste haulers, higher landfill prices may hurt independents and municipalities. “From a perspective of the customers of those firms, it may not be a good thing, because they may see significant price increases. That is the type of thing that our members are concerned about,” Skinner, of SWANA, said.

Skinner recommended that members look for long-term contracts with a clear indication of what the price is going to be over the long term. Skinner said consumer price index escalators or fuel surcharges are fine. “But you should pin down what you’re going to pay over the long term. You shouldn’t have price be open ended,” Skinner said.

The second option is to own a transfer station. “Then you can ship elsewhere if you need to. If you have a privately owned transfer station shipping to a privately owned landfill, your options are reduced. If you have a publicly owned transfer station that can ship to any landfill, there is competition in the marketplace,” Skinner said.

Third, it is important to keep municipal landfills open and operating, Skinner said. “It may not have the capacity you need over the long term, but it provides a short-term alternative. One good competitor in the market will keep the market in check.”