Norcal Waste Systems, Inc.

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Norcal Waste Systems, Inc.

160 Pacific Avenue, Suite 200
San Francisco, California 94111
U.S.A.
Telephone: (415) 875-1000
Fax: (415) 875-1124
Web site: http://www.norcalwaste.com

Private Company
Incorporated: 1983 as Norcal Solid Waste System
Employees: 2,100
Sales: $351 million (2002)
NAIC: 562111 Solid Waste Collection

Norcal Waste Systems, Inc. is an employee-owned company based in San Francisco that through some two dozen subsidiaries provides garbage collection to both residential and commercial customers, runs various recycling programs (including material recovery, composting of food and organic wastes, and construction and demolition debris recycling), and owns or manages numerous landfills. In addition to a monopoly on garbage collection in San Francisco, Norcal operates in more than 50 California communities, serving over 570,000 residential and 55,000 commercial accounts.

Company Origins Trace back to 1906 San Francisco Earthquake

Before the concept of waste management came into being, and even before the advent of organized municipal trash collection, the practice of scavenging provided a livelihood for many immigrants in America. According to a 1985 Forbe's article, "The Garbage Game," "As the various waves of immigration broke over the U.S., the newcomers invariably moved into the least desirable jobs, and garbage pickup was a natural point of entry. In the New York area, garbage collection came to be dominated by people of Italian descent—Calabrians and Sicilians in New York and Long Island, immigrants from a town near Naples in much of New Jersey. But the business is by no means an Italian specialty. Elsewhere other ethnic groups have predominated—Armenians in Southern California, Dutch in Chicago, Scandinavians in Minnesota." In many cases immigrants did not provide trash pickup but simply resorted to scavenging, looking for anything of value in the garbage of the well-off—in essence, an early form of recycling. In San Francisco, it was Italians from Genoa that dominated the scavenging trade. Many of them arrived shortly before the devastating 1906 earthquake that leveled the city. The damage caused by the quake and resulting fires provided a great deal of opportunity for scavengers. However, an endeavor that was disorganized to start with became even more so following the earthquake. After the cleanup was complete, many scavengers remained in the business, but there was much less need for their services. Ten years after the earthquake, there were more than 150 trash collectors in the city. According to Stewart Perry in his book San Francisco Scavengers, competition was fierce: "Several wagons and their owners might be picking up refuse from the same city block, each coveting the other's customers on that block—or any other block."

To get a grip on the scavenging business, which was threatening to spiral out of control, San Francisco City officials in 1921 set rates for garbage collection, established collection districts, and ultimately required permits. Because of these new regulations, individual collectors began to merge their efforts and eventually formed two cooperative companies: Scavenger's Protective Association and Sunset Scavenger Company. Every employee of these companies was a shareholder, with retired members selling their shares to newcomers. The price of shares rose steadily over the years. The two groups, both of which were comprised of Italians from Genoa, divided up the city's business. Scavenger's Protective Association took care of the city's financial district and surrounding neighborhoods, and Sunset Scavenger Company handled the outlying residential areas. Because of this division, Scavenger's Protective Association came to concentrate on commercial trash pickup as well as servicing densely populated neighborhoods. Sunset Scavenger Company, on the other hand, became more of a residential trash collector. Despite their delineated roles, however, the two companies often worked in concert. In 1935, for instance, they established Sanitary Fill Company, a landfill venture and the first of a number of subsidiaries the two companies would create together.

Both San Francisco collection companies were early recyclers, or, more accurately, modern day scavengers. Until the introduction of today's back-loading, compacting garbage trucks in the 1960s, one person was delegated to ride in the back of the open truck to set aside valuable refuse. Among their recycling efforts, the companies washed bottles to sell back to area wineries, bailed paper to be made into pulp, and repacked rags and sold them to Standard Oil.

Golden Gate Disposal Company Formed in 1965

Both of San Francisco's waste companies expanded over the years in keeping with the city's own growth. In 1965, Scavenger's Protective Association changed its name to Golden Gate Disposal Company. Sunset Scavenger Company changed its name in 1973 to Envirocal Inc., reflecting the company's diversification into a number of waste management areas and the growing importance of caring for the environment. Furthermore, the population of San Francisco was declining, leading to a reduced need for collection services. Over the next decade, both Golden Gate Disposal Company and Envirocal borrowed money and bought up garbage companies throughout northern California. Envirocal moved into such communities as Cupertino, Los Altos, Los Altos Hills, Morgan Hill, Mountain View, Portola, and Woodside. For its part, Golden Gate acquired collection companies serving Auburn, Eureka, Garberville, Oroville, Vacaville, and Vallejo. In 1983, Golden Gate was reorganized to accommodate its slate of subsidiaries, becoming Norcal Solid Waste Systems.

As had been the case for more than 50 years, both companies continued to be governed by a board of directors, comprised of 11 members, who met each week. All officers and directors owned a share of stock in their respective companies, but by the mid-1980s the price of each share had ballooned to the point that younger workers simply could not afford to buy into the business. As a result, the requirement that all employees be shareholders was dropped. In the 1940s, these shares could be bought for about $8,500, but now Envirocal's 281 shares were worth $103,000 each and Golden Gate's 156 shares were worth $100,000. What made the situation even more untenable was that because there was a lack of buyers, retirees were unable to sell their stock and had to make do with the modest dividend the companies paid. One option, of course, was to simply sell the companies as a way to allow shareholders to cash in. There were even press reports that an unnamed Los Angeles investor offered $75 million for the companies. Industry consolidators Browning-Ferris Industries and Waste Management Inc. were also suitors, but the companies wanted to stay independent and retain something of their heritage. (The employees were still predominantly Italian, although they became more inclusive following litigation in 1975 charging discriminatory hiring practices against Blacks and Hispanics. The litigants were victorious and were awarded cash and shares in the companies. Moreover, Envirocal and Golden Gate were forced to change the way in which they hired and promoted minorities.) The ability of both companies to support growth was also hampered. San Francisco law allowed them a 5 percent profit margin and forbade their revenues to be used for operations outside of the city. Finding sufficient funds for necessary capital expenditures was also a difficulty. A new garbage truck, for instance, cost as much as $120,000.

In 1986, Norcal's president, Leo Conte, read about the employee stock ownership plan (ESOP) concept, presented the idea to the board, and with its approval hired lawyers and retained investment bankers to convert Norcal to an ESOP. The ownership arrangement was advantageous on a number of levels: shareholders gained liquidity, the company's 570 employees gained a stake in the business without having to raise $100,000 each, and that year Norcal saved more than $2 million on corporate taxes, gaining funds that could be used to pay the fees of lawyers and bankers to complete the transaction.

Norcal Becomes Employee Owned in 1987

Norcal became employee owned officially on January 1, 1987. Envirocal now began to look into creating an ESOP itself, but late in 1987 elected to accomplish this goal by combining with Norcal, which bought the company for $83.6 million, or $305,000 a share. Norcal subsequently changed its name to Norcal Waste Systems, Inc. To help pay off some of the debt incurred in establishing the ESOP, Norcal sold approximately $30 million in developed property the company owned in northern California, including apartments, shopping malls, grocery stores, and warehouses. It also took on a considerable amount of debt: $48.8 million to finance the ESOP from a consortium of banks led by Chase Manhattan Bank and Bank of America, plus another $25 million for working capital and real estate financing. All told, the cost of converting both Norcal and Envirocal to ESOP status burdened the combined entity with over $138 million in debt.

Company Perspectives:

Norcal represents a dedicated team of refuse management professionals who deliver the highest quality of customer service, who protect the environment through the application of stringent standards, and who emphasize recycling of the materials collected through our many operations.

Now America's fourth-largest garbage company, Norcal looked to aggressively pursue greater growth in the years following the merger of San Francisco's long-time trash collectors. Many expected the 1990s to be the decade of the environment and a boon time for garbage handlers and specialized cleanup companies. Over the course of 1989 and 1990, the company spent over $40 million on acquisitions, becoming involved in such areas as asbestos abatement. Revenues for this period increased from $187 million in fiscal 1989 to more than $250 million in fiscal 1990. During this time, the company also became embroiled in controversy. To help pay off the debt incurred in establishing an ESOP, Norcal petitioned San Francisco's Public Utilities Commission in the spring of 1990 for a 15 percent rate increase, a request that was not well received in all quarters and was ultimately denied. The company also came under fire when the news media reported that Norcal had come under investigation by the FBI, which was looking into charges that the company tried to use campaign contributions to influence legislation before the California State Assembly. In particular, the probe focused on Norcal's relationship with Assembly Speaker Willie Brown, who was a lawyer for Norcal even as the assembly debated bills that impacted the company. In the end, no charges were filed. Norcal also faced opposition from groups in Kansas City, where it was attempting to receive permission to operate a landfill. In another effort to raise the money to pay off its heavy debt, Norcal attempted to make a public offering of stock in 1990, but a week after word leaked about the FBI investigation, the IPO was shelved. Management insisted, however, that the decision to forego the offering was made earlier and was based on difficult economic conditions and the resulting poor climate for IPOs.

Economic conditions were so poor, in fact, that by the spring of 1991 Norcal found it difficult to meet its financial obligations. Payments amounting to $1.7 million to 430 former shareholders were delayed, and the company was also unable to meet certain financial tests required by lenders of its approximate $150 million debt burden. Norcal was forced to lay off personnel and unload some of its niche operations, such as Excel Environmental, a Bay Area asbestos abatement company that experienced a dramatic drop off in business with the advent of the recession. Again, Norcal appealed to the Public Utilities Commission for an increase on the basic rates for trash pickups. Although opponents sought to actually cut rates by 15 percent, arguing that San Francisco residents should not have to foot the bill for Norcal's merger and acquisition costs, the company in the end received a 9.8 percent increase.

Norcal was able to successfully retrench in the early 1990s and return to growth mode during the balance of the decade. In 1999, the company suffered another public relations setback, however, when one of its executives, Vice-President Kenneth James Walsh, was one of seven individuals indicted on federal bribery charges. He had already been terminated by Norcal several weeks earlier after he refused to speak with company lawyers regarding the case. The matter concerned the bribing of a San Bernardino County administrative officer named James J. Hlawek. Walsh was accused of making at least 28 payments to Hlawek in amounts ranging from $650 to $5,400. During the time Hlawek held his post, from 1994 to 1998, Norcal received approximately $20 million in county contracts. In addition, a former county administrative officer, Harry M. Mays, was paid $4.2 million by Norcal to lobby his ex-colleagues regarding a county landfill contract. According to Waste News, government officials said that Hlawek received payments in two ways: "In the first, Harry M. Mays, a Norcal consultant, paid bribes to Hlawek and paid kickbacks to Walsh, who oversaw Mays' consulting work for Norcal. In the second scheme, Walsh received kickbacks from Hernandez Trucking, a dirt-hauling company that did business with Norcal; then Walsh split the money with Hlawek and Harry M. Mays." Both Mays and Walsh pleaded guilt to conspiracy to make and accept bribes. Walsh was sentenced in October 2000 to 18 months in federal prison and ordered to pay $277,000 in restitution to San Bernardino County. In the meantime, Norcal faced a civil suit initiated by the county and ultimately agreed to pay $6.6 million to settle the matter. Furthermore, it agreed to pay half of any money it recovered from Walsh or Mays as a result of the civil lawsuits the company filed against the two men. The terms of the settlement also prevented Norcal from seeking business with the county for five years.

In the midst of this untoward publicity, Norcal was about to launch an ambitious recycling effort. In 2003, the company opened a new state-of-the art recycling center capable of sorting and baling single-stream and co-mingled materials. Although a high-tech operation, the center was very much in keeping with the company's scavenger roots.

Key Dates:

1906:: San Francisco earthquake leads to large number of scavenging operations.
1921:: San Francisco begins to regulate trash collecting, resulting in the formation of Scavenger's Protective Association and Sunset Scavenger Company.
1965:: Scavenger's Protective Association becomes Golden Gate Disposal Company.
1973:: Sunset Scavenger Company becomes Envirocal Inc.
1983:: Golden Gate changes its name to Norcal Solid Waste Systems.
1986:: Norcal becomes employee owned.
1987:: Norcal acquires Envirocal, becoming Norcal Waste Systems, Inc.