The Middle Man

With a customer list that reads like a Who's Who of the waste industry, Specialty Transportation Services Inc.'s (STS) business niche is practically one of a kind.

Capitalizing on the solid waste industry's increased use of regional landfills and private waste companies outsourcing their transportation, STS is the nation's largest-for-hire carrier of solid waste. Hauling more than 440,000 loads a year for all of the major private and public waste companies, as well as several large local governments, the Portage, Ind.-based company's $51-million niche is carved from the long-haul transportation of 10.6 million tons of waste annually. Revenues for 1999 are projected to top $91 million and $128 million by 2000. STS currently transports in excess of 45,000 tons per day.

With no intentions of entering the disposal business, STS' guiding philosophy is to be a service company to the waste industry, whether contracting with public or private entities. "We look to become partners with our customers and have the same relationships with local municipalities as we would with Waste Management (WMI), Browning Ferris Industries (BFI), Allied or Republic," says Gary Goldberg, STS president.

Sand and Salt to Solid Waste What began as a modest over-the-road transportation company in the mid-1950s has evolved into a transit powerhouse that's owned today by trucking giant Asche Transportation Services (NASDAQ/NNM:ASHE). Asche, Shannon, Ill., a leading provider of temperature-controlled frozen and perishable foods, household, and retail commodities and foliage, purchased STS in January 1998.

Until two years ago, STS's operations were a part of Jack Gray Transport Inc. (JGT), which entered the transportation market in the 1980s when Superfund clean-ups were at their height and federal money was plentiful. STS purchased the municipal solid waste business segment from JGT in January 1998.

"Through the early 1980s, we were known from the Mississippi River east as one of the major haulers of hazardous waste," Goldberg recalls of the days when JGT transported waste to hazardous waste landfills owned by BFI and WMI subsidiaries.

When the famous garbage barge of 1987 began circling the Eastern Seaboard in search of a welcome mat, JGT received an inquiry from BFI representatives about outsourcing the transportation of its solid waste in New York to a long-distance port.

"I was passing through the office when I heard the employee tell BFI we weren't in the business of hauling solid waste," Goldberg says. With the inkling he may have found another trucking niche, Goldberg approached JGT founder Jack Gray with his idea of hauling solid waste. One conversation later, Goldberg was pursuing JGT's ultimate pot of gold, securing the company's first long-term contract with BFI to haul waste 92 miles one way from the Long Island suburb of Freeport to Goshen, N.Y.

"[Business] didn't explode then except within the terms of the contract with BFI," Goldberg says. "Every few years, the landfill destination would change ... and when [BFI] chose a new landfill in Pennsylvania 326 miles away, that's when the long haul of solid waste began to evolve."

A few years later, browsing through a trucking magazine, Goldberg learned of the Portland, Ore.'s Metro Service District's (Metro) efforts to privatize different aspects of its comprehensive solid waste plan including transporting waste to WMI 's Columbia Ridge Landfill in Arlington, Ore., 152 miles away. Recognizing 750,000 tons per year were destined for somebody's truck, rail or barge, Goldberg embarked on a mission to win the bid.

"The railroads were our major competition," he recalls. "Eventually, two barge lines, a railroad company and two truckers submitted bids. We came in first with the low bid and then, we had quite a battle on our hands for the next nine months."

Between the lobbying efforts of his disgruntled competitors and protests from concerned environmentalists about trucking waste through the pristine Columbia Gorge, Goldberg defended JGT and its capabilities at a series of public meetings and hearings until Metro officials satisfied their staunchest critics. On Jan. 1, 1990, JGT began its 20-year contract with Metro.

"Portland really put us on the map as a transporter of solid waste," Goldberg admits. "Metro officials did a fine job of putting a comprehensive plan together, which included [bid specs requiring] sealed containers so there would be no leakage on the roads, and solid containers and compactors for cleanliness. They recognized the high level of exposure associated with transporting waste 152 miles one way."

Building for the Future Asche and its STS acquisition have created a potential dynasty combining the muscle of both organizations' vast assets of personnel and equipment.

In addition to its formidable fleet of 575 tractor rigs, STS has the luxury of tapping into Asche's 500-plus late-model tractors, which rotate out of the fleet every two years and are retrofitted to meet STS' needs. "With Asche passing down the equipment, we have the advantage of not having to call Mack or Peterbilt to place an order and then having to wait 120 days for the order to be filled," Goldberg says. "The availability of equipment on short notice gives us a better opportunity to service the waste companies."

Asche's fleet includes 59 vehicles that are owned by owner-operators. STS has 100 vehicles owned by owner-operators, more than 1,000 trailers and 25 tippers. Almost 1,000 employees spread between 23 STS-owned or leased maintenance terminals provide the company with the comfort of acquiring new business opportunities without the typical growing pains associated with business expansions.

"[STS'] explosive growth came with the acquisition by Asche," says Asche chief financial officer Leon Monachos. "STS had a chance to partner with a public company that had access to capital markets to fuel growth."

A recent series of strategic recapitalization projects will save Asche $2.7 million on an annualized basis in addition to raising sufficient capital to continue STS' growth.

"When Asche acquired STS, it did so with mezzanine financing in the form of very expensive subordinated debt," Monachos explains. "By selling equity and recapitalizing events, we're able to get cash in and use it to pay off the subordinate debt."

A recent contract modification with Metro resulted in an infusion of $9.1 million that will be used to pay down $8 million in subordinate debt between STS and American Capital Strategies Ltd., while saving $1.1 million in interest on an annualized basis. Effective June 1, 1999, STS reduced Metro's rate by $1 per ton to transport waste to Arlington, Ore. In exchange for the rate reduction, Metro will prepay $6.6 million of monthly fixed payments provided for in STS' original contract.

"From the standpoint of a public-private venture, this is a real win-win situation for Metro because they essentially gave up nothing," Monachos says. "[Metro] gave us the fixed payments in present value that they would have been giving us eventually. And, instead of us setting aside $2.5 million in cash to guarantee our performance, they allowed us to replace it with a letter of credit. [Metro's] still covered on our performance, and we've rid ourselves of some onerous debt."

Since Asche's acquisition of STS almost two years ago, STS has grown by more than 300 percent based on projected revenues. According to Asche's 1998 annual report, future goals for the company's municipal waste segment include:

* Continued pursuit of opportunities that become available from the outsourcing of non-collection trucking by large private waste service companies;

* Seeking suitable acquisitions of smaller and regional independent companies;

* Expanding into new regions by establishing new terminals in densely populated areas; and

* Leveraging its services to capture other outsourcing opportunities for other solid waste streams like biosolids, sludges, soils and compost.

"The growth in this niche has been astronomical," Monachos says. "Even in New York, where many of the waste companies that will be players are trying to look at other modes of transportation such as rail and barge, we believe that less than 3 percent of the volume will be moved by some means other than trucking. Not only are barge or rail pretty expensive options, if you don't have rail or water at your landfill then you have to handle the waste by trucks on both ends. That's why we were successful over the railroads in Portland."

Win-Win Partnerships Coupled with the large private and public waste companies' business strategy to internalize waste disposal, Goldberg says the conglomerates' divesture of their non-collection trucking operations has reaped dividends for both partners.

"STS has given [waste industry] management the opportunity to focus on capturing garbage at homes and at businesses," Goldberg says. "[Management personnel] has recognized that if they don't capture the waste on the front-end, it won't get to their landfills, which is the area where they make their greatest profitability and margins. Why would they want to continue to buy tractors and trailers when there are haulers out there who do it for a living and can give [management] an opportunity to control their costs?"

In 1993, when STS won its largest contract to date with WMI, it spawned a trucking revolution in the waste industry. At WMI's beckoning, STS assumed responsibility for WMI's trucking responsibilities in Phoenix, which included transporting 5,000 tons of waste per day from three locally owned WMI transfer stations and one in Tucson. Ariz. It was followed by a six-year contract with the city of Phoenix last July.

Although STS doesn't own any transfer stations, it provides the personnel and equipment to load waste onto tractors.

"One of the [business] extensions we've gotten involved in is forming the loading process," Monachos explains. "It's an important part of our operation because, most of the time, we get paid by the ton and it's vital that we maximize our legal weights. It also prevents situations in which a front-end loader can damage a trailer. With our personnel doing the loading, there's never any question about responsibility in the event there's damage to a vehicle."

Providing loading and unloading services at more than 100 transfer stations and landfills, STS is mindful not to cross the chains of command with its customers.

"One of the areas we've been very careful not to get involved in is the management and characterization of waste," Monachos says. "[The owner] handles the scales and collects money. [Owners] also provide spotters on the floor. We never take title to the waste - we just provide a carrier service."

In some instances, STS back-hauls recyclables collected or sorted at their landfill destinations, but Goldberg says he's more intent on maximizing STS' efficiency with a variety of customers in a specific market area.

"Because the philosophy of waste companies is internalization, which is to get waste to their transfer stations and to their landfills, there are some opportunities to work with more than one waste company in a particular market.

"We learned our lessons early on in the scrap metal business," he continues. "When you're a large hauler of scrap metals working for scrap yards and mills that compete for the same metal, you don't want to get involved in owning scrap because you won't get phone calls from customers."

No. and Types of Trucks: 418 Peterbilts; 55 Kenworths; 67 Macks; 17 Volvos; 18 Internationals.

No. and Types of Trailers: 199 Fruehaufs; 201 McClains; 13 Wescos; 168 J&Js; 43 Travis; 136 Spectecs; 83 Easts; 49 Vantages; 34 Clements; 24 Bensons; 83 Other.

No. and Types of Tipper-Trailers: 199 Fruehaufs; 201 McClains; 13 Wescos; 100 J&Js; 90 Spectecs.

No. of Hallco Live Floors: 48 J&Js; 43 Travis; 41 Spectecs; 53 Easts.

No. of Keith Live Floors: 30 Easts

No. and Types of Dump Trailers: 49 Vantages; 34 Clements; 24 Bensons; 83 Other.

Amount of Refuse Transported Yearly: 10.6 million tons; 440,000 loads.

Sources of Wastes: 85 percent waste services companies; 12 percent municipalities; 3 percent other.

No. and Types of Employees: 675 drivers; 115 Mechanics; 150 Other.

Service Area: Nationwide.

No. of Transfer Facilities and Locations: 23 terminal locations at Arlington, Ore.; Baltimore; Bigler, Pa.; Camden, Tenn.; Chandler, Ariz.; Griffin, Ga.; Corona, Calif.; Duncan, S.C.; Federal Way, Wash.; Freeport, N.Y.; Granite City, Ill.; Greensboro, N.C.; Indianapolis; Irondale, Ala.; Irving, Texas; Las Vegas; Los Angeles; Memphis, Tenn.; Nicholasville, Ky.; Portage, Ind.; Portland, Ore.; Union City, Tenn.; Valparaiso, Ind.

No. and Types of Processing Equipment: 25 Columbia Corp. tippers; 11 Caterpillar loaders; 5 Volvo loaders.

Revenues: (1998) $52.3 million; (1999) $91.6 million (projected).