Shaw earnings plummet

• By GARY PERILLOUX
• Advocate business writer
• Published: Jul 10, 2009 - Page: 6B

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Baton Rouge-based Shaw Group, amid declining investment in petrochemical plant orders, saw quarterly earnings from its engineering and construction business drop more than 85 percent from a year ago to $7.2 million.

That’s down from $52 million for the three months ending May 2008, when The Shaw Group Inc. earned 62 cents per share. Earnings for the most recent quarter, released Thursday afternoon as financial markets closed, were 9 cents per share.

Its stock rose 5.6 percent, or $1.39, Thursday to close at $26.16.

Shaw saw its third-quarter revenue rise from $1.81 billion in 2008 to $1.85 billion this year, a gain of about 2 percent. And the company’s cash balance reached a record $1.3 billion as Shaw approaches the end of its fiscal year in August.

Company executives said softening demand for its petrochemical design, fabrication and building skills were not responsible for most of the earnings decline. Rather, an ongoing investment in its nuclear construction partner, Westinghouse Electric Co., accounted for most of the fall in recorded profits.

Shaw owns 20 percent of Westinghouse, which provides the reactor technology and design for Shaw nuclear power projects, while Toshiba Corp. owns 77 percent of Westinghouse stemming from a deal the companies struck in 2006. In that deal, Shaw borrowed money for its more than $1 billion investment and agreed to pay interest until 2013, when it can either pay off the bonds or sell its investment back to Toshiba.

But when Toshiba’s net worth fell below a predetermined threshold in the latest quarter, accounting changes were triggered. They converted long-term liabilities tied to the Westinghouse investment into non-cash charges in Shaw’s third quarter, about $40 million worth after taxes.
About half of that amount came from currency translation losses caused because Shaw’s Westinghouse bond investment is made in Japanese yen.

Shaw officials said the Westinghouse impact would have no bearing on its working relationship with its nuclear reactor partner. They also discounted the possibility that bondholders would force Shaw to sell back its Westinghouse ownership stake, something that became possible as a safety net when Toshiba’s net worth dipped below 800 billion yen in May.

Since that dip occurred, Toshiba raised an additional $3 billion in equity, said Brian Ferraioli, Shaw’s chief financial officer. That funding may move the Japanese corporation out of a zone in which bondholders, with a 75 percent vote, technically could force Shaw to sell back its ownership through a put option.

“We believe it’s highly unlikely that the bonds will be put,” Chairman Jim Bernhard told analysts and investors in a Thursday evening conference call. Shaw’s put option gives it more time to decide how it wants to handle its Westinghouse investment strategy.

The Shaw-Westinghouse collaboration is critical to Shaw’s future, with Shaw performing work on four nuclear reactors in China, beginning work on six more reactors in the Southeast U.S. and navigating the preliminary stages of eight more nuclear projects that have selected the Westinghouse reactor.

Shaw’s project backlog in the third quarter — a record $22.9 billion — grew by $8 billion from a year ago, largely a function of its mounting nuclear position.

Asked if Shaw had any share buyback or merger plans on the table because of its $1.3 billion cash balance, Bernhard was coy but indicated something may be afoot.