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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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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.
JIM BERNHARD: Thank you.
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.
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,
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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