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EX-32.2 - EXHIBIT 32.2 - REPUBLIC SERVICES, INC.rsgex32233118.htm
EX-32.1 - EXHIBIT 32.1 - REPUBLIC SERVICES, INC.rsgex32133118.htm
EX-31.2 - EXHIBIT 31.2 - REPUBLIC SERVICES, INC.rsgex31233118.htm
EX-31.1 - EXHIBIT 31.1 - REPUBLIC SERVICES, INC.rsgex31133118.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________ 
FORM 10-Q
 _________________________________________________________
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                     
Commission File Number: 1-14267
_________________________________________________________ 
REPUBLIC SERVICES, INC.
(Exact name of registrant as specified in its charter)
_________________________________________________________ 
DELAWARE
65-0716904
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
18500 NORTH ALLIED WAY
PHOENIX, ARIZONA
85054
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code: (480) 627-2700
_________________________________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ¨
Smaller reporting company ¨
 
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Emerging growth company ¨
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ
As of April 25, 2018, the registrant had outstanding 327,929,282 shares of Common Stock, par value $0.01 per share (excluding treasury shares of 23,222,056).



REPUBLIC SERVICES, INC.
INDEX
 
 
Item 1.
 
Consolidated Balance Sheets as of March 31, 2018 (Unaudited) and December 31, 2017
 
Unaudited Consolidated Statements of Income for the Three Months Ended March 31, 2018 and 2017
 
Unaudited Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2018 and 2017
 
Unaudited Consolidated Statement of Stockholders' Equity for the Three Months Ended March 31, 2018
 
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017
 
Item 2.
Item 3.
Item 4.
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 

2


PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

REPUBLIC SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
 
March 31,
2018
 
December 31,
2017
 
(Unaudited)
 
 
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
62.6

 
$
83.3

Accounts receivable, less allowance for doubtful accounts and other of $32.7 and $38.9, respectively
1,052.2

 
1,105.9

Prepaid expenses and other current assets
239.2

 
247.6

Total current assets
1,354.0

 
1,436.8

Restricted cash and marketable securities
116.3

 
141.1

Property and equipment, net
7,783.1

 
7,777.4

Goodwill
11,329.1

 
11,315.4

Other intangible assets, net
121.3

 
141.1

Other assets
404.9

 
335.2

Total assets
$
21,108.7

 
$
21,147.0

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
572.4

 
$
598.1

Notes payable and current maturities of long-term debt
707.0

 
706.7

Deferred revenue
341.5

 
312.1

Accrued landfill and environmental costs, current portion
140.4

 
135.2

Accrued interest
76.2

 
74.5

Other accrued liabilities
722.7

 
808.2

Total current liabilities
2,560.2

 
2,634.8

Long-term debt, net of current maturities
7,499.7

 
7,480.7

Accrued landfill and environmental costs, net of current portion
1,700.4

 
1,686.5

Deferred income taxes and other long-term tax liabilities, net
836.5

 
796.4

Insurance reserves, net of current portion
274.1

 
275.4

Other long-term liabilities
323.5

 
312.1

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Preferred stock, par value $0.01 per share; 50 shares authorized; none issued

 

Common stock, par value $0.01 per share; 750 shares authorized; 351.1 and 350.1 issued including shares held in treasury, respectively
3.5

 
3.5

Additional paid-in capital
4,871.6

 
4,839.6

Retained earnings
4,309.3

 
4,152.5

Treasury stock, at cost; 22.5 and 18.4 shares, respectively
(1,314.3
)
 
(1,059.4
)
Accumulated other comprehensive income, net of tax
41.7

 
22.6

Total Republic Services, Inc. stockholders’ equity
7,911.8

 
7,958.8

Noncontrolling interests in consolidated subsidiary
2.5

 
2.3

Total stockholders’ equity
7,914.3

 
7,961.1

Total liabilities and stockholders’ equity
$
21,108.7

 
$
21,147.0

The accompanying notes are an integral part of these statements.

3


REPUBLIC SERVICES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share data)
 
 
Three Months Ended March 31,
 
2018
 
2017
Revenue
$
2,427.5

 
$
2,392.8

Expenses:
 
 
 
Cost of operations
1,469.8

 
1,484.1

Depreciation, amortization and depletion
263.1

 
249.9

Accretion
20.4

 
20.0

Selling, general and administrative
261.2

 
253.5

Withdrawal costs - multiemployer pension funds

 
1.1

Gain on disposition of assets and asset impairments, net
(0.7
)
 
(8.3
)
Restructuring charges
9.5

 
4.4

Operating income
404.2

 
388.1

Interest expense
(94.8
)
 
(89.4
)
Loss from unconsolidated equity method investment

 
(2.9
)
Interest income
0.2

 
0.3

Other income, net
1.0

 
0.1

Income before income taxes
310.6

 
296.2

Provision for income taxes
72.7

 
108.4

Net income
237.9

 
187.8

Net income attributable to noncontrolling interests in consolidated subsidiary
(0.2
)
 

Net income attributable to Republic Services, Inc.
$
237.7

 
$
187.8

Basic earnings per share attributable to Republic Services, Inc. stockholders:
 
 
 
Basic earnings per share
$
0.72

 
$
0.55

Weighted average common shares outstanding
330.7

 
339.9

Diluted earnings per share attributable to Republic Services, Inc. stockholders:
 
 
 
Diluted earnings per share
$
0.72

 
$
0.55

Weighted average common and common equivalent shares outstanding
332.2

 
341.9

Cash dividends per common share
$
0.345

 
$
0.320

The accompanying notes are an integral part of these statements.


4


REPUBLIC SERVICES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
 
 
Three Months Ended March 31,
 
2018
 
2017
Net income
$
237.9

 
$
187.8

Other comprehensive income (loss), net of tax
 
 
 
Hedging activity:
 
 
 
Settlements
0.6

 
(1.0
)
Realized losses (gains) reclassified into earnings
(0.2
)
 
1.4

Unrealized (losses) gains
18.7

 
(1.1
)
Other comprehensive income (loss), net of tax
19.1

 
(0.7
)
Comprehensive income
257.0

 
187.1

Comprehensive income attributable to noncontrolling interests
(0.2
)
 

Comprehensive income attributable to Republic Services, Inc.
$
256.8

 
$
187.1

The accompanying notes are an integral part of these statements.


5


REPUBLIC SERVICES, INC.
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in millions)
 
 
Republic Services, Inc. Stockholders’ Equity
 
 
 
 
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Treasury Stock
 
Accumulated Other Comprehensive Income, Net of Tax
 
Noncontrolling
Interests In Consolidated Subsidiary
 
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
 
 
Total
Balance as of December 31, 2017
350.1

 
$
3.5

 
$
4,839.6

 
$
4,152.5

 
(18.4
)
 
$
(1,059.4
)
 
$
22.6

 
$
2.3

 
$
7,961.1

Adoption of accounting standard

 

 

 
33.4

 

 

 

 

 
33.4

Net income

 

 

 
237.7

 

 

 

 
0.2

 
237.9

Other comprehensive income

 

 

 

 

 

 
19.1

 

 
19.1

Cash dividends declared

 

 

 
(113.3
)
 

 

 

 

 
(113.3
)
Issuances of common stock
1.0

 

 
20.6

 

 
(0.3
)
 
(19.3
)
 

 

 
1.3

Stock-based compensation

 

 
11.4

 
(1.0
)
 

 

 

 

 
10.4

Purchase of common stock for treasury

 

 

 

 
(3.8
)
 
(235.6
)
 

 

 
(235.6
)
Balance as of March 31, 2018
351.1

 
$
3.5

 
$
4,871.6

 
$
4,309.3

 
(22.5
)
 
$
(1,314.3
)
 
$
41.7

 
$
2.5

 
$
7,914.3

The accompanying notes are an integral part of these statements.


6


REPUBLIC SERVICES, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)

 
Three Months Ended March 31,
 
2018
 
2017
Cash provided by operating activities:
 
 
 
Net income
$
237.9

 
$
187.8

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation, amortization, depletion and accretion
283.5

 
269.9

Non-cash interest expense
10.9

 
10.9

Restructuring related charges
9.5

 
4.4

Stock-based compensation
11.1

 
9.6

Deferred tax provision
25.3

 
8.7

Provision for doubtful accounts, net of adjustments
6.8

 
5.4

Gain on disposition of assets and asset impairments, net
(0.8
)
 
(9.0
)
Withdrawal costs - multiemployer pension funds

 
1.1

Environmental adjustments
1.4

 

Loss from unconsolidated equity method investment

 
2.9

Other non-cash items
0.5

 
1.3

Change in assets and liabilities, net of effects from business acquisitions and divestitures:
 
 
 
Accounts receivable
47.5

 
(26.1
)
Prepaid expenses and other assets
4.4

 
33.1

Accounts payable
(3.2
)
 
(18.2
)
Restructuring expenditures
(8.4
)
 
(5.5
)
Capping, closure and post-closure expenditures
(7.3
)
 
(9.7
)
Remediation expenditures
(11.2
)
 
(11.3
)
Other liabilities
(26.5
)
 
(10.9
)
Cash provided by operating activities
581.4

 
444.4

Cash used in investing activities:
 
 
 
Purchases of property and equipment
(263.3
)
 
(223.9
)
Proceeds from sales of property and equipment
3.6

 
1.3

Cash used in business acquisitions and investments, net of cash acquired
(19.1
)
 
(54.7
)
Cash received from (used in) business divestitures
1.1

 
(14.5
)
Purchases of restricted marketable securities
(30.2
)
 
(2.9
)
Sales of restricted marketable securities
30.4

 
2.8

Other
0.8

 
0.6

Cash used in investing activities
(276.7
)
 
(291.3
)
Cash used in financing activities:
 
 
 
Proceeds from notes payable and long-term debt
1,093.9

 
1,085.3

Payments of notes payable and long-term debt
(1,073.4
)
 
(1,076.2
)
Issuances of common stock
1.3

 
13.5

Purchases of common stock for treasury
(254.5
)
 
(98.9
)
Cash dividends paid
(114.4
)
 
(108.6
)
Other
(2.5
)
 
(2.1
)
Cash used in financing activities
(349.6
)
 
(187.0
)
(Decrease) increase in cash, cash equivalents, restricted cash and restricted cash equivalents
(44.9
)
 
(33.9
)
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of year
179.1

 
113.0

Cash, cash equivalents, restricted cash and restricted cash equivalents at end of period
$
134.2

 
$
79.1

The accompanying notes are an integral part of these statements.


7


REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION
Republic Services, Inc., a Delaware corporation, and its consolidated subsidiaries (also referred to collectively as "Republic", "the Company", "we", "us", or "our"), is the second largest provider of non-hazardous solid waste collection, transfer, recycling, disposal and energy services in the United States, as measured by revenue. We manage and evaluate our operations through two field groups, Group 1 and Group 2, which we have identified as our reportable segments.
The unaudited consolidated financial statements include the accounts of Republic and its wholly owned and majority owned subsidiaries in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). We account for investments in entities in which we do not have a controlling financial interest under either the equity method or cost method of accounting, as appropriate. All material intercompany accounts and transactions have been eliminated in consolidation.
We have prepared these unaudited consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information related to our organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP has been condensed or omitted. In the opinion of management, these financial statements include all adjustments that, unless otherwise disclosed, are of a normal recurring nature and necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented. Operating results for interim periods are not necessarily indicative of the results you can expect for a full year. You should read these financial statements in conjunction with our audited consolidated financial statements and notes thereto appearing in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
For comparative purposes, certain prior year amounts have been reclassified to conform to the current year presentation. All dollar amounts in tabular presentations are in millions, except per share amounts and unless otherwise noted.
Management’s Estimates and Assumptions
In preparing our financial statements, we make numerous estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. We must make these estimates and assumptions because certain information we use is dependent on future events, cannot be calculated with a high degree of precision from data available or simply cannot be readily calculated based on generally accepted methodologies. In preparing our financial statements, the more critical and subjective areas that deal with the greatest amount of uncertainty relate to our accounting for our long-lived assets, including recoverability, landfill development costs, and final capping, closure and post-closure costs; our valuation allowances for accounts receivable and deferred tax assets; our liabilities for potential litigation, claims and assessments; our liabilities for environmental remediation, multiemployer pension funds, employee benefit plans, deferred taxes, uncertain tax positions, and insurance reserves; and our estimates of the fair values of assets acquired and liabilities assumed in any acquisition. Each of these items is discussed in more detail in our description of our significant accounting policies in Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. Our actual results may differ significantly from our estimates.
New Accounting Pronouncements
Accounting Standards Adopted
During 2018, we adopted the following accounting standard updates ("ASUs") as issued by the Financial Accounting Standard Board ("FASB"):
ASU
 
Effective Date
ASU 2014-09
Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contracts with Customers (Subtopic 340-40)
January 1, 2018
ASU 2016-15
Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments
January 1, 2018
ASU 2016-18
Statement of Cash Flows (Topic 230) - Restricted Cash
January 1, 2018
ASU 2017-01
Business Combinations (Topic 805) - Clarifying the Definition of Business
January 1, 2018
ASU 2017-07
Compensation - Retirement Benefits (Topic 715) - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
January 1, 2018
ASU 2017-09
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
January 1, 2018


8

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


Revenue Recognition
Effective January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contracts with Customers (Subtopic 340-40) ("ASU 2014-09" or the "new revenue recognition standard") using the modified retrospective approach. We recognized the cumulative-effect of adopting the new revenue recognition standard as an adjustment to the beginning balance of Retained Earnings as of the date of adoption. The comparative periods have not been restated and continue to be reported under the accounting standards in effect for those periods. The timing and pattern of revenue recognition has not significantly changed under the new revenue recognition standard, nor has there been a material change to our operating or net income.
Under ASU 2014-09, we record revenue when control is transferred to the customer, generally at the time we provide a service. While the timing and pattern of revenue recognition remains unchanged, we identified certain consideration payable to our customers that is now recorded as a reduction of revenue in accordance with Topic 606. These costs were historically recorded as a component of cost of operations and include:
payments issued to our municipal customers in accordance with our residential collection contracts,
payments issued to our municipal customers in accordance with certain landfill operating agreements, and
commodity rebates and processing fees paid to customers in our collection and recycling lines of business.
Historically, we also recognized certain upfront payments to acquire customer contracts as other assets in our consolidated balance sheet and amortized the asset as a component of depreciation, amortization and depletion over the respective contract life. In accordance with Topic 606, we now amortize the asset as a reduction of revenue. The timing and pattern of recognizing these payments to our customers have not significantly changed under the new revenue recognition standard.
In addition, we historically recognized sales commissions as a component of selling, general and administrative expenses as they were incurred. In accordance with the new revenue recognition standard, we identified certain sales commissions that represent an incremental cost of the contract and should be capitalized and amortized to selling, general and administrative expense over the average life of the customer relationship.
The cumulative effect of the changes made to our consolidated balance sheet for the adoption of ASU 2014-09 were as follows:
 
Balance at
December 31, 2017
 
Adjustments
due to
ASU 2014-09
 
Balance at
January 1,
2018
Balance Sheet
 
 
 
 
 
Assets
 
 
 
 
 
Other assets
$
335.2

 
$
43.8

 
$
379.0

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Deferred income taxes and other long-term tax liabilities, net
$
796.4

 
$
10.4

 
$
806.8

 
 
 
 
 
 
Equity
 
 
 
 
 
Retained earnings
$
4,152.5

 
$
33.4

 
$
4,185.9


9

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


The impact of our adoption of the new revenue recognition standard on our consolidated income statement and balance sheet was as follows:
 
For the three months ended March 31, 2018
 
As Reported
 
Effect of Change
Higher / (Lower)
 
As Computed Excluding the Adoption of
ASU 2014-09
Income Statement
 
 
 
 
 
Revenue
$
2,427.5

 
$
86.7

 
$
2,514.2

Expenses:
 
 
 
 
 
Cost of operations
$
1,469.8

 
$
85.3

 
$
1,555.1

Depreciation, amortization and depletion
$
263.1

 
$
1.4

 
$
264.5

Selling, general and administrative
$
261.2

 
$
0.5

 
$
261.7

Operating income
$
404.2

 
$
(0.5
)
 
$
403.7

 
As of March 31, 2018
 
As Reported
 
Effect of Change
Higher / (Lower)
 
As Computed Excluding the Adoption of
ASU 2014-09
Balance Sheet
 
 
 
 
 
Assets
 
 
 
 
 
Other assets
$
404.9

 
$
(44.3
)
 
$
360.6

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Deferred income taxes and other long-term tax liabilities, net
$
836.5

 
$
(10.4
)
 
$
826.1

 
 
 
 
 
 
Equity
 
 
 
 
 
Retained earnings
$
4,309.3

 
$
(33.9
)
 
$
4,275.4

Statement of Cash flows
Effective January 1, 2018 we adopted ASU 2016-15, Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15") using a retrospective approach to each period presented. In accordance with the standard, we recognize contingent consideration and holdbacks paid within three months of an acquisition's consummation date as cash outflows from investing activities in the statement of cash flows. Payments made thereafter are recognized as cash outflows from financing activities in the statement of cash flows. As the requirements of the standard do not significantly differ from our previous accounting policy, our adoption of this guidance did not have a material impact on our consolidated financial statements.
Effective January 1, 2018 we adopted ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash ("ASU 2016-18") using a retrospective approach to each period presented. As a result of our adoption of the standard, restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Consequently, we reclassified the $0.7 million change in restricted cash and restricted cash equivalents from cash used in investing activities for the three months ended March 31, 2017.
Beginning-of-period and end-of-period cash, cash equivalents, restricted cash and restricted cash equivalents as presented in the statement of cash flows is reconciled as follows:
 
 
March 31, 2018
 
December 31, 2017
 
March 31, 2017
 
December 31, 2016
Cash and cash equivalents
 
$
62.6

 
$
83.3

 
$
33.2

 
$
67.8

Restricted cash and marketable securities
 
116.3

 
141.1

 
90.8

 
90.5

Less: restricted marketable securities
 
(44.7
)
 
(45.3
)
 
(44.9
)
 
(45.3
)
Cash, cash equivalents, restricted cash and restricted cash equivalents
 
$
134.2

 
$
179.1

 
$
79.1

 
$
113.0


10

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


Business Combinations
Effective January 1, 2018 we adopted ASU 2017-01, Business Combinations (Topic 805) - Clarifying the Definition of Business ("ASU 2017-01"), which assists entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 provides a screen that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen is not met, the entity then evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. The guidance prescribed by ASU 2017-01 will be applied prospectively to relevant transactions on or after the adoption date and did not have a material impact on the acquisitions accounted for as a business combination during the three months ended March 31, 2018.
Retirement Benefits
Effective January 1, 2018 we adopted ASU 2017-07, Compensation - Retirement Benefits (Topic 715) - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost ("ASU 2017-07") which requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented.
As our pension plan is frozen, we do not have service costs that qualify for the treatment prescribed by ASU 2017-07. Subsequent to the adoption of ASU 2017-07, net benefit costs (income) are reported in other income. Our adoption of ASU 2017-07 did not have a material impact on our consolidated financial statements for the three months ended March 31, 2018 and 2017.
Stock Compensation
Effective January 1, 2018, we adopted ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting ("ASU 2017-09"), which provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. ASU 2017-09 does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the changes are considered non-substantive. The adoption of ASU 2017-09 did not have a material impact on our consolidated financial statements for the three months ended March 31, 2018.
Accounting Standards Issued but not yet Adopted
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"), which increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 requires lessees to recognize lease assets and liabilities for most leases classified as operating leases under previous U.S. GAAP. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. As such, Republic will adopt the standard beginning January 1, 2019.
As we progress to adopt the standard, we continually monitor clarifying interpretations. In January 2018, the FASB issued Proposed Accounting Standards Update, Leases (Topic 842): Targeted Improvements, which proposed amending the guidance to add a method of adoption whereby the issuer may elect to recognize a cumulative-effect adjustment at the beginning of the period of adoption. We currently plan to adopt the standard under this proposed method in the event it is approved by the FASB. The comment deadline for the Exposure Draft was February 5, 2018, and a final decision is pending.
Under ASU 2016-02, we will recognize a right-of-use asset and a right-of-use liability for leases classified as operating leases in our consolidated balance sheet. We continue to assess the overall impact to our consolidated financial statements, however, we currently plan to apply the package of practical expedients to leases that commenced before the effective date whereby we will elect to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases.
We are assessing the disclosure requirements under ASU 2016-02, and we anticipate disclosing additional information, as necessary, to comply with the standard. To assist in quantifying the impact on our consolidated financial statements and supplementing our existing disclosures, we are in the process of implementing a software solution to manage and account for our leases.

11

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


Derivatives and Hedging
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"). ASU 2017-12 intends to address concerns through changes to hedge accounting guidance which will accomplish the following: a) Expand hedge accounting for nonfinancial and financial risk components and amend measurement methodologies to more closely align hedge accounting with a company's risk management activities; b) Decrease the complexity of preparing and understanding hedge results through eliminating the separate measurement and reporting of hedge ineffectiveness; c) Enhance transparency, comparability and understandability of hedge results through enhanced disclosures and changing the presentation of hedge results to align the effects of the hedging instrument and the hedged item; and d) Reduce the cost and complexity of applying hedge accounting by simplifying the manner in which assessments of hedge effectiveness may be performed. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted in any interim period following the issuance date. We are currently assessing the effect this guidance may have on our consolidated financial statements.
Reclassifications of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"). ASU 2018-02 allows the reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the Tax Cuts and Jobs Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. ASU 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. We are currently assessing the effect this guidance may have on our consolidated financial statements.
Income Taxes
In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (SEC Update) which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act. See Note 8, Income Taxes for discussion on our adoption plans.
2. BUSINESS ACQUISITIONS AND RESTRUCTURING CHARGES
Acquisitions
We acquired various waste businesses during the three months ended March 31, 2018 and 2017.  The purchase price for these acquisitions and the allocations of the purchase price follow:
 
2018
 
2017
Purchase price:
 
 
 
Cash used in acquisitions, net of cash acquired
$
17.1

 
$
54.7

Holdbacks
2.9

 
1.5

Total
20.0

 
56.2

Allocated as follows:
 
 
 
Accounts receivable
0.7

 
2.2

Property and equipment
7.3

 
23.7

Inventory

 
0.4

Other liabilities
(3.1
)
 
(1.9
)
Fair value of tangible assets acquired and liabilities assumed
4.9

 
24.4

Excess purchase price to be allocated
$
15.1

 
$
31.8

Excess purchase price allocated as follows:
 
 
 
Other intangible assets
$
1.2

 
$
7.3

Goodwill
13.9

 
24.5

Total allocated
$
15.1

 
$
31.8


12

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


The purchase price allocations are preliminary and are based on information existing at the acquisition dates. Accordingly, the purchase price allocations are subject to change. Substantially all of the goodwill and intangible assets recorded for these acquisitions are deductible for tax purposes. These acquisitions are not material to the Company's results of operations, individually or in the aggregate. As a result, no pro forma financial information is provided.
Montana Waste Acquisition - Subsequent Event
In April 2018, we acquired all of the issued and outstanding shares of Montana Waste Systems, Inc. ("MWS") and its affiliates which collectively operated a landfill, transfer station, hauling and portable toilet business in Montana for consideration of approximately $50 million.
Restructuring Charges
In January 2016, we realigned our field support functions by combining our three regions into two field groups, consolidating our areas and streamlining select operational support roles at our Phoenix headquarters. These changes included reducing administrative staffing levels, relocating office space and closing certain office locations. The savings realized from these restructuring efforts have been reinvested in our customer-focused programs and initiatives. Additionally, in the second quarter of 2016, we began the redesign of our back-office functions as well as the consolidation of over 100 customer service locations into three Customer Resource Centers. The savings realized from these restructuring efforts have been reinvested in our customer-focused programs and initiatives. During the three months ended March 31, 2017, we incurred restructuring charges of $4.4 million that consisted of severance and other employee termination benefits, transition costs, relocation benefits, and the closure of offices with lease agreements with non-cancelable terms. We paid $5.5 million during the three months ended March 31, 2017 related to these restructuring efforts.
In January 2018, we eliminated certain positions following the consolidation of select back-office functions, including but not limited to the integration of our National Accounts support functions into our existing corporate support functions. These changes include a reduction in administrative staffing and closing of certain office locations. During the three months ended March 31, 2018, we incurred restructuring charges of $9.5 million that primarily consisted of severance and other employee termination benefits and the closure of offices with lease agreements with non-cancelable terms. We paid $8.4 million during the three months ended March 31, 2018 related to these restructuring efforts.
In 2018, we expect to incur additional charges of between approximately $10 million to $15 million for the remainder of 2018 primarily related to employee severance costs, lease exit and contract termination costs and the relocation of certain employees. Substantially all of these restructuring charges will be recorded in our corporate segment.
3. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
Our senior management evaluates, oversees and manages the financial performance of our operations through two field groups, referred to as Group 1 and Group 2.
Goodwill
A summary of the activity and balances in goodwill accounts by reporting segment follows:
 
 
Balance as of December 31, 2017
 
Acquisitions
 
Divestitures
 
Adjustments
and Other
 
Balance as of March 31, 2018
Group 1
 
$
5,286.3

 
$
2.0

 
$
(0.3
)
 
$
0.1

 
$
5,288.1

Group 2
 
6,029.1

 
11.9

 

 

 
6,041.0

Total
 
$
11,315.4

 
$
13.9

 
$
(0.3
)
 
$
0.1

 
$
11,329.1


13

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


Other Intangible Assets, Net
Other intangible assets, net, include values assigned to customer relationships, franchise agreements, other municipal agreements, non-compete agreements and trade names, and are amortized over periods ranging from 1 to 19 years. A summary of the activity and balances by intangible asset type follows:
 
 
Gross Intangible Assets
 
Accumulated Amortization
 
Other Intangible Assets, Net as of
March 31, 2018
 
 
Balance as of December 31, 2017
 
Acquisitions
 
Adjustments
and Other (1)
 
Balance as of March 31, 2018
 
Balance as of December 31, 2017
 
Additions Charged to Expense
 
Adjustments
and Other
(1)
 
Balance as of March 31, 2018
 
Customer relationships, franchise and other municipal agreements
 
$
666.0

 
$
0.6

 
$
(0.1
)
 
$
666.5

 
$
(554.7
)
 
$
(14.1
)
 
$

 
$
(568.8
)
 
$
97.7

Non-compete agreements
 
35.6

 
0.6

 

 
36.2

 
(28.5
)
 
(0.8
)
 

 
(29.3
)
 
6.9

Other intangible assets
 
73.8

 

 
(9.5
)
 
64.3

 
(51.1
)
 
(0.3
)
 
3.8

 
(47.6
)
 
16.7

Total
 
$
775.4

 
$
1.2

 
$
(9.6
)
 
$
767.0

 
$
(634.3
)
 
$
(15.2
)
 
$
3.8

 
$
(645.7
)
 
$
121.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) In accordance with our adoption of ASU 2014-09, we transferred a $5.7 million net deferred contract asset to Other Assets during the three months ended March 31, 2018.
4. OTHER ASSETS
Prepaid Expenses and Other Current Assets
A summary of prepaid expenses and other current assets as of March 31, 2018 and December 31, 2017 follows:
 
2018
 
2017
Prepaid expenses
$
86.0

 
$
78.6

Inventories
52.3

 
51.2

Other non-trade receivables
47.3

 
28.6

Reinsurance receivable
24.6

 
23.1

Income tax receivable
23.6

 
59.7

Commodity and fuel hedge assets
2.9

 
3.0

Other current assets
2.5

 
3.4

Total
$
239.2

 
$
247.6

Other Assets
A summary of other assets as of March 31, 2018 and December 31, 2017 follows:
 
2018
 
2017
Deferred compensation plan
$
101.1

 
$
99.9

Deferred contract costs and sales commissions
92.4

 
43.6

Reinsurance receivable
69.2

 
65.9

Interest rate swaps
41.8

 
27.1

Amounts recoverable for capping, closure and post-closure obligations
30.3

 
29.9

Investments
25.9

 
26.0

Deferred financing costs
2.1

 
3.0

Other
42.1

 
39.8

Total
$
404.9

 
$
335.2


14

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


5. OTHER LIABILITIES
Other Accrued Liabilities
A summary of other accrued liabilities as of March 31, 2018 and December 31, 2017 follows:
 
2018
 
2017
Insurance reserves, current portion
$
149.8

 
$
144.8

Accrued payroll and benefits
143.4

 
212.2

Accrued fees and taxes
123.2

 
129.7

Accrued dividends
113.3

 
114.4

Accrued professional fees and legal settlement reserves
47.9

 
45.1

Ceded insurance reserves, current portion
24.6

 
23.1

Current tax liabilities
21.7

 
11.7

Commodity and fuel hedge liabilities

 
0.3

Other
98.8

 
126.9

Total
$
722.7

 
$
808.2

Other Long-Term Liabilities
A summary of other long-term liabilities as of March 31, 2018 and December 31, 2017 follows:
 
2018
 
2017
Deferred compensation plan
$
108.1

 
$
97.9

Contingent consideration and acquisition holdbacks
71.0

 
71.3

Ceded insurance reserves
69.2

 
65.9

Withdrawal liability - multiemployer pension funds
12.4

 
12.6

Pension and other post-retirement liabilities
7.2

 
7.0

Other
55.6

 
57.4

Total
$
323.5

 
$
312.1

Insurance Reserves
Our liabilities for unpaid and incurred but not reported claims as of March 31, 2018 and December 31, 2017 (which include claims for workers’ compensation, commercial general and auto liability, and employee-related health care benefits) were $423.9 million and $420.2 million, respectively, under our risk management program and are included in other accrued liabilities and insurance reserves, net of current portion, in our consolidated balance sheets. While the ultimate amount of claims incurred depends on future developments, we believe the recorded reserves are adequate to cover the future payment of claims; however, it is possible that these recorded reserves may not be adequate to cover the future payment of claims. Adjustments, if any, to estimates recorded resulting from ultimate claim payments will be reflected in our consolidated statements of income in the periods in which such adjustments are known.
6. LANDFILL AND ENVIRONMENTAL COSTS
As of March 31, 2018, we owned or operated 195 active landfills with total available disposal capacity of approximately 5.1 billion in-place cubic yards. We also have post-closure responsibility for 124 closed landfills.

15

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


Accrued Landfill and Environmental Costs
A summary of accrued landfill and environmental liabilities as of March 31, 2018 and December 31, 2017 follows:
 
2018
 
2017
Landfill final capping, closure and post-closure liabilities
$
1,281.5

 
$
1,257.7

Environmental remediation liabilities
559.3

 
564.0

Total accrued landfill and environmental costs
1,840.8

 
1,821.7

Less: current portion
(140.4
)
 
(135.2
)
Long-term portion
$
1,700.4

 
$
1,686.5

Final Capping, Closure and Post-Closure Costs
The following table summarizes the activity in our asset retirement obligation liabilities, which include liabilities for landfill final capping, closure and post-closure, for the three months ended March 31, 2018 and 2017:
 
2018
 
2017
Asset retirement obligation liabilities, beginning of year
$
1,257.7

 
$
1,224.6

Non-cash additions
10.3

 
10.6

Acquisitions, net of divestitures and other adjustments
0.1

 
(25.1
)
Asset retirement obligation adjustments
0.3

 
0.6

Payments
(7.3
)
 
(9.7
)
Accretion expense
20.4

 
20.0

Asset retirement obligation liabilities, end of period
1,281.5

 
1,221.0

Less: current portion
(76.8
)
 
(60.4
)
Long-term portion
$
1,204.7

 
$
1,160.6

We review annually, in the fourth quarter, and update as necessary, our estimates of asset retirement obligation liabilities. However, if there are significant changes in the facts and circumstances related to a site during the year, we will update our assumptions prospectively in the period that we know all the relevant facts and circumstances and make adjustments as appropriate. During the three months ended March 31, 2017, we transferred our ownership of the landfill gas collection and control system and the remaining post-closure and environmental liabilities of $24.8 million and $6.3 million, respectively, associated with one of our divested landfills.
The fair value of assets that are legally restricted for purposes of settling final capping, closure and post-closure liabilities was $28.8 million and $28.6 million as of March 31, 2018 and December 31, 2017, respectively, and is included in restricted cash and marketable securities in our consolidated balance sheets.
Landfill Operating Expenses
In the normal course of business, we incur various operating costs associated with environmental compliance. These costs include, among other things, leachate treatment and disposal, methane gas and groundwater monitoring, systems maintenance, interim cap maintenance, costs associated with the application of daily cover materials, and the legal and administrative costs of ongoing environmental compliance. These costs are expensed as cost of operations in the periods in which they are incurred.
Environmental Remediation Liabilities
We accrue for remediation costs when they become probable and can be reasonably estimated. There can sometimes be a range of reasonable estimates of the costs associated with remediation of a site. In these cases, we use the amount within the range that constitutes our best estimate. If no amount within the range appears to be a better estimate than any other, we use the amount that is at the low end of the range. It is reasonably possible that we will need to adjust the liabilities recorded for remediation to reflect the effects of new or additional information, to the extent such information impacts the costs, timing or duration of the required actions. If we used the reasonably possible high ends of our ranges, our aggregate potential remediation liability as of March 31, 2018 would be approximately $466 million higher than the amount recorded. Future changes in our estimates of the cost, timing or duration of the required actions could have a material adverse effect on our consolidated financial position, results of operations and cash flows.

16

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


The following table summarizes the activity in our environmental remediation liabilities for the three months ended March 31, 2018 and 2017:
 
 
2018
 
2017
Environmental remediation liabilities, beginning of year
$
564.0

 
$
602.9

Net additions charged to expense
1.4

 

Payments
(11.2
)
 
(11.3
)
Accretion expense (non-cash interest expense)
5.1

 
5.3

Acquisitions, net of divestitures and other adjustments

 
(6.3
)
Environmental remediation liabilities, end of period
559.3

 
590.6

Less: current portion
(63.6
)
 
(75.3
)
Long-term portion
$
495.7

 
$
515.3

Bridgeton Landfill.  During the three months ended March 31, 2018, we paid $4.0 million related to management and monitoring of the remediation area for our closed Bridgeton Landfill in Missouri. We continue to work with state and federal regulatory agencies on our remediation efforts.  From time to time, this may require us to modify our future operating timeline and procedures, which could result in changes to our expected remediation liability.  As of March 31, 2018, the remediation liability recorded for this site was $173.2 million, of which approximately $16 million is expected to be paid during the remainder of 2018. We believe the remaining reasonably possible high end of our range would be approximately $177 million higher than the amount recorded as of March 31, 2018.
West Lake Landfill Superfund Site. Our subsidiary Bridgeton Landfill, LLC is one of several currently designated Potentially Responsible Parties for the West Lake Landfill Superfund site ("West Lake") in Missouri. On February 6, 2018, the U.S. Environmental Protection Agency ("EPA") issued a Proposed Record of Decision Amendment for West Lake that includes a total cost estimate of $236 million over a five-year remediation timeline. A 75 day public comment period followed the announcement. At this time we are neither able to predict the final remedy that EPA may eventually select in its Record of Decision ("ROD") following the comment period, nor estimate how much of the future response costs of the site our subsidiary may agree or be required to pay. During any subsequent administrative proceedings or litigation, our subsidiary will vigorously contest liability for the costs of remediating radiologically-impacted materials generated on behalf of the federal government during the Manhattan Project and delivered to the site by an Atomic Energy Commission licensee and its subcontractor. Currently, we believe we are adequately reserved for the ROD that was issued in 2008. However, issuance of the final ROD and subsequent events related to remedy divisibility or allocation may require us to modify our expected remediation liability.

17

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


7. DEBT
The carrying value of our notes payable, capital leases and long-term debt as of March 31, 2018 and December 31, 2017 is listed in the following table, and is adjusted for the fair value of interest rate swaps, unamortized discounts, deferred issuance costs and the unamortized portion of adjustments to fair value recorded in purchase accounting. Original issue discounts and adjustments to fair value recorded in purchase accounting are amortized to interest expense over the term of the applicable instrument using the effective interest method.
 
 
 
 
March 31, 2018
 
December 31, 2017
Maturity
 
Interest Rate
 
Principal
 
Adjustments
 
Carrying  Value
 
Principal
 
Adjustments
 
Carrying Value
Credit facilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Uncommitted Credit Facility
 
Variable
 
$
53.9

 
$

 
$
53.9

 
$

 
$

 
$

June 2019
 
Variable
 
100.0

 

 
100.0

 
130.0

 

 
130.0

May 2021
 
Variable
 

 

 

 

 

 

Senior notes:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
May 2018
 
3.800
 
700.0

 
(0.1
)
 
699.9

 
700.0

 
(0.3
)
 
699.7

September 2019
 
5.500
 
650.0

 
(1.8
)
 
648.2

 
650.0

 
(2.1
)
 
647.9

March 2020
 
5.000
 
850.0

 
(1.6
)
 
848.4

 
850.0

 
(1.8
)
 
848.2

November 2021
 
5.250
 
600.0

 
(1.5
)
 
598.5

 
600.0

 
(1.5
)
 
598.5

June 2022
 
3.550
 
850.0

 
(4.4
)
 
845.6

 
850.0

 
(4.6
)
 
845.4

May 2023
 
4.750
 
550.0

 
(7.6
)
 
542.4

 
550.0

 
(1.0
)
 
549.0

March 2025
 
3.200
 
500.0

 
(4.7
)
 
495.3

 
500.0

 
(4.8
)
 
495.2

June 2026
 
2.900
 
500.0

 
(4.8
)
 
495.2

 
500.0

 
(5.0
)
 
495.0

November 2027
 
3.375
 
650.0

 
(6.6
)
 
643.4

 
650.0

 
(7.0
)
 
643.0

March 2035
 
6.086
 
181.9

 
(14.8
)
 
167.1

 
181.9

 
(14.9
)
 
167.0

March 2040
 
6.200
 
399.9

 
(3.8
)
 
396.1

 
399.9

 
(3.9
)
 
396.0

May 2041
 
5.700
 
385.7

 
(5.5
)
 
380.2

 
385.7

 
(5.5
)
 
380.2

Debentures:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
May 2021
 
9.250
 
35.3

 
(0.9
)
 
34.4

 
35.3

 
(1.0
)
 
34.3

September 2035
 
7.400
 
148.1

 
(34.3
)
 
113.8

 
148.1

 
(34.5
)
 
113.6

Tax-exempt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2019 - 2044
 
1.400 - 5.625
 
1,042.4

 
(6.1
)
 
1,036.3

 
1,042.4

 
(6.4
)
 
1,036.0

Capital leases:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2018 - 2046
 
3.273 - 12.203
 
108.0

 

 
108.0

 
108.4

 

 
108.4

Total Debt
 
 
 
$
8,305.2

 
$
(98.5
)
 
8,206.7

 
$
8,281.7

 
$
(94.3
)
 
8,187.4

Less: current portion
 
 
 
 
 
 
 
(707.0
)
 
 
 
 
 
(706.7
)
Long-term portion
 
 
 
 
 
 
 
$
7,499.7

 
 
 
 
 
$
7,480.7

Credit Facilities
In 2016, we entered into a $1.0 billion unsecured revolving credit facility (the "Replacement Credit Facility"), which replaced our $1.0 billion credit facility maturing in May 2017. The Replacement Credit Facility matures in May 2021 and includes a feature that allows us to increase availability, at our option, by an aggregate amount up to $500.0 million through increased commitments from existing lenders or the addition of new lenders. At our option, borrowings under the Replacement Credit Facility bear interest at a Base Rate, or a Eurodollar Rate, plus an applicable margin based on our Debt Ratings (all as defined in the Replacement Credit Facility).

18

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


Contemporaneous with the execution of the Replacement Credit Facility, we entered into Amendment No. 1 to our existing $1.25 billion unsecured revolving credit facility (the "Existing Credit Facility" and, together with the Replacement Credit Facility, the "Credit Facilities"), to conform certain terms of the Existing Credit Facility with those of the Replacement Credit Facility. Amendment No. 1 does not extend the maturity date of the Existing Credit Facility, which matures in June 2019. The Existing Credit Facility also maintains the feature that allows us to increase availability, at our option, by an aggregate amount of up to $500.0 million through increased commitments from existing lenders or the addition of new lenders.
Our Credit Facilities are subject to facility fees based on applicable rates defined in the credit facility agreements and the aggregate commitments, regardless of usage. Availability under our Credit Facilities totaled $1,725.5 million and $1,639.1 million as of March 31, 2018 and December 31, 2017, respectively, and can be used for working capital, capital expenditures, acquisitions, letters of credit and other general corporate purposes.  The credit agreements require us to comply with financial and other covenants. We may pay dividends and repurchase common stock if we are in compliance with these covenants. As of March 31, 2018, we had $100.0 million of borrowings under our Credit Facilities and $130.0 million of borrowings as of December 31, 2017.  We had $406.3 million and $462.7 million of letters of credit outstanding under our Credit Facilities as of March 31, 2018 and December 31, 2017, respectively.
During 2016, we increased the size of our existing unsecured credit facility (the "Uncommitted Credit Facility") to $135.0 million, with all other terms of the agreement remaining unchanged. Our Uncommitted Credit Facility bears interest at LIBOR, plus an applicable margin and is subject to facility fees defined in the agreement, regardless of usage. We can use borrowings under the Uncommitted Credit Facility for working capital and other general corporate purposes. The agreement governing our Uncommitted Credit Facility requires us to comply with certain covenants. The Uncommitted Credit Facility may be terminated by either party at any time. As of March 31, 2018 we had $53.9 million of borrowings and no borrowings as of December 31, 2017, under our Uncommitted Credit Facility.
Senior Notes and Debentures
During 2017, we issued $650.0 million of 3.375% senior notes due 2027 (the "3.375% Notes"). We used the net proceeds from the 3.375% Notes to repay amounts borrowed under our unsecured revolving credit facilities.
Our senior notes and debentures are general unsecured obligations. Interest is payable semi-annually. The senior notes have a make-whole provision that is exercisable at any time prior to their respective maturity dates at a stated redemption price.
Tax-Exempt Financings
As of March 31, 2018 and December 31, 2017, we had $1,036.3 million and $1,036.0 million, respectively, of fixed and variable rate tax-exempt financings outstanding with maturities ranging from 2019 to 2044. Approximately 98% of our tax-exempt financings are remarketed quarterly by remarketing agents to effectively maintain a variable yield. The holders of the bonds can put them back to the remarketing agents at the end of each interest period. To date, the remarketing agents have been able to remarket our variable rate unsecured tax-exempt bonds. These bonds have been classified as long-term because of our ability and intent to refinance them using availability under our Credit Facilities, if necessary.
Capital Leases
We had capital lease liabilities of $108.0 million and $108.4 million as of March 31, 2018 and December 31, 2017, respectively, with maturities ranging from 2018 to 2046.
Interest Rate Swap and Lock Agreements
Our ability to obtain financing through the capital markets is a key component of our financial strategy. Historically, we have managed risk associated with executing this strategy, particularly as it relates to fluctuations in interest rates, by using a combination of fixed and floating rate debt. From time to time, we have also entered into interest rate swap and lock agreements to manage risk associated with interest rates, either to effectively convert specific fixed rate debt to a floating rate (fair value hedges), or to lock interest rates in anticipation of future debt issuances (cash flow hedges).
Fair Value Hedges
During the second half of 2013, we entered into various interest rate swap agreements relative to our 4.750% fixed rate senior notes due in May 2023. The goal was to reduce overall borrowing costs and rebalance our debt portfolio's ratio of fixed to floating interest rates. As of March 31, 2018, these swap agreements had a total notional value of $300.0 million and mature in May 2023, which is identical to the maturity of the hedged senior notes. We pay interest at floating rates based on changes in LIBOR and receive interest at a fixed rate of 4.750%. These transactions were designated as fair value hedges because the swaps hedge against the changes in fair value of the fixed rate senior notes resulting from changes in interest rates.

19

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


As of March 31, 2018 and December 31, 2017, the interest rate swap agreements are reflected at their fair value of $1.2 million and $8.0 million, respectively, and are included in other assets. To the extent they are effective, these interest rate swap agreements are included as an adjustment to long-term debt in our consolidated balance sheets. We recognized net interest income of $0.9 million during the three months ended March 31, 2018, and $1.4 million during the three months ended March 31, 2017, related to net swap settlements for these interest rate swap agreements, which is included as an offset to interest expense in our unaudited consolidated statements of income.
For the three months ended March 31, 2018 and 2017, we recognized gains of $6.8 million and $1.6 million, respectively, on the change in fair value of the hedged senior notes attributable to changes in the benchmark interest rate, and (losses) of $(6.8) million and $(1.4) million, respectively, on the related interest rate swaps. The net amount of these fair value changes represents hedge ineffectiveness, which is recorded directly in earnings as other income, net.
Cash Flow Hedges
During the three months ended March 31, 2018, we entered into interest rate lock agreements having an aggregate notional amount of $150.0 million with fixed interest rates ranging from 2.800% to 2.985%. During 2017, we also entered into a number of interest rate lock agreements having an aggregate notional amount of $300.0 million with fixed interest rates ranging from 2.170% to 2.418%. Upon the expected issuance of senior notes, we will terminate the interest rate locks and settle with our counterparties. These transactions were accounted for as cash flow hedges. The fair value of our interest rate locks as of March 31, 2018 was determined using standard valuation models with assumptions about interest rates being based on those observed in underlying markets (Level 2 in the fair value hierarchy). The aggregate fair values of the outstanding interest rate locks as of March 31, 2018 and December 31, 2017 were $40.6 million and $19.1 million, respectively, and were recorded in other long term assets in our consolidated balance sheet. No amounts were recognized in other income, net in our consolidated statements of income for the ineffective portion of the changes of fair values during the three months ended March 31, 2018 and 2017.
Total gain recognized in other comprehensive income, net of tax, was $18.3 million and $0.8 million for the three months ended March 31, 2018 and 2017, respectively.
As of March 31, 2018 and December 31, 2017, the effective portion of our previously terminated interest rate locks, recorded as a component of accumulated other comprehensive income, net of tax, was $11.4 million and $11.8 million, respectively. The effective portion of the interest rate locks is amortized as an adjustment to interest expense over the life of the issued debt using the effective interest method. We expect to amortize approximately $1.3 million of net interest expense over the next twelve months as a yield adjustment of our senior notes.
The effective portion of the interest rate locks amortized as a net increase to interest expense was $0.5 million and $0.7 million during the three months ended March 31, 2018 and 2017, respectively.
8. INCOME TAXES
Our effective tax rate, exclusive of noncontrolling interests, for the three months ended March 31, 2018 and 2017 was 23.4% and 36.6%, respectively. Our effective tax rate, exclusive of noncontrolling interests, for the three months ended March 31, 2018 was favorably affected by the Tax Cuts and Jobs Act (the "Tax Act") as compared to the same period in 2017.
Cash paid for income taxes (net of refunds) was $0.4 million and $1.0 million for the three months ended March 31, 2018 and 2017, respectively.
The Tax Act was enacted on December 22, 2017. The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%, limits deductions for, among other things, interest expense, executive compensation and meals and entertainment, while enhancing deductions for equipment and other fixed assets. The Tax Act also requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings.
The SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides up to a one year measurement period from the Tax Acts's enactment date for companies to complete their accounting under ASC 740.
In accordance with SAB 118, for the year ended December 31, 2017, we recorded provisional amounts based on our estimates of the Tax Act's effect to our deferred taxes, uncertain tax positions and the one-time transition tax.
As of March 31, 2018, we have not finalized our accounting nor have we changed our previous estimates of the tax effects of the enactment of the Tax Act. We anticipate that the completion of our 2017 income tax returns, future guidance and additional information and interpretations with respect to the Tax Act will cause us to further adjust the provisional amounts recorded as of December 31, 2017. In accordance with SAB 118, we will record such adjustments in the period that relevant guidance and/or additional information becomes available and our analysis is completed.

20

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


We are subject to income tax in the United States and Puerto Rico, as well as in multiple state jurisdictions. Our compliance with income tax rules and regulations is periodically audited by taxing authorities. These authorities may challenge the positions taken in our tax filings. We are currently under examination or administrative review by state and local taxing authorities for various tax years. We recognize interest and penalties as incurred within the provision for income taxes in the consolidated statements of income. As of March 31, 2018, we accrued a liability for penalties of $0.5 million and a liability for interest (including interest on penalties) of $13.3 million related to our uncertain tax positions.
We believe that our recorded liabilities for uncertain tax positions are adequate. However, a significant assessment against us in excess of the liabilities recorded could have a material adverse effect on our consolidated financial position, results of operations and cash flows. During the next twelve months, it is reasonably possible that the amount of unrecognized tax benefits will increase or decrease. Gross unrecognized benefits we expect to settle in the next twelve months are in the range of zero to $10 million.
We have deferred tax assets related to state net operating loss carryforwards. We provide a partial valuation allowance due to uncertainty surrounding the future utilization of these carryforwards in the taxing jurisdictions where the loss carryforwards exist. When determining the need for a valuation allowance, we consider all positive and negative evidence, including recent financial results, scheduled reversals of deferred tax liabilities, projected future taxable income and tax planning strategies. The weight given to the positive and negative evidence is commensurate with the extent such evidence can be objectively verified.
As a result of the recent changes in U.S. tax law, as well as our ongoing efforts to streamline and maximize the efficiency of our tax footprint, we could further adjust our valuation allowance in a future period if there is sufficient evidence to support a conclusion that it is more certain than not that certain of the state net operating loss carryforwards, on which we currently provide a valuation allowance, would be realized. The realization of our deferred tax asset for state loss carryforwards ultimately depends upon the existence of sufficient taxable income in the appropriate state taxing jurisdictions in future periods. We continue to regularly monitor both positive and negative evidence in determining the ongoing need for a valuation allowance. As of March 31, 2018, the valuation allowance associated with our state loss carryforwards was approximately $71.6 million.
9. STOCK-BASED COMPENSATION
Available Shares
In March 2013, our board of directors approved the Republic Services, Inc. Amended and Restated 2007 Stock Incentive Plan (the "Plan"), and in May 2013 our shareholders ratified the Plan. We currently have approximately 13.4 million shares of common stock reserved for future grants under the Plan.
Grants and Expense
The following table summarizes our stock-based compensation grant and expense activity for the three months ended March 31, 2018:
 
Number of
Shares Granted
(in thousands)
 
Compensation
Expense
 (in millions)
 
Restricted stock units
408.3

 
7.7

 
Performance shares
315.6

 
4.4

 
Total
723.9

 
$
12.1

 
10. STOCK REPURCHASES, DIVIDENDS AND EARNINGS PER SHARE
Stock Repurchases
Stock repurchase activity during the three months ended March 31, 2018 and March 31, 2017 follows (in millions, except per share amounts):
 
Three Months Ended March 31,
 
2018
 
2017
Number of shares repurchased
3.8

 
1.7

Amount paid
$
254.5

 
$
98.9

Weighted average cost per share
$
66.69

 
$
60.46


21

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


As of March 31, 2018 and 2017, 0.2 million repurchased shares were pending settlement and $14.9 million and $10.9 million was unpaid and included within other accrued liabilities, respectively.
In October 2017, our board of directors added $2.0 billion to our existing share repurchase authorization that now extends through December 31, 2020. Before this, $98.4 million remained under a prior authorization. Share repurchases under the program may be made through open market purchases or privately negotiated transactions in accordance with applicable federal securities laws. While the board of directors has approved the share purchase program, the timing of any purchases, the prices and the number of shares of common stock to be purchased will be determined by our management, and will depend upon market conditions and other factors. The program may be extended, suspended or discontinued at any time. As of March 31, 2018, the remaining authorized purchase capacity under our October 2017 repurchase program was $1.6 billion.
Dividends
In February 2018, our board of directors approved a quarterly dividend of $0.345 per share. Cash dividends declared were $113.3 million for the three months ended March 31, 2018. As of March 31, 2018, we recorded a quarterly dividend payable of $113.3 million to shareholders of record at the close of business on April 2, 2018.
Earnings per Share
Basic earnings per share is computed by dividing net income attributable to Republic Services, Inc. by the weighted average number of common shares (including vested but unissued RSUs) outstanding during the period. Diluted earnings per share is based on the combined weighted average number of common shares and common share equivalents outstanding, which include, where appropriate, the assumed exercise of employee stock options, unvested RSUs and unvested PSUs at the expected attainment levels. We use the treasury stock method in computing diluted earnings per share.
Earnings per share for the three months ended March 31, 2018 and 2017 are calculated as follows (in thousands, except per share amounts):
 
Three Months Ended March 31,
 
2018
 
2017
Basic earnings per share:
 
 
 
Net income attributable to Republic Services, Inc.
$
237,700

 
$
187,800

Weighted average common shares outstanding
330,655

 
339,868

Basic earnings per share
$
0.72

 
$
0.55

Diluted earnings per share:
 
 
 
Net income attributable to Republic Services, Inc.
$
237,700

 
$
187,800

Weighted average common shares outstanding
330,655

 
339,868

Effect of dilutive securities:
 
 
 
Options to purchase common stock
904

 
1,403

Unvested RSU awards
260

 
354

Unvested PSU awards
389

 
251

Weighted average common and common equivalent shares outstanding
332,208

 
341,876

Diluted earnings per share
$
0.72

 
$
0.55

Antidilutive securities not included in the diluted earnings per share calculations:
 
 
 
Options to purchase common stock

 


22

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


11. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT
A summary of changes in accumulated other comprehensive income (loss), net of tax, by component, for the three months ended March 31, 2018 follows:
 
Cash Flow Hedges
 
Defined Benefit Pension Items
 
Total
Accumulated other comprehensive income (loss) as of December 31, 2017
$
1.4

 
$
21.2

 
$
22.6

Other comprehensive income before reclassifications
19.3

 

 
19.3

Amounts reclassified from accumulated other comprehensive income
(0.2
)
 

 
(0.2
)
Net current period other comprehensive income
19.1

 

 
19.1

Accumulated other comprehensive income (loss) as of March 31, 2018
$
20.5

 
$
21.2

 
$
41.7

A summary of reclassifications out of accumulated other comprehensive income (loss) for the three months ended March 31, 2018 and 2017 follows:
 
 
Three Months Ended March 31,
 
 
 
 
2018
 
2017
 
 
Details about Accumulated Other Comprehensive Income (Loss) Components
 
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)
 
Affected Line Item in the Statement where Net Income is Presented
Gain (loss) on cash flow hedges:
 
 
 
 
 
 
Recyclable commodity hedges
 
$

 
$
(0.7
)
 
Revenue
Fuel hedges
 
0.8

 
(1.0
)
 
Cost of operations
Terminated interest rate locks
 
(0.5
)
 
(0.7
)
 
Interest expense
Total before tax
 
0.3

 
(2.4
)
 
 
Tax (expense) benefit
 
(0.1
)
 
1.0

 
 
Total gains (losses) reclassified, net of tax
 
$
0.2

 
$
(1.4
)
 
 
12. FINANCIAL INSTRUMENTS
Fuel Hedges
We have entered into multiple swap agreements designated as cash flow hedges to mitigate some of our exposure related to changes in diesel fuel prices. These swaps qualified for, and were designated as, effective hedges of changes in the prices of forecasted diesel fuel purchases (fuel hedges).
The following table summarizes our outstanding fuel hedges as of March 31, 2018:
Year
 
Gallons Hedged
 
Weighted Average Contract 
Price per Gallon
2018
 
5,625,000
 
$2.59
If the national U.S. on-highway average price for a gallon of diesel fuel as published by the Department of Energy exceeds the contract price per gallon, we receive the difference between the average price and the contract price (multiplied by the notional gallons) from the counterparty. If the average price is less than the contract price per gallon, we pay the difference to the counterparty.
The fair values of our fuel hedges are determined using standard option valuation models with assumptions about commodity prices based on those observed in underlying markets (Level 2 in the fair value hierarchy). The aggregate fair values of our outstanding fuel hedges as of March 31, 2018 were current assets of $2.5 million, which have been recorded in other current assets in our consolidated balance sheets. As of December 31, 2017, the aggregate fair values of our outstanding fuel hedges were current assets of $3.0 million, which are included in other current assets in our consolidated balance sheets. No amounts were recognized in other income, net in our unaudited consolidated statements of income for the ineffectiveness portion of the changes in fair values for each of the three months ended March 31, 2018 and 2017.

23

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


No gain (loss) was recognized in other comprehensive income, net of tax, for fuel hedges (the effective portion) for each of the three months ended March 31, 2018 and 2017. We classify cash inflows and outflows from our fuel hedges within operating activities in the unaudited consolidated statements of cash flows.
Recyclable Commodity Hedges
Revenue from the sale of recycled commodities is primarily from sales of old corrugated containers (OCC) and old newsprint. From time to time we use derivative instruments such as swaps and costless collars designated as cash flow hedges to manage our exposure to changes in prices of these commodities. During 2017, we entered into multiple agreements related to the forecasted OCC sales. The agreements qualified for, and were designated as, effective hedges of changes in the prices of certain forecasted recyclable commodity sales (commodity hedges).
We entered into costless collar agreements on forecasted sales of OCC. The agreements involve combining a purchased put option giving us the right to sell OCC at an established floor strike price with a written call option obligating us to deliver OCC at an established cap strike price. The puts and calls have the same settlement dates, are net settled in cash on such dates and have the same terms to expiration. The contemporaneous combination of options resulted in no net premium for us and represents costless collars. Under these agreements, we will make or receive no payments as long as the settlement price is between the floor price and cap price; however, if the settlement price is above the cap, we will pay the counterparty an amount equal to the excess of the settlement price over the cap times the monthly volumes hedged. If the settlement price is below the floor, the counterparty will pay us the deficit of the settlement price below the floor times the monthly volumes hedged. The objective of these agreements is to reduce variability of cash flows for forecasted sales of OCC between two designated strike prices.
As of March 31, 2018, we had outstanding costless collar hedges for OCC totaling 90,000 tons with a weighted average floor strike price of $81.50 per ton and a weighted average cap strike price of $120.00 per ton, all of which will be settled in 2018. Costless collar hedges are recorded in our consolidated balance sheets at fair value. Fair values of costless collars are determined using standard option valuation models with assumptions about commodity prices based upon forward commodity price curves in underlying markets (Level 2 in the fair value hierarchy).
The aggregate fair values of the outstanding recyclable commodity hedges as of March 31, 2018 were current assets of $0.4 million, which are included in prepaid expenses and other current assets in our consolidated balance sheets. As of December 31, 2017, the aggregate fair values of the outstanding recyclable commodity hedges were current liabilities of $0.2 million, which are included in other accrued liabilities in our consolidated balance sheets. No amounts were recognized in other income, net in our unaudited consolidated statements of income for the ineffectiveness portion of the changes in fair values during each of the three months ended March 31, 2018 and 2017.
Total gain (loss) recognized in other comprehensive income for recyclable commodity hedges (the effective portion) was $0.4 million and $(1.9) million, net of tax, for each of the three months ended March 31, 2018 and 2017.
Fair Value Measurements
In measuring the fair values of assets and liabilities, we use valuation techniques that maximize the use of observable inputs (Level 1) and minimize the use of unobservable inputs (Level 3). We also use market data or assumptions that we believe market participants would use in pricing an asset or liability, including assumptions about risk when appropriate.
The carrying value for certain of our financial instruments, including cash, accounts receivable, accounts payable and certain other accrued liabilities, approximates fair value because of their short-term nature.

24

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


As of March 31, 2018 and December 31, 2017, our assets and liabilities that are measured at fair value on a recurring basis include the following:
 
 
 
Fair Value Measurements Using
 
Carrying Amount
 
Total as of March 31, 2018
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
 
Money market mutual funds
$
55.6

 
$
55.6

 
$
55.6

 
$

 
$

Bonds - restricted cash and marketable securities and other assets
53.0

 
53.0

 

 
53.0

 

Fuel hedges - other current assets
2.5

 
2.5

 

 
2.5

 

Commodity hedges - other current assets
0.4

 
0.4

 

 
0.4

 

Interest rate swaps - other assets
1.2

 
1.2

 

 
1.2

 

Interest rate locks - other assets
40.6

 
40.6

 

 
40.6

 

Total assets
$
153.3

 
$
153.3

 
$
55.6

 
$
97.7

 
$

Liabilities:
 
 
 
 
 
 
 
 
 
Contingent consideration - other long-term liabilities
73.0

 
73.0

 

 

 
73.0

Total liabilities
$
73.0

 
$
73.0

 
$

 
$

 
$
73.0

 
 
 
Fair Value Measurements Using
 
Carrying Amount
 
Total as of December 31, 2017
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
 
Money market mutual funds
$
30.3

 
$
30.3

 
$
30.3

 
$

 
$

Bonds - restricted cash and marketable securities and other assets
92.1

 
92.1

 

 
92.1

 

Fuel hedges - other current assets
3.0

 
3.0

 

 
3.0

 

Interest rate swaps - other assets
8.0

 
8.0

 

 
8.0

 

Interest rate locks - other assets
19.1

 
19.1

 

 
19.1

 

Total assets
$
152.5

 
$
152.5

 
$
30.3

 
$
122.2

 
$

Liabilities:
 
 
 
 
 
 
 
 
 
Commodity hedges - other accrued liabilities
0.2

 
0.2

 

 
0.2

 

Contingent consideration- other long-term liabilities
73.3

 
73.3

 

 

 
73.3

Total liabilities
$
73.5

 
$
73.5

 
$

 
$
0.2

 
$
73.3

Total Debt
As of March 31, 2018 and December 31, 2017, the carrying value of our total debt was $8.2 billion, and the fair value of our total debt was $8.6 billion and $8.8 billion, respectively. The estimated fair value of our fixed rate senior notes and debentures is based on quoted market prices. The fair value of our remaining notes payable, tax-exempt financings and borrowings under our credit facilities approximates the carrying value because the interest rates are variable. The fair value estimates are based on Level 2 inputs of the fair value hierarchy as of March 31, 2018 and December 31, 2017, respectively. See Note 7, Debt, for further information related to our debt.

25

REPUBLIC SERVICES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)


Contingent Consideration
In April 2015, we entered into a waste management contract with Sonoma County, California to operate the county's waste management facilities. As of March 31, 2018, we recognized $67.9 million of contingent consideration which represents the fair value of amounts payable to Sonoma County based on the achievement of future annual tonnage targets through the expected remaining capacity of the landfill. We estimate the remaining life of the landfill to be approximately 30 years. The potential undiscounted amount of all future contingent payments that we could be required to make under the waste management contract is estimated to be between approximately $82 million and $171 million.
The fair value of the contingent consideration was determined using probability assessments of the expected future payments over the remaining useful life of the landfill, and applying a discount rate of 4.0%. The future payments are based on significant inputs that are not observable in the market. Key assumptions include annual volume of tons disposed at the landfill, the price paid per ton and the discount rate that represent the best estimates of management, which are subject to remeasurement at each reporting date.
In 2017, we recognized additional contingent consideration associated with the acquisition of a landfill. As of March 31, 2018, the contingent consideration of $5.1 million represents the fair value of amounts payable to the seller based on annual volume of tons disposed at the landfill. The fair value of the contingent consideration was determined using probability assessments of the expected future payments over the remaining useful life of the landfill, and applying a discount rate of 4.3%. The future payments are based on significant inputs that are not observable in the market. Key assumptions include annual volume of tons disposed at the landfill, which are subject to remeasurement at each reporting date. The contingent consideration liabilities are classified within Level 3 of the fair value hierarchy.
13. SEGMENT REPORTING
Our senior management evaluates, oversees and manages the financial performance of our operations through two field groups, referred to as Group 1 and Group 2. Group 1 primarily consists of geographic areas located in the western and portions of the mid-western United States, and Group 2 primarily consists of geographic areas located in Texas, the southeastern and portions of the mid-western United States, and the eastern seaboard of the United States.
We manage and evaluate our operations through the two field groups, Group 1 and Group 2. These two groups are presented below as our reportable segments, which provide integrated waste management services consisting of non-hazardous solid waste collection, transfer, recycling, disposal and energy services.
Summarized financial information concerning our reportable segments for the three months ended March 31, 2018 and 2017 follows:
 
Gross
Revenue
 
Intercompany
Revenue
 
Net
Revenue
 
Depreciation,
Amortization,
Depletion and
Accretion
 
Operating
Income
(Loss)
 
Capital
Expenditures
 
Total Assets
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
Group 1
$
1,292.6

 
$
(229.0
)
 
$
1,063.6

 
$
113.5

 
$
221.1

 
$
97.9

 
$
9,219.5

Group 2
1,532.2

 
(208.0
)
 
1,324.2

 
140.6

 
266.4

 
75.4

 
10,332.8

Corporate entities
43.2

 
(3.5
)
 
39.7

 
29.4

 
(83.3
)
 
90.0

 
1,556.4

Total
$
2,868.0

 
$
(440.5
)
 
$
2,427.5

 
$
283.5

 
$
404.2

 
$
263.3

 
$
21,108.7

Three Months Ended March 31, 2017
 
 
 
 
 
 
 
 
 
 
Group 1
$
1,324.3

 
$
(262.0
)
 
$
1,062.3

 
$
102.3

 
$
213.8

 
$
72.5

 
$
9,109.1

Group 2
1,502.9

 
(224.4
)
 
1,278.5

 
137.0

 
272.9

 
79.6

 
9,975.7

Corporate entities
55.1

 
(3.1
)
 
52.0

 
30.6

 
(98.6
)
 
71.8

 
1,511.0

Total
$
2,882.3

 
$
(489.5
)
 
$
2,392.8

 
$
269.9