The year 2006 marks the first year of the second decade of ENR’s annual Top 200 Environmental Firms list, and its results make clear that rumors of the environmental sector’s collapse are about as true as the celebrity gossip in tabloid columns.

Even in the sixth year of a U.S. administration not known for a pro-green attitude, the Top 200 still crested on a market pushed by a booming global economy, more owner commitment to environmental spending and firms’ own zeal for growth. Firms report $37.5 billion in total revenue in 2005, an 11.5% increase over last year’s number that more than doubles the hike since 2003.

Gains strengthened domestically and particularly overseas, where firms took in $1.2 billion more in revenue than last year, a 28.6% increase. Every key environmental market shows healthy growth even if some mature areas, such as hazardous and nuclear waste, lost some market share in 2005. 

“With respect to growth and profit margins, the 2005 full year ended up being about the best year in the past 15 years,” says Paul Zofnass, president of EFCG Inc., a New York management consultant to many Top 200 firms. He is equally bullish about 2006, but cautions that some looming trends could cloud firms’ results next year—from uncollected bills and skyrocketing materials prices to growing work force gaps.

Related Links: The Top 200 Rankings Complete Report

Shakeout

Changes in the Top 200’s mix of firms this year, based on who participated and who didn’t, was a factor in how revenue shook out. But seemingly nonstop acquisition activity in this sector was a major catalyst. It drove a number of firms up the list and opened spots for new contenders. The Top 200’s loss of Geologic Services Corp., based in Littleton, Mass., and ranked 113th last year, was The Kleinfelder Group’s gain in a July 2005 purchase. As a result, the San Diego parent jumped from 94th to 59th place. “We were able to leverage more clients in the East such as big box stores,” says Kleinfelder CEO Gerald Salontai.

Entree for the Top 200 list rose to $16.2 million in revenue, up from $13.3 million last year. Buck Engineering, a Cary, N.C., environmental planning firm, narrowly missed the cut. But with a 33% rise in backlog and a 20% hike in staffing in 2005, it likely would have been a contender next year if not being recently acquired by Michael Baker Corp.

CH2M Hill Cos. had an impressive spurt, fueled by past acquisition and organic growth, to propel the ambitious firm ahead of Bechtel and into the top spot, both for the first time. Even with a small but continuing drop in environmental revenue as it diversifies, CH2M Hill passed the $3-billion mark, 19.2% more than last year. “There was large growth on the private side of the business,” says Kathy Hanna, CH2M Hill business development manager in Seattle. “It’s driven by their own acquisitions and environmental stewardship.”

The greening of the private sector also boosted results for The ERM Group, which has traditionally served that market almost exclusively, particularly overseas. Its revenue climbed almost 15% in 2005. “The base of our business is still governance and assurance,” says Dale Sands, director of key client programs. The firm recapitalized late last year through a buyout partnership between management and a new equity investor. Now valued at about $500 million, “we may look at going public when we get to the $1-billion mark,” he says.

On a Roll

The stock market has been kinder in recent years to environmental firms, among others in construction. An EFCG index of 13 publicly owned firms, 12 of which are on the Top 200, has quadrupled in value since 2001. Over the same time, the Standard & Poor’s 500 Index has been flat, says EFCG. Even so, no new names joined the 17 public firms on the Top 200 list from last year.

Being bigger may be more critical for  Top 200 firms as private owners reduce their stable of contractors.  “We do most of our business with 100 large clients under master service agreements,” says Jean-Yves Perez, executive vice president of URS Corp. “They look for firms that are pretty complete.”

Bolstered corporate attention to green issues may make up for a falloff in work from the federal market’s leading environmental owner, the U.S. Defense Dept. Despite last year’s newest and largest list of military sites proposed for cleanup and redevelopment under the Base Realignment and Closure (BRAC) program, changed military priorities such as the Iraq war and global troop redeployment are draining cleanup funds.

“BRAC may be a significant growth area, but that remains to be seen,” says Craig Weaver, executive vice president of Bechtel Systems & Infrastructure Inc. Cleanup of unexploded ordnance at U.S. sites is about the only growing DOD market, says Salah AbdelHamid, CH2M Hill business development director in Philadelphia. The firm is working at several UXO sites, including the island of Vieques off Puerto Rico, a naval bombing range for 60 years.

Big Impact. Hurricane Katrina generated debris and damage, challenging Top 200 firms. (Photo by Michael Goodman for ENR)

Hurricane Katrina pushed more federal work toward the Top 200 with emergency cleanups managed by the Corps of Engineers and FEMA. But some firms fared better serving private clients.      

Storm-related environmental services and a growing mold abatement market propelled LVI Services Inc. from 36th to 22nd place in just two years. “We created a new business for emergency response,” says President Burton T. Fried. The firm worked throughout the Gulf Coast and Florida in 2005, but also served booming real estate markets in Chicago and California, he says.

With labor issues controversial in the abatement business, Fried claims “we’ve never had a problem” with undocumented workers. He says LVI has invested $1 million in high-tech worker ID technology and “just instituted a new health insurance plan for our hourly workers. That was never done before in our industry.”

The private sector push helped hazardous waste remain the market leader, crossing $10 billion in revenue for the first time. Such work pushed Sevenson Environmental Services Inc. to the $200-million revenue mark in 2005. Closure of old manufactured gas plant (MGP) sites is a key brownfield market. “Manufacturers and chemical firms are doing well, so they are expediting cleanup,” says President Michael Elia. “MGP sites also were once exempt from regulation. Now they are under more pressure. Cities need the property.”

Transform. Industry-funded Superfund cleanup will generate a container pier. (Photo courtesy of Sevenson)

Sevenson is now starting work on a $40-million industry-funded MGP cleanup in Everett, Mass., that will turn a Superfund site into a cargo container pier.  The firm also is eyeing  General Electric’s long-delayed cleanup of PCBs in New York’s Hudson River. A $300-million contract to remove 269,000 cu yd could be awarded by September.

The nuclear waste market reached a high point in 2005 with completion of most cleanup work at the the U.S. Energy Dept.’s Rocky Flats former plutonium factory near Denver, managed by CH2M Hill. Firms expect a cascade effect at other DOE sites in Miamisburg, Ohio, West Valley, N.Y., and Idaho Falls, Idaho, as decade-long closure work moves to final stages. But some worry if federal funds will hold out. Steve Piccolo, senior vice president at Washington Group International, thinks the squeezed DOE budget will push more performance risk onto contractors.

And even as Bechtel struggles to manage the problematic multibillion-dollar waste vitrification project at the Hanford site in Washington state, firm officials see market handwriting on the wall. “The U.S. market is shrinking,” says Bechtel’s Weaver.

That prospect is turning attention to the U.K.’s developing nuclear waste cleanup program. Bechtel has been working with British officials since 2002 to structure a decommissioning program. The bid process for cleanup of the country’s first low-level waste disposal site starts as early as next month. “We’re interested because the contracts are going to look a lot like the incentive structure you get with DOE now,” says Piccolo.

Other market players are positioning to clean up byproducts of potentially resurgent commercial nuclear power in the U.S. Two high-ranking Top 200 firms, BNFL Inc. (renamed BNG America last year) and Duratek Inc., with combined 2005 revenue of more than $653 million, will disappear from the list next year following their recent purchase by EnergySolutions, an investor-backed technology firm. “EnergySolutions is one of two companies in the world with the ability to reprocess spent nuclear fuel,” says CEO Steve Creamer. “Nuclear power is a clean alternative when properly handled.”

Rising. Wastewater plant is part of a $3-billion Orange County, Calif., investment. (Photo courtesy of Orange County Sanitation Dept.)

Water and wastewater markets continued to generate lots of revenue for the usual big fish but also for smaller engineers and constructors. “These markets are healthy around the world,” says Robert Uhler, CEO of MWH, which moved up a notch on the Top 5 Firm lists in both categories. “There are lots of projects in developed countries.” Top 200 water revenue rose nearly 29% in 2005, to $6.8 billion. Wastewater revenue surpassed that at $7.3 billion but its growth rate was drastically less, only 5.6%.

“We’re seeing growth across the country due to regulatory issues...as well as population growth and capacity issues along both coasts and in the southern states,” says Gary L. Bleeker, national director of HDR Inc.’s water program. “We’re also seeing a lot of aging infrastructure.” Adds CDM President Richard Fox: “The biggest unmet need is wastewater treatment rehabilitation, not new construction.”

Carey Pester, business development director for Western Summit Constructors Inc., sees municipalities planning ahead to meet a perennial problem— drought. “We are building a $30-million, 27.5-million-gallon-per-day groundwater desalination plant in El Paso set to finish in 2007,” he adds. “It’s the largest inland desalination plant in the country.” Western Summit also sees more environmental infrastructure subsidized by private developers in a red-hot real estate market only recently starting to cool off.

Others predict more work in “asset management,” still a new market niche but “a bigger driver,” says Fox. Bleeker says, “You only have so many dollars, so you must develop a program to get the most life out of the asset while determining where to put the dollars.”

But many market players worry about stretching those dollars to cover skyrocketing materials costs. “I’ve seen a 25 to 40% jump in cost estimates in the last nine months,” says Uhler.

Dennis Hill, vice president and treatment division manager at Brasfield and Gorrie, says higher-cost materials must now be ordered sooner in bulk and stored “under lock and key.” He adds that the firm cannot get its subcontractors to honor requests from owners to hold bid prices  as long as 90 days. “Often we have to use profit to take care of escalation since bidding the job,” Hill says.

Bonding and risk issues are making jobs tougher to bid. Washington, D.C., utility officials have been hard pressed to start building a $354-million project at the 370-mgd Blue Plains wastewater treatment plant. No contractors bid the contract to construct a series of digesters by a February deadline because bonding...