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CasellaWasteSystems(NASDAQ:CWST):

DirtyAccountingShenanigansCWSTUsesAggressiveAccountingtoUnderstateLiabilitiesandExpenses

• CWSTappearstooverestimateitslandfillexpansionairspace,asevidencedbynear-constantwrite-downsofexpansionairspacefornon-uniquereasons.Thislikelyover-capitalizescostsandcreatesafalserepresentationoftheremaininglifeoflandfills.

• CWSTdiscountsitslandfillassetretirementobligationsusinga9%discountrate,whichisalmostdoublethatofcomps.Webelievethatamoreaccuratediscountratewouldbe5.5%,oritsmarginalcostofcapitaltoday.

• EBITwilldecline15%uponfulladoptionofthenewleaseaccountingstandardforCWST’slandfilloperatingleasecontracts.

• Adjustingfortheabove,webelievethatCWST’s6%EBITmarginshoulddeclinesignificantlyandlandfillPP&Eassetsshouldbewrittendownbyseveral$10sofmillions.

• CWST’sadjustedbookvalueisdeeplynegative,andadjustedEBITsignificantlylowerthanreportedEBIT.Inthelong-run,webelievethatCWSTisaninherentlyuneconomicalbusiness.

• Along-standingauditpartnerassociatedwithmultiplefraudsandanentrenchedandinexperiencedauditcommitteewilllikelyfailtospotthesefinancialdeficiencies.

CWST’sGrowthStrategyisUnderIncreasingPressure

• WebelievethatCWSToverstatesitsmainoperatingsegment(solidwaste)’sorganicgrowth,throughitsuniqueSRAfeethatshiftsrevenuesfromrecyclingtosolidwaste.

• CWSTappearstoaccountforthisfeeincollectionpricinggrowth(typicallyseenas“organic”growth)whenitincreases,andshiftitinto“surcharges”(seenasinorganicfluctuations)whenitdecreases.

• AlargepartofCWST’spremiumvaluationisduetoitsabilitytogrowpricingaggressivelyinthesupply-constrainednortheastmarkets.Webelievethatourorganicpricinggrowthanalysisrefutesthisclaim.

• Signalingafailureofitsexistingmodel,CWSThasrecentlybegananacquisitionstrategy,whichwebelieveisaredherringintendedtohideitsexistingdeficiencies.

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CWSTisawastemanagementcompanythatmainlyoperates9landfills,alongwiththeir

associatedsupplychains.Aratherboringlegacywastemanagementcompany,CWSThasnonethelessseenitssharepriceskyrocket10xoverthepastthreeyears,intandemwithabroadpickupintheoverallwastemanagementspace.CWSTiscurrentlybeingassignedapremiumvaluationforitspositionasaconsolidatorofNortheasternUSwastemanagementfacilitiesandabilitytoorganicallygrowpricingatabovetherateofcompetition.

Incontrast,ourforensicaccountinganalysisofCWSTsuggeststhatCWST’sbasebusinessmodelisnon-economical,andthatthecompanywillsoonrunintosolvencyissuesshouldnothingfundamentallychange.Wealsobelievethatthecompanyisdeliberatelyhidingthesefactsfrominvestors,throughaccountingshenanigansrelatedtoitslandfills.

Forexample,whilethecompanyreportsover$50millioninadjustedEBIT,ourindependentanalysissuggeststhatCWST’strueEBITissignificantlylowerafteradjustingforinappropriatecapitalizationofexpenses.WealsobelievethatCWSTismateriallymis-estimatingthefutureclosureliabilitiesofitslandfills,byusinginappropriatediscountandinflationratesonportionsofitsAROs.WealsobelievethatCWST’sorganicpricinggrowthoverthepastfewyearshasbeenoverstated,duetospecialaccountingforauniquesurchargeprogramthattheydeveloped.

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Part1–AggressiveLandfillAccounting

OverestimatedExpansionAirspace WebelievethatCWSTisoverestimatingtheremainingusefullifeofitsexistinglandfills,whichleadstoawholehostofaccountingproblems.

Landfilldepletionandamortizationexpenseiscalculatedonaunits-of-consumptionbasisbasedonairspaceusageagainstestimatedtotalpotentialairspace.Airspaceisavailablespaceinthelandfillthatcanstillbefilledupwithmaterial.Thekeywordsare“estimated”and“potential”.GAAPallowslandfilloperatorstoincludeintheirtotalairspacecalculationanunlimitedamountof“expansionairspace”thatmeetscertaincriteria(discussedlater).Basically,companiesestimatehowmuchairspaceisintheirlandfills(thisnumberincludesunpermittedbutestimatedexpansionairspace),andastheyusethatairspace,theyrecorddepreciationexpenseonthelandfillproportionatetothatusage.

AlthoughwecannotindependentlyverifyallofCWST’sclaimedexpansionairspace,someoftheirdisclosednumberswithregardstoexpansionairspacegiveusworry.First,over50%ofCWST’stotalestimatedairspaceisexpansionairspace,versusfarlowernumbersforallcomps.

*ADWSdoesnotdiscloseitsexpansionversuspermittedairspacebyunitofmeasurement,butinsteadstatesthattheyhave41currentpermittedlandfills,ofwhich15haveexpansionpotential.Thoseproportionsareusedtocalculatetheaboveratio.Wecautionthatthisisnotaverycomparablemeasure;weincludeditforpurposesofcompleteness

Byitself,estimatingsignificantexpansionairspaceisnotnecessarilyaggressive.ItjustmeansthatCWST’stotalairspaceamountissubjecttomoreuncertaintythanthoseofcomps. However,wearefurtherconcernedthatCWSTroutinelyadjuststheirestimatedexpansionairspacelowertoafargreaterdegreethancomps,whichindicatesahigher

0%

10%

20%

30%

40%

50%

60%

WM WCN RSG CWST ECOL CLH ADWS*

Expansion Airspace as % of Total Airspace

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propensitytooverstatetheairspaceavailable:

*WCNmergedwithProgressiveWastein2014;allresultsarecumulativestartingfrom2015**Othercompsdidnotdiscloseindetailchangesinestimatesregardingtheirexpansionairspace

TheaboveshowsveryclearlythatCWSThasadjusteditsestimatedexpansionairspacedownwardsinfargreateramountsthanallofitsmaincomps.4ofthepast6yearssawdownwardsadjustmentsforitscumulativeestimatedchangeasapercentofexpansionairspace.WebelieveCWSTcan’tmaketheargumentthatjustbecausetheyarecomparativelysmallthatsomeisolatedeventaffectedthecompany’sestimates.Theonlyunique/unluckyimpacttochangesinestimatedexpansionairspaceoverthistimeperiodcamefromtheirforcedclosureoftheSouthbridgelandfill.However,theydisclosethatthisclosureonlypartiallycontributedtothe2017decreaseinestimations;everythingelseisaresultofroutinedownwardsadjustmentsinestimations. Webelievethatthesedownwardsadjustmentsaretrends,notanomalies.OverthepastfiveyearsCWST’sestimatedexpansionairspacehasdeclinedby17%,onaverage3.5%peryear. Lastly,CWSTistheleasteffectiveinitscompsetatconvertingestimatedexpansionairspaceintoactualpermittedairspace:

-20%

-15%

-10%

-5%

0%

5%

10%

15%

2018 2017 2016 2015 2014 2013 2012

Cumulative Estimate Changes as % of Expansion Airspace

CWST WM WCN* RSG

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*WCNmergedwithProgressiveWastein2014;allresultsarecumulativestartingfrom2015

ThisisanotherclearindicatorthatCWST’sestimatedexpansionairspacemaynotbeallthattheytoutittobe.In5years,CWSThasonlysucceededinconverting25%oftheirestimatedexpansionairspaceintoactualpermittedairspace,vastlylowerthantheconversionratesofcomps. Notably,thesedownwardsrevisionsinestimatesareconsistentlyattributedto“designchanges”atCWST’slandfills,ratherthanfailurestoobtainofficialexpansionpermits.CWSTisactuallyquitesuccessfulatobtainingexpansionsonitsexistinglandfills(savesomerecentfailureswe’lldiscussalittlelater).Thefactis,eventhoughCWSTobtainsnearly100%oftheexpansionpermitsthatitpursues,thecompanystillisconstantlyforcedtorevisedownitsexpansionairspaceestimates.Thisfundamentallyimpliesthatitissimplyoverestimatingexpansionairspace,andevenabsentatrigger,willhavetoconstantlyadjusttheseairspacevalues.

DoubtfulExpansionAirspaceCWST’scriteriaforincludinglandas“expansionairspace”seemstodifferslightlyfrom

thedefinitionsofcompetitors;webelievethatthisaccountsforthediscrepancybetweenCWST’sandcompetitors’expansionairspaceamounts,bygivingCWST’smanagementbroaderdiscretioninclassifyinglandas“expansionairspace”.

Specifically,thebelowtableliststhecriteriathatCWSTandallofitscompsuseforexpansionairspace(quotesaredirectlyfromcompanies’mostrecent10-Ks):

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350%

2018 2017 2016 2015 2014 2013 2012

Cumulative Permit Changes as % of Total Airspace

CWST WM WCN* RSG

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GeneralDescr. WCN WM RSG CWSTOwnorhavecontroloftheland

Whetherthelandwheretheexpansionisbeingsoughtiscontiguoustothecurrentdisposalsite,andweeitherowntheexpansionpropertyorhaverightstoitunderanoption,purchase,operatingorothersimilaragreement

Wehavealegalrighttouseorobtainlandtobeincludedintheexpansionplan

Weownthelandassociatedwiththeexpansionairspaceorcontrolitpursuanttoanoptionagreement

Wecontrolthelandonwhichtheexpansionissought

Nofatallegalorpoliticalimpediments

Whetherweconsideritprobablethatwewillachievetheexpansion(forapursuedexpansiontobeconsideredprobable,theremustbenosignificantknowntechnical,legal,community,businessorpoliticalrestrictionsorsimilarissuesexistingthatwebelievearemorelikelythannottoimpairthesuccessoftheexpansion)

Therearenosignificantknowntechnical,legal,community,business,orpoliticalrestrictionsorsimilarissuesthatcouldnegativelyaffectthesuccessofsuchexpansion

Therearenoidentifiedfatalflawsorimpedimentsassociatedwiththeproject,includingpoliticalimpediments

Wehavenotidentifiedanylegalorpoliticalimpedimentswhichwebelievewillnotberesolvedinourfavor

Activelyworkingonobtainingpermits

Whetherinternalpersonnelorexternalconsultantsareactivelyworkingtoobtainthenecessaryapprovalstoobtainthelandfillexpansionpermit

Personnelareactivelyworkingontheexpansionofanexistinglandfill,includingeffortstoobtainlanduseandlocal,stateorprovincialapprovals

Progressisbeingmadeontheproject

Weareactivelyworkingonobtaininganynecessarypermitsandweexpectthatallrequiredpermitswillbereceived

Miscellaneous Whethertotaldevelopmentcosts,finalcappingcosts,andclosure/post-

Wemustgenerallyexpecttheinitialexpansionpermitapplicationtobe

Theexpansionisattainablewithinareasonabletimeframe;

Alltechnicalsitingcriteriahavebeenmetoravariancehasbeenobtained

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closurecostshavebeendetermined

submittedwithinoneyearandthefinalexpansionpermittobereceivedwithinfiveyears

Webelieveitislikelytheexpansionpermitwillbereceived

orisreasonablyexpectedtobeobtained

Fulfillscorporatefinancial/investmentcriteria

Whetherinternalpersonnelhaveperformedafinancialanalysisoftheproposedexpansionsiteandhavedeterminedthatithasapositivefinancialandoperationalimpact

Financialanalysishasbeencompletedbasedonconceptualdesign,andtheresultsdemonstratethattheexpansionmeetsCompanycriteriaforinvestment

Wearecommittedtosupportingtheexpansionprojectfinanciallyandwithappropriateresources

Seniormanagementhasapprovedtheproject

Thefirst3criteriaforexpansionairspacecanbeviewedascomparableforall4

companies(whichdonotseemtobeveryimportantpoints).It’scuriousthatCWSTmentions‘variances’inthemiscellaneouscategory,whenthisdoesnotseemtobeanissuefortheother3companies.Admittedly,variancesmightbepartofallthecompanies’processes,butthemerementionofitlendstoafairquestionifvarianceshavebeenaprobleminthepast.

Thelastcategorypertainstothefulfillmentoffinancial/investmentanalysisofexpansionairspaceandthewillingnesstosupportthatexpansion.

Whileitscompsclearlyaddressthispointwiththeirchoiceoflanguage,CWSTsimplystatesthat“seniormanagementhasapprovedtheproject”,asitsexplanation.Webelievethatthisisamaterialdifferencefromcompetitors,giventhatseniormanagement’sapprovalisnotnecessarycontingentontheinvestmenthavingapositiveROI(thiswholereportisdedicatedtoprovingthatCWST’smanagementis,infact,terribleatcapitalallocation).WebelievethatthisdistinctionbetweenCWST’sandcompetitors’interpretationofexpansionairspacecouldbecontributingtothefactthatCWST’sexpansionairspaceappearssomuchhigherrelativetoitscompetitors’.Simplyneedingthe“approvalofseniormanagement”toincludeairspaceasexpansionairspacegivesCWST’smanagementmuchbroaderdiscretiontopotentiallyoverestimateexpansionairspace,likewehavediscussedabove.

Consequences

Expansioneffortsforlandfillsarecapitalizedcosts.WebelievethatCWSTdeliberatelyoverestimatesitsexpansionairspacesoastocategorizealargeproportionoftheircostsas“landfillexpansioncosts”,andthereforecapitalizetheminsteadofexpensingthem.ThismeansthatifCWSTweretowritedownitsprojectedexpansionairspace,theywouldalsohavetowritedownformerlycapitalizedcostsrelatedtothoseexpansionefforts,andwouldhavetoexpense,ratherthancapitalizetheseexpansioncostsgoingforward.Webelievethatthese

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wouldresultina$5million+hittonetincomeandaseveraltensofmillionswritedownsofCWST’slandfillassets.

Before2014,~$5-10millionofCWST’sCAPEXspendeachyearwasclassifiedas“growth”CAPEX(i.e.relatedtoexpansionefforts).After2014CWSTstoppeddisclosingthisnumber.BecauseCWSThasfailedinmanyofitsexpansioneffortstodate,webelievethatthemajorityofthis$5-10millionincapitalizedcostsinthelandfillPP&Eline-itemisinaccurate.Therefore,proportionatetotheleveloffaultyexpansionairspaceestimated,webelievethatCWSTwouldhavetorealizethis$5-10millionperyearinadditionalcosts,andwrite-downtheaccumulatedtensofmillionsinexpansion-relatedcostsinitslandfillPP&Eitem.

FailedLandfillExpansions

FaultlinesarealreadybeginningtoshowwithrespecttoCWST’sproposedlandfillexpansions.In2017,CWSThadalargefailedlandfillexpansionatitsSouthbridgelandfillduetopublicoutrageconcerningnewlyfoundenvironmentalissues.TheseissuecollectivelyforcedCWSTtoshutdownthelandfillprematurely,generatingsignificantcostsandpullingforwardfutureliabilities.

Thecompanyrecentlyalsofailedtopassaproposedexpansiononitssmallestlandfill,inBethlehem.Thisfailurewasduetopublicprotestagainstexpandingthelandfill,similartoSouthbridge.NowCWSTisattemptingtocreateanew“greenfield”landfillinplaceoftheexpansionofitsexistinglandfill,whichisbeingmetwithsimilarpublicoutcry.Withjustitscurrentairspace,theBethlehemlandfillwillbefullwithinjust2-3years.IfCWSTisunabletosecureanexpansionbythen,thislandfillcouldcreatesimilarcostsandissuestoSouthbridge’sprematureclosure.

ThecompanyisalsointhemidstofexpandingitslargeCoventrylandfill.Theonlyremainingpermittheyneedisfromagroupofcitizens.TherehasbeensignificantpublicoutcryagainstexpansionoftheCoventrylandfillaswell.It’spossiblethatthiselectedgroupofcitizensfulfillsthedesiresoftheprotesters,andrejectsthelandfillpermit.

Incontrasttotheabove,CWSThashistoricallybeenfairlysuccessfulingettingitslandfillexpansions.Thisisbecausethemajorityofitslandfills(locatedinNewYorkstate)donotrequireanyformofpublicvotetogetanexpansion.MunicipalitiesgenerallygetgoodmoneyfromleasinglandfillrightstoCWST,sotheyareveryincentivizedtoseeexpansionshappen.However,inthecaseoftheBethlehemandCoventrylandfills,thepublicdogetasay.AndtheirsayisextremelynegativetowardsCWST’slandfillexpansions.CWST,aswewillshowinthisreport,isacompanyoperatingonthebrinkofdisaster.Shouldthecompanyfailtoobtainanyofitslandfillexpansions,andbeforcedtoclosedownthelandfillprematurelyandincurthosecosts,wecouldseethosecostscripplingthecompanyasawhole.Further,failedexpansionswillcatalyzetheaboveproblemofoverestimatedexpansionairspacecontributingtounderstatedexpensesintobeingrevealed.

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Leases TherecentnewleasestandardshouldcontinuetopressureCWST’searnings.CWSTpreviouslyhadseveralcontractstoleaselandfillsfrommostlymunicipalities.Theyclassifiedtheseasoperatingleases,yetstrangelycapitalizedtheleasepaymentsandrecordednocorrespondingleaseliability. Uponadoptionofthenewleasestandardstarting2019,CWST’sprevious~$7million/yearincapitalizedoperatingleasepaymentswillnowbeexpensedasoperatingleasepayments.Currently,thisnewleasestandardhasonlybeenactivefortwoquarters,andsohasnothadtoodramaticofanimpactonCWST’searnings.However,astheyeargoeson,thefullimpactoftheannualleasepaymentsshouldreduceCWST’syear-over-yearearningsmetricsby~$7million.

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Part2–UnderstatedLiabilities

AssetRetirementObligationsFurther,wehaveclearevidencethatCWSTunderstatesitsassetretirementobligation

liabilities.CWSTrecords$72millionthepresentvalueofitsclosureliability.Thispresentvalueiscalculatedusinga9%discountrateanda1.5%inflationrate,discountedovertheremainingestimatedusefullifeofCWST’slandfills.

Webelievethatalloftheaboveassumptionsareinvalid.First,wecanclearlyseethatCWST’sdiscountrateisfarmoreaggressivethanthoseof

comps,whichwouldobviouslythenresultinamuchlowerNPVcalculation:

*ADSWdisclosesarangeofdiscountratesthatituses.Weshowthelow-endoftherangeintheabovegraph,becausethatbestapproximatesitscurrentcostofcapitalandisthereforemostlikelythediscountratethatADSWiscurrentlyusing

CWSTusessuchahigherdiscountratethancompetitorsbecauseitinitiallycalculated

thisdiscountrateseveraldecadesago,whenitfirstbeganoperatingitslandfills.Discountratesusedforassetretirementobligationsaresupposedtoapproximatethefirm’smarginalcostofcapital(forexample,theinterestrateonacompany’screditfacility).CWST’sdebtfacilitieswereat>8%interestratesatthetimeofitsIPOin1998,andlikelymuchmorebeforethatgiventhatthecompanywasmuchsmaller.Whiletheabove9%discountratewouldhavebeenvalidhistorically,asoftoday,CWST’screditfacilityisata5.5%interestrate.ThismeansthatanyadditionalAROobligationsincurredoverthepastfewyearsshouldbediscountedaroundthis5.5%discountrate,yetCWSTforsomereasondiscountsalloftheirAROliabilitiesatacontinuouslyhighdiscountrateof9%.

0.00%1.00%2.00%

3.00%4.00%

5.00%6.00%

7.00%8.00%

9.00%10.00%

WM WCN RSG CWST ECOL CLH ADSW

Discount Rate Used to Calculate NPV of Landfill Closure Liabilities

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*ECOLassumesthehigherinflationrate(2.60%)oftheentirecompset,whichmeansitwouldlogicallythenalsoassumethehighestimpliedrisk-freerate

Similarly,wesimplybelievethatCWST’sinputtedinflationrateisunrealisticaswell,asoneofthelowestinthecompset:

Theclosureliabilitycalculationfirstcompoundstheclosurecostsattheaboveestimatedinflationrates,thenappliestheaforementioneddiscountratestobringthesecostsintothepresent.Byusinganabnormallylowinflationrate,CWSTunderstatesthefuturevalueoftheseliabilities.Alowandoutdateddiscountratealsocompoundstheproblembyunderstatingthepresentvalueoftheliabilities.

Webelievethattheculminationoftheseinaccurateassumptionsresultsinamaterialunderstatementoftheircurrent~$70millioninAROliabilities

0.00%0.50%

1.00%1.50%

2.00%2.50%

3.00%

3.50%4.00%

4.50%5.00%

WM WCN RSG CWST ECOL* CLH ADSW

Discount Rate minus Marginal Interest Rate

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

WM WCN RSG CWST ECOL CLH ADSW

Estimated Inflation Rate

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UnderestimatedOperatingLeaseLiabilities Thenewleaseaccountingstandardnowrequirescompaniestorecordoperatingleaseliabilitiesforcertainlong-termleases,alongwithacorrespondingright-of-useassetonthebalancesheet.CWSTappearstobesimilarlyunderstatingthesenewoperatingleaseliabilitiesbyusinganartificiallyhighdiscountratefortheNPVcalculationofthefuturepayments.

CWSTstatesthattheycalculatetheirdiscountratebasedonanindustryyieldcurve–wewouldquestionwhatactualindustry’syieldcurvetheyareusing.It’sclearthattheirestimationofanadequatediscountratefortheiroperatingleaseliabilitiesisveryoff.Wewouldroughlyestimatethattheirdiscountratehastodeclineby~2%,whichcompoundedoverthe11yeartermoftheiroperatingleaseswouldleadtoa~10-20%increaseinleaseliabilitiesneeded,or~$6-12million.Thisisnotsignificantinthegrandschemeofthings,butagainclearly

0.00%

1.00%

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3.00%

4.00%

5.00%

6.00%

7.00%

WM WCN RSG CWST ECOL CLH

Discount Rate for Operating Lease Liability

-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

WM WCN RSG CWST ECOL CLH

Discount Rate Less Weighted Average Cost of Debt

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showsthatCWSTmanagementiswillingtoartificiallymanipulatetheirnumbersinordertopresentabetterpicturetoinvestors. Discountratesaresupposedtoapproximateacompany’sincrementalborrowingrate.It’spossiblethatCWSTissendingamessagethroughthisveryhighdiscountrate,suggestingthatbecausetheirfinancialsituationissomuchmoreprecariousthancomps,theywouldhavetoborrowincrementalfundsatamuchhigherinterestratethancomps.

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Part3–DeterioratingBusinessMetrics

WithoutDilution,OneBadQuarter=TrippingCovenants WebelievethattheonlysolutionforCWST’smountingliabilityproblemistoraiselargeamountsofcapitalthroughissuingstock.Early2019,CWSTissued3.6millionsharesofstock(8%dilution)for$100millioninnetproceeds.Managementclaimedthatthisissuancewastosupportfutureacquisitions(discussedinmoredepthlater);instead,webelievethatCWSTwasforcedtodothisoffering,inordertoavoidtrippingdebtcovenantsandrunningintodefault. CWSTiscurrentlyleveragedtothehiltat3.2xEBITDA(pre-adjustments).CWST’scurrentcreditfacilityrequiresamaximumnetleverage(netdebt/EBITDA)ratioof4.50x.Althoughtheyarecurrentlycomfortablybelowthisthreshold,wewouldnotethatwithouttherecentcapitalraise,thisratiowouldriseto3.8xnetdebt/EBITDA.Further,adjustingfor$7millioninoperatingleaseexpensesyettoshowupbringsthisratioupto4.0xnetdebt/EBITDA.Withjust$70millionmoreindebtor$16millionlessinEBITDA,CWSTwouldbetrippingcovenants.Wenotethatthisisnotnecessarilythatfaraway:inQ12019CWSTburned$13.4millioninFCF. Ofcourse,therecentcapitalraiseshoresupthebalancesheetsignificantly.Althoughthisisbeneficialinthepresent,weareconcernedthatthismaysoonbecomeathemeinthefuture,ratherthanaone-offoccurrence.Negativeadjustednetincomeplussignificantleverageandadesiretopursueanaggressiveacquisitionstrategydonotmix,andonecanonlywonderwhereCWSTwillendupgettingthefinancingthatitneedstopaydownitsunderstatedliabilitiesandacquirethecompaniesitwants. BullswillpointoutthatCWSTisfreecashflowpositive,whichwillallowthemtoslowlybuildupthebalancesheettotakeontheseliabilities.Therearemultipleissueswiththisbelief.First,CWSTisnowfunnelingmorethan100%ofitsfreecashflowintoacquisitions(moreonthislater).Further,andmoreimportantly,CWST’sfreecashflowgenerationisabysmal.Overthepast7years,thecompanyhasproducedonly$94millionincumulativefreecashflow,mostofwhichhappenedinthepast3years.Thisrepresentsapaltry2.5%cumulativeFCFmargin.

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WhileFCFconversionappearstohavebeenimprovinginrecentyears,eventhecurrent$40millioninFCFgenerationrepresentsjusta6%FCFmargin.Thiscompareswith>10%FCFmarginsforallofCWST’smaincompetitors.Further,especiallyforCWST,thisFCFis,inreality,simplyabuildupofreservestofunditsaccelerating$200millioninclosureliabilities.

FCFMetricsDeteriorating CWSTmanagementlikestobragabouttheirabilitytogenerateandgrow“normalized”FCF.Take,forexample,thebelowchartfromtheirinvestorpresentation:

However,wequestionwhetherthesourceofthisFCFgrowthwasactuallyfrombusinessprowessorsimpleaccountinggames.

-40-20

020406080

100120140160

2018 2017 2016 2015 2014 2013 2012

EBITDA to FCF Conversion is Abysmal

Adjusted FCF* Adjusted EBITDA Delta

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Asyoucansee,FCFhasbenefitedinrecentyearsonlythroughtheincreasinguseofnon-cashpaymentmethods.WhilemanagementtriestopaintarosypictureofFCFgrowth,inrealitytrueFCFintheTTMperiodhasdeterioratedtonear-zero. Wenotethattheweighted-averageinterestrateonCWST’scapitalleasesiscurrently5.2%,whiletheeffectiverateonitsoutstandingcreditfacilityisonly3.95%currently(LIBOR+1.75%).ItthereforedoesnotappeartomakeeconomicsenseforCWSTtoincura5.2%interestratetodayonanewcapitallease,ratherthanjustborrowingfromitscurrentcreditfacilitiestofundnewCAPEX.WethereforebelievethatthemainreasonthatCWSTisrampingupPP&EacquiredthroughcapitalleasesasshownaboveistoartificiallyinflateFCFmeasuresattheexpenseofcreatingtrueshareholdervalue. Asareminder,partofmanagement’scompensationistiedtoFCFnumbers;managementisthereforealsoheavilyincentivizedtoartificiallyboostFCFnumbers.

Part4–ManagementEnrichment

0

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TTM 2018 2017 2016 2015 2014

FCF Contribution By:

Capital Leases Stock Compensation

-10-505

1015202530354045

TTM 2018 2017 2016 2015 2014

FCF Artificially Boosted

Reported FCF FCF Less Capital Leases and Stock Comp

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Compensation

TheindividualsthathaveprofitedthemostfromCWST’smeteoric(andarguablymanipulated)riseinfinancialsandsharepricearenoneotherthanseniormanagementthemselves.

*VariablePayiscalculatedasstockawardspluscashbonusawards

ThissharpincreaseinCEOvariable(i.e.bonus)compensationstartingin2016correspondswiththebeginningofCWST’sschemetoartificiallyinflateitsorganicpricinggrowthmetrics,aswellasmanipulationsinFCFthatwedetail.2016wasalsothestartofCWST’sstockturningfromasleepywastemanagementcompanyintoahyper-growthperformer. WebelievethatthemajorityofCWST’sCEO’s~$8.5millionincumulativecompensationsince2016hasbeenachievedthroughartificiallymanipulatingthecompany’sfinancials.WealsobelievethatCWST’scurrentincentivestructureissetupsoastoencouragefurtherfinancialmanipulation.CashBonuses First,we’lltalkaboutcashbonuses.Priorto2016,from2013-2015,CWSTcalculatedcashbonusesusing“economicvalueadded(EVA)”,calculatedasadjustedoperatingincomegrowthyoylessCWST’sWACCmultipliedbyitsnetassets.AportionofEVAgrowthwasallocatedbasedonaslidingscaletoacashbonuspoolthatCWSTexecutivesshared.

0

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2018 2017 2016 2015 2014 2013

CEO Compensation

Fixed Pay Variable Pay

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Asyoucanseefromtheabovechart,CWST’sexecutivesdidnotreapsignificantbonusamountsfromthisstructure.Forexample,in2013theymissedtheirtargetsandcashbonuspayoutwas$0.In2014theyachievedapaltry23.7%oftheirtargets. Then,in2016,theboardchangedCWST’scashbonuscompensationstructuretobeingbasedonadjustedoperatingincomeandadjustedFCFtargetseachyear(eachweightedat50%).Suddenly,bonuscompensationpickedupsignificantly. Webelievethatthevastmajorityofthisincreaseincashbonuscompensationhasbeenill-gottenthroughmanipulatingfinancialstatementsinthemethodsthatwedetailinthisreport.Year AdjustedOperatingIncome

TargetAchievedAdjustedFCFTargetAchieved %ofTarget

BonusPaid2018 0% 167.1% 83%2017 140.4% 195% 168%2016 200% 175.4% 288% Withtheexceptionofaweak2018forEBIT,managementhasseeminglyperformedstunninglyinconsistentlyexceedingtheirEBITandFCFtargetsoverthelastthreeyears.Unfortunately,webelievethatthemajorityofthisoutperformancehasbeeninorganicinnature. WehavealreadydemonstratedthroughoutthisreportwhywebelievethatCWST’soperatingincomeissignificantlyoverstatedbyupto$30millionduetofaultyusefullifeassumptionsforitslandfills.ShouldweadjustCWST’sEBITdownbythisamount,managementwouldhavepassednoneoftheminimumthresholdsinthelastthreeyearsforearningacashbonusbasedonadjustedoperatingincome. Similarly,wehavenowdemonstratedhowCWSTmanagementhasartificiallyinflatedFCFthroughincreaseduseofcapitalleasesandstock-basedcompensation,bothofwhichareeasywaystomanipulateFCFhigher.Managementalsoexcludesaline-itemcalled“non-recurringcapitalexpenditures”fromadjustedFCF,whichin2018wasmainlyrelatedtotheSouthbridgelandfillclosure.WebelievethatthisisanaggressivewaytomeasureFCF.

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Toexplainthisgraph,theredbarshowsCWST’sreportedAdjustedFCFminusthetargetAdjustedFCFformanagementbonuscalculations.TheotherbarsshowtheyoygrowthinFCFcontributionfromvariouscostsexcludedfromAdjustedFCF.Forexample,CapitalLeasesgrew~$3.5millionbetween2018and2017,implyingthatshouldthesecostshavebeenaccountedforasCAPEXinstead,FCFwouldhavebeen$3.5millionlowerin2018.

Asyoucansee,overtheyears,managementhasgottenmuchmoreaggressivewithsimplytakingcashcostsandreplacingthemwithcorrespondingnon-cashcostsinordertobeattheirFCFtargetsandearnfatbonuses.In2018anynumberofthesemanipulationscouldhaveexplainedthe67%“beat”oftargetFCFfortheyear.Wethereforesimilarlybelievethatmanagement’sFCFtargetbonusesovertheyearshavebeenill-gotten.StockBonuses Starting2016managementwasalsocompensatedthroughperformance-shareunits(PSUs).Before2016,managementonlyreceivedrestrictedstockunits(RSUs),whichsimplyvestafteraperiodoftime,therebyincentivizingexecutivestostaywiththecompany.PSUs,ontheotherhand,vestbasedonachievementofcertainfinancialtargets.ForCWST,theyvestbasedonadjustedFCFandadjustedEBITDAtargets(eachweighted50%),withthetotalamountmultipliedbyarelativetotalshareholderreturnmetric(calculatedastotalreturnforthestockrelativetotheRussell2000). Atfirstglancethismayseemlikeapositivebusinessmove–movingfromsimplyincentivizingexecutivestostayatthecompanytoincentivizingthemtoactuallyexecuteonimprovingthefinancials. Unfortunately,webelievethatmanagementsimplyusedthisasafronttoissuethemselvesmorestock.

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Asyoucansee,stockcompensationhasrisensignificantlyfromthischangeinstockcompensationstructurein2016.WebelievethatthisisbecausemanagementjustifiedissuingthemselvesmorePSUsthanpreviousRSUsbecausePSUsaremoreuncertainandaremorebeneficialtoshareholderstohavetheexecutivecorrectlyincentivized. Webelievethatthiswouldbeafairassessment,exceptforthefactthatCWSTmanagementisalsomanipulatingthefinancialstomeetthetargetsneededforvestingofPSUs. WehavealreadydetailedhowCWSTmanipulatestheadjustedFCFnumberusedtocalculateexecutivecompensationtargets.

WealsobelievethatCWSTmanagementmanipulatestheiradjustedEBITDAtargetsthroughacquisitionsfundedbydebt.Acquisitionsareaccretivetoearningswhileleavingbehindnoneoftheircorrespondingcosts(interestondebtanddepreciationofPP&E).PSUtargetsdonotappeartobeadjustedforearningscontributionfromacquisitions,soCWSTmanagementbecomesincentivizedtopursueacquisitionsatallcostsinordertomeettheirPSUtargets. Initial3-yearPSUswereonlyissuedin2016,soweonlyhaveoneyear’sdataofperformanceagainstthePSUs’financialtargets.Theyareverygood:Year AdjustedFCF

TargetAchievedAdjustedEBITDATargetAchieved

TSRPercentile TSRMultiplier

2018 150% 150% 99.6% 119.8% CWSTachieved$47.1millionofadjustedFCFagainsta$35milliontarget.Asweshowedabove,capitalleases,stockcompensation,and“non-recurringCAPEX”haveeachaccountedfor~$5millionofthisgrowthinFCFoverthe3years.Combined,CWST’sadjustedFCFdeclinestounderthe$35milliontargetwhenadjustedfortheserisesinnon-cashshiftsofcost. Similarly,CWSTachieved$138millionworthofadjustedEBITDAversusatargetof$127million.However,thecompanyhasalsoacquired~$100millionworthofbusinessessince2015.

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ApplyingCWST’s20%EBITDAmargintotheseacquiredbusinessessuggeststhattheircontributionto2018adjustedEBITDAwas~$20million,ordoublethemarginofthe“beat”ontheadjustedEBITDAtarget. TheentiretyofthisreportisdedicatedtoprovingwhytheTSR“beat”isalsoill-gotten. Therefore,webelievethatthemajorityofthevestingofstock-basedcompensationoverthelastyearforCWSThavebeensimilarlyill-gotten.

RelatedPartyTransactions Thisisjustthetipoftheiceberg,however.Whilemanagementispaidhandsomelyforcreativelyfudgingtheirfinancialstatements,theyarepaidevenmoreforprovidingrelatedpartyservicestoCWST.

ThemajorityoftheserelatedpartytransactionsinvolveconstructionservicesprovidedbyCasellaConstruction;aprivatecompanyownedbytheCasellas.TheCasellasalsoowntwoofCWST’sbuildingsinVermont,includingitsheadquarters,bothofwhichCWSTleasesfor~$140k/year.Althoughit’simpossibletoverifythenatureoftheconstructionservicesthattheCasellasprovideCWST,therearepreliminarysuggestionsthattheleaseratesforthetwofacilitiesareoverstated,whichmaycastdoubtonthearm’slengthnatureofalloftheserelatedpartytransactions. Thetwoleasedbuildingsare:25GreensHillRoad,RutlandVT(CWSTHQ);and408EastMontpelierRoad,MontpelierVT. Theleaseswereestablishedin1994at~$9k/monthforeachfacility.Thereafter,theleaseratesinflateatarateequaltothegrowthintheconsumerpriceindexofBoston,MA.From1998-2018(earlierdataareunavailable),Boston’sCPIhasgrown~60%,oraCAGRof

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Leases Construct ion Services

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~2.3%.Thiswouldimplythateachleasetodayisat~$14.5k/month,whichalignswithCWSTdisclosingthatthetwoleasescurrentlycost$28k/monthintotal. Webelievethattheseleaseratesareveryaggressiverelativetothecurrentvalueoftheleasedfacilities.Montpelier First,theMontpelierfacility.Thisisa1344squarefootbuildingon4.7acresofland.ThisspecificfacilityispartofalargerCWSToperationintheareacomprisingseveralbuildings.Thereusedtobealandfillonthislandbutitwasfilleddecadesago.Nowitseemsthattheareaprimarilyservesasatransportfacility. ThespecificfacilitythatCWSTisleasinginMontpelierwasassessedatavalueof$926kfortaxpurposes.Generally,wewouldconsidertaxassessmentvaluesaspotentiallyinaccuratemeasuresofabuilding’struevalue.However,becausethisisarathersimplestoragebuildingonalargeamountofland,webelievethattheproperty’sassessedvalueprobablyapproximatesitstruevalue. Belowarealloftherecentpropertysalesthatwecouldidentifywithinahalfmileradiusofthefacility:

Address SQFT Acres CurrentAssessedValue

Sale SaleDate SalePremiumOverAssessed

378EastMontpelierRoad

1344 4.7 926000 x x

317RiverStreet 4000 1 507300 435000 5/20/14 -14%265RiverStreet 19500 9.61 2250900 1688000 12/11/13 -25%180RiverStreet 4000 0.63 421700 632000 9/26/08 50%26GallisonHillRoad

6000 0.89 270000 270000 2/8/19 0%

NotethatCWST’sfacility(378EastMontpelier)wasboughtpriortoelectronicrecordsrecordingandsothereisnorecentsaleprice.AlsonotethatcomparisonsofpricepaidpersquarefootforexamplewouldnotbereasonablewaystomeasurethevalueofCWST’spropertybecausetheirpropertycomprisesonlyasmallbuildingonalargeplotoflandwhereasthecompsidentifiedgenerallyhavelargebuildingsonsmallerplotsofland.Wehavealsoexcludedarecentlysoldgasstationfromtheaboveanalysisbecausewedonotbelievethatgasstationsarevaluedthesameasbuildings. Allofthesepropertiesweresoldrelativelyneartheirassessedvalues.The180RiverStreetpropertyisaslightoutlierduetothesaletakingplacemorethan10yearsago.We

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thereforebelievethat$926kisareasonableapproximationforthevalueofCWST’sleasedproperty. Usingthisassumption,paying$140k/yearforthisfacilitywouldequatetoovera15%caprate,whichwebelieveisveryaggressive.Forillustrativepurposes,webelievethatamorereasonablecaprateforthispropertywouldbe5%,whichwouldequatetoapropertyvalueof$2.8million.Themostexpensivepropertyaboveis265RiverStreet,whichisacardealer.Thatpropertyhasnearly15xthesquarefootageofCWST’spropertyfornewerbuilding,ondoubletheacreage.Andyet,itwasstillwasonlyrecentlysoldfor$2.3million.WeseenoevidencethatCWST’sleasedpropertyshouldbeworthanywherenearthisamount.Wethereforebelievethatthispropertyhasanartificiallyhighcaprate,andmanagementisdestroyingshareholdervaluefortheirownbenefitbynotacquiringthispropertyinsteadofleasingit.RutlandCity CWST’sleasedpropertyinRutlandishardertoassessbecausetaxassessmentvaluesarenotpubliclyavailableandthepropertywasacquiredbeforeelectronicrecording.WedoknowfromCWST’sSECfilingsthatthepropertyistheirheadquartersandis12,000squarefeetinsize.Wecanusethissizetoapproximatethefacility’svalue. BelowareallcurrentlyavailableforsaleorforleaseofficebuildingsinRutlandavailableonLoopNet:

Address SF LeaseRate BuyCost BuyCost/SF69AllenSt 1492 99500 66.721MerchantsRow 14844 225000 15.280West 29550 0.38/0.50/SF/Mo 450000 15.2253SMain 49000 3795000 77.425NMain 2320 250000 107.826-30MerchantsRow 22200 1505000 67.8172Granger 3664 279000 76.1164Woodstock 3000 0.42/SF/Mo

137NMain 1478 169900 115.05Commons 1470 185000 125.9654USRoute4E 6412 249500 38.9225SMain 10560 0.38-1.25/SF/Mo

734EUSRoute4 1311 74500 56.8220West 10000 0.67/SF/Mo

283USRoute4E 31000 0.92/SF/Mo

79Cleveland 3800 0.67/SF/Mo

165Woodstock 5308 249000 46.9

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19West 4000 339000 84.8106West 4505 0.67/SF/Mo

88Merchants 4400 1.17/SF/Mo

134Woodstock 5280 0.6/SF/Mo

Average $0.741/SF/Mo $68.8/SF KeepinmindthatmanyofthesepropertiesareinthemiddleofRutlandCity,whereasCWST’sfacilityisinasuburb.Therefore,manyofthesevaluesmaybehigherthantheratesachievableinasuburb. Nonetheless,wecanusetheseratestoconservativelyapproximatethevalueofCWST’sfacility.CWST’sfacilityis12,000squarefeet.At$68.80persquarefootinasalescenario,thiswouldequatetoavalueof$825,000fortheproperty.ThiswouldimplythatCWST’scurrent$14,000/monthleaseisatanegregious20%caprate.Alternatively,atarateof$0.74/squarefoot/monthforalease,thiswouldequatetoamonthlyleasecostof$8,880.CWST’smonthlyleasecostis57%higherthanthisestimatedamount. Thehighestcostpropertiesintheabovelistarefor$1.17/SF/Motoleaseand$126/SFtobuy.$1.25/SF/MowouldvalueCWST’smonthlypaymentsfortheirleaseat$14,000/month.$126/SFtobuywouldvaluethewholepropertyat$1.5million,orstillan11%caprate.WedoubtthatCWST’sfacilityisthehighestvaluefacilityinallofRutlandCity(forexamplethe$1.17leaseratepropertyisrightinthemiddleofdowntownRutland).ButthisistoshowthatevenifwegiveCWSTallofthebenefitofthedoubt,theyarestillprobablyoverpayingforthisproperty.Again,thisbenefitsCWSTinsiderswhoownthesepropertiesattheexpenseofcommonshareholders. Overall,thesearerelativelyminorinflatedrelatedpartytransactionscomprisingmaybeseveral$100kintotalvalue.However,weareconcernedthattheseclearlyfaultyrelatedpartytransactionsmaybereflectiveofgreaterinflationofrelatedpartytransactions.Forexample,thereisnowaytoverifythearm’slengthnatureofCWST’s~$3millionannualconstructioncostspaidtotheCasellas’privateconstructioncompany,CasellaConstruction.Ifmanagementhasevenbotheredtoextractminimalvaluefromtheirrelatedpartyleases,wecanonlyimaginethepotentialforcostinflationonless-verifiablecostslikeCWST’srelatedpartypaymentstoCasellaConstruction.

Who’stoCatchIt? CWSThasastrangecastofcharacters,includingan12-yearauditpartnerwhohaspreviouslybeeninvolvedwithfraud,andaslateofdirectorsonaverageaged68yearsold,with

25

twoofitsauditcommitteememberscomingfromquestionablebackgrounds. Startingwiththeauditor.CWSTiscurrentlyauditedbyRSM,onthefacearespectablefirmwithnoassociationwithfraud.However,diggingdeeper,wecanseethatCWST’sauditpartnerisMichaelForaste.Forasteisauditpartnerforoneothercompany,NorthernPowerSystems,whichdelistedthisyearasafinancialfailure,afterreachingamarketcapofover$100millionin2015. Furthermore,Forastestartedouthiscareerin1994atArthurAndersen,thenleftin2002whenitcollapsedtojoinCaturanoandCompanyaspartner.CaturanoandCompanyitselfwasinvolvedinaccountingfraudsrelatedtoitsformerco-founder,RichardVitale,tosuchadegreethatitwasforcedtodroptheword“Vitale”fromthefrontofitsname.Notexactlythemoststand-upauditingfirm.APCAOBinspectionreportfrom2008indicatedthatthecompanyhad30partnersatthetime. CWSTengagedCaturanoasitsauditorstarting2006.Sincethen,CaturanowasacquiredbyMcGladrey,whichwasthenacquiredbyRSM.Thefactthat,afterallthistimeandM&A,CWST’sauditpartnerisstillanoriginalmemberofCaturanosuggeststhat,withinRSM,CWSTstillhasacloserelationshipwithCaturanoanditsoriginalauditpartnerslikeForaste,whohavehistoricallynotdemonstratedtheirabilitiestoadequatelydetectfraud. WeseesimilartraitsinCWST’sboardofdirectors,specificallyintheauditcommittee(whichisresponsiblefordetectingfinancialmisstatements).Generallyspeaking,theaverageageofCWST’sdirectorsisanincredible68,andwefeelthatatthatageononeshouldbeabletoresponsibilityoverseefinancialreporting. Morespecifically,twomembersofCWST’sauditcommitteepiqueourinterest.FirstisMichaelBurke,who’smainqualificationishisstintasCFOatLandauerfrom2012-2014.Interestingly,afterBurkeleftLandauer,Landauerreportedamassiverestatementof2013financialstatements,whichincludedareductioninrevenuesandanalmost100%reductioninEBITduetoagoodwillimpairmentcharge.WethereforedonotbelievethatBurkeisqualifiedtositonCWST’sauditcommittee. Furthermore,CWST’sauditcommitteechair,JamesCallahan,wasformerlyauditpartneratArthurAndersen,whichheleftjustpriortoitscollapse,andhasapparentlynotworkedanywheresince. Lastly,CWST’sCFOforthepast5years,EdmondColetta,isapparentlynotaCPA.NowheredoesCWSTstatethatColettaisaCPA,andColettadoesnotshowupinaCPAverificationsearch. Overall,wedonotbelievethattheaboveisanadequateslateofindividualstogovernandensurefinancialdisciplineatCWST.

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Part5–DoubtfulRevenueGrowth

Inthepriorsection,weshowedthepresenceofmaterialaccountingissuesatCWSTandwhywebelievethattheywillendupcripplingthecompany.Inthissection,wewilldemonstratethatCWST’sbasebusinessisunderincreasingqualitativepressurethatisonlyintensifying.Therefore,wedonotbelievethatCWSTcan,overthenextfewyears,growearningsenoughtoaccommodatethelargeliabilityburdenthatitwillsoonface.

OverstatedOrganicGrowth

Wastemanagementcompaniesallbreakdowntheirperiod-over-periodsolidwasterevenuegrowththesameway,showinggrowth/declinecontributedfrom:pricing,volume,fuelsurcharges,acquisitions/dispositions,and(ifapplicable)commoditypricevariances.Solidwasterevenuestypicallyaccountfor80%+oftotalrevenuesforthesecompanies,sosolidwasteorganicgrowthisacriticalKPIforanalyststokeeptrackof.Organicgrowthistraditionallyseenaspricinggrowth+volumegrowth;fuelsurcharges,acquisitions,andcommoditypricevariancesareconsideredinorganicsourcesofgrowth.

CWSTsegmentstheirrevenuegrowthintheabovestylesimilartoallofitscomps.Therefore,acasualinvestorwouldlikelyanalyzeCWST’ssolidwasteorganicgrowthsimilartocomps(i.e.bysummingpricingandvolumechangesbetweenperiods).Unfortunately,webelievethatthiswouldleadtoanincorrectmeasurementofCWST’sorganicgrowth,duetotheaccountingforauniquepricingprogramthatCWSTuses.

FuelsurchargefeesshifttheburdenoffluctuationsinfuelpricesontoCWST’scustomers,andisstandardindustrypractice.However,CWSTdifferentiatedthemselvesbyalsoinstitutingaSustainabilityRecyclingAdjustment(SRA)feein2015,whichwassimilartotheirexistingfuelsurchargeprogram,exceptthattheSRAfeewastohelpoffsetfluctuationsinrecyclingcommodityprices.ThisSRAfeewasinresponsetoincreasingpressureontherecyclingmarket,mainlystemmingfromChina(moreonthislater).CWSTiscurrentlytheonlywastemanagementcompanythathassuchafee.Therefore,theyhavealsohadsignificantleewayindeterminingtheaccountingforthisfee,leadingtowhatwebelievetobebadlydisclosedmanipulationsoforganicgrowth.

Specifically,CWSTclassifiedchangesinitsSRAfeeas“pricing”changeswhenitfirstimplementedthefeein2015.Thisismisleadingbecausewebelievethatthisfeeshouldbelumpedtogetherwiththefuelsurchargefeeinthe“surcharges”classification,giventhatitdoesnotrepresentorganicpricinggrowth,butratherpricinggrowththatvariesinaccordancewithcommoditypricechanges.

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*Source:CWSTFY201610-K

ThebelowexchangeswithanalystsclearlyshowthatSRAfeesarebeingincludedascollectionpricingchanges:

Q22015ConferenceCallTranscript:AlKaschalkWedbushSecurities–AnalystJohn,Iappreciatethatcolor.Doesthatmean,ofthe$2.2millionyoureportedinthequarter,IthinkIhavemynumberright,oritwas$3.7million,Iforget,butincludedinthatistheSRAfee.Soonago-forwardbasis,shouldwelookforasimilarlevelofpriceatleastforthenextcoupleofquarterswhenyoudoayear-over-yearcomp?Orarewegoingto--?EdJohnsonCasellaWasteSystems,Inc.–President,COOYes,acoupleofcommentsthere.OneistheSRA,bymynumbers,and,Ned,correctmeifI'mwrong,butitwasn't--itwaslessthan1%ofthe3.7%thatwegotonthecollectionside.

Q32015ConferenceCallTranscript:

CoreyGreendaleFirstAnalysisSecurities–AnalystAcoupleofquestions.Firstofall,justsoweunderstandwherethingsareflowing,theSRAfee,isthatshowingupinsolidwasteprice?NedColettaCasellaWasteSystems,Inc.–SVP,CFOItactuallygetsbookedinthecollectionlineofbusiness,soitisshowingupinthatpricelineAlthoughit’sclearthatanalystsrecognizethefactthatSRAfeesarebeingincludedas

collectionpricinggrowth,CWSTneverdisclosedfortheFYs2015and2016howmuchofcollectionpricinggrowthwasaresultoftheSRAfee(managementdiddisclose,whenprompted,SRAfeecontributioninQ22015,Q32015,andQ12016,whichwewillelaborateonlater).

Whenthefeebeganin2015,itwasat4%.Webelievethatthisartificiallyinflatedperceivedorganicgrowthin2015-16,giventhattheincreasecausedbytheSRAfee,was

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lumpedintowhatshouldhavebeenpurelyorganicpricingchanges.Thebelowgraphshowsclearlythat2015wasasignificantchangefrompriorpricinggrowth:

Wecan’tbesureexactlywhatrevenuetheSRAfeecontributedin2015andfutureyears.However,wedoknowthatcollectionrevenuesare~60%oftotalsolidwasterevenues(therestmainlybeingdisposalfees).Between2015and2016,CWSTrolledouttheSRAprogramtonearlyalloftheirlocationsandcustomers.CWSTdisclosesthatthefeestartedoutat4%,thenroseto8%withinafewmonthsasrecyclingpricesdeclined.Therefore,it’slikelythatthisfeecontributed~2.5-4%inpricinggrowthbetween2015and2016.Thisisnotablegiventhatcumulativepricinggrowthduringthattimewasonly4.5%.Therefore,withoutknowingspecificsabouttheratesandpenetrationofCWST’sSRAfee,wewouldcautiouslysaythatover50%ofCWST’s“organic”pricinggrowthin2015and2016was,inreality,inorganic. Forexample,managementdisclosedinQ12016thattheSRAfeeadded2.4%tothatquarter’spricinggrowth.TheSRAfeeprogramwasfullyrolledoutinQ42015,sothisshouldhaverepresentedtheentiretyofthepricingimpactoftheSRAprogram.ManagementdidnotdisclosetheSRAfee’simpactonoverallpricinggrowtheveragainafterthatquarter.WebelievethatthisistheminimumcontributiontheSRAfeeweretohaveonoverallpricing,because,aswesaidearlier,thefeestartedat4%,thenroseto8%shortlyafterfullrollout(i.e.inQ12016thisfeewasstilllikely4%,risingto8%sometimein2016). SomemayargueherethattheinitialrecognitionofanSRAfeeshouldbeconsideredasorganicpricinggrowth,giventhatitrepresentstheabilityofCWSTtoenactincreasesontoacustomer’sbasepricing.Wedonotbelievethatthisshouldbethecase.Collectionscustomersrecognizethedifferencebetweenasurcharge(i.e.forfuel),andbasepriceincreases.ThefactthattheSRAfeefloatsrelativetounpredictablecommoditypricestellsaconsumerthattheirfeeisnotsetinstone,unlikeabasepriceincrease.Thismakesthefeeentirelydifferentintheviewofacustomer.Further,theimplicationofabasepriceincreaseisthatitisreplicable(thatisalsothedefinitionoftrueorganicgrowth).InstitutingthisSRAfeeisobviouslynotpossible

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forCWSTtocontinuouslydo.Thisfurthersupportsourviewthatthisfeeshouldnotbeconsideredorganicpricinggrowth. Morefundamentally,theSRAfeesimplyhastheeffectofshiftingrevenueshortfallsfromtherecyclingsegmentintothesolidwastesegment.Thishasanet-neutralimpactonrevenues,butinflatesthesolidwastesegment’snumbers,whichisthemostimportantnumberinthefinancials.Inthissense,theSRAfee,evenwhenitwasinitiallyinstituted,shouldneverbeconsideredorganicgrowth,becauseitisalwaysbeingoffsetbutdeclinesintherecyclingsegmentofthesameamount.

UnderstatingOrganicDecline After2016,CWSTappearstograduallyrealizetheissueofincludingSRAfeesaspricingchanges,andbeginstoshiftthesefeesintothe“surcharges”line-item.Inthe201710-K,SRAfeesarenowincludedasapartof“surchargesandotherfees”,insteadofpricingchanges.

*Source:CWSTFY201810-K

Althoughthisistechnicallya“correct”classification,webelievethatthisagainledtoa

significantmisunderstandingofCWST’sorganicpricinggrowthprofile.CWSTappearstobetryingto“havetheircakeandeatittoo”.

WebelievethatthisisthecasebecauseCWSTappearstohaveinitiallyrecognizedtheSRAfeeaspricinggrowth,whenitcontributedpositivelytogrowth,butthenrecognizedthefeeassurchargedeclines,whenthefeeturnedtonegativegrowthyear-over-year.Thishadthedualeffectofoverstatingorganicgrowthin2015/16,thenunderstatingdeclinein2017,whenCWSTshiftedtheclassificationofthefee.

ManagementhasgenerallydisclosedthattheSRAfeestartedin2015at4%,thenwentupto8%withinafewmonths,thendeclinedbackto4%atsomeundefinedpoint,thensuddenlyroseto15%inmid-2018.Thebelowchartsprovidemorecontexttotheexacttimingsofthesechanges:

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*Fadedbarsrepresentquarterswhereexactdollar-valuecontributionsfrompricingchangesarenotdisclosed,andonlyindicatethedirectionalimpact(favorable/unfavorablecontribution)

Fromtheabove,it’sclearthatrecyclingpricingchangeshadanadverseeffectin2015andbeginning2016,thenswitchedtoasharplypositivecontributionin2017,andagaindeclinedtoasharplynegativecontributionin2018.BecausetheSRAfeefloatsinverselyagainstrecyclingprices,thiswouldimplythatthefeerosefrom2015through2016,thendeclinedsignificantlyin2017,androseagainsignificantlyin2018.Basedonmanagement’sdisclosures,wewouldgenerallysaythatthefeestartedat4%in2015,thenroseto8%in2016,thendeclinedbackdownto4%inend-2016/2017,androseagainto15%in2018. ThisclearlyshowsthatCWST’sshiftsoftheSRAfee’sclassificationwerecreatedtomaximizethe“organic”pricinggrowththattheypresented.TheSRAfeebeinginstitutedandrisingin2016boostedcollectionpricingby4-8%in2015/2016.Then,whenthefeewentbackdownto4%in2017,CWSTshiftedtheclassificationofthisfeeintosurcharges,soastoallow

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collectionpricingtonotseethe4%decline.Thatyear,thesurchargesline-itemshouldhavedeclinedasaresultoftheSRAfeegoingdown,butinfactwentupasaresultofoilpricesrecoveringfromthe2016low.

Inthisway,thedeclineinrevenuescausedbytheSRAfeedecliningwasentirelyhiddenandtakenoutofanythinginvestorscouldhaveconsideredorganicgrowth.Therefore,webelievethat,throughusingthisindustry-uniqueSRAfee,CWSTwasabletosignificantlyoverstateperceivedorganicgrowthin2015-2016.Further,byshiftingtheclassificationofthefee,CWSTwasthenabletoin2017avoidtheperceivedorganicpricingdeclinescausedbythefee.

AlthoughCWSTgloatsthattheirmaincompetitiveadvantageisoperatinginthecapacity-constrainedNortheast,whichallowsthemtolevysignificantpricingincreasesontotheircustomers,webelievethattheaboveshowsthatasignificantamountofthishistoricpricinggrowthwas,infact,artificial.WethereforedonotbelievethatCWSTwillsolvetheirfinancialwoesby“growingoutofthem”.

Below,weshowtheorganicpricinggrowthofCWSTadjustingoutthefollowing:theinitial4%SRAfeein2015,therisefrom4%to8%ofthisfeein2016,andtheeliminationofthis8%feein2016.

*For2017,thedarkbluebarshowstheeffectofaccountingforthereductionoftheSRAfeefrom8%to4%asanorganicpricingdecline.ThelightbluebarshowsCWST’spricinggrowthignoringtheSRAfeelevelchangesthatyear.

CWST’smanagementhasatargetof3-4%organicgrowthinthesolidwastebusinesseachyear.Asyoucanseeabove,adjustedpricinggrowthhasbeenperennially<1%thepastfewyears.CWST’svolumegrowthhasalsooscillatedaround0%eachyear.Wewillnotethat2018appearedtohavestrongorganicpricinggrowth,

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TheRedHerringofAcquisitions Ontopofthisunglamorousandinflatedorganicgrowthprofile,CWSTisnowtryingtobranditselfasaconsolidationplayontheNortheastwastemanagementindustry.WhereasCWSTrarelydidanylargeacquisitionsinthepast(acquisitionspendwas<$10millionmostyears),suddenlyin2018thecompanymadeawhopping$90millioninacquisitions,andisonpaceforasimilaramountthisyear.Thecompanyhassetagoalof$20-40millioninacquisitionsperyear. AswehavedemonstratedinPart1,CWSTinnowaygeneratesadequateFCFtosupportsuchanaggressiveacquisitionstrategy.Infact,theyhadtoraisemoneyinQ1justtogetthefundstodothesefirstfewacquisitions. So,agoodquestionis:whyaretheydoingit?Webelievethatacquisitionsareaclevermethodformanagementtoa)distractfromtheabovefaultyrevenueandearningsissues,andb)potentially“acquire”theirwayoutoffinancialdistress.Wehaveseenmanyexamplesofcompaniesbeforewho,whenfacedwithdifficultfinancialresults,electtoaggressivelyacquireandthatwaytransitiontheirbusinessoutofthemessthatitis.

ConclusionInconclusion,webelievethatCWSTisafinanciallyinsecurecompanymasqueradingasa

seculargrowthstory.WebelievethatinvestorshavemateriallymisunderstoodCWST’sbalancesheet,incomestatement,andrevenuegrowth.ThestockpriceofCWSThasincreasedmorethan10foldinthelastfiveyears,andwebelieveitcouldgivebackalotofthatgainonceinvestorsstarttounderstandtheaccountingdifficultiesthecompanyfaces.