Winds of change: Being part of a utility's subsidiary
Tougher Industries, a century-old mechanical contractor with offices in Albany and Poughkeepsie, recently joined the ranks of PSEG Energy Technologies (ET), bringing in 350 employees and annual sales of $60 million. It joined nine other Northeast U.S. mechanical contractors that have been acquired by the subsidiary of parent company Public Service Enterprise Group since January 1998.
In addition to Tougher, PSEG ET has acquired Fluidics, Inc., Phila-delphia, PA; Arden Engineering Constructors, Inc., Pawtucket, RI; Liber Rich/Rich Fire Protection, Pleasantville, NJ; Struble Air Conditioning, Fairfield, NJ; Frank A. McBride Co., Hawthorne, NJ; East Coast Mechanical Inc., Virginia Beach, VA; Thomas H. Barham Co., Tinton Falls, NJ; and Central Plumbing & Heating, Allentown, PA.
Headquartered in Edison, NJ, PSEG ET provides industrial and commercial businesses with a choice of energy products and services to assist them in reducing energy costs and improving efficiency. The company lists more than 5,000 customers in the Northeast.
The lure of new business opportunities, such as selling bundled services, was a main selling feature for contractors when PSEG came knocking on their doors. Now, hvacr companies have the ability to sell, install, maintain, and manage energy systems and provide the energy to run the systems.
The News visited with five of the acquired contractors and asked them to address the difficult decision of selling their business and their expectations on becoming members of the PSEG family. One of the contractors, Fluidics, Inc., is featured in the accompanying sidebar article (page 10).
Tougher IndustriesTougher chairman Don McKay said he had been contemplating what he would do as the winds of change swept over his company. He said he had been doing some strategic planning on an exit strategy and weighed several options.
“We looked at consolidators and we looked at roll-ups,” McKay said. “We were members of a peer group with seven other contractors and had actually talked about taking $170 million in total business and doing what the roll-up companies are doing today.
“We met with PSEG a little over a year ago and it seemed that the fit was best with ET. We filled a niche in their market area, particularly because of the sheet metal work we do throughout the Northeast.
“It was also a great way for me to come up with an exit strategy.”
McKay said he talked to other utilities but felt PSEG was more focused on what it wanted to do and how it was going to approach the market.
“Some of the others didn’t seem to have a handle on where they were going,” McKay said. “I was not impressed with the consolidators because the basis for their growth seemed to be in acquisitions. There didn’t seem to be any focus on profitability and sustaining the organizations.”
Since Tougher is firmly en-trenched in the New York market, it seemed that it would be a perfect fit for PSEG ET to expand their reach northward and tie into their markets in New England. An attractive selling feature of the company was more than just being an “active and growing service business,” as McKay stated.
“We have a great deal of sheet metal capability in the Northeast,” he said. “At the moment we, along with the Frank A. McBride Co., are the only members of the PSEG team that do extensive sheet metal work. We can link up with McBride and be able to match anybody in this region for sheet metal output.
“We do spiral duct and flat oval ductwork, and no other contractor in the Northeast does flat oval duct. We recently invested in a new production line that makes a finished length of ductwork, handled by three people, in 20 seconds.”
McKay acknowledged that the Tougher facilities also offer growth potential for PSEG since the shop facilities are underutilized. He expects that Tougher will be able to add more shifts as PSEG grows.
Another thing the new blend of contractors brings to the table is stability. McKay believes that small mechanical contractors will continue to ride the cyclical waves of business, but PSEG will be better prepared for the changes.
“I’ve been in the business for 50 years and have never seen the same business levels,” he said. “Energy Technologies will bring stability, and quality will go up, too.”
So the company that was founded by a friend of Teddy Roosevelt back in the 1890s is taking on a new chapter. With the partnership between independent hvacr contractors and utility companies becoming a new twist to doing business, companies like Tougher stand to weather the cyclical nature of the business and continue to thrive.
“I’m looking forward to some real fun,” said McKay, who began his career in 1945 as a refrigeration technician. “There are a lot of opportunities in bundled service work.”
Struble-Mcbride Service Co.Keith Struble has a hard time containing himself these days. When he thinks of the company’s future, his face lights up and his smile widens. He knows he made the right choice to sell his 26-year-old company to PSEG ET, and he is looking forward to the business opportunities in front of him.
“In the past I never had the resources to do large projects,” Struble said. “Now, if I want to do a hundred $1 million contracts, I could do it.”
He had no reservations about selling the company that he built from the ground up and turned into a $5 million service business. The only question was, who would he choose to sell it to?
“I wanted to sell to a utility because I didn’t want to end up owning stock in the company [like consolidators],” he said. “I didn’t want my life to be predicated on the ups and downs of the stock market.”
Struble likes the position the company has in the PSEG family. It is located in central New Jersey, close to corporate headquarters. The fact that his service department interacts so well with the “mother ship” is a strong selling feature for Struble.
“In less than a year we will probably be the biggest service company in New Jersey doing $35 million in service,” he said. “Being part of a large service business is very exciting.”
Struble likes the idea of being able to work with other large mechanical contractors, such as Frank McBride and Thomas Barham. As an independent, he never could have imagined working side by side with a $60 million contractor. Struble eventually merged with McBride’s service segment to form a large, single service company.
But ultimately he believes that the service business strategy meshes well with PSEG’s and that both sides have a lot to offer each other.
“We have always focused on service, maintenance, installation, and energy management,” Struble said. “We work well with ET because a lot of what we do plays well with their strategy. We both sell solutions.”
Does he have any advice for other contractors who are looking to follow Struble’s lead?
“Contractors who are looking into acquisitions can call and I would pass the information on to ET if I feel it would be a good fit for our business,” he said. “There is a lot of interest out there. My business friends have said that if they were to sell, they would sell to a utility.”
If other contractors choose to stay independent or pursue other avenues of acquisition, Struble said that’s OK too.
“There is always going to be room for everyone and no one should be afraid of that,” he said. “There will be a lot more acquisitions and consolidations but it will be good for the marketplace — and there will be good, fair competition.”
Struble sees the many bundled services that PSEG offers as a new wave of one-stop shopping for customers. He said that he can save his customers energy costs, and these costs may be funneled right back to his company. For example, “We saved a customer $25,000 in energy costs and they turned around and awarded us a $71,000 project.
“I looked at this [acquisition] as an opportunity,” he continued. “I never looked at it as a [sell-out] to a utility. As a business owner, you look for more opportunities to secure the business and grow the business. If a utility is the way to do it, then you go with a utility. If you think the best way to do that is to go with a consolidator, then you go with a consolidator.”
Thomas H. Barham Co.Bill Barham said he took an interest in ET because he knew some of the companies that had joined up with the utility subsidiary. But the president of the Thomas H. Barham Co. said when ET started acquiring other contractors, he wasn’t prepared to sell.
“Consolidators and utilities had approached us before,” he said. “It was a matter of feeling comfortable with the purchaser.”
The Tinton Falls, NJ mechanical contractor brought its business with its 100 employees under the ET umbrella just this last January. The 100-year-old mechanical contractor specializes in pharmaceutical, educational, medical, and correctional facility construction. The move further solidified ET’s service base in New Jersey.
“We filled in the slot for central New Jersey and it was a natural fit,” Barham said. “We had worked before with Frank McBride.”
Barham likes the fact that he has the opportunity to work with other ET contractors like McBride, who can help open doors to projects in a broader geographical area. “We have a massive amount of qualified people to draw from because we can integrate people from other contractors and move them into our projects,” he said.
As for this contractor’s employees, “They are taking it [the acquisition] well,” Barham said. “There are a few kinks to work out. The sale is three months old and it will take a while to settle down. Our key players have stayed on board with us.”
Barham said he plans on staying with the company, too. After all, he has been in the business since he was a tyke. But he did have some sleepless nights leading up to the sale. “It’s tough to take the keys to the door and give them to someone else. It is not an easy step.”
Barham said he is looking forward to hearing from other New Jersey contractors who are interested in joining the ET team. “Curious competitors have called and asked how I like [working for ET]. I am able to offer my input on potential contractor acquisitions. I’d have to know about the contractor and then advise ET if they would make a possible fit.”
Barham is happy with the fit and with the people he works with. Being able to interface with other million dollar contractors is just one benefit.
“ET offers different characteristics for our customers,” he said. “We can now offer things like bundled services and service contracts. And we are working with other people in the field who are familiar with this business. These are people who have worked with a shovel in their hand and built their businesses from the ground up.”
Will this new infusion of utility-owned companies put a jolt into the conventional hvacr trade? Not necessarily, according to Barham.
“The landscape is definitely changing,” he said. “But some of the independent contractors will continue to do very well.”
Central Plumbing & HeatingRandy Clemens saw the writing on the wall as he watched other contractors partner with utilities and consolidators. The ceo of Central Plumbing & Heating, Allentown, PA, felt it was time to make a move to remain competitive.
“Originally we weren’t looking to sell, but we saw other people around us selling,” he said. “We figured we could become more competitive and grow the business if we joined PSEG.
“They had a lot to offer and could provide us with good resources. This [acquisition] allows us to offer things we couldn’t as a single company.”
The 90-employee mechanical contractor has been a solid part of the Allentown business scene since 1943. It serves commercial-industrial customers in the Lehigh Valley region. PSEG ET acquired the contractor in January 2000.
Clemens said he could have chosen the path of others and sold to a consolidator, but the fit “didn’t seem attractive. It seemed that ET was doing all of the right things to back its contractors.”
Clemens noticed an instant attraction to the new venture when he started getting curious phone calls from his competitors. The callers were asking questions about the acquisition and how it felt being united with a utility company.
“I had reservations about the sale at first, but the more I found out about PSEG, the quicker the reservations went away,” he said. “They’ve given me a chance to become a better entrepreneur.”
If Clemens had reservations, it was a good bet that some of his customers did too. So he sent out formal letters to all of his company’s customers explaining the new partnership. The results? “No negative feedback,” he said.
Clemens said that his employees also have taken to the new opportunities very well. The same isn’t true for his competitors. “A lot of them are very nervous. They realize that this is the future of business.”
But Clemens said that for some contractors, the future remains the same as the past. And that’s not all bad. “As long as you are a small independent you will be OK,” he said. “The larger contractors will eventually have to team up with someone else.”
One of the reasons for this thinking is that larger contractors will now have the ability to compete for bigger projects, whereas traditional smaller contractors will stay away from this type of work due to lack of capital and employees, a problem that now doesn’t have much affect on Central. “We can get workers from other ET companies and that is why I can bid on major projects,” said Clemens.
For now his plans are to expand his region and possibly invite other contractors to experience what he is going through right now. “I feel secure now with my future, and with the company’s future.”
Sidebars: Energy solutions: The key at PSEG Energy TechnologiesEDISON, NJ — The people in charge at PSEG Energy Technologies (ET) all share a passion: to provide energy solutions to all of their customers. They are driven by that philosophy and share it with their newly acquired mechanical contractors.
“We want to provide lifecycle capability for our customers,” said president and ceo Stanley Kosierowski. “Customers aren’t used to that type of package — one-stop shopping.”
ET is a direct subsidiary of PSEG Energy Holdings and an unregulated subsidiary of Public Service Enterprise Group that was launched in 1997. ET, headquartered in Edison, NJ, employs more than 2,100 workers in the Mid-Atlantic and New England regions.
Some of the energy management services (also known as bundled services) available from ET include:
- Analysis and design — Consulting services from the design of high-voltage and lighting systems to maintenance of a data center;
- Construction and mechanical — Designs, builds, and maintains building systems;
- Energy — The “Online Energy Auction” helps customers find the best energy deal for their business;
- Financing — Offers financing arrangements to help improve cash flow;
- Building operation and maintenance — On-site building operations/maintenance management to improve energy-related and other building system operations and develop site-specific energy management guidelines with the customer; and
- Distributed generation — Services to meet on-site electric generation needs.
HVACR contractors provide servicesET began acquiring mechanical contractors to serve the hvacr needs of its customers in January 1998.
“Mechanical contractors are an important part of our overall picture,” said Fred Fastiggi, vice president of business development. “Mechanical contractors are always in the buildings and are geographically close to the customers.”
ET has spent a lot of time studying the markets and the contractors that serve the bigger commercial-industrial customers. “Our intent was not to buy a company and shed their image,” said Kosierowski. “We believe in growth.”
Fastiggi agreed. “We want contractors to keep doing what they are doing. We will back them financially.”
ET also favors keeping on owners to run their businesses. They don’t want these people to think of acquisition as an exit strategy although somewhere down the road, exiting will be exactly what the former owners will do.
“Most of them are on a contract of three years,” said Joe Cardile, vice president of business solutions. “Some are older and will not return [after contract expiration] and some will remain on board.
“I expect half of them to be here three years from now. One of the first things we discuss is chemistry — we spend a lot of time looking for the correct fit. We are as candid as we can possibly be.”
Contractor strategiesEd Quinn, a regional vice president and former owner of acquired contractor Fluidics, Inc., said he was interested in joining PSEG and staying with the company. He was excited about the new opportunities he would have with the backing of a large, financially secure company.
“I felt we had to defend our position in the marketplace and that if we didn’t align with a utility, someone else would come in and take our customers,” he said. “I looked forward to [the acquisition] because we had the opportunity to upgrade our business systems and we wanted to bid on some very large projects.”
Fluidics is one of the nine mechanical contractors acquired, and more are being planned. ET has specific goals in mind and specific contractors to meet those goals.
“We want people who have done design-build work and who have service departments,” said Fastiggi. “We look at union companies because union people are well prepared and do good work. We also want to fill certain holes in geographic regions.
“We are looking to pick the ‘best of class’ people. They must be industry leaders in their particular region.” “We haven’t lost a company that we really wanted,” said Cardile. “We are being seen as a company that has a plan. We will continue to look at our needs and also what is available. There is some concern that the better companies are not available.
“I don’t know if we will stay at the same [acquisition] pace as the past six months, but every major acquisition we’ve had during that time, there has been competition for.”
Quinn said he had a few bouts of nerves before selling his company, but the fit has been very good. “Going from an entrepreneur to having to answer to someone else was on my mind, but the change has been very smooth. There really is not a project that we wouldn’t go after now.”
“Our combined companies have the best chance of manning new projects,” added Cardile. “We are able to move people from company to company. If the fit doesn’t work, we can transfer people around.
“Don’t forget, we are putting former fierce competitors on the same team.”
The mix does indeed seem to be working so far. ET managers estimate that business will rise from its current $70 million mark to $500 million in the next year, thanks in part to internal growth and acquisition.
And what about the future? Will the residential market be next?
“We are not seeking residential contractors right now,” said Fastiggi. “We are not selling the same things as consolidators — we have an energy orientation.”