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Executives

Chris Sammons – Vice President, Investor Relations

J. M. Bernhard Jr. – Chairman of the Board, President and Chief Executive Officer

Brian Ferraioli – Executive Vice President and Chief Financial Officer

Gary Graphia – Chief Operating Officer

Analysts

Jamie Cook - Credit Suisse

Andrea Wirth - Robert W. Baird & Co., Inc.

Andy Kaplowitz - Barclays Capital

Steven Fisher - UBS

Martin Malloy - Johnson Rice & Company

Joe Ritchie - Goldman Sachs

David Yuschak - SMH Capital

Joseph Gibney - Capital One Southcoast, Inc.

Scott Levine - J.P. Morgan

Barry Bannister - Stifel Nicolaus & Co. Inc.

John Rogers - D. A. Davidson & Co.

[Mark Levin] – Davenport and Company

Carl Dorf - Dorf Asset Management, LLC

Andrew Root - Alkeon Capital Management

The Shaw Group, Inc. (SGR) F3Q09 Earnings Call July 9, 2009 5:00 PM ET

Operator

Good afternoon ladies and gentlemen, and welcome to The Shaw Group, Incorporated [audio impairment]. (Operator Instructions) Please note that this conference is being recorded.

I will now turn the call over to Mr. Chris Sammons, Vice President, Investor Relations. Mr. Sammons, you may begin.

Chris Sammons

Good afternoon everyone. Thank you for joining us today. I’d like to remind everyone we have a slide presentation posted on our website which accompanies the call today. Our website is shawgrp.com and the slides are on the Investor Relations page. We’ll refer to those by number as the call proceeds.

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.

Before we begin I’d like to refer everyone to Slide 2, which explains the forward-looking statements and Regulation G, Reconciliations. Please consider those cautionary statements and schedules and information appropriately with respect to today’s call. There will be a question-and-answer session as usual after our prepared remarks and the operator will give you instructions.

So now I’ll refer you to Slide 3 and turn the call over to Brian Ferraioli.

Brian Ferraioli

Thanks Chris. Good afternoon everyone. Thank you for joining us. Our third quarter had record operating cash flow, in excess of $430 million. We also had record cash balance of $1.3 billion, the first time in the history of the company that we’ve had cash in excess of $1 billion. We also had record backlog for the second straight quarter and that was driven primarily by the booking of the new nuclear EPC contract in Georgia for the southern company.

And finally the earnings for the quarter were mixed. We had strong performance by most of our operating segments, but this strong performance was partially offset by two underperforming fossil contracts in our Fossil and Nuclear segment.

Turning to Slide 4, looking at the financial statements as we’ve done in the past we show the first column as as reported or generally accepted accounting numbers, and we’ve had as we have in the past significant volatility due to non-cash charges in our Westinghouse segment and the way we look at the business, the core business is the third column and that’s what I’ll start with my explanations, looking at our activities excluding the Westinghouse segment.

Looking at revenues, revenues compared to the prior quarter or last year were basically flat and gross profit was down a bit, but I remind you that in the third quarter of 2008 we had the release of $13 million of contingency in our E&C group relating to some contingencies on license agreements. So it was a very strong earnings quarter a year ago, which was not repeated this quarter.

So you’ll also notice in the EBITDA lines and in the net income are down accordingly. The EPS, diluted EPS for the quarter $0.57 and the operating cash flow on a consolidated basis $432 million. And if you exclude the Westinghouse segment almost $450 million. The new awards, $5.7 billion for the quarter. Again a very, very strong quarter.

Moving back to the Westinghouse segment, we’ve had $62.6 million in pretax charges. These charges, non-cash, are related to two types of events. The first one, as in prior quarters, when we mark-to-market the yen bonds that are outstanding for financial reporting purposes to the U.S. dollar, we’ve had a charge of $33.2 million on a pretax basis. That results when the U.S. dollar declines against the yen, and so those yen bonds being translated into dollars, result in a higher dollar value and therefore a charge to the P&L.

The second item relates to the fact that during the quarter, Toshiba filed its financial statements for its fiscal year 2008 and they failed to meet a certain financial metric that’s contained in the Put Option agreement that we have with them. As a result of that failure to meet that financial metric, it’s termed a Toshiba event in our agreement. The Toshiba event has certain accounting implications for us. And we’ll talk more about that in greater detail a few slides forward.

But for the P&L purposes we were required to expense the original bond discount and the deferred financing costs which in total about $29.4 million on a pretax basis. So again I’ll talk to this later on in the presentation, but I want to emphasize the full amount of these charges in Westinghouse are non-cash. .

Turning to Slide 5 and the core business activities, you see on total revenues for the year compared to the prior quarter were up slightly, mainly driven by increased volume of work in our E&I group, offset to some extent by a reduction of revenues in maintenance. But looking at the individual segments, the Fossil and Nuclear, revenues were down slightly from a year ago. And as I mentioned there were two contracts in that segment underperforming and therefore the earnings were down from the quarter a year ago.

Our E&C group continues to perform extremely well. You look at the revenue lines here which exclude flow through costs were relatively flat, but the gross profit still was very, very strong, approximately $41 million. And again I mentioned a year ago there was $13 million in contingency releases relating to these license performance guarantees that we no longer require. So it was comparing a strong quarter to a strong quarter a year ago.

As I mentioned in the second quarter, this business continues to perform well. Its’ earning significant profits on the work its executing, but the concern we have for them is the fact that their bookings have declined due to the decline in the price of oil as well as the general economic conditions throughout the world. So we expect this business to drop a bit into the future.

Our Maintenance business, revenues are down from a year ago. That’s another segment that’s suffering a bit from the general economic conditions. There’s been a reduction in the number of construction projects that this group has been executing and you see on the gross profit line it’s a similar story. A year ago they had some strong and relatively high margin construction projects that they just don’t have this year, given the current environment.

Our E&I group continues to perform extremely well. You see the volume of business is up on the revenue line $100 million or 30% from a year ago quarter. And their earnings are also up. This is driven by just an increase in the volume of business primarily from the hurricane protection project in southeast Louisiana. And the increase in the volume of work also allows additional overhead to be absorbed on the projects, so contributing to the earnings improvement. This business we believe is on an upswing. Jim will talk later on about the opportunities of the E&I group have, but we think this business and its bookings are going to continue to grow in the near future.

Moving on to F&M, they had a record quarter for revenues, $179 million, up substantially from the year ago quarter. Their earnings are also very strong at $44 million. But you see the gross profit percentage is down a bit from the year ago. So although the volume was up, the margins are down a bit. And again that reflects the general economic conditions. And the F&M segment suffers a bit whenever the process industry slows as their reduced volume of work coming from oil refineries, chemical and petrochemical plants.

Moving on to Slide 6 and a little bit more of the explanation relating to our investment in Westinghouse and a Toshiba event. As I mentioned, Toshiba filed its financial statements for 2008 on May 8 and their net worth as defined in our Put Option agreement fell below the 800 billion Japanese yen threshold established in that agreement. The Put Option agreement also serves as part of the security for the bonds that were issued to finance our investment, and this is what resulted in the Toshiba event. The Toshiba event allows our bond holders to direct us to put our investment in Westinghouse back into Toshiba. However, this requires a 75% super majority vote of the bond holders. Subsequent to their filing, Toshiba raised $3 billion in equity in June and may no longer fail to meet the minimum financial criteria which triggered the Toshiba event.

However, I want to emphasize, no matter what happens here there’s no change to our commercial relationship that we have with Toshiba regarding the work that we do jointly with Westinghouse on the AP1000 Nuclear Project. I also want to add that we’ve received no notice or any indication that bond holders intend to direct us to put the shares back to Toshiba.

Moving on to Slide 7, looking some of the financial implications or the accounting implications I should say from the Toshiba event, basically the equity investment and the debt that we have on the books moves up to short term. But as I previously mentioned the deferred financing cost and the original bond discount get expensed in the current period rather than being amortized over the life of the bond facility as it was currently prior to this quarter.

Moving on to Slide 8, our cash, a record $1.3 billion. We expect our cash balance to continue to grow in the fourth quarter, albeit not at the same level of the cash generated in the third quarter. And you see we have virtually no debt. Whatever debt we have is some equipment financing that we take advantage of when there is opportunities that we think are advantageous from an economic perspective.

So with that I’ll turn the call over to Jim and he’ll go through the operations.

J. M. Bernhard Jr.

Thanks Brian. Turning to Page 10, market overview on power. You know, certainly there was more gas plants are increasing as natural gas prices have softened, so there is some activity there. But as we mentioned earlier there’s still continued opportunity in the domestic scrubber market and the, I think you’ll find a high demand for capital structure in particular on nuclear on up rate projects. In fact on the up rate projects and the Senate version of the energy bill calls for those up rates to be classified as renewables which is a significant step forward for the nuclear industry.

Vogtle and the V.C. Summer project remain on the short list for DOE loan guarantees and we’re proceeding on schedule on both those particular projects.

Looking at our power portfolio, if you look at the variety of jobs that we have mostly in the eastern and southern part of the United States, over 30 million man hours peaking at 7 million man hours. So we have a very substantial direct power workforce that as time goes on we’ll be moving to particular nuclear sites as these coal plants wind down.

On Page 12 gives you an overview of the Westinghouse operating nuclear plants that are throughout the world, blue indicating the existing plants and you can see they have a nice portfolio throughout the world. We believe over the next 20 years that will continue to maintain their share of new plants throughout the world, which is about 50%. So I think that they’ll at least do that and all indications are that they have the preferred technology going forward.

On Page 13, the only three projects that have construction work in progress approval recovery are the ones that we have contracts for. For those listening for the first time, this allows the utility to recover the actual construction costs during construction, which we believe is a significant part of building a nuclear power plant. We have several we’re in the process of bidding and the nuclear business remains healthy in the United States and continues to develop outside the country as well.

On Energy and Chemical, the market is not as promising as certainly as the power market is. We expect to see some projects that have been delayed. Indications are they’re going to return late ’09, early ’10. The market certainly has been soft and continues to be soft which has affected the energy and chemical business on backlog, and will begin to affect the fabrication business in the fourth quarter.

Well Fabrication as we mentioned, they’ve had several projects delayed or canceled, in particular the refinery business in the United States as well as some chemical projects. The clients are being very cautious on capital deployment. The business continues to perform well, and despite these market conditions we’re optimistic that the recent bid activity will increase the buying and ramp up especially in the second half of Calvert 2010, when in particular nuclear piping will be going through some of our facilities.

On Page 16, Environmental Infrastructure certainly a bright spot. 94% of the existing backlog’s with the U.S. federal government. They have the largest backlog they’ve ever had currently, and the backlog continues to expand and the list of inquiry is certainly very, very healthy. The federal position is going to benefit from the ARA funding as well, and there’s several projects on the levee part of the business that we’re doing down in New Orleans. There’s several new projects out for bid. We continue to perform well on MOX project and this business should certainly increase in revenue next year and the following for sure.

Opportunities related to American Recovery and Reinvestment Act, we tried to break that down today to show you that the part of the business that we will be focusing on, that opportunity hit over $122 billion worth of work that’s going to be available over the next two to three years.

Our backlog, $22.9 billion, extremely healthy. It’s up over $8 billion from the end of August of last year. All businesses lines in the power have increased their backlog. E&I’s increased their backlog and as we said the Fab and E&C’s a little less than our expectations were. But overall, it’s been a tremendous increase in backlog that we should draw the benefits over the next few years.

Looking again at Fossil and Nuclear toward more the operational performance, earnings for the quarter were negatively impacted on cost of two projects. One is in start up and the other is about 90 to 95% complete. So those are working their way through the system.

The backlog continues to creep in new EPC bookings and we continue to add to our management team with our recent Lee Elder joined us from General Electric, who will be in charge of marketing.

Our EBITDA was somewhat soft this quarter because of those two particular projects.

On Maintenance as Brian mentioned earlier the EBITDA was a little less because the overall construction industry where they do a lot of small cap projects has been soft and it will probably remain soft for the next six to nine months. But the Maintenance is encouraged next year. There are several major awards anticipated in the Maintenance business and renewals. Especially this is a part of the company that will be doing the nuclear work and the expansion at the plants that exist, so this business will be very, very healthy for the next two to three years. Especially on the up rate business.

Energy and Chemicals, solid execution off of our record quarter last year, still $29.4 million in EBITDA. The energy and service contract international petrochemical clients have been soft. We’ve got a couple of major awards that will work well into the system. However, I can, this part of the business has seen little or no recovery of solid activity. A lot of what ifs, but no hard contract at this point. So I don’t think it’s changed much from quarter-to-quarter.

If we turn to Page 22, looking at Fabrication business continues very strong performance. The business volume has come down and will continue to come down somewhat before recovering in the latter part of this year and 2010. But this business is still doing very, very well.

Environment and Infrastructure, we look for this business to continue to improve. Strong performance as we talked about the hurricane protection projects, the MOX projects is a major contributor to the overall company’s earnings and continue to do so in the next several years. We have several additional government contracts with very huge government agencies and businesses. Extremely busy in the part of the business that we participate in the federal government and state and local. And we look for that backlog to continue to increase as well as our EBITDA over the next several years.

Looking forward to guidance, my revenue remains unchanged, $7.1 to $7.3, approximately $2 a share for EPS, just slightly lower than we had expected a few months ago, the quarter ending August, and we have increased our cash flow I think $375 to $525 million.

In summary, on Page 25 strong performance across most of the businesses. However, two fossil contracts that we’re completing helped to mix the overall results. Record operating cash flow now having over $1.3 billion in the bank is certainly an impressive one. The record backlog, significant new orders driven by domestic nuclear bookings, is very, very significant. The opportunities for new government awards, domestic nuclear market continues to develop and will contribute to, be major contributors to [our] and are expected to begin in 2010.

At this time we’ll open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Jamie Cook - Credit Suisse.

Jamie Cook - Credit Suisse

First question, Brian, relates to the issues in the Fossil and Nuclear segment. The one project you mentioned charges, can you, the coal project that I believe is 90 to 95% complete is that the same project as last quarter? And if so can you quantify the dollar amount? And then the second question on the I believe the scrubber project that just started, you mentioned increased labor and material costs, if you could just give us a little more color on what the issues there? I guess it’s of particular concern given we’re just sort of in the beginning stages of that project. And I do have a follow up after that.

Brian Ferraioli

Okay, Jamie. Let me make sure I hit them all. First of all, the charges that were inferred here are not related to the project that we talked about last quarter. Okay? Both are coal projects. One is an air emissions project. They’re both though pretty far advanced. The air emissions one is not a new project. Both have to do with labor productivity, increased labor costs. They’re well into the field and very near completion.

Jamie Cook - Credit Suisse

The coal plant and the emissions plant are 90 to 95% complete?

Brian Ferraioli

Correct.

Jamie Cook - Credit Suisse

Okay. I thought you said one of the projects had just started. Maybe I was incorrect.

J. M. Bernhard Jr.

There was a project that’s in start up.

Jamie Cook - Credit Suisse

Oh, that was start up. I apologize. Okay. And then I guess my last question before I get back in queue, I was a little surprised, I mean, actually you didn’t quantify the charge, before I go on to my last question. How big was it?

Brian Ferraioli

We have not quantified that and we’re just going to leave it there. And we think the results for the quarter, for the group, pretty much speak for themselves.

Jamie Cook - Credit Suisse

I guess my last question, Brian, I was a little surprised that you guys lowered guidance in the fourth quarter. I mean I think your fourth quarter implies $0.46, which is well below last year and sort of the run rate we saw in the first three quarters, if you ex out the charges I guess in the second quarter. So I’m just trying to get a feel for why the weakness in? Are we assuming any run over from the issues that we’ve had in the third quarter?

Brian Ferraioli

No. As we mentioned the results for this quarter were mixed. We were disappointed with the two projects that we referred to already, so that’s part of it. But more importantly, for the fourth quarter as we’ve been mentioning for some time the E&C business is coming down due to the, again, the general economic conditions and the drop in the price of oil. So we do not expect their earnings to be at the same level. They were record second quarter, they were good this quarter, but down from the second quarter and we expect that to continue into the fourth quarter. The other one is the Fabrication and Manufacturing business. Same, very strong, very good performance but because of the decline in the process related industry business, we expect their earnings to drop as well. So that’s the main reason for the change, the three, the two projects this quarter as well as the rundown in those two businesses I mentioned.

Jamie Cook - Credit Suisse

And then, Jim, what are you going to do with all that cash?

J. M. Bernhard Jr.

I’m not going to answer that question. You know, the cash we have is very significant and again, you know, we look for that to increase in the fourth quarter and next year. So certainly we’ll have to deploy it in some manner and we’re evaluating the opportunities at this time.

Operator

Your next question comes from Andrea Wirth - Robert W. Baird & Co., Inc.

Andrea Wirth - Robert W. Baird & Co., Inc.

I wonder if you could just address the backlog first. How much did you actually add to the backlog for that nuclear contract this quarter?

Brian Ferraioli

We haven’t disclosed the dollar value of that individual project. We have confidentiality issues with our client and it’s also a sensitive commercial issue for us. So we haven’t disclosed that on any of them.

Andrea Wirth - Robert W. Baird & Co., Inc.

And then just in terms of any cancellations, was there anything meaningful in this quarter?

Brian Ferraioli

Nothing significant.

Andrea Wirth - Robert W. Baird & Co., Inc.

And then I just wondered if you could talk a little bit about the Army Corps of Engineers. I think you were fairly optimistic that you would start seeing more projects come through there, particularly of the levee works. I’m just wondering if you could give us an update on that front.

J. M. Bernhard Jr.

Well you know those continue to be in evaluation. We continue to bid bore. We have gotten some smaller Army Corps of Engineers projects this quarter and fourth quarter we expect to get a significant award. So. FEMA contracts, etc. So it continues to develop. There’s a lot of opportunities out there, more than we’ve seen since we [bought] the business, since 2002. Significantly more.

And historically the Army Corps of Engineers has been this company’s largest customer.

Andrea Wirth - Robert W. Baird & Co., Inc.

And then just one final question on natural gas. Obviously the price is coming down. It would make sense that interest would be higher but are you really actually seeing a meaningful increase in inquiries on the natural gas side of things? You know, especially since given the fact that we still have a lack of carbon legislation out there.

J. M. Bernhard Jr.

Well we see inquiries. We don’t see anybody, you know, executing contracts. And I think that the execution of contracts is somewhat deterred by what you just said, the carbon legislation. I think a lot of people are holding back until they have more certainty.

Operator

Your next question comes from Andy Kaplowitz - Barclays Capital.

Andy Kaplowitz - Barclays Capital

Brian, could you talk about, you know, in the guidance you mentioned E&C and S&M as coming down a bit. I mean, those are two high margin pieces of your business and so I think the question that we have is, you know, what those businesses could look like in a slower run rate? You know, is there any way to sort of sensitize, you know, what the margins would be in the S&M business or the E&C business in a slower run rate environment?

Brian Ferraioli

Well Andy as I think you know we’ve had this discussion in the past and we haven’t given any forward guidance on margins. So I can’t do that here. But one of the things I want to emphasize, though, you know, they’ve had a drop off in the bookings relating to the process industries. But as Jim mentioned they’re extremely busy in the proposal stage. So we believe that there’s a good opportunity for, you know, this business to rebound, to have a bit of a dip. They’re particularly quoting on a lot of front end, study and front end engineering designed to fee packages which lead to the larger EPC projects, you know, sometimes six to 12 months down the road. So they’re very, very busy on the proposal side. It’s just that clients haven’t necessarily released those awards.

Andy Kaplowitz - Barclays Capital

When do you think the nuclear fab business, I think you mentioned, you know, sometime in fiscal 2010, but it’s a big fabrication facility you’re building. When can it have a meaningful impact on the S&M business?

J. M. Bernhard Jr.

The second half of 2010.

Andy Kaplowitz - Barclays Capital

And you know at that point it’ll be filled enough where it can contribute meaningfully? Can I ask you guys about, you know, you give out this 12 month backlog number and you know the number’s been relatively stable, maybe even going down a little bit as you’ve booked not a lot of backlog. And so I guess the question is, you know, how do we sort of reconcile that? Is it just, you know, a lot of this nuclear stuff is sort of long lead? And then we wait for the E&I stuff to come along, which is more book and burn type work? Is that sort of what’s going on here?

Brian Ferraioli

Certainly the nuclear work is much longer than the fab and the E&I work that you mentioned, with the exception of the MOX project in E&I. So together there has been some of that.

Andy Kaplowitz - Barclays Capital

Brian, if I could ask you, you know, the SG&A number in the quarter was a little higher than we estimated, you know, and we know there’s been a few [way] offs in the pipe fab business. Is there anything unusual in that number? Is there some severance charges in that number?

Brian Ferraioli

No, no, there was no severance charges in there. We had some non-income tax charge in there and we had some one time fees associated with our fabrication facility, the modular facility. Those two in total were about $3.5 million.

Andy Kaplowitz - Barclays Capital

And so could we see the SG&A come down a little bit over the next couple of quarters from that $78 million?

Brian Ferraioli

My only hesitation is certainly those will not repeat as I mentioned. My only hesitation is the proposal expense. And as I mentioned earlier E&C is particularly busy on proposals, so it should come down a bit but there will be an uptick from what we were doing earlier in the year on the proposal side.

Operator

Your next question comes from Steven Fisher – UBS.

Steven Fisher – UBS

At one point, really to the air quality project I’m wondering at what point you locking in the materials are cost for these projects. I mean they’re a fixed price obviously and I mean clearly that’s resulted in a cost overrun. So how does that finding and cost locking in work?

Brian Ferraioli

Well most of the equipment was all purchased early on. This was more materials rather than large pieces of equipment.

Steven Fisher – UBS

In other words the project required more materials than you had anticipated?

Brian Ferraioli

That’s correct.

Steven Fisher – UBS

And I guess the question would be, I mean, how many other projects in the air quality area do you have that could end up being in the same position? I mean is it all of them, that this could happen on any of them basically?

Brian Ferraioli

I mean in theory, it could happen on any other. We certainly hope not. What I would like to point out is we went back and looked at all of our air emissions projects and in general they’ve all been pretty successful as a whole as a business line for us, and in a vast majority of the cases we wound up making more money at the end of the job than we had anticipated when we originally did the job. So yes, there was a hiccough here but we don’t see this as any sort of systemic type issue with air quality projects.

Steven Fisher – UBS

And related to the Toshiba event, is there anything that you can do to prevent the bond holders from causing you to Put the investment? Or is that entirely out of your control?

Brian Ferraioli

Well, as we mentioned earlier, with the raise of the equity they’re may no longer be this, they may no longer fail to meet the minimum financial criteria.

J. M. Bernhard Jr.

We believe it’s highly unlikely that the bonds will be Put.

Steven Fisher – UBS

And then just lastly, you have announced a number of changes in management in the power business over the last several months. I mean is that more business development driven or is it operational? And if it’s more operational, what sort of changes have they made or can you anticipate them making?

Brian Ferraioli

Maybe we’ll have Gary Graphia, our Chief Operating Officer respond to that.

Gary Graphia

We have continued to add industry veterans really for both purposes. We expect them to help us continue to improve upon our execution capabilities as well as call upon their experience in the industry, particularly Lee Elder to help us in our business development efforts as well.

Operator

Your next question comes from Martin Malloy - Johnson Rice & Company.

Martin Malloy - Johnson Rice & Company

On the cash balances, can you talk a little bit about what advance payments are in there and working capital needs? And how much of that cash is truly discretionary?

Brian Ferraioli

Okay, first of all in our view there is no advance payment. Most of the businesses, particularly the ones who are operating with any fixed price structure have a milestone payment. So we hit the milestone, we bill the client and the cash is ours. So it doesn’t have to go back to our client and that’s what I refer to as advance payments. We’ve done the work and we’ve earned the money.

The issue is what about cash management for our costs? And that’s where I think you’re alluding to and there may be some of that, well there is some of that cash that frankly is to project continued execution to completion, some of those cash balances on the individual project basis would go down. However, as long as we continue to be a going concern and we continue to book new work and we continue to be in business, there is no reason why that cash balance should go down. So it’s a bit of a convoluted question to answer. We think it’s our cash. We think it’s our cash and if you believe you’re going to be able to continue to book work going forward, we would not expect that cash balance to decline significantly.

I guess if your question is a theoretical one, if the business were to stop with nothing else coming in the door, yes, some of that cash would be spent in executing the jobs where we have favorable working capital conditions. But that’s what we try to do. I mean I think that’s one of our jobs is to have favorable working capital movement and we as an organization you know look at that in every one of our reviews and we push very hard and focus our management team as well as individual project teams on that. So we like to think we’re going to retain all of that cash.

Martin Malloy - Johnson Rice & Company

And on the proposals for the E&C segment, can you talk a little bit more about geographically where those are? International markets, are you seeing some of the environmental work domestically that customers are looking at?

J. M. Bernhard Jr.

Both of the E&C businesses are international, a great majority of it. So very little at all is domestically.

Brian Ferraioli

And that’s for existing works. So you can look at that both from the revenue as well as proposal activity is international for them.

Operator

Your next question comes from Joe Ritchie - Goldman Sachs.

Joe Ritchie - Goldman Sachs

The first question I have related to the adjustment to the progress schedule and what that actually means for the nuclear EBITDA guidance that you’ve given in the past. So if I remember correctly, for 2010 and 2011 specifically you’ve given EBITDA guidance of $75 million and $125 million. I’m wondering if you could comment on what kind of impact the switch in the schedules had on that guidance.

Brian Ferraioli

Okay, Joe, we didn’t give any updated guidance after the schedule change. But what I can tell you is that that guidance that we have previously given assumed the three projects were running in parallel. And now you have one of those three going to be delayed. So, but we haven’t been more specific than that. But if you assume there were three in there and now there are two running ahead of the other, I think you can come up with a reasonable estimate of what impact it may be.

Joe Ritchie - Goldman Sachs

Okay, that’s fair. I guess on the progress specific project, is the delay I’m to understand is somewhere in the 18 to 24 month range. Is that consistent with your expectations as well?

J. M. Bernhard Jr.

Currently.

Joe Ritchie - Goldman Sachs

The second question I have relates to the Turk project and I wanted to see if you could potentially give us an update on the permit application to get that project going again. Is there any update there?

J. M. Bernhard Jr.

The permit is in place. There’s no problem as we understand it with the permit. The air permit and water permit are all in place and there’s not a legal proceeding on the permits. I think there’s a question if the Public Service Commission acted responsibly or really needed the project to go forward. So that is being litigated as we build the plant.

Joe Ritchie - Goldman Sachs

Okay, and just so that I have a sense of, how much of that project is still in your backlog?

Brian Ferraioli

A significant component. We haven’t disclosed the amount but it’s still a significant component of it. Yes.

Joe Ritchie - Goldman Sachs

And then I guess lastly, I recently saw a couple of days ago I saw some news that you know the UAE had put out the bid on the first nuclear plant being built out there. Is that something, actually I was a little surprised to not see your name on the pre-qual bids unless I missed it. Is that something that you’re potentially going after or no?

J. M. Bernhard Jr.

We don’t comment on individual jobs we bid, proposals we may or may not bid.

Operator

Your next question comes from David Yuschak - SMH Capital.

David Yuschak - SMH Capital

On the your E&C and the S&M segments, is the, on the E&C side of it when you mentioned about these projects internationally do you term the projects more mega projects or are they more smaller projects? Are you banking on more bigger projects or is there more smaller proposals being looked at?

Brian Ferraioli

Well I think the potential down the road is they can be some very large projects. The point I was trying to make earlier is the proposals are for the early phases of them. Let me backtrack a little bit though. I’m not sure when you say mega projects, there are some projects being discussed in Saudi Arabia that clearly are mega projects. There are other projects that, you know, are pretty good sized projects. I don’t know if you’d classify them as mega projects, but, you know, pretty good sized for us.

David Yuschak - SMH Capital

In the E&C space, too, are you seeing within the existing backlog a stretch out of the stuff you do have booked at this point in time, too, that may be creating the bigger hole maybe in the fourth quarter than maybe what you may have thought could have because of the impact of stretch outs?

Brian Ferraioli

No. No significant schedule changes, if that’s what you mean. No.

David Yuschak - SMH Capital

Is it fair to say maybe that third quarter from the fabrication shop maybe came in better than expected in this quarter, creating more of a problem in the fourth quarter as well maybe? Is that another possibility?

J. M. Bernhard Jr.

No. I think it came in better than expected but not the significance that may be indicated. There’s a lot of projects that weren’t in our backlog that we anticipated working on that we had our alliances and we have project agreements on that have been put on hold and have not issued [drawings] to continue with the work. So although a significant event, which is going to soften the fourth quarter for the fabrication business.

David Yuschak - SMH Capital

And maybe just from a technical point of view, Brian, having moved everything up to the current assets and current liabilities, does that create covenant problems for you?

Brian Ferraioli

No. No. Not at all. All considered within the credit agreement we have, the Westinghouse investment and the debt, so it doesn’t matter if it’s shorter or long term.

Operator

Your next question comes from Joseph Gibney - Capital One Southcoast, Inc.

Joseph Gibney - Capital One Southcoast, Inc.

I just want to follow up a little bit on the F&M booking side. Last quarter we got the full progress EPC come through, this quarter the full Georgia Power. You mentioned last quarter was a portion of SCANA. Is it safe to assume that all remaining portions of the SE&G have come through within your bookings in F&M this quarter?

Brian Ferraioli

I’m sorry. Let me make sure I understand your question correctly. Did you ask did all of the SCANA project been booked this quarter?

Joseph Gibney - Capital One Southcoast, Inc.

That’s correct. You booked a portion of it last quarter. I just didn’t see it within your slides and commentary relative to has all of it now fallen into F&M?

Brian Ferraioli

No. No, it has not. There is a significant milestone in that contract that will not be achieved, not a milestone for our work but a milestone within the contract when the client timing wise may release us for the final portion.

Joseph Gibney - Capital One Southcoast, Inc.

And back to the coal powered issues on F&M and labor productivity. You mentioned 90 to 95% completion. Are we still September, October timeframe or is that pushing a little bit?

J. M. Bernhard Jr.

The job we talked about earlier is in start up. I’m not sure what the other coal [mine] and the air project [quality] is, so I’m not sure if it’s October or September.

Brian Ferraioli

Yes, I don’t remember the exact date. Somewhere up in there. Yes, it’s somewhere in that ballpark.

Joseph Gibney - Capital One Southcoast, Inc.

And then just related to some of the delays on the capital [inaudible] and broader spending, has anything changed relative to thought process on timing, potentially out of [RWE] on the UK side?

J. M. Bernhard Jr.

No, nothing since last quarter has changed significant to this quarter.

Joseph Gibney - Capital One Southcoast, Inc.

Last one for you, just general CapEx trend here as you’re looking in the fourth quarter, given the nice build in cash, just curious on the capital side on the spending for 4Q.

Brian Ferraioli

It will continue at a pretty good clip for us, particularly related to the modular facility that F&M are constructing in Louisiana. We have about $95 million in CapEx spent so far this year. We have been projecting something in the $175 range. We’ll probably come down a bit from there, but I don’t have a good number off the top of my head to give you, but it’s going to be probably less than the $175 total for the year that we had previously spoken about.

Operator

Your next question comes from Scott Levine - J.P. Morgan.

Scott Levine - J.P. Morgan

If I understood correctly it sounds like the down side to the earnings guidance is related to the slowdown in E&C and fab and manufacturing. Would you care to comment on where the upside is to the cash flow guidance is coming from?

Brian Ferraioli

Our cash flow was generated this quarter from all of our main operating segments. They all were very, very cash positive. In one of the segments, particularly in the E&C segment they had an adjustment to one of their existing projects in terms of their milestones and that contributed to some of the improvement. There were some projects that the cash flow came in a little bit earlier than what we had originally planned at the beginning of the year, when we first came up with our plan for the year.

But, you know, the guidance we’ve given I should also comment on that we have a fair number of cash collections projected for the very last week of August which is the end of our fourth quarter. Depending upon exactly what day those collections come in, that $525 that we gave could be a little bit higher or could be a little bit lower. So it’s lumpy is what I’m trying to say, and depending upon how that hits in the fourth quarter that number could be up or down a bit.

But in general it was a pretty across the board cash generation quarter for us. The nuclear projects have started. The fossil projects continue to draw off cash. The F&M and the E&I and E&C were all contributors. So it was a general, across the board quite positive.

Scott Levine - J.P. Morgan

And I think on the last conference call you cited Asia as a source of optimism on E&C. Sounds like, you know, the commentary on just E&C broadly is a little bit more muted. You know would you care to comment? Has the outlook there gotten any weaker or is it as optimistic as maybe you would have characterized it two, three months ago? Have there been any developments?

J. M. Bernhard Jr.

I think opportunities are still robust but the timing is still uncertain.

Scott Levine - J.P. Morgan

As robust as you would characterize it two or three months ago?

J. M. Bernhard Jr.

Yes.

Scott Levine - J.P. Morgan

One last one. You know we’re kind of seeing the energy bill proposals come through. Would you care to comment on what you’ve seen so far and your thoughts on the proposals and what you’ve seen so far insofar as it affects your business, the nuclear business in general?

J. M. Bernhard Jr.

What we were particularly encouraged, in fact we’re very encouraged that the Senate version of the energy bill allowed to all of the up rates at existing plants to be treated as renewables. So that certainly is a step in the right direction to get maybe new reactors at existing plants to be treated as renewables, which we think is an important step. So we’re encouraged as the bill, as the sausage is being made.

Scott Levine - J.P. Morgan

And as far as loan guarantees, you know, is there anything that in your opinion we should be thinking about there or would you de-emphasize that in terms of [inaudible]?

J. M. Bernhard Jr.

I believe the loan guarantees are significantly more important for the de-regulated utilities. As we tried to present in the presentation, the projects that we have all have the ability to recover the cost of construction during construction. So that’s a long way to get it financed, projects that are, you know, not in that state would have to rely more on loan guarantees. So, you know, our projects are going forward because of the regulated utility base and our belief with or without the loan guarantees. I don’t think they’re as significant as they would be for de-regulated utilities.

Operator

Your next question comes from Barry Bannister - Stifel Nicolaus & Co. Inc.

Barry Bannister - Stifel Nicolaus & Co. Inc.

The Xcel Comanche Power Station Ultra Supercritical was on track for first fire on June 23, 2009, and Shaw’s scope in the project was to balance the plant for unit three without them handling the boiler. Did that first fire start up go well?

J. M. Bernhard Jr.

We are waiting to do seam blow as soon as they finish the boiler.

Barry Bannister - Stifel Nicolaus & Co. Inc.

And Cleco unit three was scheduled to fire in early June with a September, October completion. When you took the charge last quarter it was 90% complete. What’s the status of that?

J. M. Bernhard Jr.

It’s fired and we have completed seam blowing on unit four.

Barry Bannister - Stifel Nicolaus & Co. Inc.

And Lake Charles, you decided to go it alone on that rather than Toshiba or others as a partner, and that’s a nice project. When do you think that will complete? How much will it cost in CapEx?

J. M. Bernhard Jr.

I think we’ve given about. Brian?

Brian Ferraioli

Yes, CapEx is approximately $100 million.

J. M. Bernhard Jr.

And we start operation in late October.

Barry Bannister - Stifel Nicolaus & Co. Inc.

And then lastly, I thought there would be a little more Mexico benefit for F&M in the quarter. Did that not materialize? Or was it just overcome by the volume effect?

J. M. Bernhard Jr.

You know the volume, I think it had a good quarter. I’m not sure what the expectations are for Mexico. I think it had a good quarter.

Barry Bannister - Stifel Nicolaus & Co. Inc.

I was thinking, you know, there would be more of a you know 15, 20% drop in labor costs for that portion of capacity.

J. M. Bernhard Jr.

I’m not sure if you can, I’m not sure if we’ve given how much capacity went through the Mexico Shaw.

Brian Ferraioli

No, we have not.

J. M. Bernhard Jr.

Okay.

Barry Bannister - Stifel Nicolaus & Co. Inc.

And then just to clarify, you did say that Cleco was still on schedule for September, October? And what percent complete is that? Is it still 90 or 95 or?

J. M. Bernhard Jr.

It’s more than 90. I think it’s 93, 94% complete. I’d say mechanical completion is at the end of August and the turnover is October, late October, November, something like that. Substantial completion is before that. I think performance tests are done somewhere like that.

Barry Bannister - Stifel Nicolaus & Co. Inc.

So it sounds like your charge was more than adequate or adequate to meet the needs of completion, the one you’ve already reserved for.

J. M. Bernhard Jr.

We try to make our charges adequate all the time and beginning when we estimate the projects.

Operator

Your next question comes from John Rogers - D. A. Davidson & Co.

John Rogers - D. A. Davidson & Co.

A couple of things. Brian, you touched on this, but in terms of the advance billings, the substantial increase in the quarter, is that associated with the different types of contracts that you’re now executing or?

Brian Ferraioli

No. No. When you say different types of contracts?

John Rogers - D. A. Davidson & Co.

I’m just wondering what’s driving that up so much.

Brian Ferraioli

I like to think good management of our working capital.

J. M. Bernhard Jr.

I mean, you know, we gave guidance of $375 at the beginning of the year and you know we had a little shortfall in the second quarter. Some of these things don’t come in the second quarter, you know, when $200 million would have smoothed it out, but I mean I think that, you know, the milestones we’re meeting and moving forward. I think the fabrication business has been a good generator, E&C, all of them are generating and projected to generate positive cash certainly in the fourth quarter and next year as well. So we’re in a good position as far as for our balance sheet.

Brian Ferraioli

John, just to make sure its clear, we don’t expect the volume of the cash flow in the fourth quarter to be what it was in the third quarter. Okay? But likewise I also want to give credit, I mean, I think we have an organization that is extremely focused on cash flow. I mean the guys in the operations down to the projects levels are very, very focused on that and you know they’ve done a good job.

John Rogers - D. A. Davidson & Co.

It’s impressive. I guess I’m just trying to understand if you’re changing your approach to the market or? And then how sustainable this is and will continue to see this?

J. M. Bernhard Jr.

Brian came from an organization that had put a lot of emphasis on cash and he brought that culture with him to Shaw. And I think if you look over the last 24, 30 months since Brian’s been here you’ll see a significant increase in our cash position.

John Rogers - D. A. Davidson & Co.

Secondly I was just, in terms of the Toshiba event as it becomes clear that the bonds won’t be called or there won’t be a Put required, will you move that investment back down, out of current working capital back into long term?

Brian Ferraioli

Well John for financial reporting purposes, the accounting standards are, you know, pretty high to reverse the current position. So I mean it’s hard to predict the future, but it’s a pretty tough standard to get over.

John Rogers - D. A. Davidson & Co.

And then lastly I guess, Jim, just again on the F&M side, the sales of bending machines, are these substantially different margins on that as opposed to fabricating products?

J. M. Bernhard Jr.

I’d rather not answer that. I’d like to answer it, but I’d rather not. I can’t answer that. That would be a significant competitive [inaudible].

Operator

Your next question comes from [Mark Levin] – Davenport and Company.

[Mark Levin] – Davenport and Company

Most of my questions have been asked and answered. Just a quick one. In terms of the E&I business I think you’d mentioned $3 billion worth of projects that you were bidding on at the end of the last quarter. Has that number changed? I think you’d mentioned a number of $200 to $500 million opportunities last quarter.

J. M. Bernhard Jr.

I think we’ve gotten some of them and I think we’re still bidding about the same amount.

[Mark Levin] – Davenport and Company

And then secondly, you know, maybe you would talk a little bit about opportunities in nuclear. I think you’d mentioned fairly recently that you felt confident about maybe one or even two announcements over the next 12 months. Do you still feel that confident? And then, related to that point, internationally what are you thinking over the next 12 months as well on the nuclear side?

J. M. Bernhard Jr.

I think we’re going to do okay. I mean, we have a lot of activity in the U.S. You know, throughout this nuclear market, you know, with the exception of projects being delayed 18 months or so, you know, our customer base has responded and awarded projects probably ahead of when we thought. The UK is developing overseas. Brazil is developing overseas. India is a little further behind. There is significant activity in the Mideast as you’re aware of, from UAE to Saudi to Egypt. There is significant activity in the nuclear business throughout the world and without giving a competitive advantage, we believe that the participation by Shaw will be a very significant one and not limited to the United States at all.

I believe that it will be as equal where the units are being built. And I’m certainly more encouraged every quarter goes by we continue to execute, continue to get new inquiries, we continue to do upgrades, we continue to participate in a lot of different forms in the nuclear business. And it’s become apparent that we’ve become an important choice for engineers and talented folks who want to participate in the nuclear business.

Operator

Your next question comes from Carl Dorf - Dorf Asset Management, LLC.

Carl Dorf - Dorf Asset Management, LLC

I’ve been a long term investor in the company and well there’s two things that obviously concern me now. The first one is that consistently we’ve seen cost overruns and you indicated that a lot of projects you’ve made more than you thought you were going to make. So if my assessment is correct then we’re seeing the cost side problems but we’re not seeing any additional revenue showing up so we can assess how good your bidding really is on these projects. And my concern is while the backlog is growing nicely I’d like to have a comfort level that this backlog is going to turn out to be profitable and we’re not going to continue to see cost overruns.

My second question deals with the energy and chemical business. And the simplistic thing that I’m looking for is how much of the cost side of that business is controllable? Of course I understand what you said, due to the bidding process we’re going to see, you know, pressure on the earnings, the profit margins. Of course you’re going to have to keep people in place in order to do that bidding. So if there is some way you can guide on that or looking at it another way what kind of revenue level in this business do you have to generate with the costs that you’re not going to be able to change to be at a breakeven level?

Brian Ferraioli

Okay. Let me see if I’ve understood. On the first part, what you see in the financial results, you see it all. It’s a blend and you see the good, the bad. I mean I’m not sure how to respond other than that the financial results reflect hopefully what happened every quarter.

Carl Dorf - Dorf Asset Management, LLC

Well what I’m getting at is when there’s a problem on the cost side, it’s broken out and you’re telling us what the cost overrun is. If you make more particular money on a project to the best of my knowledge, that’s not being broken out and shown to us. So I can’t look at that and assess how good your bidding process is where okay, we may lose money on some of these projects but we’re more than making it back on others. Or maybe we’re making 50% of it back.

Brian Ferraioli

I don’t think we broke out any of the information for this quarter on any specific project. We just try to summarize which is I think our objective is to summarize what happened for the quarter. And the summary for the quarter on the fossil nuclear business, where that net net there were two projects that we were disappointed with.

Carl Dorf - Dorf Asset Management, LLC

I presume in this quarter there were not any projects that you made more money on than you expected to.

Brian Ferraioli

I didn’t say that, but when I take a step back and try to summarize the quarter’s results, what happened to the quarter versus our expectations and our objectives and what we think the business could have earned, the net was that two projects that we discussed under performed and that’s what we think why the results were less than what we had hoped and what we expect them to be.

Carl Dorf - Dorf Asset Management, LLC

I understand, but in your outlook you obviously or shouldn’t be giving an outlook which is anticipating that you’re going to make more money on some projects but not anticipating that there may be some cost problems. This is an ongoing part of your business.

Brian Ferraioli

I think we try to give guidance and we have our internal expectations based upon what we think we’re going to make for the quarter or for the year. And then the results for the quarter are what they are. And we do better sometimes and sometimes we don’t. And in this quarter for the F&M business, we did not do as well as we had anticipated nor what we consider to be acceptable.

Carl Dorf - Dorf Asset Management, LLC

To try to finish up on this particular aspect of my question, is there any kind of confidence that you can give to me that we’re not going to continue to see cost overruns affecting the anticipated outlook on your business? Whether it’s the air business or the nuclear business or any of the business. I’d like to try to come away from this with some feeling that the backlog that you’re building, even if we’ve had near term problems, is not going to continue to see the same kind of cost overruns that have been troubling the company in the past.

J. M. Bernhard Jr.

I think that you can draw confidence that a couple of these projects were bid and booked at a different time when the company’s development as well as the different bidding environment. I think you can take comfort in that the organization is a lot more experienced and a lot more keen to problems to anticipate early on than they may have been four years ago, since the acquisition of Stone in Russia. I think we’ve gone through a series of project people. I think we’ve gone through a series of management and we have a team in place that is developing as a very fine one. I think you should take comfort in that because I do.

Carl Dorf - Dorf Asset Management, LLC

What kind of feedback can you give me on my energy and chemical question if any?

J. M. Bernhard Jr.

I think that is a little off base because the breakeven as we reduce our employees and our project people as the projects wind down, if there’s not a project for them then over a period of time we have to reduce workforce. Same thing we’ve done in the fabrication business, we’ve tried to reduce that. So I don’t think that that’s really a number breakeven, not breakeven. So I don’t think it’s like that. Most of the costs are variable and not fixed.

Carl Dorf - Dorf Asset Management, LLC

Is there a dollar amount on fixed costs that as long as we’re going to stay in this business you still would have to?

J. M. Bernhard Jr.

Yes, we’re going to stay in this business period.

Carl Dorf - Dorf Asset Management, LLC

I understand that and that’s why I’m saying is in order to do that is there a particular dollar amount of fixed costs, is there a minimum that you would have to maintain that you could share?

J. M. Bernhard Jr.

We can easily cover that hurdle. Okay, let’s go into the next question. I think we’ve had to try to get some of these other guys in here before we kind of quit here. It’s been over an hour. Next question?

Operator

Your next question comes from Andrew Root - Alkeon Capital Management.

Andrew Root - Alkeon Capital Management

I just wanted to follow up on an answer to a prior question. I wasn’t clear from the question and answer on Turk if that project is actually still ongoing or it’s been halted by the court order.

J. M. Bernhard Jr.

It’s still ongoing at the same schedule that we’ve been building plants since the beginning.

Andrew Root - Alkeon Capital Management

So someone is attempting to stop it but it hasn’t been stopped?

J. M. Bernhard Jr.

Right.

Andrew Root - Alkeon Capital Management

And then the second question is just a little.

J. M. Bernhard Jr.

I don’t know if they’re, whoa, whoa, whoa, let me stop. I don’t know if they’re attempting to stop it. I’m not that familiar with the litigation. I know it’s not permit based and it’s something to do with as I understand it with the permission to build as far as economic viability. That’s what I understand that the litigation is about, but the permits are in place.

Andrew Root - Alkeon Capital Management

Yes. Essentially asking the utility to re-prove its demand case.

J. M. Bernhard Jr.

Something like that. From where we sit, you know, there’s been a lot of money spent too. It would be hard to say that another way would be more prudent at this point.

Andrew Root - Alkeon Capital Management

That makes sense. The second question is I’m just looking for a little more color on the cash question. You know it’s kind of old school but would a share buyback be on the table or are there particular business funds, do you want to add more to your business fund? Just a little bit more color on what you think would be terrific.

J. M. Bernhard Jr.

Looking at today’s stock price, maybe all of them. But I mean I think we do have $15, $16 thousand now in cash. There’s a significant amount of cash. And certainly as was mentioned earlier we are going to deploy the cash in some manner. That would be a huge amount for this corporation to maintain.

Andrew Root - Alkeon Capital Management

Is there a level that has been identified for the board as sort of a minimum, comfortable operating level with the nuclear projects coming on above which you might be a little more flexible?

J. M. Bernhard Jr.

You know I think that’s a target that moves based on availability in the financial community. It’s, you know, three years ago it’s one number. Maybe today it’s a different number. Maybe last year in October it was still a different number.

Brian Ferraioli

And also a lot of it depends on what’s in the backlog as well at any point in time. So if you have a higher risk or a lower risk. You know it does move around.

J. M. Bernhard Jr.

Okay. And I don’t think there’s any more questions. Appreciate the attendance and we’ll look forward to addressing the next conference at the year end. Thank you.

Brian Ferraioli

Thank you everyone.

Operator

Thank you for participating in The Shaw Group’s third quarter 2009 earnings conference call. This concludes your conference for today. You may all disconnect at this time.

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