Michael E. Hoffman [email protected] (443) 224-1305

Brian J. Butler, CFA [email protected] (410) 246-6315

Michael E. Hoffman 443-224-1305 [email protected] Stifel does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. All relevant disclosures and certifications appear on pages 25 through 28 of this report. 1

Solid Waste

Source: Ashley Felton

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Solid Waste

LANDFILL IS HERE TO STAY

The next big move IF it comes is likely from Organics

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80% in 1994

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60% in 2000

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54% in 2014

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48% in 2030

Average paper prices jumped from $40/ton to $110/ton which accounts for the landfill volume change

AND THAT APPEARS TO BE ABOUT AS LOW AS IT GOES

Source: Factset Research Systems and Stifel estimates

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Solid Waste

Really Cheap Airspace •

When $20/ton landfill can be reached economically by train $20 to $30 per ton

$65 to $100 per ton

$65 to $120 per ton

$25 to $40 per ton $35 to $60 per ton

$15 to $40 per ton 4 Source: Association of American Railroads

Solid Waste

Really Cheap Airspace •

When $20/ton landfill can be reached economically by train in the US Landfill Does Not go away ~$75/ton

~$115/ton

~$75/ton

~$75/ton

Source: Department of Transportation

Source: Association of American Railroads

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Solid Waste

Anaerobic Digestion

Source: Daniel Ullrich

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Solid Waste

Organics/Food Waste •

About 20% of the MSW waste stream

•

Yard Waste is about half

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Food Waste is about half •

Focus on institutional sources

•

Only Anaerobic Digestion can process high volumes • And even it has to have $75 tip fees

•

NO OTHER TECHNOLOGY CAN DO HIGH VOLUME WITHOUT A SUBSIDY 7

Source: Factset Research Systems and Stifel estimates

Solid Waste

STOP DIVERTING FOCUS ON RECYCLING • 10% in 1985 • 20% in 1995 • 30% in 2005 How much of diverted volume – claimed as recycling ends up back in a landfill as a residual Source: Factset Research Systems and Stifel estimates

• 34% in 2014 • 40% in 2030

Average paper prices jumped from $40/ton to $110/ton which accounts for the landfill volume change

Some incremental paper but the next move IF it happens is Food Waste 8

Source: secondaryfibers.com

National Average OCC

Nov-2014

May-2014

Nov-2013

May-2013

Nov-2012

May-2012

$200 $180 $160 $140 $120 $100 $80 $60 $40 $20 $0

Nov-2011

May-2011

Nov-2010

May-2010

Nov-2009

May-2009

Nov-2008

May-2008

Nov-2007

May-2007

Nov-2006

May-2006

Nov-2005

May-2005

Price per Ton (USD)

Solid Waste

PAPER PRICE Processing Costs are $75/ton in Single Stream

Long-Term Average 9

Solid Waste

Recycling Good

Bad

Source: Good Housekeeping Source: Good Housekeeping

Source: pixabay

Glass is just Sand! Source: Richard Wheeler (Zephyris)

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Solid Waste

PHASE I •

First Comes a Landfill Volume Recovery

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Started in late 2012 and carried on into 2013

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Housing starts at about 1 million 11

Solid Waste

PHASE II • Commercial Container Weights Increase ENOUGH to Put Pressure on Cost • 2Q14 some indication of that pressure

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Solid Waste

PHASE III •

Service Intervals Swing Meaningfully Positive Driving Lots of Operating Leverage

•

Some early indication but not enough to move the margin needle yet

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Solid Waste

Phase III • Service Interval Upgrades mean less rollbacks

Source: Waste Management

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Solid Waste

COLLECTION PRICE • Core price increases in commercial and industrial 3% to 5% • Rollbacks run 10% to 30% • Customer defections 7.5% to 11.5%

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Solid Waste

LANDFILL PRICE • Will the top 25 landfill operators find their way back to better than inflation pricing? •

Can LF price like Airgas/aggregates/railroads

• Have to stop subsidizing private independent haulers • US average $40/ton with a range from $20 to $100 • Canada average $80/ton with a range from $65 to $115

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Solid Waste

FUEL PRICE •

Used to be 4% of cost

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Now it is 8% to 10%

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Everyone has a surcharge

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What does lower crude oil mean? 17

Solid Waste

Returns of Capital • This is not lip service • ROIC IS driving behavior at the top 25 companies • Impacts how and what they spend capital on •

Publicly traded Solid Waste will spend less money 18

Solid Waste

CNG Fleet Conversion • Predominantly voluntary •

Diesel Gallon Equivalent (DGE) Savings are $1.50 to $2.00/gallon

•

Payback less than 4 years

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5 years 30% to 35% of the solid waste routed fleet will be converted 19

Solid Waste

Productivity • Automation of Residential Collection • Target is 80% in 3 years • At low 60% now • Savings are not just labor • Lowers Risk as well 20

Solid Waste

Automated Side Loader

Source: Republic Services

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Solid Waste

Automation • Helps improve Recycling Rate • Single Stream • Put multiple two wheel containers at the household

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Solid Waste

Single Stream

Source: “Somerville Recycling" by Vistawhite

Source: “Somerville Recycling" by Rubbermaid

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Solid Waste

Summary •

Solid Waste Fundamentals are sound even in a low growth economy, in our view

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Phase II appears to be in late innings so Phase III can’t be far off

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The top 25 are spending money smarter

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Automation and CNG conversion are real

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Municipalities will face more pressure to take the recycling price exposure 24

Solid Waste

Disclosures Important Disclosures and Certifications I, Michael E. Hoffman, certify that the views expressed in this research report accurately reflect my personal views about the subject securities or issuers; and I, Michael E. Hoffman, certify that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report. For our European Conflicts Management Policy go to the research page at www.stifel.com. Stifel's research analysts receive compensation that is based upon (among other factors) Stifel's overall investment banking revenues.

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Solid Waste

Disclosures Our investment rating system is three tiered, defined as follows: BUY -For U.S. securities we expect the stock to outperform the S&P 500 by more than 10% over the next 12 months. For Canadian securities we expect the stock to outperform the S&P/TSX Composite Index by more than 10% over the next 12 months. For other non-U.S. securities we expect the stock to outperform the MSCI World Index by more than 10% over the next 12 months. For yield-sensitive securities, we expect a total return in excess of 12% over the next 12 months for U.S. securities as compared to the S&P 500, for Canadian securities as compared to the S&P/TSX Composite Index, and for other non-U.S. securities as compared to the MSCI World Index. HOLD -For U.S. securities we expect the stock to perform within 10% (plus or minus) of the S&P 500 over the next 12 months. For Canadian securities we expect the stock to perform within 10% (plus or minus) of the S&P/TSX Composite Index. For other non-U.S. securities we expect the stock to perform within 10% (plus or minus) of the MSCI World Index. A Hold rating is also used for yield-sensitive securities where we are comfortable with the safety of the dividend, but believe that upside in the share price is limited. SELL -For U.S. securities we expect the stock to underperform the S&P 500 by more than 10% over the next 12 months and believe the stock could decline in value. For Canadian securities we expect the stock to underperform the S&P/TSX Composite Index by more than 10% over the next 12 months and believe the stock could decline in value. For other non-U.S. securities we expect the stock to underperform the MSCI World Index by more than 10% over the next 12 months and believe the stock could decline in value.

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Solid Waste

Disclosures Of the securities we rate, 52% are rated Buy, 46% are rated Hold, and 2% are rated Sell. Within the last 12 months, Stifel or an affiliate has provided investment banking services for 21%, 8% and 0% of the companies whose shares are rated Buy, Hold and Sell, respectively. Additional Disclosures Please visit the Research Page at www.stifel.com for the current research disclosures and respective target price methodology applicable to the companies mentioned in this publication that are within Stifel's coverage universe. For a discussion of risks to target price please see our stand-alone company reports and notes for all Buy-rated stocks. The information contained herein has been prepared from sources believed to be reliable but is not guaranteed by us and is not a complete summary or statement of all available data, nor is it considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of Stifel or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed within. Past performance should not and cannot be viewed as an indicator of future performance.

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Solid Waste

Disclosures Stifel is a multi-disciplined financial services firm that regularly seeks investment banking assignments and compensation from issuers for services including, but not limited to, acting as an underwriter in an offering or financial advisor in a merger or acquisition, or serving as a placement agent in private transactions.. These materials have been approved by Stifel Nicolaus Europe Limited, authorized and regulated by the Financial Conduct Authority (FCA) in the UK, in connection with its distribution to professional clients and eligible counterparties in the European Economic Area. (Stifel Nicolaus Europe Limited home office: London +44 20 7557 6030.) No investments or services mentioned are available in the European Economic Area to retail clients or to anyone in Canada other than a Designated Institution. This investment research report is classified as objective for the purposes of the FCA rules. Please contact a Stifel entity in your jurisdiction if you require additional information. Additional Information Is Available Upon Request © 2014 Stifel, Nicolaus & Company, Incorporated, One South Street, Baltimore, MD 21202. All rights reserved.

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