Enron, Arthur Andersen and WorldCom to the contrary, numbers don't lie: the environmental market posted solid gains in 2001. ENR's Top 200 Environmental Firms reported $32.8 billion in revenue for the year, a 13% gain over the previous year. For the first time ever, the annual number topped $30 billion, despite the twin anchors of recession and a costly war on terror instigated by the Sept. 11 attacks on the Pentagon and World Trade Center.
Conventional wisdom says the environmental market lags the general economy, that a Bush administration would cast a pall on remediation spending and that the cost of fighting a war would divert military funds earmarked for base cleanup. All of these things could come to pass, but none has happened yet.
Every market sector but one recorded revenue growth for the year, ranging from 4% expansion of hazardous waste work to a whopping 37% jump in nuclear cleanup efforts. The lone laggard was the air sector, which fell by 9%, possibly as a consequence of President Bush's Clear Skies initiative, which is being interpreted as a relaxation of the existing Clean Air Act standards.
HOLD THE FORT So far, U.S. is spending for war, but not cutting back on cleanup. (Photo courtesy of the Dept. of Defense)
SAFE AT HOME. The war on terror is creating new market opportunities, as the Office of Homeland Security and the Environmental Protection Agency order vulnerability assessments of the national infrastructure. "We recognized the potential for water security work after 9/11," says John Somerville, president of Wakefield, Mass.-based Metcalf & Eddy, an environmental arm of AECOM Technology Corp.
The Los Angeles-based parent company hiked revenue last year by 45%, but only moved up two positions on the list, from No. 20 to No. 18. The company moved away from work in the nuclear sector and bolstered its water efforts, increasing its share of environmental work by 5%, to 22% overall. Metcalf & Eddy has passed through a succession of owners in the last decade. Competitors regarded it as a once-respected consulting firm that had lost direction. Under AECOM, however, the firm may be recovering some of its lost luster.
"As we see market opportunities, we launch initiatives. The water security area is as successful as any this year," says Somerville. "We have 15 projects under way. We see requests for proposals every week."
EPA's grants for large water system vulnerability assessments are only $115,000 apiece, barely a drop in the settling tank. "We'd all really rather be doing pilot plants for UV (ultraviolet) disinfection with our big systems," says Richard Moore, a vice president in the Tampa office of water-wastewater consultant Camp Dresser & McKee Inc. On the other hand, the vulnerability assessment work gives consultants a chance to cement re- lationships with municipal customers. Systems that provide water for more than 150,000 people "are asking us to look at critical areas of water distribution networks and conduct �what-if' scenarios with regard to possible terrorist activity," says Richard D. (Dick) Kuchenrither, senior vice president and director of the technical applications group at Kansas City-based Black & Veatch.
Water infrastructure security makes the news these days, says Richard D. Fox, president of Cambridge, Mass.-based CDM, Camp Dresser & McKee's parent company. The public doesn't realize that many public agencies "had been doing a lot of work on the security issue anyway," he says. "A majority of municipalities have had the issue on the agenda for maybe a decade....I don't think there's been a wholesale market swing because people had been doing this all along."
There was a temporary dip in airport-related environmental work immediately after Sept. 11. Since then, "It's been a very quick recovery," Fox says. Despite inconvenience and byzantine pricing structures, the summer vacation season has the traveling public once again moving through airports. The Dept. of Transportation and Office of Homeland Security are mandating safety-related improvements and the earlier work is coming back to normal, reflecting "a tremendous pent-up need," Fox says.
The numbers posted by the Top 200 certainly don't reflect the expected double-whammy of war and recession, says Bob Uhler, president and CEO of MWH. The Broomfield, Colo.-based engineering-construction firm is showing the benefits of combining Montgomery Watson Inc., No. 12 on last year's list, and Harza Engineering Co., No. 75. MWH ranks No. 9, reporting $803 million in 2001 revenue, 29% above the 2000 combined total of the component parts.
"One of the stunning things about this is that the government opened its pocketbook to the U.S. military, but didn't reduce environmental spending," says Uhler. "That's why [the U.S.] went from surplus to deficit. We didn't see what we normally see, what we saw in Bosnia. Environmental contractors are telling us there is no pressure to redistribute funds."
BROWNFIELDS State efforts picking up. (Photo courtesy of Law Environmental)
SHAKY AT THE TOP. On last year's list, six firms reported more than $1 billion in revenue. This year, the billionaire's club has eight members but their positions could be as secure as a logrolling lumberjack's. Three California firms trod water�No. 1 U.S. Filter Corp., Palm Desert; No. 2 Bechtel Group Inc.; and No. 6 URS Corp., both San Francisco. Each recorded similar revenue levels in 2001 as in 2000. CH2M Hill Cos., Denver, grew revenue by 20%, to maintain the No. 3 spot. At No. 4, Boise-based Washington Group International Inc. is still recovering from the Raytheon Engineering and Construction International Inc. acquisition debacle but continued to add to a growing backlog. The company recorded a 60% revenue growth from 2000 to 2001 as it worked its way through a reorganization. In January, it emerged with a new $350-million revolving credit arrangement. Late last month the board adopted a shareholder rights plan designed to prevent a hostile takeover.
Foster Wheeler Corp., Morris Plains, N.J., slipped a notch to No. 5 this year, as revenue declined from $1.4 billion to $1.3 billion. But the parent company's stock slippage was more precipitous, from a high of about $18 per share in April of last year to a recent level below $2.50. After Chief Financial Officer Gilles A. Renaud left in May, the company arranged for credit extensions from its bankers. Officials aren't commenting, but sources claim the firm is on the block.
The IT Group, No. 5 last year, filed for bankruptcy and was purchased by The Shaw Group, Baton Rouge, which nailed the No. 7 slot on this year's list with $25 million less revenue than IT reported for 2000. "The traditional environmental sector is flat, maybe slightly declining," says Tim Barfield, president of Shaw Environmental Group. He doesn't expect to see double-digit growth in the environmental sector any time soon, "but in the non-traditional areas, there are opportunities we have as a company where we can even grow our traditional market and regain the market share IT lost."
The No. 8 firm, Long Beach, Calif.-based EARTH TECH, topped $1 billion for the first time, but actually slipped a notch on the list. Of more importance to President and CEO Diane Creel are the well-publicized problems of EARTH TECH's parent, Hamilton, Bermuda-based Tyco International Ltd.
When Creel engineered the sale of EARTH TECH to Tyco in 1996, the firm was stalled at $200 million in annual revenue and Wall Street interest in environmental firms was flagging. But she and Dennis Kozlowski, then-CEO at Tyco, hit it off. Both loved to grow by buying. The self-proclaimed Army brat, and her new boss�a Newark, N.J., cop's son�were known for rapidly rolling up seemingly disparate companies into a unified revenue engine.
But the wheels have come off for Kozlowski, currently under indictment in New York City for sales tax evasion and evidence tampering. His legal problems were the nail in the coffin at Tyco. He stepped down last month, but stockholders were already demanding his ouster. Share prices topped $60 as recently as last December, but fell swiftly as questions arose about alleged offshore tax evasion and other dubious accounting practices. In recent sessions, the stock has been trading around $12.
What this means for Creel and EARTH TECH is still unknown, but it seems that her corporate shopping sprees will be curtailed, at least for a while. "We have had a pretty aggressive acquisition strategy for the past twelve months, which has now slowed down," she says. The North American market has been challenging this year, Creel notes, but there are environmental opportunities related to the anthrax scare and other post-Sept. 11 needs. In March, EPA awarded EARTH TECH a five-year, $100-million contract to provide emergency rapid response services in Region VI, which includes Louisiana, Oklahoma, New Mexico and Texas.
U.S. Filter's French owner, Vivendi Universal, is also experiencing problems that could reverberate across the Atlantic. Jean-Marie Messier's effort to leverage an international water company into a multimedia conglomerate has fallen out of favor in the board room and on the street. The stock chart for the past two years looks like a black diamond downhill run in the French Alps: From a high above $90 in early 2000, the stock price has traded below $20 in recent weeks. Five directors have left the board in the past two months. A special governance committee is trying to rein in the maverick Messier and the cash-strapped parent company is cutting its stake in the environmental arm, from 68% to 40%. Messier managed to save his job at a rancorous June 25 board meeting in Paris, but the directors instructed him to slash $3.9 billion in debt from the balance sheet this year. Vivendi Universal's core debt is about $15 billion.
By cutting its stake in the environmental unit, Vivendi Universal may actually be helping U.S. Filter, says Andrew D. Seidel, president and CEO. He says there was no real synergy between Vivendi Universal's entertainment and environmental units, making the decision "a very positive thing for the shareholder groups of both companies." The proceeds from Vivendi Universal's share offering in the environmental division will raise about $2 billion, and "we'll do a secondary offering that will raise about $1 billion, which we'll further use to grow our business," Seidel says.
U.S. Filter also is spinning off its non-water-related units. By the end of 2002, Seidel reports, U.S. Filter will have sold companies valued at about $1.1 billion. "I think U.S. Filter has really hit a balance of being able to generate significant internal growth" without relying on further acquisitions, he says.
WAITING IN THE WINGS. Should any of the top-tier players falter, there is no shortage of candidates ready to step in. As usual, there was significant turnover, with 37 companies�nearly one in five�on the list that weren't there the year before. Distribution also was fairly even, with five of the newcomers reporting revenue of more than $100 million, 16 under $20 million and 16 in the middle range, a popular area for mergers and acquisitions in recent years.
"There is a lot of boom and bust going on," says MWH's Uhler. Despite getting positive traction from combining Montgomery Watson and Harza, he predicts that near-term growth will be organic."We have a controlled growth strategy. No more than 15% a year. We don't want [any more] mergers," he says.
Others may take a different tack. "There is a very strong pressure on prices in this market," says Jean-Yves Perez, Denver-based vice president for URS Corp. "Margins are declining." URS' stock has been steady, currently trading around $28 per share, off from a $34.80 52-week high in April, but up from a post-Sept. 11 low of $18.20. The firm is pursuing a strategy of layoffs and acquisitions.
"This continues to be a market of consolidation," says Perez. "The whole industry continues to be active in mergers and acquisitions."
One advantage to consolidation is that "with fewer firms�we've turned the corner and are getting a better return. It gets back to being treated as a professional and not a commodity," says Frank DeMartino, president and chief operating officer of No. 10 Parsons Corp.
The Pasadena, Calif.-based design and construction firm grew environmental revenue by 15% in 2001, in part by increasing its concentration on the hazardous waste sector from 42 to 51%. The company also benefits from being privately held, says DeMartino. "We don't have to report to analysts, so we strategically plan on a three- to five-year period....It seemed wrong in the dot-com era, but now, retrospectively, it [is] a great benefit to be private," he says.
Apparently, his peers agree. Thanks to consolidation, the number of privately held firms among the Top 200 increased by 10 last year, to 179. That is the most since the survey began in 1996.
In the "mature" federal environmental marketplace, there are few opportunities but they tend to be large ones. "We tend to chase a small number of very large rabbits," says James W. Thiesing, group vice president for federal operations at Jacobs Engineering Group Inc.
The Pasadena-based remediation contractor turned in a solid performance, moving up on construction/remediation and federal listings. It held steady in nuclear and hazardous waste works, but slipped slightly in booking new contracts.
Thiesing is looking forward, hoping to land work in the multibillion-dollar, treaty-driven chemical weapon destruction program at Tooele, Utah, Newport, Ind., and Aberdeen, Md. Jacobs expects to compete for another round of military base closures by 2005, as well as accelerated cleanups at Dept. of Energy sites at Rocky Flats, Colo., Hanford, Wash., and Fernald, Ohio, Thiesing says.
Funding pressures are pushing the government to accelerate the pace at federal nuclear production sites, says Ron Peterson, president of Fluor Hanford. The Defense Dept. is moving to adopt more commercial practices in disposing of materials and waste at large sites. "Any sort of a stockpile that can become a weapon is going to fit in with homeland security. It will get a high priority," he says.
Along with accelerated scheduling, DOD will also begin to look at life-cycle costing and lump-sum work, structuring performance-based contracts with rewards for contractors willing to take on additional risks, he says.
The June 27 Group of Eight accord to spend $20 billion over the next decade to help Russia dismantle its weapons stockpile could provide a lucrative opportunity for U.S. firms with experience on DOD cleanups. "The only sure way to protect stockpiles is to eliminate them," says Tom Roell, president of Fluor Federal Services. "The priorities are being shaken up. Our challenge is figuring out where the money will be spent, the path it will take."
Larger firms seeking big federal contracts have an advantage, says Roell. "It's harder to get insurance, bonding and so forth. Since 9/11, most companies can't carry the load alone. They have to team to bid the big jobs. Now there are two to four bidders where there used to be six to eight on very big jobs," he says.
That could spell larger market share for big federal players like Fluor, Bechtel Group and CH2M Hill Cos. if the federal sector continues to expand and the jobs get bigger. Fluor claims an 11% share of the DOE market, says Peterson, "and a glass ceiling of 35%."
Peterson also expects the Army Corps of Engineers will de-emphasize its Total Environmental Restoration contracts, too. "Those risks are pretty darn small after 9/11," he says. Consequently, Fluor is is looking for other places to grow its federal business, such as the $11-billion embassy rebuilding program.
"There is talk of BRAC (DOD's Base Realignment and Closure) cleanup slowing, but we haven't seen it yet," says Nick Masucci, president of Louis Berger Group. The East Orange, N.J., design firm had a solid year in 2001. It increased environmental revenue by 23%, to $109.6 million, good enough to move up two notches on the list to No. 47. The company increased its environmental work load and brought U.S. work load up to the level of its international work. Diversity was the key, according to Masucci. "Environmental planning, permitting and environmental science are all doing fine. We had 10% growth [in those areas] last year," he says.
EXPERTS NEEDED DOE wants to accelerate cleanup at former weapon sites. (Photo courtesy of Fluor Daniels)
ART OF THE STATES. In many ways, the brownfields market is similar to BRAC. Remediation normally involves the same contaminants as are found on military bases, but brownfields usually are smaller and permitting and funding are often handled at the state or local level. EPA continues to stimulate brownfields work by periodically releasing grants for pilot programs, but the real action is at the state level.
Ohio joined the list of states cleaning up the national inventory of abandoned former industrial sites, pumping the first $40 million into a revamped four-year, $250-million program (ENR 6/10 p. 17).
Estimates of the number of U.S. brownfield sites range from 400,000 to 1 million. State and local programs are ramping up, one reason the category grew at a 15% pace last year, almost matching the 19% growth rate of federal work. "Brownfields range from slightly polluted to Superfund sites," says Elwin Larson, HDR Inc.'s national director of environmental and resource management. The Omaha-based firm moved up a spot this year to No. 25, recording $198.4 million in environmental revenue.
Larson's view of brownfields work is in line with many state program directors. "If we could integrate environmental concerns with future development, that's good business," he says.
One project was close to home. ASARCO's old Omaha lead refinery was adjacent to a site for a new convention center. Until the city project started, "there was no clear motivation to demolish it and cap it," Larson says. "With the new construction, they got a voluntary cleanup and developed it as a 23-acre park with an interchange and a park-and-ride. It was a great example of a brownfield that turned the corner for the community."
Metcalf & Eddy's Somerville says building public-private partnerships is crucial to successful brownfields work. "We're trying to meet with developers, help them identify sites, get them approved. Then we can help provide cleanup services," he says.
The firm also helps municipalities develop bid packages for developers, Somerville says. Versatility helps. "We work with an agency or with a developer. We do site assessments for EPA and we're a direct contractor to them," he says. Now, "we're taking it to the next step, to development."
Remediation is "not a regulatory-driven situation any more. It's got to be financially driven," says Erhardt Werth, executive vice president for guaranteed business solutions at ARCADIS G&M Inc. The Highlands Ranch, Colo.-based firm logged $178 million in 2001 environmental revenue, most of it in private sector work. The firm reported $158 million in new contracts, enough to place it among the Top 50 in that category.
Ideally, owners want the consultant to "clean it up and make the liability go away. A lot of clients are looking to sell or release property," Werth says, and if the value of the property can offset the cost of remediation, so much the better.
FULL TANK Water business remains strong, as design-build work expands. (Photo courtesy of Jordon, Jones and Goulding)
HIGHS AND LOWS. The overall environmental market is strong, but the economic slowdown is retarding progress in some states. "In California there is a 23.6% budget deficit, so we expect to see a slowdown in capital projects," says DeMartino of Parsons. "We need a good economy to generate a large amount of taxes. That's what funds environmental projects."
Across the country, "population growth is fueling demand for infrastructure in the Southeast," says Donald R. Allen, president of Jordan, Jones & Goulding Inc. The Norcross, Ga.-based designer grew environmental revenue by 21% last year, but competition still dropped it three notches, to No. 85.
"In Georgia there are several issues. Metro Atlanta is beginning to see that we're pushing the limit on water supply," Allen says. "We have ample supply through 2030, but beyond [then] we will have to look at doing things differently."
Saltwater intrusion is raising alarms along the coast and agricultural drawdowns are straining the groundwater supply in the center of the state, Allen says. Georgia, Alabama and Florida are trying to negotiate a tripartite compact on water supply, but consensus is proving to be elusive.
"The challenge for us is managing the infrastructure in a sustainable way," Allen says. The 60-million-gal-per-day F. Wayne Hill wastewater treatment plant, with high-level solids removal and advanced treatment for organic compounds, "is the forerunner to the kinds of treatment plants we must provide for re-use," says Allen. "It represents the advanced treatment that cities will have to go to."
In Florida, the Everglades restoration is ramping up. Billed as a $7-billion to $8-billion program, "It will go on for decades," says HDR's Larson. His firm is part of the consulting team mapping goals for the health of Lake Okeechobee, the largest inland lake in the U.S. outside the Great Lakes.
The economic slowdown could impair Florida's ability to come up with its funding share and delay work in the short term, "but there is too much momentum for it to go away," Larson says.
On the Gulf Coast, Louisiana continues to map a plan for an even larger program�the so-called Coast 2050 project to stop loss of coastal wetlands. The Corps of Engineers estimates that 1 million acres and a valuable fishery along the Louisiana coast will vanish by 2040 unless countermeasures are implemented. Preliminary cost estimates are $14 billion, much of it in dredging, levee work and water diversion.
Elsewhere, conventional water and wastewater work continues. Design-build project delivery continues to gain popularity with public owners. Design-build "has been a good venue for us to pursue and secure business," says Jim Frey, senior vice president of St- Louis-based Alberici Corp. "The volume fluctuates, but it remains a significant portion of our overall work."
Design-build saves 20 to 30% of the cost, says MWH's Uhler. "We've had to bring in hard-nosed builders to add to the front end," he says. "The front end of design-build begs for decentralization, but the back end begs for control to protect the risk. It's a challenge."