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| SGR > SEC Filings for SGR > Form 10-Q on 10-Jul-2009 | All Recent SEC Filings |
10-Jul-2009
Quarterly Report
• Environmental & Infrastructure (E&I);
• Energy & Chemicals (E&C);
• Maintenance;
• Fabrication & Manufacturing (F&M);
• Investment in Westinghouse; and
• Corporate.
Fossil & Nuclear Segment
Our Fossil & Nuclear segment provides a range of project-related services,
including design, engineering, construction, procurement, technology and
consulting services, primarily to the global fossil and nuclear power generation
industries.
Nuclear. We provide engineering, procurement and construction (EPC) services
that support the U.S. and international markets with the AP1000 Westinghouse
units for the nuclear power industry. Recognized in the nuclear power industry
for improving the efficiency, output and reliability of existing domestic plants
(also known as uprates), we have added more than 2,250 megawatts (MW) of new
nuclear generation to the electric power transmission grid in the U.S. since
1984. In addition, we currently serve as architect-engineer for the National
Enrichment Facility and provide engineering services in support of new nuclear
units in South Korea and the People's Republic of China. We have been awarded
four AP1000 nuclear units in China and EPC contracts for six domestic AP1000
units, two each, for Georgia Power, South Carolina Electric & Gas and Progress
Energy. We anticipate long-term growth in the global nuclear power sector,
driven in large part by the U.S., United Kingdom, China, India, Brazil, and
Canada. Our support of existing U.S. utilities, combined with our 20% equity
investment in Westinghouse, is expected to result in increased levels of
activity in this sector for us. Safe and reliable operation of existing plants,
concerns about carbon emissions and climate change and incentives under the
Energy Policy Act of 2005 have prompted significant interest in new nuclear
construction in the U.S. According to the Nuclear Energy Institute and the
Nuclear Regulatory Commission, in the U.S. there are plans for at least 31 new
units under development as of May 2009, with the Westinghouse AP1000 design
being considered for at least 14 of them. 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 Toshiba on new plant work, should
position us to capitalize on the long-term growth within this industry.
Please read our disclosures under "Liquidity" later in this report with
respect to the circumstances in which our ownership in Westinghouse may be
purchased by Toshiba. Information may also be found in Notes 5 and 7 of our
financial statements included in this report.
Clean Coal-Fired Generation. During periods of wide fluctuations in oil and
natural gas prices, electric power companies in the U.S. typically pursue
construction of new coal-fired power plants utilizing advanced combustion and
emission control technologies. Coal-fired capacity is capital intensive to build
but has relatively lower operating costs when compared to other fossil fuels. We
recognize that future regulations targeting carbon emissions as well as current
market conditions are likely to slow future development of coal and other solid
fuel-fired power plants. Nevertheless, we believe we are well positioned to
capture a significant market share of future coal-fired power plants as they
develop either domestically or internationally.
Air Quality Control (AQC). Our AQC business includes domestic and selected
international markets for flue gas desulfurization (FGD) retrofits, installation
of mercury emission controls, projects related to controlling fine particle
pollution, carbon capture and selective catalytic reduction (SCR) processes used
at existing coal-fired power plants. We believe that we are the market leader
for EPC FGD projects.
Federal and State environmental regulations and related air quality concerns
have increased the need to retrofit existing coal-fired power plants with modern
pollution control equipment. On July 11, 2008, the D.C. Circuit Court of Appeals
(the Court) vacated the Clean Air Interstate Rule (CAIR) in its entirety in its
decision North Carolina v. EPA (Case No. 05-1244). On December 23, 2008, in
response to a petition filed by the Environmental Protection Agency (EPA), the
Court reversed its decision to vacate CAIR until a new rule is established. The
immediate effect of this action on the AQC market is positive because it
provides some temporary stability. While new emissions legislation remains
undecided, indications point toward increasingly stringent legislation, which is
expected to have a positive effect on future demand for AQC services.
There is also a market for installation of mercury emission controls at
existing coal-fired power plants. We have several EPC projects in execution that
were partially or fully driven by mercury control requirements. We believe the
domestic market for these services could increase in the future as more states
establish new rules or as federal regulations become more stringent.
The market for the selective catalytic reduction (SCR) process to reduce
nitrogen oxides continues to be fairly active, and we expect to continue
executing and pursuing SCR and particulate control work both domestically and in
select international markets.
Gas-Fired Generation. We continue to observe renewed interest in gas-fired
generation as electric utilities and independent power producers look to
diversify their generation options and take advantage of reduced natural gas
prices. Recent initiatives in many states to reduce emissions of carbon dioxide
and other "greenhouse gases," and utilities' desire to fill demand for
additional power prior to new nuclear power plants being completed, are also
stimulating renewed demand for gas-fired power plants. Gas-fired plants are less
expensive to construct than coal-fired and nuclear plants but tend to have
comparatively higher and potentially more volatile operating costs. While it is
unclear what the impact of current economic conditions might have on the timing
or financing of such projects, we expect that gas-fired power plants will
continue to be an important component of long-term power generation development
in the U.S. and internationally, and we believe our capabilities and expertise
position us well to capitalize on opportunities in this market.
Renewable Energy. We are also actively pursuing projects using a variety of
renewable energy technologies, including geothermal, biomass and concentrating
solar, both domestically and internationally.
E&I Segment
The E&I segment provides integrated engineering, design and construction,
regulatory, scientific and program management services for government and
private-sector clients worldwide. E&I also designs and executes remediation
solutions including the identification of contaminants in soil, air and water.
Our team of professionals is strategically located throughout the U.S. and
abroad to provide innovative solutions to complex environmental and
infrastructure challenges. We also provide project and facilities management and
related logistics support for non-environmental construction, emergency response
and watershed restoration. Infrastructure services include program management,
construction management and operations and maintenance (O&M) solutions to
support and enhance domestic and global land, water and air transportation
systems. We believe we are well positioned to capture opportunities generated by
the American Recovery and Reinvestment Act (ARRA) recently passed by the U.S.
Congress.
Federal Markets. Our core services include design and construction,
environmental restoration, regulatory compliance, facilities management and
emergency response services to U.S. government agencies, such as the Department
of Energy (DOE), the U.S. Army Corps of Engineers (USACE), the Department of
Defense (DOD), the EPA and the Federal Emergency Management Agency (FEMA).
Environmental restoration activities are centered on engineering and
construction services to support customer compliance with the requirements of
the Comprehensive Environmental Response, Compensation and Liability Act and the
Resource Conservation and Recovery Act. Additionally, we provide regulatory
compliance support for the requirements of the Clean Water Act, Clean Air Act
and Toxic Substances Control Act. For the DOE, we are currently working at
several former nuclear weapons sites including Savannah River, South Carolina,
where we are executing the mixed oxide project (MOX), providing engineering,
construction and construction management services for a facility that will
produce fuel rods for nuclear power plants. The E&I segment also has contracts
with the DOE to develop the Next Generation Nuclear Plant and the Global Nuclear
Energy Program as a conceptual design engineering service provider.
For the DOD, we continue to execute design-build efforts associated with the
Inner Harbor Navigation Canal Hurricane Protection project in Louisiana, and we
are involved in projects at several Superfund sites and Formerly Utilized Sites
Remedial Action Program (FUSRAP) sites managed by the USACE. For the U.S. Army,
we are working on the Army's chemical demilitarization program at several sites.
Our Mission Support and Facilities Management business provides integrated
planning and O&M services to federal customers. These services traditionally
include operating logistics facilities and equipment, providing public works
maintenance services, operating large utilities systems, managing engineering
organizations, supervising construction and maintaining public safety services,
including police, fire and emergency services. Our customers include the DOE,
the National Aeronautics and Space Administration, the U.S. Army and the U.S.
Navy.
We foresee that a significant portion of future DOD and DOE environmental
expenditures will continue to be directed to cleaning up domestic and
international military bases and to restoring former nuclear weapons facilities.
The DOD has determined that there is a need to ensure that the hazardous wastes
present at these sites, often located near population centers, do not pose a
threat to the surrounding population. We believe that we are well-positioned to
assist the DOD with decontamination and remediation activities at
these sites. We are pursuing opportunities to expand funding under current DOD
contracts, where ARRA funding will be dedicated to shovel-ready projects.
Similarly, the DOE has long recognized the need to stabilize and safely store
nuclear weapons materials and to remediate areas contaminated with hazardous and
radioactive waste, and we believe that we are well positioned to assist DOE with
these efforts and to capitalize on current opportunities resulting from ARRA
funding. ARRA funds have already been earmarked for work at several project
sites currently under contract with the DOE and we are focused on other
significant proposals for DOE projects to be funded by ARRA appropriations.
Commercial, State and Local Markets. Our core services to these markets
include environmental consulting, engineering, construction management and O&M
services to private-sector and state and local government customers. Full
service environmental capabilities include site selection, permitting,
design-build, decontamination, demolition, remediation and redevelopment. We
provide complete life cycle solid waste management services with capabilities
that range from site investigation through landfill design and construction to
post-closure O&M or site redevelopment. We also provide sustainability services
on a national basis. We assist commercial clients in defining what
sustainability means to them and in designing and developing operational
concepts to integrate sustainability into their businesses.
Coastal and Natural Resource Restoration. We have performed wetland
construction, mitigation, restoration and related work in the Everglades, the
Chesapeake Bay area and other areas throughout the U.S. New opportunities for
these types of services are present in both the governmental and commercial
markets. The Coastal Wetlands Planning Protection and Restoration Act provides
federal funds to conserve, restore and create coastal wetlands and barrier
islands, and we believe our E&I segment is positioned to participate in wetlands
and coastal restoration work in Louisiana and other locations throughout the
U.S.
Transportation and General Infrastructure. We believe opportunities for our
infrastructure-related services will continue with our state and local clients,
stimulated by the need for restoration of aging transportation, water,
wastewater and other infrastructure systems and by funding available to state
and local jurisdictions as a result of ARRA funding. By leveraging our
capabilities across several business segments, we believe that we can
participate in large scale and localized infrastructure projects by partnering
with government agencies and with private entities for design and build services
to meet our clients' needs arising from aging infrastructure, congestion and
expansion requirements.
Ports and Marine Facilities. We continue to pursue opportunities in maritime
engineering and design services, including navigation, sediment management, port
and waterway development, coastal engineering, environmental services, shoreline
protection and marine security capabilities. Our portfolio includes capabilities
for services to government and commercial port and marine facility clients
offering a full range of infrastructure planning services, design, engineering
and project management services to our domestic and international maritime
clients.
E&C Segment
Our E&C segment provides a range of project related services, including
design, engineering, construction, procurement, technology and consulting
services, primarily to the oil and gas, refinery, petrochemical and chemical
industries. Volatility to our business is possible in the short-to-medium term
as a result of the global economic downturn. To the extent our clients' markets
are impacted by the current economic conditions, we could expect a negative
impact on E&C segment's services. In the long-term, as the global economy
recovers, we expect expenditures by major oil and petrochemical customers to
continue.
Chemicals. During fiscal year 2008, demand in the chemical industry was
strong, fueled by the growth in the economies of China and India, as well as the
rising standard of living in other developing economies. In the medium-term, we
expect the number of new petrochemical projects to flatten as depressed global
economic conditions persist and as credit has tightened in many financial
markets. We expect Middle Eastern customers to continue to focus on long-term
capacity plans and investments as long-term fundamentals appear to remain solid.
Middle Eastern projects, which are still in planning phases, may benefit from
decreasing commodity prices and low cost feedstock. In Asia, we believe the
demand for chemicals will remain robust, and investment by domestic and
international firms is expected to remain high, particularly in the Chinese
chemical industry.
We expect that major oil and petrochemical companies will integrate refining
and petrochemical facilities in order to improve their profits, providing
additional opportunities for us. In petrochemicals, we have extensive expertise
in the construction of ethylene plants, which convert gas and/or liquid
hydrocarbon feedstock into ethylene, and derivative facilities, which provide
the source of many higher value chemical products, including packaging, pipe,
polyester, antifreeze, electronics, tires and tubes. We also perform services
related to gas processing including propane dehydrogenation facilities, gas
treatment facilities and liquefied natural gas plants.
Refining. We believe that refiners are searching for new products that can be
produced from petroleum and are considering integration of those products into
petrochemical facilities. We believe the demand for our services in the refining
industry has been driven by refiners' needs to process a broader spectrum of
heavier and traditionally less expensive crude oils and to produce a greater
number of products. Over the last two years, the refining sector has experienced
considerable investment, mainly in the Middle East and Asia. Throughout the
remainder of 2009, we expect refining expenditures to continue at a stable pace
in the Middle East. We believe refinery capacity constraints and the demand
stimulated by clean fuels and clean air legislation are contributing to
increasing opportunities, primarily in the U.S and also the Middle East. In
Europe, we expect diesel demand to drive investment, and in addition, we believe
conversion processes such as deep catalytic cracking (DCC) and catalytic
pyrolysis will increase due to the trend for refinery and petrochemical
integration. While the refining process is largely a commodity activity,
refinery configuration depends primarily on the grade of crude feedstock
available, desired mix of end-products and considerations of capital and
operating costs.
We believe that fluid catalytic cracking (FCC) remains a key refining
technology. We have an exclusive agreement with an international customer to
license DCC, a key FCC-derived technology that encourages the refiner's entry
into the petrochemical arena. We believe this technology is emerging because of
its ability to produce propylene, a base chemical that is in short supply and
for which demand is growing faster than that of ethylene.
Ethylene. Ethylene is an olefin, which is used as a building block for other
petrochemicals and polymers. It is produced by the steam cracking of hydrocarbon
feedstocks. Ethylene is used in the manufacture of polymers such as
polyethylene, polyester, polyvinyl chloride and polystyrene. Ethylene represents
one of our core technologies, and it is likely that the global economic slowdown
and financial market changes, coupled with the surplus ethylene supply in 2009,
may result in ethylene projects being delayed. Despite the anticipated slowing
of further investment, we believe additional projects are being planned in the
Middle East, where the need for project financing is not as pronounced as some
other areas of the world and is less likely to impact the implementation of
grassroots facilities. Further, we expect owners to focus on maximizing the
productivity of existing assets which could increase the number of
debottlenecking and revamp projects. We believe that these projects will provide
additional opportunities for us.
We believe ethylene production from petroleum derived naphtha is declining
due to the availability of alternative low-cost ethane feedstock in the Middle
East. This change impacts the economic viability of gas feed steam crackers in
North America where the natural gas prices are more volatile as a result of
commodity market trading conditions. We expect new facilities to favor primarily
gas feed crackers based on ethane extracted from natural gas. We estimate our
historic market share to be approximately 35% over the last 15 years. We are
aware of only four ethylene technology licensor competitors and believe we are
well positioned to compete for new opportunities in this market.
Maintenance Segment
Our Maintenance segment is a market leader, providing a full range of
integrated asset life cycle capabilities that compliment our power and process
industrial EPC services. We provide clients with reliability engineering, plant
engineering, turnaround maintenance, refueling outage maintenance, routine
maintenance, modifications, capital construction, off-site modularization,
offshore fabrication, support and specialty services. We perform services to
restore, rebuild, repair, renovate and modify industrial facilities, as well as
offer predictive and preventative maintenance. We offer comprehensive services
to clients in combinations that increase capacity, reduce expenditures and
optimize cost to enable the highest return on critical production assets within
their facilities. Maintenance segment services are provided at client work sites
located primarily in North America.
Nuclear Plant Maintenance and Modifications. There are currently 104
operating nuclear reactors in the U.S. requiring engineering, maintenance, and
modification services to support operations, plant refueling outages, extend
life/license, upgrade materials, increase capacity uprates and improve
performance. We provide system-wide maintenance and modification services to 36
of the 104 operating domestic nuclear reactors. We concentrate on complicated,
non-commodity projects in which our historical expertise and project management
skills add value.
In addition to supporting operations and improving performance at existing
commercial nuclear power plants, we believe we can further expand in plant
restarts, uprate-related modifications and new plant construction. We also
believe we can expand our in-plant support services.
Chemical Plant/Refinery Maintenance and Capital Construction. We have a
continuous presence in approximately 90 U.S. field locations serving alternative
energy, petrochemicals, specialty chemicals, oil and gas, manufacturing and
refining markets. We believe that specialty chemicals, clean fuel programs and
refining markets provide us with the best long-term growth opportunities.
Expansion of these markets has been enhanced by governmental regulations
supporting cleaner burning fuels and impending infrastructure and
stimulus programs. Our Maintenance segment also includes a capital construction
component serving existing chemicals and petrochemicals clients and which
includes an array of grassroots green-field projects. Our construction scope
includes constructability reviews, civil and concrete work, structural steel
erection, electrical and instrumentation, mechanical and piping system erection.
In addition to our varied spectrum of maintenance and construction work, we
continue executing a strong resume of substantial rebuild projects. We
successfully mobilize resources under demanding client deadlines to rebuild and
restore facilities damaged by natural disasters or catastrophes. Our successful
project completions include major petrochemicals, nuclear power, natural gas
processing and refining facilities in the Gulf Coast region.
F&M Segment
Our F&M segment is among the largest worldwide suppliers of fabricated piping
systems. Demand for our F&M segment's products is typically driven by capital
projects in the electric power, chemical and refinery industries. Typically, we
contemporaneously invoice our clients when we purchase materials for our pipe,
steel and modular fabrication contracts. Our invoices generally do not include
extended payment terms nor do we offer significant rights of return. These
contracts typically represent the majority of the business volume of our F&M
segment. We maintain limited amounts of stock inventory primarily relating to
our manufacturing and distribution businesses.
Pipe Fabrication. We believe our expertise and proven capabilities to furnish
complete piping systems in a global market have positioned us among the largest
suppliers of fabricated piping systems for power generation facilities in the
U.S. We are also a leading supplier worldwide, serving both our other business
segments and third parties. Piping systems are normally a critical path item in
heavy industrial plants that convert raw or feedstock materials to products.
Piping system integration accounts for a significant portion of the total
man-hours associated with constructing power generation, chemical and other
processing facilities. We manufacture fully-integrated piping systems for heavy
industrial customers around the world.
We provide fabrication of complex piping systems from raw materials,
including carbon and stainless steel and other alloys, such as nickel, titanium
and aluminum. We fabricate pipe by cutting it to specified lengths, welding
fittings on the pipe and bending the pipe to precise customer specifications. We
currently operate pipe fabrication facilities in Louisiana, Arkansas, Oklahoma,
South Carolina, Utah, Mexico and Venezuela and through a joint venture in
Bahrain. Our South Carolina facility is authorized to fabricate piping for
nuclear energy plants and maintains a nuclear piping American Society of
Mechanical Engineers certification.
We believe our induction pipe bending technology is one of the most advanced,
sophisticated and efficient technologies available. We utilize this technology
and related equipment to bend pipe made of carbon steel and alloy items for
industrial, commercial and architectural applications. Pipe bending in a shop
can provide significant savings in labor, time and material costs when compared
to field fabrication performed in many industrialized countries. Pipe bending
also increases the product strength when compared to welding. Additionally, we
have commenced a robotics program that we believe may result in increased
productivity and quality levels. By utilizing robotics, as well as new welding
processes and production technology, we are able to provide our customers a
complete range of fabrication services.
Structural Steel Fabrication. We produce custom fabricated steel components
and structures used in the architectural and industrial markets. These steel
fabrications are used for supporting piping and equipment in buildings, chemical
plants, refineries and power generation facilities. Our fabrication lines
utilize standard mill produced steel shapes that are cut, drilled, punched and
then welded into the configurations and to the exact specifications required by
our customers. We have fabrication facilities operating in Louisiana, as well as
our newest location in Mexico, which offers the latest in advanced technology
and efficiency for structural steel fabrication.
Manufacturing and Distribution. We operate manufacturing facilities in
Louisiana and New Jersey where products are ultimately sold to operating plants
and engineering and construction firms, as well as to our other business
segments. Manufacturing our own pipe fittings and maintaining inventories of
fittings and pipe enables us to realize greater efficiencies in the purchase of
raw materials, reduces overall lead times and lowers total costs. We operate
distribution centers in Louisiana, Oklahoma, Texas, Georgia and New Jersey that
distribute our products and products manufactured by third parties.
Module Fabrication Facility. We are in the process of constructing a major
. . .
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