Republic Services (RSG)

Allied Waste Industries (NYSE: AW) is the second largest trash company in the United States. The company operates a network of 161 transfer stations, 168 active landfills, and 57 recycling facilities located in throughout the U.S. and Puerto Rico. ^[1]. Because Allied picks up the majority of its waste directly from customers, sorts it in Allied transfer stations, and then deposits the waste in Allied Waste landfills, the company is able to avoid paying fees to use other waste management companies’ facilities. More than 70% of the waste picked up by Allied Waste is deposited in company-owned landfills^[2].

The company has a heavy debt burden and spends nearly 60% of operating income on interest and other related expenses^[3]. As a result the company is particularly vulnerable to swings in interest rates.

Business Financials

In FY 2006, Allied's revenue grew 6.7% to $6.028 billion; up from a 4% revenue increase during the previous year^[4]. A stable market and increasingly favorable pricing contributed to consistent revenue growth over the last 3 years years^[5]. In 2006, revenue grew 6.7%, but an increase in income tax expenditures resulted in a decrease in net income compared to FY 2005. The company's operating margin in FY 2006 was 16.4%^[6].

Key Trends and Forces

• Government Regulation - The waste management industry is tightly regulated by the Environmental Protection Agency (EPA), in addition to other federal, state, and local agencies. Waste management operations vary widely from market to market, and depending on the government level of the regulating agency, new regulations can significantly impact Allied's revenue (i.e. changes to landfill regulation in California won't impact revenue as much as if the EPA were to change landfill regulations for the entire country). Violating governmental regulations can carry stiff penalties and fines plus the cost of cleanup of any hazardous materials. Possible future legislation governing interstate shipments of waste would force an industry-wide shift in waste disposal strategy^[9].

• Interest Rates - Allied Waste currently carries ~$7 billion in debt. Swings in interest rates can dramatically impact the amount that Allied has to spend to service its debt.^[10].

• Oil Prices - Approximately 50% of all waste deposited in Allied's landfills is brought by Allied-owned collection companies. The fleet of collection vehicles, transfer trucks, and landfill machinery are dependent on fuel bought at open market prices, thus subject to the fluctuations of the oil market. Large swings in oil prices can dramatically affect Allied's bottom line^[11].

• Waste Generation and Landfill Shortages - In the last decade, the amount of waste generated in the United States has increased by more than 17%^[12], while the total number of active landfills has decreased by more than 43%^[13]. Offsetting this disparity, in the last sixteen years, the amount of material recovery (recycling) has increased 18%^[14]. The landfill permitting process has become so extensive that the current trend of landfill capacity decreasing while waste generation increases is expected to continue for the foreseeable future. Expecting landfill and waste generation trends continue, the main variable is recycling and examining how an increase/decrease would affect Allied Waste.

• Outstanding IRS Cases - The IRS is examining two tax issues - income tax audit of an acquired company during the years leading up to the buyout (1996-1999), and an exchange of partnership interests (2002). Losing these two cases would result in a combined loss of more than $470 million^[15].

• Labor Unions - 29% of Allied's 24,000+ employees are members of a labor union. The company has no history of labor disputes and no pending conflicts, but as Waste Connections (WCN) demonstrated in December of 2007, the potential for work-stoppages is quite real^[16].

Competition

Allied Waste is the second largest waste management company in the United States (based on revenue). Its main corporate competitors are Waste Management (WMI) and Republic Services (RSG). Additional smaller competitors exist in individual markets, such as Waste Connections (WCN) in the Southern and Western United States, and certain counties operate their own municipal waste management systems.

Waste Management (WMI) offers a broader range of services and products including: hazardous waste landfills and disposal, renewable energy harvested from its landfills (natural gas), and other alternative energy options^[17].

Republic Services (RSG) is the smallest of the three companies with the least overall market penetration and the fewest facilities ^[18]

	Waste Management (WMI)[19]	Allied Waste (AW)[20]	Republic Services (RSG)[21]
Collection Companies	413	304	135
Active Landfills (Non-active)	283 (187)	168 (112)	59 (NA)
Transfer Stations	370	161	93
Recycling Facilities	131	57	33
Revenue - FY 2006 ($ mil)	$13,363	$6,028.8	$3,070.6

Waste collection operations for each company are carried out by an alliance of subsidiary "collection companies" that are responsible only for the collection phase of the waste management process^[22].

Market Share

The waste management industry is split between publicly-traded companies, municipal services, and privately-held companies; publicly-traded companies generate 60% of the industry's overall revenue. Local regulations concerning waste management vary widely from place to place and as such, Allied Waste and its competitors must tailor its services to the specific needs and regulations in each market. The best indicator of overall market share available is the approximate number of customers served.

	Waste Management (WMI)[23]	Allied Waste (AW)[24]	Republic Services (RSG)[25]
Customers Served (approx. million)	21	10	5.5

Notes

1. ↑ AW 2006 10-K, Item 1: Business, page 1
2. ↑ AW 2006 10-K, Item 1: Business, page 1
3. ↑ AW 2006 10-K, Item 7: Executive Summary, page 26
4. ↑ AW 2006 10-K, Item 7: Results of Operations, page 26
5. ↑ AW 2006 10-K, Item 7: Results of Operations, page 24
6. ↑ AW 2006 10-K, Item 7: Results of Operations, page 24
7. ↑ AW 2006 10-K, Item 7: Executive Summary, page 26
8. ↑ AW 2006 10-K, Item 7: Executive Summary, page 26
9. ↑ AW 2006 10-K, Item 1A: Risk Factors, page 12
10. ↑ AW 2006 10-K, Item 7: Executive Summary, page 25
11. ↑ AW 2006 10-K, Item 1A: Risk Factors, page 11
12. ↑ EPA MSW 2006, Figure 1, page 1
13. ↑ EPA MSW 2006, Figure 7, page 8
14. ↑ EPA MSW 2006, Table 3, page 9
15. ↑ AW 2006 10-K, Item 1A: Risk Factors, page 10
16. ↑ AW 2006 10-K, Item 1A: Risk Factors, page 11
17. ↑ WMI Website, Overview
18. ↑ RSG Website, Overview
19. ↑ WMI Website, Overview
20. ↑ AW 2006 10-K, Item 1: Business, page 1
21. ↑ RSG Website, Overview
22. ↑ Allied Waste Subsidiaries
23. ↑ WMI Website, Overview
24. ↑ AW Website, Overview
25. ↑ RSG Website, Overview

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