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SHAW GROUP INC Conference Call to Report Status of Financial Reporting - Final

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OPERATOR: Ladies and gentlemen, thank you for standing by and welcome to the Shaw Group conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Thursday, July 12, 2007.

I would now like to turn the conference over to Mr. Chris Sammons, Vice President of Investor Relations. Please go ahead.

CHRIS SAMMONS, VP IR, THE SHAW GROUP: Thank you, operator. Good morning, everyone. Thank you for joining us. With me on the call today are Jim Bernhard, Chairman, President and Chief Executive Officer of Shaw, and Dirk Wild, Senior Vice President, Chief Accounting Officer and Interim Chief Financial Officer.

Before we begin today, I would like to remind everyone that any statements made on this conference call that express a belief, expectation, intention or plans, as well as those that are not historical facts, are considered forward-looking statements and are protected under the Safe Harbor of the Private Securities Litigation Reform Act. These forward-looking statements may involve a number of risks and uncertainties which may cause the Company's results to differ materially from such statements. These risks and uncertainties include factors detailed in our SEC filings, including our Forms 10-K and 10-Q, and on our Website under the heading forward-looking statements. In addition, as required by SEC Regulation G, a reconciliation of any non-generally accepted accounting principles or GAAP measures mentioned during our call today will be reconciled to the most appropriate GAAP measure, and that will be available on our website.

As usual, there will be a question-and-answer period after our comments today, and the operator will provide instructions on that Q&A period. Now I will turn the call over to Mr. Jim Bernhard.

JIM BERNHARD, CHAIRMAN, PRESIDENT & CEO, THE SHAW GROUP: Thank you for joining us today. We will provide an update on the status of our financial reporting, an update on the business, and outlook going forward. Let me start today by having Dirk Wild review the status of our financial reporting with you.

DIRK WILD, SVP, CAO & INTERIM CFO, THE SHAW GROUP: Thank you, Jim. Good morning, everyone. I would like to first cover the status of our first-quarter and second-quarter financial statements, and then I will provide an update on our expectations for the third and fourth quarters. In April 2007, we reported that we were conducting an independent review to determine the amount and reporting periods that may be affected by potential error in the estimated cost of an ongoing project. We gave an estimated range of $7 million to $12 million pretax.

We have now completed our review and have determined that the total estimated cost on the project as of November 30th were approximately $6.5 million higher than previously reported. Of the $6.5 million, approximately $2.6 million or $1.4 million after-tax we now believe should have been identified before we issued our August 31, 2006 financial statements.

However, we have concluded that this amount is not material to those August 31st financial statements. Therefore, we are expecting to restate our November 30th financials statements to reflect the entire $6.5 million correction. The restatement will reduce gross profit by $6.5 million and decrease net income by approximately $3.6 million or $0.04 per diluted share for the three months ended November 30, 2006.

Now I would like to discuss our expected results for the second quarter. We expect our consolidated revenues to be $1.2 billion, consolidated gross profit to be approximately $31 million, and operating loss to be $41 million, and our net loss to be approximately $74 million or $0.93 per diluted share. Significant items that contributed to our net loss for the quarter include the following. First, we recorded a $40 million pretax or $24 million net of tax loss related to our investments in military housing privatization joint ventures. We currently have investments in five separate joint ventures to privatize housing for the military.

The $40 million pretax loss includes a $25 million impairment charge related to three of the five projects, resulting from construction cost overruns and shortfalls in rental income due to lower than expected occupancy levels. And $15 million charge related to a contingent liability associated with our exposure under a surety indemnity agreement.

We are currently considering several strategies aimed at recovering our investments in these military housing privatization joint ventures. One involves working with the appropriate branches of the Armed Forces to restructure these privatization contracts. We have issued recovery plans to the military, and we are in discussions to modify the applicable scopes of work.

Another option we are exploring concurrently is the sale of our interest in some or all of these joint ventures. The sales could result in a recovery of all or a portion of our investment, which would result in gains at the time the sales are closed.

The second significant item contributing to our loss is a $9 million pretax or $16 million net of tax loss recognized on our investments in Westinghouse Segment. The pretax loss is comprised of general administrative expenses of approximately $2.9 million, primarily related to fees incurred to obtain the audited historical Westinghouse financial statements and net other expenses of about $6.1 million which include interest expense of $8.9 million, amortization of the commercial relationship agreement and the put option of $14.8 million, and a foreign currency gain on the yen denominated bonds of $33.6 million, and an unrealized loss on the yen denominated embedded derivative of $16.1 million.

In addition, you'll note that although we recognized a loss on our investment in Westinghouse Segment, we recorded income tax expense of $6.6 million. This is because we are not benefiting for tax purposes the amortization of the put option or the embedded derivatives.

The third significant item is margin deterioration of approximately $32 million pretax or $21 million net of tax on two substantially complete EPC projects, primarily resulting from tentative settlement on claims. As a result of those settlement of claims, we expect to receive about $70 million from the release of restricted cash and the collection of receivables, and we will have less than $20 million of claims and unapproved change orders remaining on our balance sheet.

Last time is we also recorded a $10 million increase in our tax liabilities related to certain tax matters, which contributed to our overall net loss for the quarter.

In summary, we have worked diligently to resolve many of the issues and outstanding claims on our major projects and other significant uncertainties. And to achieve settlements on many of these projects, we can put these issues behind us.

Now I would like to spend a few minutes talking about our expected results for the third quarter ended May 31, 2007. Because we have been focused on closing out first and second quarters, we have not yet completed our work on the third quarter and are still in the process of reviewing our results. Therefore, I will be providing you with ranges for our consolidated and segment results.

We are expecting consolidated revenues to be approximately $1.6 billion and consolidated gross profit to be between 115 and $135 million. We are expecting net income of 24 to $28 million or about $0.30 to $0.35 per diluted share. This includes a net loss of approximately $4 million net of taxes or $0.05 per diluted share for the investment in Westinghouse Segment. These estimates include an assumed effective tax rate of approximately 40% and a preliminary estimate for the value of the embedded derivative component of the Westinghouse put option.

Now I would like to discuss our segment expected results for the third quarter in a little bit more detail. We mentioned on our last call that we are reorganizing our internal structure, which has affected our reportable segments. We have split the former E&C segment into a new Fossil and Nuclear segment and a new E&C segment. So my segment results will incorporate the reorganization.

We anticipate revenues from our Fossil and Nuclear segment to be approximately 425 to $450 million, and gross profit to be approximately 35 to $40 million, reflecting significant activity on our existing air quality control systems and coal projects. Going forward, we expect revenue and gross profit to increase for the Fossil and Nuclear segment as we have commenced work on several significant projects in the last several months. We expect additional major projects to start in the near-term.

We expect revenues from our new Energy and Chemicals segment to be approximately 275 to $300 million. This includes approximately $125 million of customer furnished materials on a major international petrochemical project. We expect gross profit for our new E&C segment to be approximately 18 to $20 million.

Revenues from our F&M segment are expected to be 100 to $125 million, and gross profit is expected to be approximately 24 to $27 million. Our F&M segment is continuing to produce strong results, primarily due to the strength of the domestic manufacturing and distribution business and increased demand for fabrication services.

Revenues from our E&C segment are estimated to be 340 to $365 million, and gross profit is estimated to be 23 to $28 million. Revenues from our Maintenance segment we expect to be 350 to $375 million, and gross profit is expected to be 15 to $20 million.

Those third-quarter expectations are positively impacted by the seasonality of outages in the power industry. We would expect that both revenue and gross profit in the fourth quarter would be lower in the Maintenance business, due to that seasonality. For our investment in Westinghouse Segment, we expect a loss of approximately $4 million net of taxes for the third quarter.

This loss includes general and administrative expenses of approximately $1 million and net other expenses of approximately $10 million, which includes interest expense of $8 million, amortization of the commercial relationship agreement and the put option of $15 million, a foreign currency gain on the undenominated bonds of $15 million, and an estimated unrealized loss on the undenominated embedded derivative of approximately $2 million.

We also expect to record income from our equity investment in Westinghouse of approximately 1 to $2 million net of taxes. This third-quarter income represents our share of Westinghouse's net income for the period from January 1 through March 31, 2007.

Now let me turn back to the consolidated income statement. We expect consolidated general and administrative expenses for the third quarter to be approximately 65 to $70 million, and we would expect G&A expenses to be in this range for the fourth quarter as well. We expect consolidated depreciation and amortization expense for the quarter to be about $25 million, which includes $15 million of amortization of the commercial relationship agreement and the put option.

We expect consolidated interest expense for the quarter to be about $10.5 million, which includes $8 million related to the Westinghouse bonds. We expect interest income to be about $2.6 million for the quarter. We expect net foreign currency gains of approximately $30 million for the quarter. This includes the $15 million gain related to the translation on the Westinghouse yen denominated bonds. We are also expecting to have net income of less than $1 million.

With respect to income taxes, our preliminary estimate is that our consolidated effective rate for the third quarter will be approximately 40%. We expect to recognize income from unconsolidated subsidiaries of approximately $2 million during the third quarter, the majority of which relates to our equity investment in Westinghouse. Additionally, we expect to record minority interest expense of about $4 million.

Moving on to our cash flows and other significant items for the third quarter. Our cash balance as of May 31st was approximately $220 million, of which about $38 million was restricted. We are expecting cash flows from operations to be approximately $133 million for the quarter; net cash used in operating activities to be approximately $21 million, primarily due to capital expenditures. Net cash used in financing activities is expected to be about $57 million.

This consists of net repayments on the revolving credit agreement and repayments of debt and capital leases. This amount includes cash for the redemption of the remaining senior notes for approximately $16 million during the third quarter, which resulted in a $1 million loss.

Related to our credit facility, we have received a waiver which extends our filing deadline for our first and second-quarter 10-Qs to July 16th, and we are currently in the process of requesting and we expect to receive an additional waiver to extend the filing deadlines for our first, second and third-quarter 10-Qs to August 31st. At May 31st, we had outstanding letters of credit of about $539 million, and we did not have any outstanding borrowings on our credit facility.

With respect to guidance for the second half of fiscal 2007, the third and fourth quarters, we expect to earn $0.50 to $0.60 per diluted share on a GAAP basis. Now this includes an estimated $0.10 per diluted share for Westinghouse related foreign currency gains in the third quarter. Therefore, we still expect to meet our previous guidance of $0.70 to $0.80 per diluted share, excluding the investment in Westinghouse Segment.

Our third-quarter year-to-date operating cash flow is expected to be almost $300 million. So you can see that we are well on our way to meeting our previously issued guidance of 300 to $350 million for the full-year 2007.

Now let me turn the call back over to Jim to discuss our backlog, new awards, and operations.

JIM BERNHARD: Good morning again. As Dirk just stated, our third-quarter results have begun to show the positive effects of the strong power and chemicals projects. Revenues are estimated to approach $1.6 billion. I asked us for net income in the range of $0.35 to $0.40 per diluted share, excluding our investment in Westinghouse. Cash flow from our business was very strong at $133 million, bringing our total operating cash flow for the nine months nearly $300 million.

We're very pleased to again announce a record backlog. As of May 31, 2007, $13.3 billion. The $13.3 billion backlog is an increase of approximately $2.1 billion from our second-quarter backlog, and reflects the continued very strong bookings in the power generation and chemicals market. In addition, we remain very excited about numerous early-stage projects which we see in our core end markets that have the potential to become significant contracts for us in the very near future. I will speak to more of these in just a moment.

Of the $13.3 billion in backlog, $5.4 billion or approximately 43% is expected to be converted to revenue over the next 12 months. Even as our backlog grows with significant large projects, the near-term conversion remains very strong. Let me take a moment and review some of our most recent project awards that are included in the third-quarter backlog.

AEP Turk is a 600 megawatt ultra-supercritical powerplant in Southwest Arkansas with an approximate value of $700 million. We were awarded an EPC contract to build a state-of-the-art 600 megawatt ultra-supercritical powerplant in Hempstead County, Arkansas. An ultra-supercritical facility is a highly efficient coal-fired plant that requires less fuel per megawatt, resulting in reduced emissions.

The project takes advantage of our capabilities in both fossil power generation and high alloy piping materials to our fabrication and manufacturing businesses. A pfE E&G Mercer -- the mercury control at FGD system in New Jersey, approximately $450 million, we continue to lead the engineering and construction engineer industry in air quality control projects. We were awarded an EPC contract to install mercury control and flu gas desulphurization systems for units one and two at pfE E&G Mercer's generation station near Trenton, New Jersey.

We also began work in the third quarter on a chlor-alkali facility in Louisiana. We were awarded construction service contract to build a chlor-alkali unit as part of our pioneer's expansion of this chlor-alkali facility in St. Gabriel, Louisiana. We provide overall construction management and site construction, including architectural work and the installation of foundations, mechanical equipment, piping, etc.

Maintenance continues to perform very well, looking to over $345 million during the quarter, $155 million of which is in nuclear services for clients such as TVA, Entergy, TXU, and PSE&G.

Major awards this quarter, we were awarded a major ethylene plant outside the United States for a major integrated oil and gas company. Due to a confidentiality agreement, which will continue for the next few weeks, we are unable to announce the particular companies named, but let me give you a little flavor on this. Our ethylene technology has been selected, awarded an EPC contract for a major integrated oil and gas company. Our ethylene recovery facility adding well over $1 billion to our backlog.

In addition to this ethylene facility, the project calls for the design and construction of a 220 megawatt cogeneration plant at the site. This project is a great example of our ability to provide a broad-based solution for our clients. Our Fabrication and Manufacturing business will also benefit and provide over 150 million in pipe fabrication for this facility. We look to discuss more information soon about the project, as we have begun engineering work on it, including the client, project location, etc.

In environmental and infrastructure project, the MOX nuclear fuel fabrication facility, we've had a scope increase of approximately $150 million. This scope increase is a major step forward in the construction phase of the project. We would expect a significant scope increase with a current estimate total construction price tag in excess of $4 billion.

Let me go through a few projects that are not in our third-quarter backlog that we have announced and are preparing to announce. Projects that are not in our backlog at the end of the third quarter, the Entergy Little Gypsy project, repowering project, approximately $600 million, replace an old gas-fired boiler. We announced it in April, but it is not included in our backlog and expected to be included in the fourth quarter backlog.

EPA Region 3 IDIQ contract. Shaw is one of two contracts on this $350 million IDIQ emergency rapid response services is for Region 3 of the EPA; covers states Louisiana, Texas, Oklahoma, and Mississippi. The project will be added to the backlog in the fourth quarter.

We were awarded this week an 800 megawatt supercritical clean coal plus an FGD scrubber associated with an existing unit at this powerplant. This project will exceed $1.3 billion. We will be issuing a press release next week on this particular project, once the client has approved the verbiage in the press release. But we have signed the contract and this $1.3 billion will be included in our fourth-quarter backlog, and these projects are approximately $2 billion on these three projects. So our fourth-quarter backlog will obviously increase over our third-quarter backlog at this point.

I'm also pleased to inform you not much has changed in the robust markets, especially for power generation and chemicals. We continue to work with our clients on developing projects to meet base-load generation needs and for emission control retrofit work. The opportunity for significant EPC projects remains very strong, and we have not seen any slowdown in our clients' planning of new power generation stations, and the air quality control market continues to be steady.

With the addition of the AEP project order backlog, we're now performing work on five new coal plants with total contract value in excess of $3.6 billion. With the addition of the PSE&G work this quarter, we're now performing work on 13 separate air quality control projects with a total value of over $3.2 billion.

Let me turn quickly to nuclear work. In addition to the new nuclear build programs in China, the U.S. plans for over 30 new reactive plants are now in development. We see imminent opportunity for nuclear power generation EPC contracts in the United States. We continue to expect to book from two to eight EPC contracts to build nuclear plants in the U.S. in this next -- before the end of the next fiscal year.

As you know, we have recently participated in the successful restart project for TVA's Browns Ferry Unit 1 to provide a broad range of maintenance, modification and construction services for the project since 2002, and we're very proud of the project which was essentially a rebuild. We are in a very strong position to benefit from the nuclear power industry in the near-term and long-term, due to our decades of industry experience and in place seasoned nuclear experienced professional in our craft staff. Of course, with our 20% ownership interest in Westinghouse, we have an additional opportunity to benefit in the nuclear renaissance.

As you know, we are very pleased that the Chinese have selected the Westinghouse AP 1000 technology and the Shell/Westinghouse Consortium for the first four reactors of their nuclear power generation program. We're proceeding with the early stage of the work. Contract signing is going to be this month, and the placement of orders for long leadtime procurement items. We expect to have our final contract, as I said earlier, completed this month.

I might also mention to you news in the past couple days about the Progress Energy announcement. They have selected the Westinghouse AP1000 technology for their project in Florida, and we continue to see AP1000 take significant marketshare as technology selections are made for new build projects. With the AP1000 safety advantages, modular construction techniques, and reduced volume of piping fitting vales, selection of the AP1000 continues to be the technology of choice in the United States as well as throughout the world.

Our Maintenance and Construction business unit continues to solidify its leadership in providing nuclear power maintenance, modifications, refueling, and turnaround services. We also see opportunities for expansion of our maintenance services into the fossil power market.

Our maintenance and construction services; our chemicals industry continue to be very strong demand, and we were pleased with our position in this market and believe that this group will continue to complement other services, enhance our ability to offer a full range of EPC services to our clients in power and chemicals market.

In the chemicals market, especially the market for our ethylene technologies, we continue to add and respond to opportunities around the world. As I mentioned earlier, we have been awarded a major new ethylene project which includes a 220 megawatt cogeneration plant; in total, well in excess of $1 billion. We expect to see additional bookings in the chemical markets over the next year, which would include an additional major ethylene project and numerous downstream projects as well.

The power generation energy and chemical markets and the pipe fabrication and manufacturing business continue to drive extremely strong demand for our pipe fabrication and manufacturing capabilities. We expect bookings and revenues to continue to grow, and we have ASME certification in place for all piping necessary for nuclear plants, and these opportunities are expected to be very significant in the near and long-term.

As previously announced, we are continuing our pipe fabrication and manufacturing capacity expansion program, most recent with the addition of a major facility to begin construction in Mexico. This new facility with the recent acquisition of Mid States Pipe Fabrication, the acquisition of Ezeflow which sells fittings under the brand TUBE-LINE, the reopening of our Tulsa shop, shift additions at several plants, will allow us to take advantage of a historically strong market demand.

Our E&I group continues to see reduced spending in certain of its primary end markets, especially federal government spending. We see opportunities presented by utility clients for environmental work associated with new power generation projects, including permitting and air monitoring.

Environmental restoration work for both brownfield development and restoration is increasing, and recent emergency response contract awards could result in new task orders over the coming quarters. In addition, the recent increase and scope of MOX project, the additional federal funding for this project could be the most significant project ever undertaken in this division.

Let me talk about over the last six, nine months of management changes and additions. We have recently made some important management changes and have added significant talent to our senior management team. I'd like to briefly review some of these key changes that will better position Shaw for continued growth while enhancing our execution across our business lines.

First, Richard Gill, has been officially named President of the Power Group. Rich is a long time executive and construction industry expert. We are pleased to have a senior tech like Richard to lead our power group, especially through this tremendous growth cycle of the power industry that is just beginning.

Dave Brannen, a former top executive with Bechtel, has joined The Shaw Power Group as Executive Vice President. David brings over 35 years of power industry experience to Shaw, and he will focus on engineering, execution and project management processes as we continue to grow our power business.

Clarence Ray, former president of Duke/Fluor, has also joined The Shaw Power Group as Executive Vice President. Among other management responsibilities, Clarence will leverage over 35 years of experience in the power industry to focus on risk management for our power group.

Monty Glover has been named President of the Fossil Power Division. Within the Power Group, Monty has been with Shaw since 2001, most recently serving as president of the construction within the engineering and construction group. Monty brings over 30 years of engineering and construction experience to Shaw's fossil power division, and we look to his continued leadership.

Lou Pucher has been promoted to President of the Energy and Chemicals work. Lou joined Shaw this year, most recently serving as President of Operations within the E&C Group. We are pleased to have an industry veteran like Lou leading our chemicals business.

Gary Graphia has been named Executive Vice President, Corporate Development Strategy. Gary Will assume responsibilities over mergers and acquisitions. Our Shaw capital subsidiary, strategic markets, risk management, safety and communication sales, as well as marketing. Cliff Rankin has joined Shaw's general counsel and corporate secretary. Cliff joined Charles from Vinson & Elkins where he was a partner in specialized and complex transitional matters including construction project finance, development acquisitions and structured and commercial finance. Pleased to have Cliff on board. We're fortunate to have someone of Cliff's caliber and professional background as Shaw's general counsel.

Patrick Thompson has been recently promoted to Executive Vice President, Chief Operating Officer of Shaw Environmental Infrastructure. Patrick recently served as Shaw's Senior Vice President, Chief Administration Officer, and will now focus his talents on our E&I group. Patrick with work closely with our president, Ron Oakley, to grow the business. Jeff Merrifield, as we announced yesterday, has joined our Power Group as Senior Vice President. He will report to Richard Gill, President of the Power Group.

Jeff was formerly a Presidential appointed commissioner on the United States Nuclear Regulatory Committee, served as counsel and staff director for the U.S. Senate Subcommittee on Superfund Waste Control and risk assessment. He brings valuable power industry, regulatory and legislative experience to Shaw, and will leverage our growth in the power business.

Let me turn to our financials department. We are pleased to be able to announce today that we have selected a new CFO who will be joining us at the end of the month, Brian Ferraioli. He was president and controller of Foster Wheeler since 2002, where he had responsibility for worldwide financing, reporting and internal control functions. From July 2000 until November 2002, he served as Vice President and Chief Financial Officer for Foster Wheeler USA, and from July '98 to 2000, he served as Vice President and Chief Financial Officer of Foster Wheeler Power Systems.

He has implemented all of the Company's Sarbanes-Oxley policies and procedures and possesses significant Security and Exchange experience and has reporting experience in his 28-year tenure in the engineering and construction business. We're pleased to bring him on at the end of the month at Shaw.

Let me also look forward to Bob Belk's return to the organization within the next several weeks. Bob was instrumental in steering our substantial growth as Chief Financial Officer, and the Company will continue to maximize his historical perspective and institutional relationship gained during the past few years. Dirk will continue as Chief Financial Officer and hand off those duties to Brian at the end of the third-quarter financial release.

So Brian will be joining us at the end of the month and will do that transition, and I think with this leadership team that we have in place today, it sets us up for a managed high-pace group that we see in the future.

Let me now open up the call for any questions.

OPERATOR: (OPERATOR INSTRUCTIONS) Scott Levine, JPMorgan.

SCOTT LEVINE, ANALYST, JPMORGAN: Good morning. I was hoping you might be able to talk a little bit about your plans in the piping business. Do you now have the capacity that you need to support your growth initiatives there (inaudible) another acquisition last night, or are their other additional major steps that remain to be taken in that business?

Also, hoping you could talk about the margin potential you see over the next few years versus what you have reported recently.

JIM BERNHARD: The pipe fabrication business, basically we thought the third-largest pipe fabricator in the United States, Mid States Fabrication. We believe that we currently have about 60% marketshare, and we're in the process over the next six months of staffing most of our product stock with second shifts.

We are on a very fast-track basis to complete a facility in Mexico, which will be completed the early part of next year. It will -- it will add a tremendous amount of capacity, and we continue to believe that even though with the tremendous capacity expansion that the total capacity in the United States will not meet the expectations of the work available. So there's going to be a tremendous opportunity there to -- margins should increase throughout '08 and '09 on that business, as well as volume. With the exception of the E&I group, all our margins in our different segments are on an uptick going forward.

SCOTT LEVINE: Okay. Additionally, you recently announced an agreement with Alinda Capital on the transportation business. Hope you might be able to just talk a little bit more about what you plan to do there.

JIM BERNHARD: Well, we [recently] -- Alinda Capital where we have access to a significant amount of money many times that we have clients come to us in the power business or chemical business looking for equity funding on particular projects. With Alinda as a source of capital, we complete the cycle not only to be able to do the engineering, procurement and construction, but to be able to provide equity financing on particular projects.

I think it is a significant move. I think over the coming years that you'll see significant projects that we are able to develop and negotiate on projects because we have a source of capital to supply our clients.

SCOTT LEVINE: One last one then on the cost overruns, you mentioned the two new domestic plants. Can you just elaborate, are those labor issues? And you indicate that they are largely complete. Are these the type of issues that might affect other projects in the future, or are they contained to the projects you announced?

JIM BERNHARD: Those were projects completed over a year ago that we have filed. We chose to do at this time rather than take a legal strategy to move forward to collect maximum amount of dollars, we thought it was in the best interest of the Company to negotiate the best settlement we could at this time so we could take our management, which we did, and take our management attention to the massive amount of workload we have going forward.

So our original strategy was going to take an arbitration legal strategy to finish these clients. So we changed that strategy this year and negotiated final resolutions on these particular projects and released about $70 million worth of cash, and we don't have to take our time to -- attention on these particular claims any more.

So we have less than $15 million worth of total claims on the books today, and we're moving forward and we have a lot to do. Next question.

OPERATOR: Barry Bannister, Stifel Nicolaus.

ROBERT CONNORS, ANALYST, STIFEL NICOLAUS: This is actually Robert Connors in for Barry. As my first question, I was just wondering as far as timing on nuclear, when are you definitively able to break ground versus the timing of the COL; not necessarily when Shaw Group can claim a booking for the EPC or when Westinghouse claims a booking, but when are you definitively able to break ground after approval of the COL?

JIM BERNHARD: Well, let me start. We will start doing bookings long before we break ground. There's a significant amount of engineering and procurement, the significant amount of building of modules that will go to the site eventually. Even in addition to that, in addition to that, the COL, there's a variety of work that continues to be expanded that the NRC is allowing us to do at the site before the COL is approved. So the activity is not only going to be started on site in a small way, but there is significant amount of opportunity and work to be done off-site with the engineering module, fabrication, etc., before the COL becomes effective.

So we are very busy in the nuclear business. We continue to recruit personnel which we have a great opportunity to do with our recent success in China, and the market looks very bright.

ROBERT CONNORS: Okay. Then on a sort of housekeeping basis, the guidance for 3Q of $0.30 to $0.35 after $0.05 related to Westinghouse, that is before all Westinghouse-related income, put options and so forth, or is that that on a GAAP basis?

DIRK WILD: The $0.30 to $0.035 is on a GAAP basis; the $0.05 is the total net result from the investment in Westinghouse. So if you add the $0.05, it is a loss on Westinghouse. So if you add the $0.05, you are at $0.35 to $0.40 excluding Westinghouse for the third quarter.

ROBERT CONNORS: Okay, thank you.

OPERATOR: David Yuschak, SMH Capital.

DAVID YUSCHAK, ANALYST, SMH CAPITAL: Just in looking at this current power cycle, it appears that we are at a very strong position with most of your owners wanting to do the expansions that are much higher quality than what we saw in that quick cycle earlier this decade. But the question I've got for you is with all that work that is out there that you have currently got booked plus the potential, how do you guys see the billings in excess costs and excessing playing out?

Are we going to see, because of all of this activity, a lot more money that needs to be put down upfront for these investments to kind of help your working capital requirements? I'm just kind of curious how you see that working capital issue playing out here, given the amount of work that needs to get done?

JIM BERNHARD: We have a pretty firm contract stance that costs incurred and costs committed have to equal cash in hand. So the working capital requirements should be little or none on these major projects. But on saying that, our contract types continue to be tweaked where only parts of contracts are firm and subject to escalation and labor subject to owner's participation or the owner takes the liability completely. So the contracts are starting to be a lot less definitive and finite in the end cost.

DAVID YUSCHAK: Is that primarily because of the robust major nature of the potential there, that the owner knows that he needs to be a little more flexible on that? Or is that just basically you guys just giving a little more, because of the robust nature, being a little bit more adamant about how you structure these things?

JIM BERNHARD: Well, the market is very good; there is no question about that. It is difficult to sometimes, because of the volatility of labor, etc., escalation market that we have seen to put a finite handle on what the final costs may be, and the owners certainly recognize that and are willing to participate in full or in part in that process.

The second is you're absolutely right, we have targeted regulated base utilities about three years ago because of their substantial ups and downs. They're still going to be there in the regulated market, and we believe that the nuclear business will be driven by the regulated market as predominantly the major coal plants, although there will be others do it, but we believe still that the regulated market is the market that we have chosen predominantly to participate.

DAVID YUSCHAK: One last question. You're to be congratulated, I think, on the strength of the management team you've put into place. I think it's probably the first opportunity you would have had to, given the robust nature, to really begin to attract good, quality people to take advantage of this.

Does this mean that in addition to domestic opportunities that it is possible that in addition to China that you can be doing other things internationally, just because of Stone & Webster's reputation internationally in power?

JIM BERNHARD: We will be, and I think we will have some announcements on that in short order. And we will be doing more work outside of the United States in the power business. I think what has helped us to attract people is Shaw is becoming a very significant player in the power business. Our 20% ownership in Westinghouse, I think young people, seasoned people, etc., see the future of the Company, especially over a long period of time in nuclear. So the quality of individuals we are able to attract today are not as difficult maybe as it once was.

DAVID YUSCHAK: Okay, appreciate it. Thanks, guys.

OPERATOR: Chase Becker, Credit Suisse.

CHASE BECKER, ANALYST, CREDIT SUISSE: Good morning, it is Chase Becker in for Jamie Cook. My question is just with respect to the military privatization projects that you mentioned, and you mentioned that you could potentially restructure or sell your interest in those JVs. Just curious, what is the likelihood that that actually happens?

JIM BERNHARD: The likelihood of that happening are 70%, 60% level, at least on one or two of them.

CHASE BECKER: Okay. Then my second question is with respect to the costs that you recognize here for the second quarter, they were a little bit higher than what we had previously anticipated. So I guess going forward, should we think of this a sort of the kitchen sink and that you feel pretty comfortable going forward that you're not really going to have any more of these cost issues?

JIM BERNHARD: I think the significant new strategy that we took on claims is that we chose not to go forward on what we had historically done in this litigation process and arbitration process, and chose to take the best settlement we could to release the maximum amount of cash at this time. So that is the strategy we took. So quite frankly, our management has so much opportunity on work out there, we thought at this particular time that it was best to focus on the work going forward.

And as I said, we have less than $15 million as a corporation in outstanding claims, which I can imagine that we will always have something out there. Doing the $1.5 billion a quarter, we are going to have less than 1/10 of 1%. So we're going forward here, and things look pretty bright. Okay?

CHASE BECKER: Thank you very much.

OPERATOR: Hasan Doza, Luminus Management.

HASAN DOZA, ANALYST, LUMINUS MANAGEMENT: Good morning, guys. Jim, my first question is on the 800 megawatt MW coal project which you guys will announce in a couple of days, can you at least talk about what part of the country this project will be located?

JIM BERNHARD: In the Southeast.

HASAN DOZA: My last question is what is the status and the timing of the ramp-up of the construction of the Chinese nuclear project?

JIM BERNHARD: We are beginning now. We have begun engineering. I think that it will just from this point on for the next 4 1/2 years, it will be a typical bell curve. So it will be a more significant part next year and a very significant part in '09.

HASAN DOZA: So assuming that happens, your portion of the project and your investment income in Westinghouse should be significantly higher going forward if those projects ramp up.

JIM BERNHARD: Oh, yes. I mean, we fully anticipate -- the scheduled signing date is next Thursday or the following Thursday. So we have already been paid cash on the project to start the proceeding, although the final documents haven't been signed.

HASAN DOZA: By the way, great hire from Foster Wheeler. Congratulations.

JIM BERNHARD: Thank you.

OPERATOR: Barry Bannister, Stifel Nicolaus.

JIM BERNHARD: Yes, Robert.

ROBERT CONNORS: Hi, guys. I am trying to drive to sort of a before-items number, and I count total charges in your press release related to the second quarter of roughly $0.89, and you guys relate -- a balance of the charges related to a number of things like cost accruals, revenue adjustments, goodwill impairment, tax incentives and so forth. And I was trying to get to a number of what you -- how much those cost in the quarter, like maybe on net income or an EPS basis, that balance that you referred to in the press release.

DIRK WILD: Robert, I think that you should let us come out with that in our 10-Q. There are a number of impairments. We had things like a small goodwill impairment and just a number of items that kind of make up that difference. And no other large item like these items, so I think it is best to wait to the Q to provide all those details.

ROBERT CONNORS: Okay, thanks. Then just on revenues in the second quarter, they were a little lighter than what we had thought, but in the third quarter they were a little stronger. Was this sort of a timing or a seasonality issue?

JIM BERNHARD: Let me bring that light. There's always going to be a few hundred million dollars more in the third quarter or first quarter of the calendar year because we do tremendous amount of outage work in maintenance. Those outages are always in the spring and fall. So there's also going to be I guess 200 hundred to maybe a little bit more, $300 million blip in those two quarters because of the outage work we do on maintenance, okay?

So when you should always, when you're working your models, maybe put a couple -- 200, 250 more than you might normally have as a run rate because of the seasonality.

ROBERT CONNORS: Okay, thanks.

OPERATOR: Martin Malloy, Southcoast Capital.

MARTIN MALLOY, ANALYST, SOUTHCOAST CAPITAL: Good morning. On the nuclear projects that you talked about that were potentially imminent, I think it was two to eight, could you talk a little bit about what the revenue would be or the project size to you for both in API 1000 and non-API 1000?

JIM BERNHARD: I would rather not until we announce the first project. We are negotiating with several people right now. I'd rather just -- let's wait until we go ahead and book the first scope project. And then once we do that, book our first major projects, maybe we will have a conference call right after that to explain what is going on. Fair enough?

MARTIN MALLOY: Okay, thank you.

JIM BERNHARD: Thanks, guys, for the conference call. Thanks for your attention. We continue to work hard on these financial issues. The market is very robust and we have great opportunity in front of us in just about every segment of our business. So thanks for your patience and let's see if we can make some good news going forward. Thanks, guys.

OPERATOR: Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day, everybody.

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