The Shaw Group Inc. F4Q08 (Qtr End 08/31/08) Earnings Call Transcript

The Shaw Group Inc. (SGR)

F4Q08 (Qtr End 08/31/08) Earnings Call

October 30, 2008 9:00 am ET

Executives

Chris Sammons - VP of IR

Jim Bernhard - President and CEO

Brian Ferraioli - EVP and CFO

Analysts

Jamie Cook - Credit Suisse

Barry Bannister - Stifel Nicolaus

Andy Kaplowitz - Barclays Capital

Brian Chin - Citigroup

David Yuschak - SMH Capital

John Rogers - D.A. Davidson

Joe Richie - Goldman Sachs

Presentation

Operator

Welcome to the Shaw Group fourth quarter and fiscal year 2008 Earnings Call. (Operator Instructions).

It is now my great pleasure to turn this conference over to Mr. Chris Sammons, Vice President, Investor Relations. Please go ahead, sir.

Chris Sammons

Thank you for joining us today. First off, I'd like to remind everyone that we have posted a slide presentation on our website to accompany this conference call. To get to the presentation, please go to shawgrp.com then the Investor Relations page, in center of the page is the link. The slides also can be printed or you can follow along on the screen. We will reference the slides by number as we proceed. Leading the call today are, Jim Bernhard, Chairman of the Board, President and Chief Executive Officer of Shaw, and Brian Ferraioli, Executive Vice President and Chief Financial Officer.

Also before we begin, I'd like to refer everyone to slide number two, regarding forward-looking statements and Regulation G reconciliations. Please consider this information with respect to the call, the press release and the slides. There will be a question-and-answer period at the end of the presentation and the operator will give us instructions.

Now, I'll refer you to slide three. I'll turn the call over to Brian Ferraioli, our Chief Financial Officer.

Brian Ferraioli

Thank you, Chris. Good morning everyone, and thank you for joining us. As you see on slide three, we had a very strong quarter, measured in terms of both EBITDA net income, and obviously, earnings per share for the quarter. We also had record operating cash flow and we ended our fiscal year at the end of August with a record cash balance.

During the fourth quarter, however, we did uncover a cost increase on one of our projects and then reviewing the cost increase on that project in the fossil & nuclear group. We discovered that there were certain errors that will require us to restate the second and third quarters of fiscal 2008.

Going over to page four, I'll try to walk you through the new information that has come out in the fourth quarter prior to the restatement, and then we'll move on to the restatement and then the actual GAAP number.

So on slide four, this is the new information since the third quarter, when we last spoke.. We had a very strong quarter for net income and earnings per share, even with a $59 million pre-tax profit reversal on the project I mentioned previously.

The quarterly performance was led again by our F&M group, and E&C, and we had very strong and steady performance out of our E&I segment. If you look at the revenue, $1.8 billion for the year, up 11% from the same period from a year ago, if you look at the gross profit, 7.8% again, a rise from the year before. Again, this is with the full profit reversal on the coal project that I mentioned prior to any restatement.

The coal project was partially offset by a reduction in our incentive compensation. We also benefited from an improved tax rate during the quarter.

We had record operating cash flow and that was led by our fossil & nuclear and E&C segments. The Westinghouse segment continues to have volatility with the translation of the yen denominated debt. We had a $36.5 million gain for the quarter, and that's included in the EBITDA number for the Westinghouse segment, the $40.3 that you see on the page.

Turning to page five, looking at the segment, again, prior to any restatement of the prior quarters, Fossil & nuclear had a record volume of revenues. You see the gross profit is reflective of the charge that we've discussed.

Moving on to E&C, again, they had record revenues for the quarter. They had very strong gross profit. The gross profit percentage again very, very strong. That does reflect in part the reversal of the management incentive compensation during the quarter.

Moving on to E&I; E&I's revenues were relatively flat from a year ago, here you see that their gross profit was up significantly, and the gross profit percentage continued to rise. They're becoming a strong, steady performer for us after some troubles in the past.

F&M continues to be the market leader in their group, and in their sector. They had record revenues for the quarter. You see very strong gross profit and gross profit percentage

Turning to slide six, I will try to walk you through the restatement. Here we've shown on Slide six, the amounts that are being restated for the second and third quarters of fiscal 2008, and you can see from an EBITDA perspective the total is $11.3 million. The after tax number is $6.9 million or $0.08 per share.

Just a little color on the errors. The errors on the project were really more of a clerical-type nature. For example, when data was being extracted from the project cost on the job to be analyzed to come up with the forecast to go on the project, a $5 million entry was input into a spreadsheet as 500,000. So there was a $4.5 million error. In another instance, the costs to go were accurately forecast, but there was an input error where the inception to date costs were missed so the total forecast was understated. These were the type errors that lead to the restatement.

So moving on to slide seven, these are the financial results now after reflecting the restatement of second and third quarter. If you look at the EBIDTA line in the column, excluding Westinghouse, $100 million which is up dramatically, 55% from quarter a year ago, net income also up significantly from a year ago. And again, we had a record operating cash flow that I think had mentioned earlier.

Looking at slide eight, for the year end summary, we had a very strong year from the terms of our revenue growing, led by our fossil & nuclear, E&C and F&M segments. $7 billion in revenues, up 22% from a year ago. The gross profit percentage again increased, and this is after the charge that we previously discussed. We had record EBITDA, a significant change from a year ago, same for net income, for cash flow, and new awards again were very, very strong at $8.3 million.

I want to point out also in the Westinghouse segment, the negative number for EBITDA that reflects a $69.7 million foreign translation loss associated with the yen denominated bonds.

Moving on to slide nine, looking at the segments for the year, again, fossil & nuclear had a significantly higher volume, record revenues, and improved margins even with the project that we referred to earlier.

E&C again has significantly improved from a year ago, due to their strong performance, as well as higher margins on the jobs. They had record revenues. You see the gross profit is up dramatically from a year ago and the gross profit percentage, 16%, which we expected to be, remains somewhere in that same category for the balance of fiscal 2009, given that we have a major project that has a fair amount of flow-through costs going through it in 2009, but we expect margins to remain in that area of the mid teens.

Moving on to E&I, you see they are relatively flat from a revenue perspective, but up nicely from a gross profit and gross profit percentage. F&M again continues to be very, strong with record revenues, very strong profits, as they continue to perform very, well.

Moving on to slide 10, just to give an update on the Westinghouse segment and the volatility from the foreign exchange movement; at the end of our quarter, at the end of August, the yen/dollar rate was 108.77, dramatically different, I guess, from where it is today, but at that point it was a 108.77, the yen-denominated bonds get mark-to-market. And as you see the yen-denominated put option is not, however our exposure, the delta between the two, the put options in the bonds is $40 million versus $36 million when we originally made the investment, so really not much change in our overall exposure.

However, if you move to the right and the change, you'll see that $106 million of foreign translation losses have gone through the P&L since the investment with $102 million offset from the put option, which is not being mark-to-market in the P&L.

So gain, a lot of volatility. If we were to close our quarter as of yesterday's exchange rate, we would report again a non-cash translation loss of approximately $135 million. So again, significant volatility going through the P&L without a significant amount of economic impact to us.

Finally, I just want to point out again that we have targeted $24 million per year in dividends from our investment in Westinghouse. I just would like to point out that those dividend rights are available to us during the entire period that we own the investment in Westinghouse. And if not paid to us during the period of ownership, it continues beyond even after we no longer own our investment in Westinghouse.

Moving on to slide 11, we had record cash at the end of our fiscal year, $937 million or approximately $11 per share. With very, very little debt, you see $10 million excluding the limited recourse at Westinghouse that we previously discussed. So a very strong quarter, both from an earnings and from a cash-generation perspective.

With that, I'll pass it to Jim and he'll go through the backlog and markets.

Jim Bernhard

Our backlog year-over-year has increased to $15.6 billion, and we expect during fiscal 2009 for our backlog to increase once again. If you look at the pie chart to the right, you'll see the execution of the backlog and the timeframe.

Turning to page 14, our backlog including projects that we are working on, let me be clear on this, progress, if we take Santee Cooper, we've already signed EPC contracts, but until we get full notice to proceed, we're not going to put them in our backlog, even though we are in the process of working on those projects. So our backlog remains very strong.

In that backlog, we have done, turning to page 15, basically three categories that our clients fall in. One, regulated utilities, regulated utility in the United States is basically the credit worthiness of the people they serve, look to pay their debt, their electricity bill. We feel that very secure.

Second, national or international oil companies, sovereign companies, these companies are our primary customers for E&C, and as you see by Exxon Mobil's earnings today, they are very strong, and of course the US Government as well. So those are our three big pots of clients, and one we feel secure in.

However, in doing this, we have gone back to every major client that we have in our backlog. We have confirmed that the projects are moving forward. We further confirmed that their capital expenditures are continuing as was planned. The step two was to confirm that all our suppliers were able to meet their commitments to our projects. Looking for softening, looking for weakness and I think that everyone expects that, however, we just can't get there. As expected some times that may happen, but with the clients that we have, regulated utilities, major oil companies and the US Government actually, spent a lot more money, which we would be in prudent shape to participate.

As you know, we are ranked number one, going to page 16, in power, which is a huge kudos for this company, and we continue to develop our market, not only in fossil, but in nuclear as well, and the market continues to look very, very good with the regulated utilities in the United States.

Outside the United States on page 17, in the power market, we're actively working on a nuclear power plant in Brazil, UK. India now has the ability to do work there. As you know, we're bidding on in South Africa; we're doing work in Indonesia, we are building nuclear power plants in China. So that business has quietly moved not only in domestic power entity, but able to do work throughout the globe, which certainly are major opportunities going forward.

On 18, to try to give you a little comfort, recently, Southern announced in their earnings call last week that they continue to move forward with their nuclear power plant as their base load capacity.

We have purchased over $400 billion worth of equipment, we continue to work on the project. Our Westinghouse continues to work on the project. The legislature of Georgia has passed [legi] for the cost recovery. So we're moving forward on the project as any other project that has full notice to proceed in the springtime of this year.

On the Santee Cooper, same thing, they have recommitted in their long-term port management is whether they continue to layout how they were going to finance it. It's a joint venture between South Carolina Electric & Gas and Santee Cooper. We continue to work on the project. They have purchased over $0.25 billion of material, and that budget continues to go forward.

On Progress Energy, on page 20, the legislature supports the nuclear work; it has been approved by the public service commission of Florida. Progress Energy has given us over $0.25 billion of cash to proceed with the project. That project continues to move forward as expected. These are major projects for us, excess of $12 billion in backlog. Then again, this project should move forward in the spring.

Looking at our business segments on page 22, our Fossil & Nuclear business continues to do well with the exception of a major cost increase on the coal project this summer, as working on an accelerated basis to meet accelerated incentive milestones for next year on the completion of the projects.

Productivity was a lot more than expected, and we had a major cost increase on that project. We still believe that we may likely finish the project early and get substantial incentive compensation.

However, we have not put the incentive compensation into our earnings at this time, and I think that we need to get a lot closer to the end date before we would feel comfortable for doing that. But that would be a more substantial amount of offset to the cost.

Turning to page 23 on our maintenance, our maintenance continues to do well. Basically, the first quarter and the third quarter of every year is a major quarter in terms of outages in the nuclear field.

We had a write-off in the fourth quarter on an international entity that we brought 15 years ago, that had been dormant, which decreased substantially. I think it was probably $3.5 million, which was a dormant company that was written-off during this quarter, nothing to do with operations or performance of our maintenance group.

On page 24, our Energy & Chemicals continues to do very well. We've reviewed that all their projects are looking for softness, but we didn't find any. Looking at the awards they are going to be getting this year that we have award letters from negotiating contracts, all of them look very strong.

We continue to challenge our entities looking for slowness, looking for [mines] that reflect the market that we see out there and we continue to be encouraged by customers. I mean, they very strongly say, we don't place our market on $100 on oil. Most of these guys are on $50, $60 a barrel of oil and have planned these projects for years, there the long-term price of oil hasn't changed.

So that's what they are telling to us, and we don't see a weakness in the market. We're looking for a weakness, we're trying to find a weakness, almost hoping to find a weakness to verify what we think should happen, but it just hasn't been so.

Fabrication & Manufacturing continues to be robust, will be robust. They are starting to participate in AREVA MOX project which is a nuclear oriented project in a very major way, continuing to sell the vending machines throughout the world.

They continue to negotiate with various clients to build fabrication facilities in different parts of the world which we will be their major departure from a domestic and a little bit of international work going forward. So we are very, very encouraged about their business.

The Mexican shop on page 26 continues to improve its product and continues to [mend up] on the quantity of people and tonnage produced.

As also looking on page 27, the fabrication facility that we are building for nuclear power plants and other modules that we may do, both offshore as well as other modules associated with our projects continue to progress nicely. The first quarter of 2009 should be in production. This is a major facility in Louisiana. It will give us huge opportunities, not only for our technology but other nuclear technology as well. And capacity, it will have over 1,400 workers.

28, we're really encouraged, I think that the E&I has stabilized and will do well this year. We look forward to increase their award pace as well as their profitability, as we've seen in the fourth quarter, based on government spending that we expect on the Federal Government level.

I think that they will be a prime market for us in the type of work that's likely to be done. So this market is actually one that we think that has been lagging in recent years but has shown signs of turning the corner and doing well, contributing to us in major way in our profitability going forward.

Looking at summary for '08, we continue to have record bookings revenue, as well as earnings in actual dollars as well per share. I'm very proud that we're ranked Number One by ENR in the United States in Power.

Our Fab & Manufacturing business continues to certainly be best in class. And as we look in our E&C and E&I, they are much improved, and our maintenance business remains steady.

I'm very proud to say that we signed the first two nuclear EPC contracts and an interim agreement with progress on another, and all those progressing that schedule and continue to spend money on those projects.

Our financials were record in EBIDTA, net income, EPS, operating cash flow. At this time when you're not one of the major components of our business, so we feel very secure and robust that we're going to be able to take advantage of many different opportunities in the market over $900 million in cash at the end of the year.

We increased our credit facility; as well we've extended our credit facility. We were upgraded both by Moody's and S&P. So we look at the overall 2008 as one of our accomplishments from 2007.

Going forward on a conservative basis, looking at where we are realistic or where we are in the market and being very cautious, we believe that our revenue will be between $7 billion and $7.3 billion, our EPS, $2.50 to $2.70, and again, operating cash flow of $250 million to $300 million level.

Okay. Third one, in conclusion, it was strong year for us, our backlog position is strong, our backlog will grow year-over-year into 2010. Our nuclear projects remain on track and I believe our focus is the right one on regulated electric utilities, and national/international oil companies, as well as the US Government, should help us shield any major economic downturn.

At this point, Chris, I'd like to open it up for any questions.

Chris Sammons

Thank you. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). First question comes from the line of Jamie Cook from Credit Suisse. Please proceed with your question.

Jamie Cook - Credit Suisse

My first question, Brian, can you just give a little more color on the problem project, the coal project, if you can give any color, which one it is? What percent complete we are, in what phase we're re in, and whether we've had hits in previous quarters outside of the restatement?

Brian Ferraioli

Okay. We're approximately about 90% complete on the project. We're a little reluctant to go into the details of the naming of the project, given some of the commercial sensitivities that Jim mentioned earlier. We found the errors that I mentioned before for the second and third quarters. There is no indication of anything else for any other period. As Jim mentioned, a lot of the cost increase specifically occurred in the fourth quarter, as it was summer time when the project was at its peak. So we think that's pretty well summarizes the situation.

Jamie Cook - Credit Suisse

Did you take charges in any other quarters outside of the restatement?

Brian Ferraioli

No.

Jamie Cook - Credit Suisse

Okay. And what is your estimate in terms of, it's 90% complete. When do you expect to finish the project by?

Brian Ferraioli

In the summer time of next year.

Jim Bernhard

We're actually begun to stock-up as well.

Jamie Cook - Credit Suisse

Okay. Jim, I appreciate your color on your thoughts on what's happening in nuclear, and I understand you're safer in the sense that you work with regulated utilities, but we are hearing across the board that a lot of utilities are cutting CapEx spending. A lot of people think that even the regulated utilities might hold off on these projects in light of the economic environment, in light of the ability to finance these projects. When you think about the three nuclear projects, you're talking about, I mean, what is the way actually…

Jamie Cook - Credit Suisse

Jim, I understand that on the nuclear side you work with regulated utilities, so you should be safer, but we're hearing major CapEx cuts from utilities, there are concerns it will happen on the regulated side, one of these guys just pushed out spending, given concerns of recession, given concerns over financing of these projects. When do you think you'll get these projects in backlog and what's the likelihood, that not that they go away, but that they get stalled?

Jim Bernhard

Okay. Let me state that that's a good question. All these utilities, one, haven't been approved by the Public Service Commission. Number two as they build this plant, unlike other plants they would build, like a gas plant, they get to recover the construction costs as they build it. For example, if they would build a combined cycle power plant, they couldn't recover the cost that they built with, but in a nuclear plant they could. If they expect a major recession, what is likely to be cut out of their capital expenditures is not the nuclear plant, because that will produce electricity in 2018, what maybe cut out or delayed is the combined cycle scheduled to produce electricity in 2010 or 2011.

That might be pushed back a year, because that's for intermediate electricity, but for a project scheduled to produce electricity in 2018, at the estimates that we have now for the requirements of electricity growth, I think that our indications are just what I've said, that they might postpone a combined cycle, but not the nuclear, because it makes sense, because electricity for a combined cycle to come on line sooner as for the nuclear is seven, eight years down the road, when everybody believes the economy will hopefully be at a lot better, on the up. So, it's just the opposite of what you might think and don't be lost in the translation that they are able to put it in their rate base.

Jamie Cook – Credit Suisse

Okay. And then Brian, my last question for you then I'll get back in queue. Let's assume nuclear doesn't happen or coal in the UK doesn't happen, can you sort of talk me through how we should think about base earnings for Shaw Group, because you do have a lot of sort of steady operations, a lot steadier business that should help sustain the earnings base?

Jamie Cook – Credit Suisse

Brian, my question is, let's assume nuclear doesn't happen or the UK doesn't happen. There is a lot of businesses within Shaw Group that aren't cyclical, that are somewhat steady in nature when you think about the federal business, the maintenance business. Can you just talk me through how we should think about sort of base EBITDA for Shaw Group?

Brian Ferraioli

Well, Jamie, another thing though I think you need to focus on as well is the scrubber business. We're expecting 2009 for us to be a very, very strong booking year for scrubbers. We have several that are already in backlog, under construction, but we expect some rather significant awards as well, primarily driven by state mandates.

On top of that, you're right, we do have the E&I Group, 92%, I think of their backlog is with the Federal Government, and the fab business' activity spread across a number of industries, and maintenance is maintaining the fleet of existing nuclear power plants. I mean, if you took an extreme case where they were no nukes, no new coal, what would the EBITDA be? It's hard for me to say, because we do have a number of other markets we can address. So we still think there are plenty of businesses out there. And as Jim said, we expect our backlog to grow year-on-year.

Jamie Cook - Credit Suisse

Thanks, I'll get back in queue.

Operator

Our next question comes from the line of Barry Bannister with Stifel Nicolaus. Please proceed with your question.

Barry Bannister - Stifel Nicolaus

Hi. Brian, I think your arrival in the firm has really done a lot to help fix the back end and instill confidence, I understand it was a clerical error, but if hypothetically this is one of the older bookings, my guess is it was a Louisiana utility. I mean what confidence do we have that there aren't any clerical errors at Cliffside our [Turk] or Little Gypsy or Wise County or Comanche to your other projects?

Brian Ferraioli

Well, I understand your question, Barry. First of all, those projects are in a much earlier stage. So the impact of any hiccup that may occur would be much, much smaller from the financial reporting perspective, but nevertheless, when we file our K later today, you'll see that we considered ourselves having a material weakness in this area on the project reporting. And we've done a lot of checking before preparing the yearend financial results. We're pretty comfortable with the position on these other projects. We'll be dedicating a lot more resource in 2009 to improving the processes within project control.

The good thing on this one is that all the cost, and all the commitments made it to the job correctly. What happened was, when the data was being extracted and been analyzed, that's where problems occurred. So to me, it was encouraging, that's much better. It's unacceptable, but much better than if you had systems problems where information wasn't getting to the project team on a timely basis. That was not the case in this problem.

Barry Bannister - Stifel Nicolaus

All right. And then, I understand (inaudible) back few years ago of using a 2.7% yen interest rate to finance $1 billion purchase, but, ultimately at the end of the put, isn't the option that you have to recognize the cumulative loss at the time on the yen or refinance it? How does that work?

Brian Ferraioli

Well, first of all, we have been recognizing every quarter the mark-to-market. So we have been recognizing the losses on the debt side of it. When the debt matures we have various options. We can put the shares back to Toshiba, as we mentioned before. We could payoff the debt. Or we could seek to refinance it, or a combination of the two of those. So at this point in time, we have all the options available to us. As we can continue to throw off cash, that's clearly one of the possibilities we could use our cash for in the future.

Barry Bannister - Stifel Nicolaus

I see. So the logic of the math is that at 2.7% rate, if you had to refinance it at 7.7%, it would be the 500 basis-point differential over a six-year term, and so that's how much yen change you could absorb before it would have been a bad decision to finance in yen?

Brian Ferraioli

I think that's a fair way to look at it.

Barry Bannister - Stifel Nicolaus

All right. Thanks, guys.

Operator

Our next question comes from the line of Andy Kaplowitz with Barclays Capital. Please proceed with your question.

Andy Kaplowitz - Barclays Capital

Hi guys, good morning.

Jim Bernhard

Good morning, Andy.

Andy Kaplowitz - Barclays Capital

So looking at your guidance for fiscal '09, I mean, I know, Jim, you said it's conservative. It looks quite conservative. I mean, I understand the environment is uncertain; backlog is up 10% for fiscal '08. So I guess I'm just kind of trying to figure out why your revenue is up only marginally in 2009 versus 2008?

Jim Bernhard

We're taking a conservative posture on awards, et cetera. We have a lot of money, $900 million for the last four or five weeks, much of the time it's been in treasuries, it's hard to get a lot of income off that. We've taken a pretty conservative posture on our guidance going forward.

Let's see how the year goes, let's see things stabilize, we'll take a look at that, but right now, we're preparing to execute our plan on this basis, and I think it's a solid one, but it's a realistic one with all these moving parts out there. I'm a pretty optimistic guy, but I think that today we need to be a little bit more cautious in our steps.

Andy Kaplowitz - Barclays Capital

I hear you there. Jim, you mentioned the cash on the balance sheet I mean, it's a sizable amount now. Maybe if you can give us a little bit more color on some of the thoughts you might have about using that cash. Do you just keep it for a while and see what happens? Are there interesting targets out there? Any thoughts around that.

Jim Bernhard

I think all of that. I think there are interesting targets out there. I think that we have a substantial amount of cash, I think it's comfortable where it is, we are not in a hurry to do anything, but this company has done quite well on the acquisitions that we have done in the past. We're patient on the acquisition front. And cash flow goes up and down, too, but we should have positive $300 million or so next year, so it's a good cash position.

If you look where we've come and where we are now, over a $1 billion in cash generation in the last 24 months, another $300 million or so next year. The business continues to perform well on a cash basis. And I think we'll continue to do that, but look guys we've got a big cautious yield sign out in front of us with the way the markets are.

Andy Kaplowitz - Barclays Capital

Jim, one more question, if I could. Your international customers, what are they saying nowadays, places like South Africa been sort of bubbling, but with the credit crisis it seems that maybe these things might be delayed a bit. What are people saying to you about the possibility for either nuclear or coal internationally over the longer term?

Jim Bernhard

I think India's going to build, I believe, four sets of nuclear plants, Russian technology, AREVA technology, Westinghouse technology and GE technology, I believe those will be going simultaneously. When you get into South Africa we believe that that will be postponed. I believe, as you say, that these projects are going to be very, very difficult to finance in South Africa. And although, we're actively working with the country, I believe that the chances of getting them financed in today's market are challenging.

In the UK, we believe that that's going to progress as scheduled. I mean the need for electricity. Take coal plants, the ones we're building, they are actually knocking down two coal plants and replacing it with two coal plants that emit less volume of pollutants to the UK. We believe the UK market will be half AREVA and half Westinghouse technology, the way it looks like to us.

Brazil is looking at a new plant, so there's a lot of activity the US has their. And they're going to be built. And it would be not a far stretch to have this as part of the energy bill, guarantees continuing for a long period of time.

So we're cautious, we know where we are. And there's one thing, we believe that this year we have an opportunity to get more scrubber work than we ever had. We really have some good opportunities there with some major clients. So business is good there.

Our E&C business is doing well. I mean, they have major awards in polysilicon, used for the wafer, for solar technology. So we're doing some different things as well. And as you know piping, anything that contains fluids to move it in directions is what piping does. So we're okay. Cautious, but got a good backlog, got good clients and a good client is defined now as one that pays.

Andy Kaplowitz - Barclays Capital

Thank you.

Chris Sammons

Next question operator?

Operator

And our next question comes from Brian Chin with Citigroup. Please proceed with your question.

Brian Chin - Citigroup

Hi. Thank you. Can you give a sense of the $6.1 billion of fossil & nuclear backlog, how much of that is just nuclear?

Jim Bernhard

Is maintenance backlog included in that?

Brian Chin - Citigroup

Correct.

Jim Bernhard

Okay. Probably, $600 million.

Brian Chin - Citigroup

$600 million. Okay.

Jim Bernhard

Predominantly China work.

Brian Chin - Citigroup

Predominantly China work, okay. For the US plants, what are the development milestones at the different nuclear sites that are important for determining whether you add a chunk of the potential work into the backlog?

Jim Bernhard

When we get full notice to proceed or we have different stages of limited notice to proceed, the way I understand now, correct me if I'm wrong. I believe we should get full notice to proceed on Southern and SCANA in spring, right?

Brian Ferraioli

We anticipate in the spring time getting additional releases from both SCANA and from Southern. Unclear at this time, whether it's going to be a full notice to proceed, if it we were a full notice to proceed, we'd book everything into backlog. We already have a signed contract. There is a possibility that one of them may or both may release parts, say, until they expect to get their COLA. And if that were the case, we would book into backlog the component of that work that we would expect to execute up until the COLA, which would probably be in excess of a $1 billion or so. So, either way, we're looking at some significant additions to backlog in the spring time of 2009.

Brian Chin - Citigroup

Okay. So let me make sure I understand it. So if the COLA work is approved of, then you've got a $1 billion per unit that we're looking at? I'm sorry if I misunderstood that.

Jim Bernhard

No. We're likely, as a minimum, to get a $1 billion per unit to keep proceeding to the COLA.

Brian Chin - Citigroup

Got it.

Jim Bernhard

A lot of the stuff has to brought and manufactured before the COLA. There are even activities that we can do associated with the site before the COLA.

Brian Ferraioli

Brian to be specific to your question, we would book whatever we are released to do.

Brian Chin - Citigroup

Okay. And then on raw materials procurement, is the raw material side of the nuclear awards still something that we should be thinking of as more cost flow-through and cost reimbursable?

Jim Bernhard

No, you should think of those as mostly fixed, subject to escalation.

Brian Chin - Citigroup

Fixed, subject to escalation. All right. And then lastly, in your comments, I believe I heard you say on one of the projects there was a $0.25 billion of cash advanced from the customer company back to you, and that cash, if I understood it right, was sitting on your balance sheet. Did I hear that correctly?

Jim Bernhard

The customer did advance the money. However, it went for Westinghouse consortium to buy equipment.

Brian Chin - Citigroup

Okay. So that cash is not on your balance sheet?

Jim Bernhard

That's correct.

Brian Chin - Citigroup

Okay.

Jim Bernhard

The point was that the customer has paid a significant amount of money to buy equipment.

Brian Chin - Citigroup

Okay. If I were to look at cash advances from any customers to you for work to be performed still, is that an element of cash that I need to consider as being material on the balance sheet right now or how do I think about that?

Brian Ferraioli

Well, this is Brian. The way we approach our contract is we try to schedule the projects so that we are cash-positive on all projects. As long as we continue to have additional bookings, we should continuously have cash building up from new projects as the other projects get to their end phases and start to trail downwards. That's our approach to the business, has been for some time. That also protects us in any situation where there may be a cancellation.

Every prospect that goes out the door, proposal that goes out the door, we look at cash flow on a cancellation-curve basis. I mean, we did that before the financial crisis, we did it during the financial crisis, and it's just the way we operate. We think we've been pretty good at managing our working capital.

Brian Chin - Citigroup

Okay. I may follow up off-line with you with some extra questions if that's okay, but I appreciate the time. Thank you.

Brian Ferraioli

Thank you.

Operator

And our next question comes from David Yuschak with SMH Capital. Please proceed with your question.

David Yuschak - SMH Capital

Good morning, gentlemen. I'm just kind of curious on your expectations guys, on the scrubbers. Few years ago you had a big ramp-up in scrubber demand following the start of the recovery here, and then you start seeing new plant construction for coal and all that. What's the logic of your expectations of seeing scrubbers coming back nicely next year? And is it an idea that some of these utilities may want to try to extend the lives of these coal plants to do that? I'm just kind of curious as to some of the logic to those expectations?

Jim Bernhard

Well, we have letters of intent for some that would be a pretty aggressive sign that that will go forward. These coal plants, some of the regulated utilities have delayed, maybe longer than others to do that, but there is a significant amount of scrubber work. And significant amount of scrubber work, well in excess of a $1 billion, we believe that we'll have the opportunity to get this year.

David Yuschak - SMH Capital

The idea that, like you said earlier, maybe the combined cycle doesn't go down, but maybe instead of replacing some of the older coal plants are just going to continue to extend the life or is it that can more of that come then because maybe some logic along that line?

Jim Bernhard

I think that they just have never gotten into the queue so they waited for the rush and always expected to do this. I won't tell you the utilities' names, but then you will say okay that makes sense, but then if I did that, I'm sure we may have a competitor too getting in to their car and give a knock on the door, so we're not going to do that. So we're working with these utilities and we fully expect during the year to have major scrubber announcements.

David Yuschak - SMH Capital

Just going back to your outlook on the revenue side being conservative, is some of that just because maybe the utilities, because of the capital markets, the way they're at today, some of the permanent financing there is not just in place yet, so that you may have to think that some of the stuff could be pushed out until that financing gets done? I'm just wondering, being conservative, what the assumption behind it was, if in fact your customer may be thinking that I need to get some more permanent capital in place before I go full bore ahead?

Jim Bernhard

We went to all the clients, I mean, a lot of these projects we're working on the field. We tried to find something to write-down out of our backlog and tried to find something that's not in go forward, because we're still hiring people. If we knew a project was going to be delayed or something, it will be easier to be transfer people from one project to the other, but, we're still actively hiring people in E&C and our power group and it just hasn't been the case.

It would be a lot easier for me to say, yeah, we're getting this project delayed and this project cancelled, and thereby I expected that, but the problem is that that's not accurate information. And it may turn on a dime, some 90 days from now or six months from now, but today, the people feel comfortable on their capital expenditures. I mean, you look at Exxon, they announced today that they were able to make $14 billion by cutting costs, et cetera. They're going to spend $25 billion going forward, and capital expenditure program is all alive.

So, I mean, these big, huge oil companies, international companies, sovereign wealth companies, regulated utilities, backed by the credit worthiness of the people of the state they serve and the Federal Government are our primary customers. I believe that those will remain intact going forward.

David Yuschak - SMH Capital

Thank you, Jim.

Chris Sammons

Thank you, Dave. Next question, operator?

Operator

And our next question comes from John Rogers with D.A. Davidson. Please proceed with your question.

John Rogers - D.A. Davidson

In terms of the $7.1 billion to $7.3 billion in revenue for fiscal '09 that you're looking for, how much of that is in backlog right now?

Jim Bernhard

We have a spot for that, John, on slide 13. Recall that a lot of our fabrication and manufacturing business is not so backlog-intensive.

John Rogers - D.A. Davidson

Right. And that's what I'm curious about, because how much visibility do you have with this backlog out over the next, I mean, does it extend out into 2012, '13, portions of it?

Jim Bernhard

Very little. I mean, next year we've got over $4 billion. So this year we have got $5.7 billion, next year we got $4.2 billion, already in backlog. It looks (inaudible) backlog will be up this time next year. It looks pretty good out there. It would be easy for me to say that the sky's falling, but it doesn't look like it, maybe you guys know more than I do.

John Rogers - D.A. Davidson

Okay. And then specifically on the Federal Government, some of the contracting projects there, how does that market look in terms of it coming down?

Jim Bernhard

We've had a major project with (inaudible) we have been very successful with that in (inaudible) project, we got the first project and many, many more to come, many billions to come and we're doing a good job on what they call the list of go project, there's a lot of wetlands restoration that's going to occur in Louisiana, a lot of it has been funded.

There will be a lot of environmental cleanup, we got a lot of infrastructure projects, and I think we're in good shape in terms of, if the Federal Government accelerates spending under any administration to start to create jobs. It's a big customer for us. In fact, the core engineer is year in and year out our biggest customer. Likely money will be spent through the core of engineers. If you want to get money out there through the economy. Fortunately, it's our biggest client. So we could do well here. So we'll see how things go.

John Rogers - D.A. Davidson

Okay. Thank you.

Chris Sammons

Thank you, Operator. Next question?

Operator

And our next question comes from Joe Richie with Goldman Sachs. Please proceed with your question.

Joe Richie - Goldman Sachs

Two questions for you. On the fossil & nuclear side, you mentioned earlier that you could book potentially up to a $1 billion per unit on both the SCANA and Southern projects. I was wondering, in terms of your expectations on what's expected in terms of earnings for 2009 or 2010, what's built into your expectations today?

Brian Ferraioli

Is your question's specific to the nuclear bookings?

Joe Richie - Goldman Sachs

Are the nuclear bookings that you're expected to book in 2009, are those built into your expectations or EPS expectations at $2.50 to $2.70 for or 2009? Are there any expectations that a portion of that will come from the nuclear work that you're doing?

Brian Ferraioli

Very little. Most of the earnings projections are related to items that are already in backlog, so on the fossil side, it will be primarily the fossil work that they are already executing. The one nuclear job is the job in China, Jim referred to, where we're re doing services, and the other units as well, with the exception of fabrication, who do a lot of book and burn in the same year.

Joe Richie - Goldman Sachs

Okay. Great. And then the second question is really relating to your E&C backlog. Seems over the last four quarters your E&C backlog has been relatively stagnant, and hasn't really changed much in the last four quarters, and it is actually down about 15% year-over-year. Can you talk about the growth opportunities you're seeing in that at space, specifically? And have you started to see any delays given the fact that oil is pulled back to $70 per barrel at this point?

Jim Bernhard

I think that the backlog deterioration might be a little bit misleading. We only have one EPC project in our backlog with E&C where we used to have a multitude of projects. What we're trying to do now is sell our technology, sell front end packages and license agreements, which carry a lot higher margins, but they tend not to be big backlog driven items. So I think that the EBIT has increased in our backlog, while the revenue has not.

Joe Richie - Goldman Sachs

Okay. And then in terms of the opportunities that you're seeing, I guess for '09, can you talk about any specifically; are there any large projects that are out there for you that you're hopeful on?

Jim Bernhard

I think they'll have a good booking year. There's a multitude of projects from manufacturing of polysilicon for solar plants, to LTG projects, to ethylene projects, to front end, they have a good opportunity. We went over there a couple days ago.

Brian Ferraioli

If your question is that the one major project that they have to book in order to hit their numbers, the answer is no. We have a variety of good prospects. None of which is a single mega project that's a make or break type of booking.

Joe Richie - Goldman Sachs

Okay, great. Thanks for your time.

Chris Sammons

Okay. Thank you, everyone. We appreciate you being on the call today. Our time has expired, and if anyone has any additional questions and like to follow-up with me, please do so. I'm going to ask Jim, if he has any closing comments and then we'll end the call. Thank you.

Jim Bernhard

You know, we're cautiously optimistic. Things look stable in our market and we're hopeful that they'll remain that way, but they look stable and maybe even have a tad increase. So, we'll see how it goes, but we are very weary of the financial situation throughout the world and are tuned into that and trying to be realistic on our guidance going forward. Thank you. Have a good day.

Chris Sammons

Again, thank you.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation .

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