SFAS 159.  In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115 (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 permits all entities to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”).  A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date.  Upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not deferred.  SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities.  SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007.  The Company is currently evaluating the impact this statement will have on its financial position and results of operations. 

 

3.	STOCK-BASED COMPENSATION

 

A summary of activity related to restricted stock and restricted stock units under the 2002 Restricted Stock Plan and the Second Amended and Restated 2004 Equity Incentive Plan at December 31, 2006, and changes during the three month period ended March 31, 2007, is presented below:

 

		Unvested Shares
Outstanding at December 31, 2006			568,940
Granted			399,356
Forfeited			(5,362	)
Vested			(148,279	)
Outstanding at March 31, 2007			814,655

 

The weighted average grant date fair value per share for the 399,356 shares of common stock underlying restricted stock units granted during the three month period ended March 31, 2007 was $28.91.  

 

4.	LANDFILL ACCOUNTING

 

At March 31, 2007, the Company owned 25 landfills, and operated, but did not own, three landfills under life-of-site operating agreements and eight landfills under limited-term operating agreements.  The Company’s landfills have site costs with a net book value of $439,013 at March 31, 2007.  With the exception of three owned landfills that only accept construction and demolition waste, all landfills that the Company owns or operates are municipal solid waste landfills.  For the Company’s eight landfills operated under limited-term operating agreements, the owner of the property (generally a municipality) usually owns the permit and is generally responsible for final capping, closure and post-closure obligations.  The Company is responsible for all final capping, closure and post-closure liabilities for the three landfills that it operates under life-of-site operating agreements. 

Many of the Company’s existing landfills have the potential for expanded disposal capacity beyond the amount currently permitted.  The Company’s internal and third-party engineers perform surveys at least annually to estimate the disposal capacity at its landfills.  The Company’s landfill depletion rates are based on the remaining disposal capacity, considering both permitted and expansion airspace, at its owned landfills and landfills operated under life-of-site operating agreements. The Company’s landfill depletion rates are based on the term of the operating agreement at its operated landfills that have capitalized expenditures.  Expansion airspace consists of additional disposal capacity being pursued through means of an expansion but is not actually permitted.  Expansion airspace that meets certain internal criteria is included in the estimate of total landfill airspace. 

 

Based on remaining permitted capacity as of March 31, 2007, and projected annual disposal volumes, the average remaining landfill life for the Company’s owned landfills and landfills operated under life-of-site operating agreements is approximately 52 years.  The Company is currently seeking to expand permitted capacity at five of its owned landfills and one landfill that it operates under a life-of-site operating agreement, and considers the achievement of these expansions to be probable.  Although the Company cannot be certain that all future expansions will be permitted as designed, the average remaining life, when considering remaining permitted capacity, probable expansion capacity and projected annual disposal volume, of the Company’s owned landfills and landfills operated under life-of-site operating agreements is 57 years, with lives ranging from 6 to 206 years. 

 

During the three months ended March 31, 2006 and 2007, the Company expensed approximately $4,506 and $4,505, respectively, or an average of $2.72 and $2.55 per ton consumed, respectively, related to landfill depletion. 

 

The Company reserves for final capping, closure and post-closure maintenance obligations at the landfills it owns and landfills it operates under life-of-site operating agreements.  The Company calculates the net present value of its final capping, closure and post-closure commitments recorded in 2007 assuming a 2.5% inflation rate and a 7.5% discount rate.  The resulting final capping, closure and post-closure obligation is recorded on the balance sheet as an addition to site costs and amortized to depletion expense as the landfill’s airspace is consumed.  Interest is accreted on the recorded liability using the corresponding discount rate.  During the three months ended March 31, 2006 and 2007, the Company expensed approximately $149 and $253, respectively, or an average of $0.09 and $0.14  per ton consumed, respectively, related to final capping, closure and post-closure accretion expense. 

 

The following is a reconciliation of the Company’s final capping, closure and post-closure liability balance from December 31, 2006 to March 31, 2007:

 

Final capping, closure and post-closure liability at December 31, 2006		$	11,638
Increase in final capping, closure and post-closure liability from changes in annual engineering cost estimates			1,218
Assumption of closure liabilities from acquisitions			2,181
Liabilities incurred			318
Accretion expense			253
Change in third party final capping, closure and post-closure liability			(702	)
Final capping, closure and post-closure liability at March 31, 2007		$	14,906

The Company performs its annual review of its engineering cost estimates in the first quarter of each year. 

The Company owns two landfills for which the prior owners are obligated to reimburse WCI for certain costs it incurs for final capping, closure and post-closure activities on the portion of the landfill utilized by the prior owners.  At December 31, 2006 and March 31, 2007, the Company has recorded on its balance sheet a receivable of $3,473 and $2,771, respectively, from the prior owners in long-term other assets and has accrued the prior owners’ portions of the final capping, closure and post-closure obligation, totaling $3,473 and $2,771, respectively, in other long-term liabilities. 

 

At March 31, 2007, $14,491 of the Company’s restricted assets balance was for purposes of settling future final capping, closure and post-closure liabilities. 

 

5.	LONG-TERM DEBT

 

Long-term debt consists of the following:

 

		December 31, 2006			March 31, 2007
Revolver under Credit Facility, bearing interest ranging from 6.20% to 8.25%*		$	400,000		$	400,000
2026 Senior Convertible Notes, bearing interest at 3.75%			200,000			200,000
2001 Wasco Bonds, bearing interest from 7.0% to 7.25%*			11,740			11,285
California Tax-Exempt Bonds, bearing interest ranging from 3.45% to 3.94%*			20,090			20,090
Notes payable to sellers in connection with acquisitions, bearing interest at 5.5% to 7.5%*			4,867			4,066
Notes payable to third parties, bearing interest at 5.1% to 11.0%*			7,495			8,120
			644,192			643,561
Less - current portion			(6,884	)		(7,098	)
		$	637,308		$	636,463

*  Interest rates in the table above represent the range of interest rates incurred during the three month period ended March 31, 2007. 

Comprehensive income includes changes in the fair value of interest rate swaps that qualify for hedge accounting.  The difference between net income and comprehensive income for the three months ended March 31, 2006 and 2007 is as follows:

 

		Three months ended
		March 31,
		2006			2007
Net income		$	15,723		$	22,380
Unrealized gain (loss) on interest rate swaps, net of tax expense (benefit) of $1,231 and $(873) for the three months ended March 31, 2006 and 2007, respectively			2,096			(1,416	)
Comprehensive income		$	17,819		$	20,964

 

The components of other comprehensive income and related tax effects for the three months ended March 31, 2006 and 2007 are as follows:

 

		Three months ended March 31, 2006
		Gross			Tax effect			Net of tax
Amounts reclassified into earnings		$	(1,238	)	$	(458	)	$	(780	)
Changes in fair value of interest rate swaps			4,565			1,689			2,876
		$	3,327		$	1,231		$	2,096
		Three months ended March 31, 2007
		Gross			Tax effect			Net of tax
Amounts reclassified into earnings		$	(1,421	)	$	(550	)	$	(871	)
Changes in fair value of interest rate swaps			(868	)		(323	)		(545	)
		$	(2,289	)	$	(873	)	$	(1,416	)

 

The estimated net amount of the existing unrealized gains as of March 31, 2007 (based on the interest rate yield curve at that date) included in accumulated other comprehensive income expected to be reclassified into pre-tax earnings within the next 12 months is $2,255.  The timing of actual amounts reclassified into earnings is dependent on future movements in interest rates. 

 

8.	INCOME TAXES

 

The Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), at the beginning of fiscal year 2007.  FIN 48 requires a company to evaluate whether the tax position taken by a company will more likely than not be sustained upon examination by the appropriate taxing authority.  It also provides guidance on how a company should measure the amount of benefit that the company is to recognize in its financial statements.  Under FIN 48, a company should also classify a liability for unrecognized tax benefits as current to the extent the company anticipates making a payment within one year.  As a result of the implementation of FIN 48, the changes to the Company’s reserve for uncertain tax positions was accounted for as a $2,898 adjustment to increase the beginning balance of retained earnings on the Company’s balance sheet.  At the beginning of 2007, the Company had approximately $6,702 of total gross unrecognized tax benefits.  Of this total, $2,618 (net of the federal benefit on state issues) represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in any future periods. 

The Company and its subsidiaries are subject to U.S. federal income tax as well as to income tax of multiple state jurisdictions.  The Company has concluded all U.S. federal income tax matters for years through 2002.  The 2004 U.S. federal income tax return is currently under examination by the Internal Revenue Service. All material state and local income tax matters have been concluded for years through 2001. 

 

The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense.  The Company had approximately $453 accrued for interest, net of tax, and no accrual for penalties at the beginning of fiscal year 2007.  The Company does not anticipate the total amount of unrecognized tax benefits will significantly change by December 31, 2007. 

 

During the three months ended March 31, 2007, the Company recorded adjustments to income tax expense resulting from the reconciliation of its current and deferred income tax liability accounts and changes to the geographical apportionment of state income taxes.  The net impact of these adjustments was a decrease in income tax expense of $363. 

 

9.	SHARE REPURCHASE PROGRAM

 

The Company’s Board of Directors has authorized a common stock repurchase program for the repurchase of up to $500,000 of common stock through December 31, 2008.  Under the program, stock repurchases may be made in the open market or in privately negotiated transactions from time to time at management’s discretion.  The timing and amounts of any repurchases will depend on many factors, including the Company’s capital structure, the market price of the common stock and overall market conditions.  During the three months ended March 31, 2006 and 2007, the Company repurchased 3,207,750 and 184,500 shares, respectively, of its common stock under this program at a cost of $80,586 and $5,282, respectively.  Additionally, as a result of the stock split, fractional shares equal to 3,040 whole shares were repurchased at a price of $132. As of March 31, 2007, the remaining maximum dollar value of shares available for purchase under the program is approximately $216,659. 

 

10.	STOCK SPLIT

 

On February 12, 2007, the Company announced that its Board of Directors had authorized a three-for-two stock split of its common stock, in the form of a 50% stock dividend, payable to stockholders of record as of February 27, 2007.  Shares resulting from the split were issued on March 13, 2007. In connection therewith, the Company transferred $227 from retained earnings to common stock, representing the par value of additional shares issued.  All share and per share amounts for all periods presented have been adjusted to reflect the stock split. 

 

11.	COMMITMENTS AND CONTINGENCIES

 

The Company’s subsidiary, High Desert Solid Waste Facility, Inc. (formerly known as Rhino Solid Waste, Inc.), owns undeveloped property in Chaparral, New Mexico, for which it sought a permit to operate a municipal solid waste landfill.  After a public hearing, the New Mexico Environment Department approved the permit for the facility on January 30, 2002.  Colonias Development Council (“CDC”), a nonprofit organization, opposed the permit at the public hearing and appealed the Department’s decision to the courts of New Mexico, primarily on the grounds that the Department failed to consider the social impact of the landfill on the community of Chaparral, and failed to consider regional planning issues.  On July 18, 2005, in Colonias Dev. Council v. Rhino Envtl. Servs., Inc. (In re Rhino Envtl. Servs.), 2005 NMSC 24, 117 P.3d 939, the New Mexico Supreme Court remanded the matter back to the Department to conduct a limited public hearing on certain evidence that CDC claims was wrongfully excluded from consideration by the hearing officer, and to allow the Department to reconsider the evidence already proffered concerning the impact of the landfill on the surrounding community’s quality of life.  The hearing has been rescheduled for June 19, 2007.  At March 31, 2007, the Company had $8,520 of capitalized expenditures related to this landfill development project.  If the Company is not ultimately issued a permit to operate the landfill, the Company will be required to expense in a future period the $8,520 of capitalized expenditures, less the recoverable value of the undeveloped property and other amounts recovered, which would likely have a material adverse effect on the Company’s reported income for that period. 

The Company opened a municipal solid waste landfill in Harper County, Kansas in January 2006, following the issuance by the Kansas Department of Health and Environment (“KDHE”) of a final permit to operate the landfill.  On October 3, 2005, landfill opponents filed a suit (Board of Commissioners of Sumner County, Kansas, Tri-County Concerned Citizens and Dalton Holland v. Roderick Bremby, Secretary of the Kansas Department of Health and Environment, et al.) in the District Court of Shawnee County, Kansas (Case No. 05-C-1264), seeking a judicial review of the order, alleging that a site analysis prepared for the Company and submitted to the KDHE as part of the process leading to the issuance of the permit was deficient in several respects.  The action sought to stay the effectiveness of the permit and to nullify it. On April 7, 2006, the District Court issued an order denying the plaintiffs’ request for judicial review on the grounds that they lack standing to bring the action.  The plaintiffs have appealed this decision to the Kansas Court of Appeals, and the oral arguments have been scheduled for June 7, 2007.  While the Company believes that it will prevail in this case, a final adverse determination with respect to the permit would likely have a material adverse effect on the Company’s reported income in the future. 

 

Resourceful Environmental Services, Inc. (“RES”) filed a complaint alleging that Waste Connections, Inc. and Waste Connections of Mississippi, LLC misrepresented their intention concerning the potential purchase of RES (Resourceful Environmental Services, Inc. v. Waste Connections, et al., filed on December 31, 2002 in the Circuit Court of Tippah County, Mississippi, Case No. T-02-308).  Plaintiff is seeking compensatory damages of $400, and punitive damages of $50,000.  A trial is scheduled for June 4, 2007.  The Company believes that this case is without merit.  The Company has not established a reserve for this case, and it has no insurance coverage in the event of recovery by the plaintiff.  An adverse determination in this case, coupled with a significant damage award to the plaintiff, could have an adverse effect on the Company’s reported income in the period incurred. 

 

On October 25, 2006, a purported shareholder derivative complaint was filed in the United States District Court for the Eastern District of California, naming certain of the Company’s directors and officers as defendants, and naming the Company as a nominal defendant.  The suit, captioned Travis v. Mittelstaedt, et al., alleges violations of various federal and California securities laws, breach of fiduciary duty, and related claims in connection with the timing of certain stock option grants.  On October 30, 2006, the Company was served with another purported shareholder derivative complaint, naming the Company as a nominal defendant and naming certain of the Company’s current and former directors and officers as defendants.  The suit, captioned Nichols v. Mittelstaedt et al. and filed in the Superior Court of California, County of Sacramento, contains allegations substantially similar to the Travis suit.  On January 30, 2007, a third purported derivative action was filed in the same federal court as the Travis case.  This case is captioned Pierce and Banister v. Mittelstaedt et al., and is substantively identical to the Travis case but also alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.  The Travis and Pierce and Banister cases have been consolidated, and the plaintiffs were given until April 23, 2007, to file an amended consolidated complaint.  On April 3, 2007, a fourth purported derivative action, captioned Priest v. Mittelstaedt et al., was filed in the Superior Court of California, County of Sacramento, and contains allegations substantially similar to the Travis and Nichols suits.  As is typical in this type of litigation, additional suits containing substantially similar allegations may be filed in the future.  The lawsuits are in the preliminary stages, and the Company and the individual defendants have yet to respond to any of the operative complaints.  The Company has completed a review of its historical stock option granting practices, including all option grants since its initial public offering in May 1998, and reported the results of the review to the Audit Committee of its Board of Directors.  The review identified a small number of immaterial exceptions to non-cash compensation expense attributable to administrative and clerical errors.  These exceptions are not material to the Company’s current and historical financial statements, and the Audit Committee concluded that no further action was necessary.  As with any litigation proceeding, the Company cannot predict with certainty the eventual outcome of this pending litigation.