The Shaw Group Inc. is a leading global provider of technology, engineering, procurement, construction, maintenance, fabrication, manufacturing, consulting, remediation and facilities management services to a diverse client base that includes multinational and national oil companies and industrial corporations, regulated electric utilities, independent and merchant power producers, government agencies and equipment manufacturers. We have developed and acquired significant intellectual property, including downstream petrochemical technologies, induction pipe bending technology and environmental decontamination technologies. Through our investment in the Westinghouse Group, we have exclusive opportunities to bid on engineering, procurement and construction (EPC) services on future Westinghouse advanced passive AP1000tm nuclear power technology units to be built in the United States (U.S.) and other locations. Our proprietary olefin and refinery technologies, coupled with ethyl benzene, styrene, cumene and Bisphenol A technologies, allow us to offer clients integrated oil refinery and petrochemicals solutions. We believe our technologies provide a competitive advantage in the market place and will help us to compete on a longer-term basis with lower cost competitors from developing countries that are likely to emerge.
Shaw has significant experience in effectively managing subcontractors, craft labor and materials procurement associated with the construction of oil refineries, petrochemical plants, electric power generation plants and other industrial facilities. We have the versatility to function on any given project as the primary contractor, subcontractor or quality assurance construction manager. We provide technical and economic analysis to a global client base primarily in the fossil, nuclear power, energy and chemicals industries.
Our stock trades on the New York Stock Exchange (NYSE) under the ticker symbol “SHAW.” Prior to August 21, 2009, our stock traded on NYSE under the ticker symbol “SGR.” We are a Louisiana corporation with our executive offices located at 4171 Essen Lane, Baton Rouge, Louisiana 70809, and our telephone number is (225) 932-2500.
In 1987, J. M. Bernhard, Jr., our Chairman, President and Chief Executive Officer, and two colleagues, founded Shaw as a pipe fabrication shop in Baton Rouge, Louisiana. Since then we have significantly expanded our expertise and the breadth of our services through organic growth and strategic acquisitions.
In July 2000, we acquired certain assets of Stone & Webster, Inc. (Stone & Webster), a leading global provider of EPC, construction management and consulting services to the energy, chemical, nuclear, environmental and infrastructure industries. Combined with our existing pipe fabrication and construction capabilities, the Stone & Webster acquisition transformed Shaw into a vertically integrated EPC services company.
Our May 2002 acquisition of the assets of the IT Group, Inc. (IT Group) significantly increased our position in the environmental remediation and infrastructure markets, particularly in the U.S. government services sector. The IT Group acquisition further diversified our end market, client and contract mix and provided new opportunities to cross-sell services, such as environmental remediation services, to our existing EPC clients.
In October 2006, we acquired a 20% interest in two companies (Investment in Westinghouse) who, together with their subsidiaries, are collectively referred to as the Westinghouse Group (Westinghouse). Westinghouse provides advanced nuclear plant designs and equipment, fuel and a wide range of other products and services to the owners and operators of nuclear power plants. We believe our Investment in Westinghouse uniquely positions us in the domestic and international nuclear electric power markets through the commercial relationship agreement (Westinghouse CRA) which provides us certain exclusive opportunities to bid on projects where we would perform EPC services for future projects utilizing Westinghouse’s nuclear AP1000 technology. For an explanation of this investment, see Part I, Item 1 — Business — Investment in Westinghouse Segment, below.
In 2006, we formed Shaw Capital, Inc. (Shaw Capital), a wholly owned subsidiary. Shaw Capital leverages our global presence, technical and operational experience and transactional capabilities to identify and develop targeted energy and construction project investment opportunities for third party investors, which might result in management fee revenues. Shaw Capital may seek to arrange equity, mezzanine and debt investments in the energy, chemicals, environmental and infrastructure markets, which might present opportunities for us to participate with equity ownership in projects where we may be performing EPC or related services.
Our Business Segments
Because of the wide variety of Shaw’s technical services and our vertical integration, we believe we are uniquely positioned to provide seamless services to our clients throughout the lifespan of projects, from the concept, design, building and construction phases to the maintenance, operations, decommissioning and decontamination phases. Our segments strive to support and complement each other, allowing Shaw to rely on internal resources for much of our work. We believe our direct hire construction capabilities provide us with a competitive advantage in many of the markets we serve.
Fossil, Renewables & Nuclear Segment
Our Fossil, Renewables & Nuclear segment provides a range of services, including design, engineering, construction, procurement, technology and consulting services, primarily to the fossil, renewables and nuclear power generation industries.
Nuclear Power Generation. Safe and reliable operation of existing plants, carbon emissions concerns, climate change and domestic incentives under the Energy Policy Act of 2005 have prompted significant interest in new nuclear plant construction. As of May 2009, approximately 21.0% of the electric power generated in the U.S. was from nuclear power plants. We provide a wide range of technical services to meet the demands of this growing sector, including engineering, design, procurement, construction, and project management that support the domestic and international nuclear power markets. As part of the Westinghouse CRA, we have been awarded a technical services contract for four AP1000 nuclear power units in the People’s Republic of China (China) and three EPC contracts to build six domestic AP1000 units — two each for Georgia Power, South Carolina Electric & Gas and Progress Energy. These projects are among the first new nuclear power construction projects in the U.S. in more than 30 years. We recently reached several international milestones including supervising the placement of the first nuclear concrete and the first major structural module at the world’s first AP1000 nuclear power plant at the Sanmen nuclear power plant in China’s Zhejiang province. Domestically the Nuclear Energy Institute and the Nuclear Regulatory Commission (NRC) disclosed that as of July 2009 there are plans for developing of at least 33 new nuclear units, with the Westinghouse AP1000 design being considered for at least 14 of them. We believe that our support of existing U.S. utilities, combined with our Westinghouse CRA, could result in increased activity in the nuclear sector for us. Recognized in the power industry for improving the efficiency, capacity output and reliability of existing domestic nuclear plants (also known as power uprates), we have added more than 2,111 megawatts (MW) of new nuclear capacity to the U.S. electric power transmission grid since 1984. In addition, we serve as architect-engineer for two uranium enrichment facilities and provide engineering services in support of new nuclear units in South Korea and China. We anticipate long-term growth in the global nuclear power sector, driven in large part by the U.S., United Kingdom (U.K.), China, India, Brazil, the Czech Republic and Canada. While it is unclear what impact current economic conditions might have on the timing or financing of such projects, we expect that our existing base of nuclear services work, combined with our collaboration with Westinghouse and its majority owner Toshiba Corporation (Toshiba) on new nuclear plant work, should position us to capitalize on the long-term growth within this industry.
Please read our disclosures under “Liquidity” in Part II, Item 7 — Managements’ Discussion and Analysis of Financial Conditions and Results of Operations with respect to the circumstances in which our ownership in Westinghouse may be purchased by Toshiba. Information may also be found in Note 6 — Equity Method Investments and Variable Interest Entities and Note 8 — Debt and Revolving Lines of Credit contained in our consolidated financial statements beginning on page F-1.
Clean Coal-Fired Generation. The U.S. has significant coal reserves and at May 2009, approximately 45.4% of electric power currently generated in the U.S. comes from coal-fired power plants. Electric power companies in the U.S. have historically pursued construction of new coal-fired power plants, because, although coal-fired capacity is capital intensive to build, it generally has relatively lower operating costs as compared to other fossil fuels. Recently, however, uncertainty surrounding potential regulations targeting carbon emissions, as well as the global economic downturn and low natural gas prices, have caused the development of coal and other solid fuel-fired power plants to slow significantly. Nevertheless, we believe that coal will continue to be a significant component of future domestic energy generation, and we intend to continue positioning our resources to capture a significant market share of any new build or expansion projects.
Air Quality Control (AQC). Our AQC business includes domestic and international markets for flue gas desulfurization (FGD) retrofits, installation of mercury emission controls, fine-particle pollution control, carbon capture and selective catalytic reduction (SCR) processes used at existing coal-fired electric power plants. We believe we are the market leader for EPC FGD projects.
Existing U.S. government and state environmental AQC regulations have driven the need to retrofit existing coal-fired power plants with modern pollution-control equipment. In July 2008, the D.C. Circuit Court of Appeals issued an opinion in North Carolina v. EPA, vacating and remanding the Clean Air Interstate Rule (CAIR), a pollution reduction program designed to reduce power plant emissions through various air quality standards. As a result of the Court’s decision, the current CAIR standards remain in place until the Environmental Protection Agency (EPA) makes modifications. These rulings provide some temporary stability to the emission standards. Although the EPA is required to revise the current CAIR rule and the status of any new emissions legislation remains undecided, we anticipate that the revised CAIR rule and any future CAIR-related legislation will continue to impose stringent requirements on air emissions, which is expected to have a positive effect on future demand for our AQC services.
Mercury emission controls and the SCR process for nitrogen oxide emission controls and AQC services are in continued demand. We believe the domestic market for both these services could increase if the current federal and state government trends toward increased regulation continue, and we believe there will be select international markets for pursuing the SCR and fine particle control work.
Gas-Fired Generation. At May 2009, approximately 20.8% of the electric power generated in the U.S. was generated by natural gas-fired power plants. We continue to observe renewed interest in gas-fired electric generation as electric utilities and independent power producers look to diversify their options. In many states, recent initiatives to reduce carbon dioxide and other greenhouse gas emissions and immediate demand for additional electric power generation capacity seem to be stimulating renewed demand for gas-fired power plants. Gas-fired plants generally are less expensive to construct than coal-fired and nuclear power plants but tend to have comparatively higher and potentially more volatile operating costs. We expect power producers to increase capital spending on gas-fired power plants to take advantage of recent lower natural gas prices and the prospect that these prices may remain low for some time because of gas field development projects in the U.S. as well as potential liquefied natural gas (LNG) imports. Although the effect of current economic conditions on the timing or financing of such projects is unclear, we expect that gas-fired power plants will continue to be an important component in the development of long-term power generation in the U.S. and internationally. We believe our capabilities and expertise position us well to capitalize on opportunities in this market.
Renewable Energy Generation. At May 2009, approximately 4.2% of the electric power generated in the U.S. was from renewable sources such as biomass, geothermal, solar, wind and other energy sources. We are actively pursuing international and domestic projects using a variety of renewable energy technologies, including geothermal, biomass and concentrating solar. Although the current economic climate and uncertainty of climate-control legislation have slowed development of many of these projects, we believe renewable energy projects will likely be a significant part of the energy market in the near future.