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ADS WASTE HOLDINGS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 14, 2014

You should read the following discussion in conjunction with the unaudited condensed consolidated financial statements and notes thereto included under Item 1. In addition, you should refer to our audited consolidated financial statements and notes thereto and related Management's Discussion and Analysis of Financial Condition and Results of Operations appearing on Form 10-K for the year ended December 31, 2013. Overview We are the largest privately owned non-hazardous solid waste management company in the United States, as measured by revenue and provide non-hazardous solid waste collection, transfer, recycling and disposal services for residential, commercial and industrial customers across the Southeast, Midwest and Eastern regions of the United States as well as in the Commonwealth of the Bahamas. We service over 2.3 million residential customers, approximately 302,000 commercial and industrial ("C&I") customers and 732 municipalities. We are vertically integrated with approximately 5,300 employees and we own or operate a network of 91 collection operations, 71 transfer stations, 25 recycling facilities and 42 active landfills with a fleet of approximately 3,000 vehicles.



Results of Operations

The following table sets forth for the periods indicated our consolidated results of operations and the percentage relationship that certain items from our consolidated financial statements bear to revenue (in millions and as percentage of our revenue). Three Months Ended March 31, 2014 2013 Service revenues $ 321.2 100.0 % $ 307.2 100.0 % Operating costs and expenses Operating 210.4 65.5 % 197.0 64.1 % Selling, general and administrative 38.5 12.0 % 36.1 11.8 % Depreciation and amortization 62.2 19.4 % 66.7 21.7 % Acquisition and development charges - 0.0 % 0.1 0.0 % Loss on disposition of assets 0.3 0.1 % 0.1 0.0 % Restructuring 1.5 0.5 % 1.2 0.4 % Total operating costs and expenses 312.9 97.5 % 301.2 98.0 % Operating income $ 8.3 2.5 % $ 6.0 2.0 %



Overall, operating income increased $2.3 or 38.3% to $8.3 for the three months ended March 31, 2014 as a result of price and volume growth and lower depreciation costs.

Revenue

Our revenue base is distributed across several markets and business lines, with the primary business lines being our solid waste collection, transfer and landfill disposal operations. Our remaining revenue is generated from recycling, fuel fees and environmental fees, landfill gas-to-energy operations and other ancillary revenue-generating activities. In general, we integrate our recycling operations with our collection operations and obtain revenue from the sale of recyclable materials. 23



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Revenues from our collection operations consists of fees we receive from commercial, industrial, municipal and residential customers and are influenced by factors such as collection frequency, type of collection equipment furnished, type and volume or weight of the waste collected, distance to the recycling facilities, transfer station or disposal facility and our disposal costs. Our residential and commercial collection operations in some markets are based on long-term contracts with municipalities with terms typically of three to five years or longer. We provide front load and temporary and permanent roll-off service offerings to our customers. While the majority of our roll-off services are provided to customers under long-term contracts, we generally do not enter into contracts with our temporary roll-off customers due to the relatively short-term nature of most construction and demolition ("C&D") projects. Our transfer stations, landfills and, to a lesser extent, our recycling facilities generate revenue from disposal or tipping fees. Revenues from our landfill operations consists of fees, which are generally based on the type and weight or volume of waste being disposed of at our disposal facilities. Fees charged at transfer stations are generally based on the weight or volume of waste deposited, taking into account our cost of loading, transporting and disposing of the solid waste at a disposal site. Recycling revenue consists of the sale of recyclable commodities to third parties. The amounts charged for collection, disposal, transfer, and recycling services may include fuel fees and environmental fees. Fuel fees and environmental fees are not designed to be specific to the direct costs and expenses to service an individual customer's account, but rather are designed to address and to help recover for changes in ADS' overall cost structure and to achieve an operating margin acceptable to ADS. Other revenue is comprised of ancillary revenue-generating activities, such as landfill gas-to-energy operations at municipal solid waste landfills, management of three third-party owned landfills, customer service charges relating to overdue payments and customer administrative fees relating to customers who request paper copies of invoices rather than opting for electronic invoices and broker revenue, which is earned by managing waste services for our customers. The following table sets forth our consolidated revenues for the periods indicated (in millions). Three Months Ended March 31, 2014 2013 Collection $ 225.3 70.1 % $ 215.8 70.3 % Disposal 100.0 31.1 % 95.6 31.1 % Sale of recyclables 8.0 2.5 % 8.6 2.8 % Fuel fees and environmental fees 20.9 6.5 % 16.4 5.3 % Other revenue 23.3 7.3 % 24.0 7.8 % Intercompany eliminations (56.3 ) (17.5 )% (53.2 ) (17.3 )% Total service revenues $ 321.2 100.0 % $ 307.2 100.0 %



Three Months Ended March 31, 2014 compared to 2013

Revenue for the 2014 quarter was $321.2, an increase of $14.0, or 4.6%, from revenue of $307.2 in the 2013 quarter. The increase was due to the following:

Collection revenue increased by $9.5, or 4.4%, of which $6.0 was driven by

increases in volume, $5.8 was driven by the impact of acquisitions in the

current and prior years. Partially offsetting the increases were net price

decreases in collection revenue of $2.3. 24



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Disposal revenue increased by $4.4 or 4.6%, of which $2.3 was driven by price

increases and the remainder was driven by increases in volume.



Sale of recyclables decreased by $0.6 or 7.0% primarily resulting from volume

decreases. Fuel fees and environmental fees increased by $4.5 or 27.4% due to the



continuation of the harmonization and increasing participation of the fees

charged to customers.



Other revenue decreased by $0.7 or 2.9%, which was mainly due to the loss of

volume related to our national accounts business from special waste activity.

The major components of other revenue are the revenues generated from the operation of two managed landfills in Florida, landfill gas-to-energy projects and the brokerage business.



Operating Expenses

The following table summarizes our operating expenses (in millions and as a percentage of our revenue). Three Months Ended March 31, 2014 2013 Operating $ 207.3 64.5 % $ 193.1 62.8 %



Accretion of landfill retirement obligations 3.1 1.0 %

3.9 1.3 % Operating expenses $ 210.4 65.5 % $ 197.0 64.1 %



Our operating expenses include the following:

Labor and related benefits consist of salaries and wages, health and welfare

benefits, incentive compensation and payroll taxes.



Transfer and disposal costs include tipping fees paid to third-party disposal

facilities and transfer stations and transportation and subcontractor costs

(which include costs for independent haulers who transport waste from

transfer stations to our disposal facilities and costs for local operators

who provide waste handling services associated with our national accounts in

markets outside our standard operating areas). Maintenance and repairs expenses include maintenance and repairs to our

vehicles, equipment and containers.



Fuel costs include the direct cost of fuel used by our vehicles, net of fuel

tax credits and any ineffectiveness on our fuel hedges. We also incur certain

indirect fuel costs in our operations that are not taken into account in the

above analysis.



Franchise fees and taxes consist of municipal franchise fees, host community

fees and royalties. Risk management expenses include casualty insurance premiums and claims

payments and estimates for claims incurred but not reported.



Other expenses include expenses such as facility operating costs, equipment

rent, leachate treatment and disposal, and other landfill maintenance costs.

Accretion expense related to landfill capping, closure and post-closure is

included in "Operating expenses" in our consolidated income statements,

however, it is excluded from the table below (refer to discussion below

"Accretion of landfill retirement obligations" for a detailed discussion of

the changes in amounts). 25



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The following table summarizes the major components of our operating expenses, excluding accretion expense on our landfill retirement obligations (in millions and as a percentage of our revenue): Three Months Ended March 31, 2014 2013 Labor and related benefits $ 77.6 24.2 % $ 73.1 23.8 % Transfer and disposal costs 45.4 14.1 % 42.7 13.9 % Maintenance and repairs 16.7 5.2 % 14.6 4.8 % Fuel 26.4 8.2 % 24.4 7.9 % Franchise fees and taxes 12.7 4.0 % 12.0 3.9 % Risk management 7.2 2.2 % 5.9 1.9 % Other 21.3 6.6 % 20.4 6.6 % Total operating expenses $ 207.3 64.5 % $ 193.1 62.8 %



The cost categories shown above may not be comparable to similarly titled categories used by other companies. Thus, you should exercise caution when comparing our operating expenses by cost component to that of other companies.

Three Months Ended March 31, 2014 compared to 2013

Operating expenses increased by $14.2, or 7.4%, to $207.3 for the 2014 quarter from $193.1 in the 2013 quarter of which $3.2 was attributable to severe winter weather experienced in most of our marketplaces.



Labor and related benefits increased by $4.5 or 6.2% to $77.6, of which

approximately $2.1 was attributable to merit increases, $1.3 was attributable

to weather related overtime costs and the remainder was due to acquisition

activity.



Transfer and disposal costs increased by $2.7 or 6.3% to $45.4, which was

primarily attributable to increases in volume from organic growth and acquisition and new contract activity.



Maintenance and repairs expense increased by $2.1, or 14.4% to $16.7, of

which $0.9 was attributable to severe winter weather related issues and the

remainder attributable to higher collection volume.



Fuel costs increased $2.0, or 8.2% to $26.4, of which $0.4 was due to higher

cost fuel blends that were required to power vehicles in certain geographic

areas during the severe weather and the remainder primarily due to overall

increases in the average cost of fuel which increased 4.6% over the comparable quarter.



Franchise fees and taxes increased $0.7 or 5.8% to $12.7 primarily due to

increases in disposal volumes. Risk management expenses increased $1.3 or 22.0% to $7.2 primarily due to



adverse development of existing claims compared to the same period in the

prior year.



Other operating costs increased $0.9 or 4.4% to $21.3 in 2014, of which $0.6

was due to impacts of the severe winter weather.

Accretion of landfill retirement obligations

Accretion expense was $3.1 and $3.9 for the three months ended March 31, 2014 and 2013, respectively. The decrease of $0.8 was primarily attributable to a decrease in the interest rate on landfill retirement obligations. 26



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Selling, General and Administrative

Selling, general and administrative expenses include salaries, legal and professional fees, rebranding and integration costs and other expenses. Salaries expenses include salaries and wages, health and welfare benefits and incentive compensation for corporate and field general management, field support functions, sales force, accounting and finance, legal, management information systems, and clerical and administrative departments. Rebranding and integration costs are those costs associated with rebranding all of the acquired and merged businesses' trucks and containers and those costs expended to align the corporate and strategic operations of the acquired and merged businesses. Other expenses include rent and office costs, fees for professional services provided by third parties, marketing, directors' and officers' insurance, general employee relocation, travel, entertainment and bank charges, but excludes any such amounts recorded as restructuring charges. The following table provides the components of our selling, general and administrative expenses for the periods indicated (in millions and as a percentage of our revenue): Three Months Ended March 31, 2014 2013 Salaries $ 25.1 7.8 % $ 24.8 8.1 % Legal and professional 2.7 0.9 % 2.6 0.9 % Rebranding and integration costs 0.4 0.1 % 1.3 0.4 % Other 10.3 3.2 % 7.4 2.4 %



Total selling, general and administrative expenses $ 38.5 12.0 % $ 36.1 11.8 %

Three Months Ended March 31, 2014 compared to 2013

Our salaries expenses increased by $0.3 or 1.2% primarily due to the merit increases over the comparable period offset by the retirement of a senior executive and favorable development in health insurance claims.

Legal and professional fees increased $0.1 or 3.8% to $2.7 impacted by current litigation matters, but remained relatively flat as a percentage of revenue.

Rebranding and integration costs are mainly related to the costs associated with the acquisition and integration of Veolia. These costs are mainly comprised of professional fees, including legal, accounting, engineering and rebranding costs. The decrease of $0.9 from the 2014 quarter to the 2013 quarter is primarily a result of nearing completion of the overall programs associated with the rebranding and integration of the Veolia acquisition. Other selling, general and administrative expenses increased by $2.9 or 39.2% to $10.3 mainly due to an increase in general travel expenses, acceleration of the timing of certain corporate meetings, increased bank charges and rent at corporate and regional offices. 27



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Depreciation and Amortization

The following table summarizes the components of depreciation and amortization expense by asset type (in millions and as a percentage of our revenue). For a detailed discussion of depreciation and amortization by asset type refer to the discussion included in the following two sections herein. Three Months Ended March 31, 2014 2013



Depreciation, amortization and depletion of property and equipment

$ 51.6 16.1 % $ 55.6 18.1 % Amortization of other intangible assets 10.6 3.3



% 11.1 3.6 %

Depreciation and amortization $ 62.2 19.4



% $ 66.7 21.7 %

Depreciation, Amortization and Depletion of Property and Equipment

Depreciation, amortization and depletion expense includes depreciation of fixed assets over the estimated useful life of the assets using the straight-line method, and amortization and depletion of landfill airspace assets under the units-of-consumption method. We depreciate all fixed assets to a zero net book value, and do not apply salvage values. The following table summarizes depreciation, amortization and depletion of property and equipment for the periods indicated (in millions and as a percentage of our revenue): Three Months Ended March 31, 2014 2013



Depreciation and amortization of property and equipment $ 30.7 9.6 % $ 35.0 11.4 % Landfill depletion and amortization

20.9



6.5 % 20.6 6.7 %

Depreciation, amortization and depletion $ 51.6



16.1 % $ 55.6 18.1 %

Depreciation and amortization of property and equipment decreased by $4.3 to $30.7 for the three months ended March 31, 2014 primarily due to certain assets acquired in the Veolia transaction becoming fully depreciated. Landfill depletion increased $0.3 to $20.9 due to an increase in volumes at our landfills.



Amortization of Other Intangible Assets

Amortization of other intangibles assets was $10.6 and $11.1 or as a percentage of revenue, 3.3% and 3.6%, for the three months ended March 31, 2014 and 2013, respectively. The decline in amortization is the result of certain intangible assets now being fully amortized. Our other intangible assets primarily relate to customer lists, municipal and customer contracts, operating permits and non-compete agreements.



Acquisitions

In the ordinary course of our business, we regularly evaluate and pursue acquisition opportunities that further enhance our vertical integration strategy.

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Two acquisitions were completed during the three months ending March 31, 2014 for a purchase price of $0.1 subject to net working capital adjustments, which are expected to be completed within the year. The results of operations of each acquisition are included in our condensed consolidated statements of operations subsequent to the closing date of each acquisition. Further, we paid the final installment of $1.8 on an acquisition that closed in 2013. One acquisition was completed during the period ended March 31, 2013 for a purchase price of $0.2.



Asset Impairments and Divestitures/Discontinued Operations

From time to time, we may divest certain components of our business. Such divestitures may be undertaken for a number of reasons, including as a result of a determination that a specified asset will no longer provide adequate returns to us or will no longer serve a strategic purpose in connection with our business.



We completed the sale of certain assets and liabilities in Oxford, MA in December 2013 and the results of those operations have been included in discontinued operations in the accompanying condensed consolidated statements of operations for the three month period ended March 31, 2013.

We entered into a letter of intent in December 2013, to sell certain assets in Panama City, FL and completed the sale in January 2014. The assets are classified as held for sale in the accompanying condensed consolidated balance sheets as of December 31, 2013 and the results of those operations have been included in discontinued operations in the accompanying condensed consolidated statements of operations for all periods presented. In connection with the acquisition of Veolia ES Solid Waste division, we were required by the United States Department of Justice to divest certain businesses in Georgia and New Jersey. We completed the divestitures in 2013 and the results of those operations have been included in discontinued operations in the accompanying condensed consolidated statements of operations for the three month period ended March 31, 2013. In August 2013, we completed the sale of certain assets and liabilities in New York and New Jersey from the IWS and Veolia ES Solid Waste division businesses for approximately $45.0, of which $25.0 was received in cash on the date of closing, $5.0 was received in December 2013 and the remainder in the form of a mandatorily redeemable preferred security due 2017. We also reacquired the outstanding minority interest of $2.5 previously held by the minority shareholder in August 2013. The results of those operations have been included in discontinued operations in the accompanying condensed consolidated statements of operations for the three month period ended March 31, 2013. (Loss) income from discontinued operations before tax for the three months ended March 31, 2014 and 2013 was $(0.5) and $0.5, respectively. The increase in the loss is due to the completion of the sale of the assets that were held for sale in due course in calendar 2013 and in January 2014.



Restructuring Charges

In September 2012, we announced a reorganization of our operations, designed to consolidate management and staff in connection with the merging of the operations of IWS and ADS. Subsequent to the closing of Veolia ES Solid Waste division acquisition, further organizational changes were announced and implemented. Principal changes included consolidation and elimination of management, relocation of staff to new regional headquarter locations and divesting of certain locations. Through this reorganization, we eliminated approximately 80 positions throughout the Company and offered voluntary separation agreements to those impacted.



During the three months ended March 31, 2014 and 2013, we recognized $1.5 and $1.2 of pre-tax restructuring charges, respectively, of which for the three months ended March 31, 2014, $1.0 was related to relocations and $0.5 was related to lease termination costs and for the three months ended March 31, 2013, $0.2 was related to employee severance and benefits cost and $1.0 was related to relocation.

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Interest Expense

The following table provides the components of interest expense for the periods indicated (in millions of dollars and as a percentage of our revenue):

Three Months Ended March 31, 2014 2013 Interest expense on debt and capital lease obligations $ 31.8 9.9 % $ 40.3 13.1 % Accretion of original issue discounts and loan costs 4.0 1.2 % 4.4 1.4 % Amortization of terminated interest rate swaps - 0.0 % 1.5 0.5 % Less: capitalized interest (0.3 ) (0.1 %) - 0.0 % Total interest expense $ 35.5 11.0 % $ 46.2 15.0 % The decrease in interest expense from the three month period ended March 31, 2013 to the three month period ended March 31, 2014 is principally due to lower interest rates on the current debt as a result of a re-pricing transaction that was affected on the Term B loan in February 2014, which lowered the interest rate floor by 50 basis points, the repricing transaction in February 2013 that lowered the margin by 100 basis points as well as decreased average debt levels during the 2014 period. Debt Modifications We modified our Term B loan during the three month period ended March 31, 2014 and 2013 and incurred approximately $1.3 and $19.5, respectively of costs in connection with the modifications, which were capitalized as debt issuance costs. The modification in February 2014 lowered the interest rate floor by 50 basis points and the modification in February 2013 lowered the margin by 100 basis points. Income Taxes The Company's effective income tax rate for continuing operations for the three months ended March 31, 2014 and 2013 was 28.3% and 35.8%, respectively. We evaluate our effective income tax rate at each interim period and adjust it accordingly as facts and circumstances warrant. The difference between income taxes computed at the federal statutory rate of 34% and reported income taxes from continuing operations for the three months ended March 31, 2014 was primarily due to a permanent difference from an employee stock option plan. The difference between income taxes computed at the federal statutory rate of 34% and reported income taxes from continuing operations for the three months ended March 31, 2013 was not significant. The Company's effective income tax rate from discontinued operations for the three months ended March 31, 2014 and 2013 was 40% and 120%, respectively. The difference between income taxes computed at the federal statutory rate of 34% and reported income taxes from discontinued operations for the three months ended March 31, 2014 was not significant. The difference between income taxes computed at the federal statutory rate of 34% and reported income taxes from discontinued operations for the three months ended March 31, 2013 was primarily due to the impact of the release in a recorded valuation allowance due to projected use of net operating losses in certain legal entities. 30



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Reportable Segments

Our operations are managed through three geographic regions (South, East and Midwest) that we designate as our reportable segments. Revenues and operating income/(loss) for our reportable segments for the periods indicated, are shown in the following tables (in millions): Operating Depreciation Service (Loss) and Revenues Income Amortization

Three Months Ended March 31, 2014 South $ 121.4$ 17.6 $ 18.7 East 78.4 (0.9 ) 17.2 Midwest 121.4 7.4 24.3 Corporate - (15.8 ) 2.0 $ 321.2$ 8.3 $ 62.2 Three Months Ended March 31, 2013 South $ 117.3$ 17.4 $ 18.4 East 78.6 0.5 19.1 Midwest 111.3 2.7 27.0 Corporate - (14.6 ) 2.2 $ 307.2$ 6.0 $ 66.7



Comparison of Reportable Segments-Three Months Ended March 31, 2014 compared to 2013

South Segment Revenue increased $4.1, or 3.5% for the three month period in 2014 compared to the 2013 period. The increase in residential collection revenue of $3.0 over the comparable period in 2013 is primarily a result of expanding service for an existing municipal residential contract. Additionally, the commercial collection business increased by $1.3 over the comparable period driven by increases in volume and the harmonization of fuel fees and environmental fees contributed $0.6 of the increase in revenue. Operating income from our South Segment increased by $0.2 for the three month period in 2014 compared to the 2013 period. The increase in operating income was driven by the increases in volume and pricing noted above, lower depreciation and amortization expense of $0.3 offset by increased operating costs of $0.6 as a result of the severe winter weather experienced in the South region. Further, there were increased fuel expenses of $0.4 for the period and increased leachate and gas management costs. East Segment Revenue decreased by $0.2, or 0.3% for the three month period in 2014 compared to the 2013 period. The decrease in revenue was driven by severe winter weather, which accounted for a decrease of $2.9 and the closure of the Moretown landfill that occurred in the latter half of calendar 2013, which contributed $0.5 to the decrease. These impacts were partially offset by acquisition volume, which contributed $3.0 and increases in price and fuel and environmental fees. Operating income from our East Segment decreased by $1.4 for the three month period in 2014 compared to the 2013 period, primarily as a result of severe winter weather which increased operating expenses due to lost productivity and was impacted by bad debt charges in the period, partially offset by a decrease in depreciation and amortization expense of $1.9. 31



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Midwest Segment

Revenue increased $10.1 or 9.1% for the three month period in 2014 compared to the 2013 period, which is attributable to the harmonization and increased participation of fuel fees and environmental fees which contributed $3.4 of the increase, strong volumes from special waste projects, which contributed $1.1, other disposal volume increases which contributed $2.2, and increases in both permanent and temporary rolloff which contributed $1.9. Acquisitions further contributed $1.8 of the increase in revenue for the three months ended March 31, 2014. Operating income from our Midwest Segment increased by $4.7 for the three month period in 2014 compared to the 2013 period, which is attributable to the increases in volumes and pricing initiatives and a decrease in depreciation and amortization expense of $2.7. These increases were offset by higher operating costs due to lost productivity caused by the severe winter weather sustained for the period ended March 31, 2014, which accounted for approximately $1.9 in the quarter. Corporate Region



Operating loss increased $1.2 or 8.2% for the three month period in 2014 compared to the 2013 period, primarily as a result of costs incurred in connection with the defense of a legal matter and increased staffing at the corporate office.

Liquidity and Capital Resources

Our primary sources of cash are cash flows from operations, bank borrowings and debt offerings. We intend to use excess cash on hand and cash from operating activities, together with bank borrowings, to fund purchases of equipment, working capital, acquisitions and debt repayments. Actual debt repayments may include purchases of our outstanding indebtedness in the secondary market or otherwise. We believe that our excess cash, cash from operating activities and funds available under our Revolving Credit Facility (defined below) will provide us with sufficient financial resources to meet our anticipated capital requirements and maturing obligations as they come due. At March 31, 2014, the Company had negative working capital, which was driven by draws on the revolver to fund semi-annual interest payments on the bonds. At December 31, 2013, the Company had negative working capital which was driven by repayments on the revolving line of credit in the fourth quarter of 2013. In addition, the Company drew on its revolver to fund acquisitions that were completed in December 2013. The Company has more than adequate availability on its revolving line of credit to fund short term working capital requirements. 32



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Summary of Cash and Cash Equivalents, Restricted Cash and Debt Obligations

The table below presents a summary of our cash and cash equivalents, restricted cash and debt balances as of March 31, 2014 and December 31, 2013 (in millions): March 31, December 31, 2014 2013 Cash and cash equivalents $ 27.0 $ 12.0 Total restricted funds $ 2.4 $ 2.4 Debt: Current portion $ 45.6 $ 29.1 Long-term portion 2,299.0 2,302.8 Total debt $ 2,344.6$ 2,331.9 Cash on hand increased primarily as a result of a draw made on the revolving line of credit in anticipation of paying the semi-annual interest payment on the senior notes and working capital. Net debt increased due to the draw on the revolving line of credit as discussed above.


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Source: Edgar Glimpses