of hazardous waste and, indeed, sharply reducing their output of hazardous waste, through such methods as pretreatment, enhanced recycling and conservation. This change in policy was primarily due to: (i) increasing costs for landfill and incineration (with landfill costs having risen from $ 15-25 per ton in the 1970's to $ 150-250 per ton currently), (ii) concern over liability exposure on the part of the waste generators (particularly with respect to land disposal, where there is no termination of liability), (iii) negative publicity, caused by the EPA's reporting requirements, (iv) regulatory restrictions on land disposal, and (v) development of products that generate less waste, such as biopesticides, alternatives to cholorfluorocarbons and substitutes for chlorinated solvents. Environmental clean-up projects also were reduced during 1992, in part due to uncertainty over the renewal of Federal Superfund legislation, higher costs of off-site removal, tougher rules on off-site disposal and other regulations which encourage on-site remediation, and the lower volumes at environmental cleanup projects. Prior to December 31, 1992 (and before the change in Federal administrations), the Environmental Protection Agency had expressed a strong preference for on-site treatment of hazardous wastes, including the proposal of new hazardous waste regulations which were projected to shift from 20% to 90% of all hazardous wastes away from landfills and incinerators, thereby reducing the amount of hazardous waste material to be trucked to the off-site facilities owned, operated or leased by CHW.
During 1992 and in March of 1993, CHW and WMX (on CHW's behalf) also made several predictions regarding the long-term financial prospects for the CHW. In its 1992 Annual Report to Shareholders, released during the Class Period, CHW represented that the July 1992 formation of the Company's Thermal Operations Group "allowed the Company to provide customers with needed incineration capacity." In fact, there already existed an excess of capacity which resulted in a permanent impairment in the value of the Company's incinerators. CHW optimistically projected in its 1992 Annual Report that "continued suspension of operations at the Chicago incinerator while the [long-term] permit is being pursued is not expected to materially impact future results of operation."
In its 1992 Annual Report, WMX reported that CHW "aggressively undertook programs" to "streamline its organization across the board" in an effort "to focus further on controlling its costs while enhancing service to customers" and predicted that CHW waste services "should expect to see its revenues grow to more than $ 2 billion in 1993." Additionally, on or about March 15, 1993, CHW advised the market that it expected to report earnings for the first quarter of 1993 comparable to its earnings for the first quarter of 1992. Ultimately, CHW was able to obtain comparable earnings by executing the sale of Wheelabrator Technologies, Inc., a company in which CHW had a stake and in which WMX held majority ownership. The execution of this sale accounted for 40% of its first quarter 1993 earnings.
The market responded to these reports and predictions in the following ways. On February 4, 1993, Prudential Securities issued a public report based upon the just-released earnings, recommending that investors buy CHW common stock and commenting on CHW's apparent "continuing strong based business" and a supposedly strong recent pick-up in CHW's bidding activity on special projects. On February 8, 1993, the Chicago Corporation, another securities firm, commenting on CHW's just released year-end 1992 results, opined that "the Company is positioned for strong 1993 results," and "for the first time in nearly two years, the Company now feels it is seeing a pick-up in volume attributable to an economic recovery," and management appears confident that the special services group will see strong revenue growth in 1993." Based upon the Company's reported results for year-end 1992, the Chicago Corporation estimated CHW's 1993 earnings at $ 0.95 per share and recommended that investors buy CHW common stock "because of the company's outstanding market position and improving earnings outlook."
In a February 9, 1993, report, Merrill Lynch, based upon its belief that CHW's 1993 earnings momentum could exceed general expectations, rated CHW above average /2/ and buy /1/ for the intermediate and long terms, respectively, noting:
We expect revenues to sequentially rise as 1993 progresses. Moreover, the recently reported fourth quarter . . . indicated significant underlying operating leverage potential. Importantly, earnings visibility appears to be higher now than at any time over the past ten quarters. Finally, the large earnings gains we expect from Chem-Waste beginning in the first quarter and extending through 1992 should be a significant building block for a re-acceleration of Waste Management's earnings growth as well.
In fact, on March 18, 1993, Prudential was recommending that investors purchase CHW common stock based, in part, on the earnings and other financial data reported for year-end 1992 and based on the Company's estimate of first quarter earnings.
After CHW released its earnings for the first quarter of 1993, it made several statements regarding the reasons for its "flat" or "reduced" earnings. CHW reported that the reasons for a 6% decline in business revenues for the first quarter of 1993, as compared with the first quarter of 1992, were primarily due to temporary conditions, such as bad weather, a weak domestic economy, and the change in the Federal Administration.
On July 19, 1993, CHW, for the first time, hinted that market conditions and other factors might require a downward assessment in the carrying value of its incineration assets. On that day, CHW issued a press release which stated that "the Company . . . will be reviewing whether certain of its assets relating to hazardous waste incineration services are appropriately valued in light of the market conditions referred to above." No write-down was taken at that time. The July 19, 1993, press release suggested that "the possibility exists that the company will record a charge which could be material to its results of operations."
On or about September 3, 1993, the Company announced that it had abandoned plans, begun in 1987, to build an incinerator in Kettleman Hills, California. CHW also acknowledged that existing incinerator capacity was adequate to meet the disposal needs of the western United States. Following this disclosure, at the close of trading on September 3, 1993, CHW common stock fell to $ 9.25 per share -- a decline of over 50% from the trading price at the commencement of the Class Period only eight months earlier. The September 6, 1993, edition of Crain's Chicago Business thereupon reported:
The company's restructuring options are fairly straightforward, based on public financial records, the company's own statements as to the bleak condition of the hazardous waste disposal market and analysts' views on what the company must do to improve profitability.