Allied Waste

Executive Summary

NSJ Consulting is pleased to present its financial evaluation and recommendations to Allied Waste Industries' Senior Management. This analysis examines the Company's performance over a five year period (YE2002 through YE2006) and draws comparisons to industry peers. Recommendations and suggestions for improvement are integrated throughout and serve collectively as a cornerstone for Allied Waste's continual success in the non-hazardous solid waste management business.

The primary issues facing the Company today, and into the future, stem from its (1) expense management and (2) an over-levered capital structure. These issues are working in conjunction to produce marginal returns on net income, assets and equity, which are all below industry averages. These specific issues were selected because they are prevalent across the total analysis horizon and materially impact the underlying value of the Company.

NSJ Consulting has concluded that in order to mitigate these issues and to improving the underlying value of the Company, the following recommendations should be implemented:

Expense Management Recommendations:

* The Company should reinforce its commitment to Best Practice initiatives;

* Improve transportation productivity through better routing and maintenance efficiency;

* Reduce procurement costs through more effective pricing;

* Increase overall operating productivity by timely divestment of operations that do not provide adequate returns;

* To offset the exposure to rising energy costs, all new contracts, renewals or re-negotiations must provide for a fuel or energy surcharge, and;

* To hedge fuel market volatility, the Company must continue to execute fixed price fuel purchase contracts.

Leverage Reduction Recommendations:

* NSJ Consulting has concluded that the Company should focus on reducing its long term debt over the next three years by a margin of 50% or $1,112 million per year.

* At this level of overall leverage (65.25%) the Company is expected to benefit from a cost of capital structure afforded by investment grade companies. In turn, the reduction in leverage will further reduce interest rate exposure, increase liquidity and increase shareholder value (higher returns on income, assets & equity).

Detailed Analysis

Introduction

Allied Waste's senior management has hired NSJ Consulting to evaluate the Company's current financial condition and future growth prospects. The analysis concentrates on the following disciplines to include (1) financial structure, (2) liquidity, (3) efficiency, (4) leverage, (5) profitability and (6) a DuPont analysis. This detailed analysis and attached appendices, serve as a guide to unleash the financial success inherent in the Allied Waste Industries, Inc.

1 - Financial Structure:

To flesh out the aforementioned issue of (1) expense management and (2) marginal returns (below industry averages) on net income, assets and equity, it is necessary to turn to the Company's financial statements, beginning with the Income Statement.

Periodic revenue growth has ranged since 2003 from 1.41% to 5.13%, with average annual growth of 3.23%. In fact, the Firm posted increased revenue of 13.51% between 2002 and 2006. However, Operating Expense and SG&A Expense between 2002 and 2006 each increased by 22.62% and 28.66%, respectively. The net result is reflected in EBITDA, which decreased by 7.69% over this period.

A closer look at the Company's operating expenses reveals that transportation and fuel costs are primarily responsible for boosting the overall cost of operating since 2003. For instance, from 2004 to 2006, fuel costs have increased by an average of 25.08% per year and transportation costs have increased by 12.22% per year for the same period. SG&A expenses increased due to labor, sales force expansion and increased professional fees by an annual average of 10.07%.

The increase operating expense load is also contributing to lackluster investment returns which have posted below industry averages for the last five years. For example, 2006 investment returns tracked well below industry norms, in categories such as (1) net income (2.7% vs. 8.5%), (2) assets (3.32% vs. 6.57%) and (3) equity (4.47% vs. 9.2%). Contributing to the sluggish operating performance, the Balance Sheet uncovers that the Firm is also over-leveraged.

The Company's vertically integrated model is rooted in its ability to generate direct and ancillary income from its landfills that serve as its principal fixed assets. The Balance Sheet reflects the Company's long term investment in landfills, with an overall increase of 16.20%, from 2002 to 2006. Goodwill, which averages 60% of its holdings, emphasizes the Company's longer term acquisition trend.

In order to facilitate its growth, the Company has incurred significant liabilities from levels as high as 95.86% of total assets in 2002 to 73.94% in 2006 (a net decrease of 22.87%). Presently, overall liabilities in 2006 of 73.94% still exceed industry levels and continue to constrain returns. This notion is further supported by the fact that, as of 2006, long term debt to total capitalization is equal to 64.97%, whereas the average industry value is merely 42.25%. Moreover, the Company has also financed its growth through the issuance of preferred stock, which has also encumbered cash flow.

Underpinning the Company's overall activities, cash flow from operations has been adequate to cover short term debt obligation on a continuing basis. Cash flow from operations has increase by 19.48% over the last two years. Investment activities also support the Company's effort to perpetuate growth, as Capital Expenditures (net of acquisitions) have increased by 24.80% overall since 2002. Finally, financing activities exhibit a net cumulative decrease in long term debt of approximately of $2.53 billion from 2002 to 2006. Underlying financing activity to decrease debt has been fueled through the issuance of common stock, which has increased by more than 1.83x times since 2002 levels.

2 - Liquidity:

In comparison to the industry, the Company is out performing its competitors in terms of cash and receivables management. Contrary to the Company's negative net working capital (NWC) and below average industry