Regional O&M firms find sweet spots in tight market

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The contract operations market is dominated by major players, but regional O&M firms are out to prove there’s space for growth. Could the sector’s leaders soon face a challenge from the middle ranks?

The contract operations market for water services in North America is a huge financial landscape, and, on paper at least, the market seems to be a playground for industrial giants. The dominance of the major market players, however, is far from complete. Smaller operators have carved out well-established niches across North America, and these regional O&M firms are out to prove that there’s still space for growth outside, between and, in some cases, inside the market leaders’ territories.

According to AWI’s annual contract ops survey published in May, the North American operations and maintenance market for the “Big Five”– American Water, CH2M Hill OMI, United Water, Severn Trent Services and Veolia Water – topped $1.6 billion in 2011. The market for smaller players is small by comparison, but mid-sized firms surveyed by AWI have a combined annual revenue stream of $125.8 million, or 7.8 percent of the Big Five’s market share. If the market delivers as mid-sized players hope, the Big Five could soon see a growing number of upand- coming challengers.

Drawing the boundaries of the mid-sized O&M market presents several big challenges. As is the case with the overall utility business, the mid-sized contract ops market is highly fragmented. The number of contracts available tends to vary from one region to the next, and facilities run by mid-sized firms can run the gamut from less than 1MGD to more than 15MGD. In recent years, some firms have secured contracts that rival the size of the sector’s largest; Georgia-based ESG Operations is currently contracted to run the 65MGD wastewater treatment plant in Augusta, Ga., and Woodard & Curran runs a reuse project for Orlando, Fla., whose flows can reach as high as 81MGD. Midsized O&M companies often occupy a self-defined “Goldilocks zone” between the international arena of the Big Five and the small-town stomping grounds of mom-and-pop operations.

“I know a lot of companies on the east coast that handle very small water systems. But once you get past a certain point for a number of customers, there’s only four or five companies,” said Russell Tierney, northeast regional manager of water operations for WhiteWater, Inc. “We do have a few large customers, but we’re kind of that niche in the area where the big guys don’t want to come down and the real little guys don’t want to come up.”

In some ways, the current state of the mid-sized O&M business is a reflection of the sector’s past. John Eddlemon, senior vice president of ESG Operations, said the current mid-sized O&M market is in some ways reminiscent of the business strategies of larger companies in the previous decade. The wave of acquisitions that came in the late 1990s and early 2000s swept up many smaller players as they were consolidated into larger companies such as Veolia (formerly USFilter/Vivendi), United Water and Southwest Water. (see table, above). The companies that remained independent (or, in the case of ESG, were founded after the round of buy-ups) emerged to find that a new market vacuum had appeared.

From a revenue perspective, regional players such as Maine based Woodard & Curran and Georgia-based ESG Operations tend to make up the bulk of the mid-sized market, with operations spread over several states. Other, smaller players such as NYSE-listed Middlesex Water and WhiteWater, a subsidiary of R.H. White Companies, are tightly focused in the northeastern U.S. but have begun to take over key O&M contracts from larger competitors. In December 2011, WhiteWater purchased 37 water and wastewater contracts in New Hampshire, New Jersey and Massachusetts from United Water. In April 2012, Utility Service Affiliates, a subsidiary of Middlesex Water, wrestled a 10-year O&M contract in Avalon, N.J., away from incumbent American Water. More recently, Woodard & Curran was chosen in June to run the water assets of Cohasset, Mass., which had been another American Water contract. American did not submit a bid for the contract renewal.

Some smaller firms have amassed a long list of small clients while others have acquired fewer but more valuable contracts. Nebraska-based PeopleService, Inc. has roughly 120 active contracts that make up $11 million in annual revenue, while Weston & Sampson has about 100 contracts for its $9 million in revenue. Woodard & Curran’s 45 contracts mean revenue of roughly $39 million, while ESG’s 14 contracts bring in about $36 million. APT Services, the O&M branch of APTwater/Rochem, has a handful of valuable contracts. Its four contracts yield roughly $10 million a year.

Eddlemon said competition for medium and small utilities is heating up. In addition to competing with other regional firms, ESG has been going head-to-head with the sector’s largest players since it was founded. He said more than half of his company’s contracts have been won from two of the sector’s largest players.

“Eighty-five percent of the work that we’ve won has been at the expense of the large, multinational firms,” Eddlemon said. “Since our inception, we have competed with the ‘Big Five’ on practically every project that we have been awarded.”

And that market shows signs of growth. Most of the firms surveyed said their contract ops business has been growing, and the pace of some companies’ growth is comparable to the largest O&M firms. Market leader Veolia’s O&M business grew 3 percent from 2010 to 2011, while Severn Trent Services’ revenues declined by 6.7 percent. The mid-sized firms may be smaller, but many of them are growing noticeably year by year. Steve Niro, O&M business manager and senior vice president at Woodard & Curran, said his firm’s operations business has been growing at about 10 percent per year for the past 10 years. ESG expects a 20-percent jump in business in 2012 and hopes to break $50 million in revenue in the near future. Massachusetts- based Weston & Sampson has observed a 10 percent jump in O&M revenues year over year. No single firm interviewed by AWI has even begun to approach the size of Severn Trent Services, the smallest of the Big Five by revenue, but the mid-sized market as a whole undoubtedly represents a significant piece of the O&M puzzle. ESG’s Eddlemon said his company expects the market for small and mid-sized contract ops in the southeastern U.S. alone to reach $100 million within three years. PeopleService president Alan Meyer said that small and medium-sized cities will give mid-sized firms chances for organic growth, adding that market players have only begun to scratch the surface.

“I don’t think there’s a municipality out there that isn’t a potential client. It may sound kind of utopian, but I think it’s true,” Meyer said. “The big guys generally focus on the larger communities, and that’s fine. I don’t mind. They can stay there as far I’m concerned. There’s hundreds of the towns we serve for every one that they serve.”

It should be noted that AWI’s survey of mid-size firms is far from comprehensive; many firms either declined to be interviewed or did not respond to requests for comment. Others responded but declined to share their O&M revenues. The midsized O&M market is dominated by privately held companies.

The size of firms in the mid-sized O&M market is often what sets them furthest apart from their counterparts in the Big Five. APT Services president Mark Minter said his company’s relatively small size limits the types of contracts APT can chase. APT, a newcomer to the O&M business with just four contracts and less than two years under its belt, isn’t likely to be able to match larger firms’ capital or marketing muscle. Where APT can gain traction is with medium-sized contracts at medium sized facilities, Minter said.

“That’s less of a shark fest, less of a piranha feeding frenzy. I think it’s where companies can do the most good,” Minter said. “I think the ones in the middle and on the medium end are the ones that are best suited to contract operations.”

When it comes to chasing larger contracts, mid-sized firms take different approaches depending on past experience and current competition. In some cases, that means passing up contracts that are out of one’s league. Tierney said WhiteWater voluntarily passed up a chance to bid for the operation of a 30MGD wastewater treatment plant in Lynn, Mass., because the company was “not ready to make that leap yet.” The company instead has continued to target facilities that are 10MGD or less. Middlesex, meanwhile, has focused on showing potential customers that it has the same technical and management skills as larger companies, according to CEO Dennis Doll. If a proposal is issued in an area where Middlesex is highly active, then Middlesex has “just as much of an opportunity to present a credible proposal” as any of the national companies, he told AWI.

Reversions in the mid-sized O&M market seem to be relatively rare, and the nature of reversions is often colored by the O&M partner’s smaller size and, in some cases, more local focus. Niro said Woodard & Curran recently had its first reversion in “many, many years” when the City of Dallas, Ga., took back control of its two wastewater facilities and 24 lift stations. The client estimated that taking operations back in-house would save $50,000 a year, but the transition may not even be final.

“As we were chatting and talking about demobilizing or transitioning out, they also said, ‘We’re not sure if this is going to work, and we may we give you a call and have you come back,’” Niro said.

In contrast to larger cities that routinely put the operation of their assets out to bid, some smaller cities are less apt to change operators after dealing with a firm they know and trust. In some cases, small municipalities may not even want a given operator to leave. The choice, however, is not always their own. Some small cities require contracts to be re-bid every few years, and many are bound by state bidding laws requiring them to take the lowest bidder. In one case, WhiteWater very nearly lost a client they had been serving for 10 years, Tierney said. Neither the company nor the client wanted the contract to change hands.

“We had someone bid against us – the last bid – and we only won by $5,000 a year. So it’s very close, and the town was very nervous because we’ve been working there for 10 years,” Tierney said. “It was a little stressful for them because they really didn’t want to lose us, but they have to abide by the laws.”

One of the most pronounced differences between large and medium operators is how company size affects customer relations. All the respondents to AWI’s survey said being more regionally focused has helped them interface more smoothly with the smaller municipalities they serve.

“Our attraction to many clients is that we’re not one of the big companies. We can’t afford to perform poorly. Every project that we have is very important to us,” Niro said. “I think it is an advantage in the market that we’re in.”