COVER STORY Top 200 Environmental Firms (7/5/99)

The 'Other' E-biz Continues to Grow

While Web-based upstart outfits are moving at light speed, environmental firms steadily ease into the next stage of their development

By Andrew G. Wright, Debra K. Rubin, Mary B.Powers, Sherie Winston, William J. Angelo, Stephen H. Daniels and Paul Rosta

The environmental market could be called the other E-business. ENR's 1999 Top 200 Environmental Firms bear little resemblance to Amazon.com, ebay and other high-flying, Internet-driven, high-tech ventures. The ENR 200 are not rewriting conventional economic theory, spinning out lucrative IPOs almost weekly or creating an expanding class of 20-something millionaires.

   No, this realm is a bit more staid: plain as dirt, elemental as air and water and about as sexy as hauling out the trash. Its business still is judged in conventional terms. Clients expect tangible results. Big government clients like the Dept. of Defense and the Dept. of Energy are pushing harder than ever before to see quantifiable progress in cleaning up their contaminated sites. Industrial clients who want to concentrate on their own core businesses are trying to outsource to outside specialists, as much as possible, the management of waste-stream byproducts. For the service provider, keeping the client in compliance with state and federal regulations is more than a goal—it is a prerequisite to getting the deal.

     Likewise, municipalities face the twin challenges of expanding populations and ever-stricter state and federal standards for water and wastewater treatment. These owners expect their design engineers and contractors to provide infrastructure that will surpass established benchmarks for quality, durability and costs.

     The older E-business has grown steadily since 1970, the year marking the first Earth Day observance, the establishment of the U.S. Environmental Protection Agency and the enactment of the Clean Air Act. Public support for a cleaner environment, aided by a regulatory jump start, created a robust new service sector that enjoyed a period in the late 1970s and 1980s as a Wall Street darling. Those golden days of green may be gone forever, but what remains is a legitimate, steadily expanding global economic sector. In 1998, the Top 200 market totaled $26.7 billion in revenue, adding $2.6 billion to the previous year's total, an increase of nearly 11%. Once again, hazardous waste, water and wastewater treatment dominated this year's list, accounting for 70% of the total market.

     Consolidation and acquisition, trends that marked previous years, again were catch phrases in 1998. At the top of the heap for the second year is U.S. Filter, reporting nearly $5 billion in revenue, up from $2.9 billion in 1997. The master consolidators devoured enough small fry to position itself for a $6.2-billion buyout by Vivendi, the French utility and media conglomerate (ENR 4/5 p. 16).

     Palm Desert, Calif.-based U.S. Filter is "now in the process of integrating GDE (Generale des Eaux)," Vivendi's global water and wastewater treatment arm, says U.S. Filter President Richard J. Heckman. "We'll have one big company at the end of the summer...a $13-billion company," he says, approaching the size of Coca Cola, with 80,000 employees in 120 countries. Heckman says the world market for water is $300 billion a year and "that's low. If Walmart sells $100 billion worth of goods, I have a hard time believing all the water in the world is only three times that."

     It can be perilous being near the top of the Top 200, however. Consider Philip Environmental Services Group, a Canadian consolidator whose two-year buying spree pushed it into third place last year. Dropping off the ENR Top 200 is the least of the firm's woes. Accounting and inventory irregularities triggered a spate of lawsuits and a stock swoon that landed Philip in Chapter 11 bankruptcy proceedings. The company received permission to extend its reorganization plan filing to June 30. Another part of the workout involved a $70-million May sale of Philip's utility management arm to Azurix, Houston-based Enron's entry into the water business. Having just completed its own initial public stock offering, Azurix is concentrating on building the same credibility in water that Enron claims in oil and gas.

     Bechtel is gaining momentum in capturing large government contracts. DOE, under pressure to cut cleanup costs at its large sites, seems to be placing more emphasis on quantifiable results. San Francisco-based Bechtel, which built its reputation on heavy civil engineering expertise, is well positioned to benefit from the transition from site characterization to cleanup. The firm won the Oak Ridge, Tenn., operations and management contract in 1998 and added doe's $3.5-billion, five-year Idaho lab o&m agreement this spring. "This is not high-tech," says John Wallace, Bechtel vice president and manager of finance. "Dirt can be cleaned up cheaply these days." Wallace expects to see "more pressure on costs and competitiveness at doe."

     The three newcomers to the billionaires' club in 1998, are The it Group, URS Corp. and CH2M Hill Inc., respectively in slots four, five and six. It and URS added revenue through large well publicized, large acquisitions. CH2M Hill reported $900 million in revenue in 1996 and 1997. The Denver-based firm crossed the threshold by integrating several small additions from the past few years and capturing more business from design-build delivery and outsourcing. "Utilities are changing what they expect from their consultants," says Mark Laswell, director of business development and planning for the company's water group. "Most utilities are looking at alternate methods" of project delivery, he says. "They are outsourcing services from meter reading to operations of facilities."

     The purchases include GTI from Fluor Daniel and ICF Kaiser International's environmental engineering division. President-CEO Anthony DeLuca believes in improving "the bottom line by adding to the top line." The GTI acquisition will help it provide integrated services to major clients such as PPG, a long-time industrial customer. "We've worked with them for years. GTI had been doing [water-wastewater] work for them. We're able to integrate and expand our service, realizing economies of scale. It's good for them and good for us," he says.

     Investors have rewarded it, moving the stock from just above $5 per share last fall to just under $17 per share the last week in June. "We've beaten analysts' projections for 11 straight quarters. If anything, our stock is undervalued," says DeLuca. Although he professes to be pleased in general with integration of the purchased components, DeLuca says, "We haven't yet seen the market synergies: one plus one equals three. We'll see that in the year 2000."

      URS Corp. also bought its way into the billionaires' club, taking on nearly $700 million in debt to buy the Dames and Moore Group. URS, which had previously bought Greiner and Woodward Clyde, ranked 17th in 1997, with $290 million in revenue. Dames & Moore was next on the list, with $282 million. The consolidated companies recorded $1.1 billion in revenue in 1998, but URS officials declined to comment on market prospects. The quarterly earnings report cautions investors that integrating Dames and Moore could be difficult. So far, investors have approved the move: The stock moved from a 52-week low near $13 last October to $28 last week, high for the year.

GROW OR DIE

     The shopping sprees at the top of the listed depleted the ranks of the companies reporting at least $100 million in revenue, from 42 in 1997 to 38 last year. A company has to change as market segments change, says Craig Goehring, CEO of Brown and Caldwell, a water-wastewater firm in Pleasant Hill, Calif. He believes changes in the hazardous waste field are a major influence on consolidation. The hazwaste sector continues to slip in terms of market share. Gross revenue for 1998 topped the 1997 total slightly, $7.8 billion compared to $7.775 billion. But market share continues to slide, dropping from 39% of the market in 1996 to 32% in 1997, to under 30%. As if to underscore the point, the Hazardous Waste Action Coalition recently changed its name to the Environmental Business Action Coalition. The group, a Washington, D.C.-based American Consulting Engineers Council affiliate, says it is responding to clients' demands that environmental consultants deliver economies of scale by combining remediation and redevelopment.

     URS and Dames and Moore were "titans of the hazardous waste industry," Goehring says. The buyout was "inevitable with the reduction in growth" in the sector, he says. Diversification is an option, he adds, "but Dames & Moore diversified and they lost their company." Goehring feels comfortable in the middle. The privately held firm, ranked 36th with $111 million in revenue, bought Nashville-based Eckenfelder Inc. last year to bolster its industrial business. Goehring predicts $135 million in revenue this year, with municipal contracts in Atlanta and Orange County, Calif., in place and growth in design-build and information technology work. Bigger isn't necessarily better, Goehring says: "We haven't had a customer yet ask us if we're a billion-dollar company."

     American Ecology Corp. also is hoping to benefit from concentrating on a niche market—low-level nuclear waste. The firm turned in its best first quarter in a decade this year, says Joe Nagel, president of the Boise-based firm. Acquisitions on the chemical waste side did not perform as anticipated, he says, and the firm was forced to downsize, dump non-core subsidiaries and restructure more than $45 million in long-term debt. The retrenchment dropped American Ecology three slots among the Top 20 Nuclear Waste companies, to No. 17, but positions them well for the future. Laws must change, Nagel says, to enable American Ecology to take nuke waste at permitted sites such as the one it has at Richland, Wash. At present, only waste from an 11-sate compact is allowed. Nuclear waste is "a major issue out there [that] we have not faced as a society," he says.

     Nuclear business and consolidation have both been good for MACTEC, says President Scott E. State. The privately held, Golden, Colo.-based firm secured a cash infusion from Credit French Merchant Bank to fund acquisitions that doubled its size in 1998. The largest involved QST Environmental Inc., which ranked No. 63 on last year's Top 200 list, one slot ahead of MACTEC

      Pumped up MACTEC is No. 25 this year and ranked ninth among the Top 20 Nuclear firms, up four places from 1997. MACTEC made the leap by patiently attracting private equity investors, then leveraging its position to attract lenders. "In a consolidating market," says State, "you have to have cash-flow financing. Public companies like it can put that together, but you don't typically see privately held firms who are able to produce the kind of financing we have." Nagel says the firm is looking to make even more acquisitions and move further up the Top 200 list. "Our objective is to be a Top 10 firm in the next three years," he says.

     Consolidation has been good for remediation contractor Sevenson Environmental Services Inc., as well. The Niagara Falls, N.Y.-based firm is doing better as the number of competitors shrinks, says Michael Elia, company president and CEO. Margins are improving, too, he says. Sevenson is winning one job in four these days, compared to one in 10 previously, says Elia.