Fluor Corp (FLR) 2006 Q3 法說會逐字稿

Good morning, and welcome to Fluor Corporation's third quarter conference call. This call is being recorded. At this time all participants are in a listen-only mode. A question-and-answer session will follow management's presentation. There will be a replay of today's conference call beginning at 1 PM Eastern time today, accessible on Fluor's website at www.Fluor.com. A telephone replay will also be available through 11:59 PM Eastern time on November 13, 2006, by calling 888-203-11 12. The access code of 3148837 will be required.

At this time for opening remarks I would like to turn the call over to Ken Lockwood, Vice President of Corporate Finance and Investor Relations. Please go ahead, Mr. Lockwood.

Thank you, operator. Good morning, everyone. With us today are Alan Boeckmann, Fluor's Chairman and CEO, and Mike Steuert, Fluor's Chief Financial Officer.

Our earnings announcement and Form 10-Q were released yesterday after the market close. Before getting started, I would like to read our cautionary note regarding forward-looking statements.

In discussing certain subjects, we will be making forward looking statements regarding projected earnings, market outlook, new awards, fixed fee projects, claim recoveries and other statements regarding the intent, belief or expectations of Fluor and its management. These forward-looking statements reflect our current analysis of existing trends and information, and there is inherent risk that actual results and experience could differ materially. These differences could arise from any number of factors. Information concerning factors that could cause actual results to differ materially from the information that we will give you is available in our Form 10-Q filed March 1, 2006, and the Form 10-Q filed on May 8 of 2006, both of which are available online or upon request.

The information in this conference call related to projections or other forward-looking statements maybe relied upon subject to this cautionary note as of the date of this call. The Company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events, or any other reason.

Now with that, I'd like to turn the call over to Alan Boeckmann, Fluor's Chairman and CEO.

Thanks, Ken. Good morning, ladies and gentlemen. Thank you, first of all, for joining us on the call today. This morning we'd like to review our third quarter with you. In addition, give you an update on our current business outlook and discuss our guidance, both for the remainder of 2006 and for 2007.

I would like to first point out that excluding the fixed-price charges that we pre-announced two weeks ago, Fluor's underlying results were very strong, particularly from Oil and Gas, Industrial and Infrastructure, and Global Services. We also generated substantial positive cash flow from operations in that quarter.

We had another strong quarter of awards with $4.8 billion, which is the second largest quarterly booking in our history, only second to last quarter's record $5.8 billion. This drove our backlog up another 10% sequentially over the last quarter, up to $19.8 billion, which is an all-time record level for our Company. We continue to see significant opportunity for continued growth in all of our business groups with the exception of government.

Our Oil and Gas and Power segments are particularly well suited to capitalize on significant growing capital spending trends. I'm going to talk a bit about our challenges in the government unit.

But first of all, revenues in the third quarter were $3.4 billion, essentially level with the third quarter of 2005. In that quarterly we included a $294 million from the resolution of claims on the Hamaca project. Due to fixed-price contract charges discussed in our press release and conference call two weeks ago, Fluor's reported net earnings for the quarter were $27 million or $0.31 per share as compared to $131 million or $1.51 per share for the same period last year.

As a reminder, net earnings for third quarter of '05 included $74 million in positive pretax outcomes on Hamaca and the Caribbean hotel project, and another gain from the sale of real estate. Our operating profits in Q3 were $47 million after recognizing loss provisions of $168 million on fixed-price projects.

Strong operating profit contributions from Oil and Gas and Global Services were substantially offset by estimated cost overruns on a number of fixed-price projects in the government group and to a lesser extent, in industrial and infrastructure.

The government segment recorded provisions of $133 million related to certain United States Embassy projects and a $13 million loss on a construction project at the Bagram Air Force base in Afghanistan. In addition, the I&I segment recognized a provision of $22 million relating to a highway project in California.

Now while we are disappointed certainly with the charges taken on these fixed-price projects, we are committed to completing these projects within the current estimates.

As I look at each segment, let me start with Oil and Gas. That group represents over one-third of the Company's year-to-date revenue and continues to perform very well. Operating profit for Oil and Gas increased to $87 million compared to $84 million a year ago, and that included earnings of $31 million from the resolution of the Hamaca project claim. Excluding this claim, that was settled in 2005, the underlying finance performance of the Oil and Gas segment was up substantially over last year. Our operating margins rose to 6.3%, up from 5.8% a year ago and that, again, reflects the favorable impact of successful project completions and an increase in the level of higher margin, front-end engineering and design work.

Operating profits in industrial and infrastructure were $22 million and that included a loss provision of $22 million relating to the highway project that I mentioned earlier in California. This compares with $44 million in operating profit in the third quarter a year ago, and that was positively impacted by a $33 million reversal of charges relating to a resort hotel project in the Caribbean.

Operating margins were 2.7% in the third quarter of '06, and that was up from 2.4% in the second quarter and compared with 5.1% in the third quarter of '05.

As I look at the underlying performance of this group, I am very encouraged by the positive momentum that we have in mining, in infrastructure, and life sciences. Our Global Services segment continues to post very solid results and while we consider this unit one of our more stable, non-cyclical business, they have been posting very strong growth. Revenue from Global Services grew 32% to $484 million, up from $368 million a year ago.

Our operating profit in that group increased 19% to $32 million, up from $27 million in 2005. These higher profits were driven by improvements across the segment's various business lines and they include the impact from work on hurricane relief activities. Operating margins there were 6.5%, down from 7.2% in the year-ago period. Margins were impacted by a higher level of overhead investment in construction and procurement initiatives that are expected to deliver benefits across all business lines.

Our Power segment reported a 55% increase in revenue to $147 million, up from $95 million in the third quarter of last year. For the quarter, the Power segment reported an operating profit of $2 million, down from $6 million a year ago. The profit margin was 1.4% compared to 6.2% in the prior year. Current operating profit and margin levels reflect activity on projects that are in the early states along with an overhead investment that positions us for growth.

While the profits a year ago reflect a contribution of some close-outs -- some very successful close-outs of projects. Our first coal-fired project for TXU is progressing and we hope to receive full notice to proceed in 2007. There are a number of prospects for both new coal-fired facilities as well as scrubbers, but we are being very selective in which projects we choose to pursue. We expect to be successful in winning our fair share of projects that meet our risk criteria in this very attractive growth market.

The Government segment reported third quarter revenues of $550 million, down 16% from $651 million a year ago. The segment reported an operating loss of $95 million and that compares with an operating profit of $21 million a year ago. The strong performance from the balance of the government business including Hanford, Fernald and FEMA, was in fact more than offset by the provisions of $133 million relating to the Embassy projects and the mentioned $13 million charge on a construction project in Afghanistan.

Ladies and gentlemen, as you know, we have experienced difficulty in our Government group on these Embassy projects. But just to recap, let me give you a few very important points. First, all Embassy projects are essentially complete except for Haiti.

Secondly, our third quarter charges that we pre-announced two weeks ago reflect our best estimates in terms of labor availability, productivity, and security. Also, we are pursuing potential claim recoveries from the Department of State.

Mike and I are receiving continuous updates on these projects and plan to make additional site visits until they are completed. And while we have taken significant remedial action, including the replacement of three levels of management in the Embassy chain of command -- we have done that with seasoned Fluor veterans -- we do believe that we have the financial impact of the embassies behind us and we have exited that market. And finally, I've instructed the Government group to refrain from bidding any new fixed-price projects.

So with that, let me turn the call over to Mike Steuert to review additional details of our operating performance including new awards and other financial data. Mike?

Thank you, Alan, and good morning. Since most of you have reviewed our business results in yesterday's press release, I will again focus my remarks on providing additional detail on the third quarter new awards and backlog for each segment, as well as a few corporate financial items.

As Alan just mentioned, our total backlog now stands at $19.8 billion. While we had very strong orders -- Oil and Gas -- we also had a healthy level of new bookings across the rest of our diversified portfolio. The percentage of fixed-price work in backlog declined to 28% and our work outside the United States was at 66%.

Now let's go through the highlights of each of our segments. Starting with our largest business group, Oil and Gas, new awards for $2.9 billion for the quarter, up 11% over the second quarter. The largest award in the quarter at approximately $2 billion was a cost-plus contract for the engineering procurement and construction management of the utilities and offsites for a new petrochemical plant in Saudi Arabia.

This is another example of where we successfully moved from doing the front-end engineering and design to project management and then on to the EPCM of utilities and offsites.

The other major project award above $100 million was for the front-end engineering and design for a major refinery expansion program in the United States. The balance of the new awards were for various upstream, downstream petrochemical projects concentrated in the U.S., Canada, Europe, and the Middle East. We continue to receive a steady flow of front-end assignments that have the potential to convert to full EPCM scope in the future.

Total backlog for the Oil and Gas segment increased to $10.1 billion, up 21% from last quarter and up 91% from a year ago. Oil and Gas segment now represents about 50% of Fluor's total backlog. In spite of lower energy prices over the last several months, project opportunities remain robust for the foreseeable future as our clients continue to reinvest capital to meet strong global energy demand.

After the third quarter closed, we received an award for program management, construction management and three major engineering packages for BP's $3 billion Canadian crude refinery upgrade facility in Whiting, Indiana. Our initial $300 million award will be booked in the fourth quarter.

Turning now to our Industrial Infrastructure segment -- new awards were $743 million, up from $690 million a year ago. New awards in the third quarter were heavily weighted towards our Mining segment with the two life sciences and infrastructure projects.

The largest award in the quarter was for the engineering, procurement and construction management of copper mine processing facilities in Arizona. There were two other mining projects awarded in the quarter, including the design and construction of new processing facilities at a gold mine in Northern Peru, and for new silver ore processing and related infrastructure at a plant in Bolivia.

Backlog for the I&I segment remains strong at $5.3 billion, similar to the second quarter, and up from $4 billion a year ago.

In October, the Fluor-Transurban consortium entered into an agreement with the Virginia Department of Transportation to start preliminary engineering work on I-95/395, High Occupancy Vehicle lane project. The full amount of this project will be placed in the backlog once federal environmental approvals have been obtained and financial feasibility has been established. It should occur toward the middle of 2007.

Moving on to our Government segment, the Group had new awards of $731 million, down from $1.1 billion a year ago when we booked the final year of the Fernald project. The largest award for the quarter was for the annual funding of approximately $500 million for the nuclear remediation work for the Department of Energy at our Hanford site. Fluor successfully secured a two-year contract extension at Hanford, which will carry us through September of 2008.

The quarter included approximately $121 million in contract awards from FEMA for individual systems relating to providing temporary housing in Louisiana. We also booked a contract valued at approximately $35 million related to emergency planning and response efforts. We expect that this will be the last large FEMA contract for the Katrina-related work. I would remind everyone that we have been awarded a two-year FEMA contract for emergency assistance in 2006 and continuing into 2007.

The unit also booked several Operations and Maintenance contracts through its DEL-JEN unit, and added additional task orders for continuous response work in Iraq and Afghanistan under the [CTAC2] contract. Backlog at the end of the third quarter was $928 million, up from $699 million last quarter.

In our Global Services Operations and Maintenance group we recorded $221 million of new awards in the quarter, which was down from $510 million a year ago when we booked a long-term maintenance contract for a major new customer. Operations and Maintenance awards were mainly in the oil, power, and industrial markets.

The largest award this quarter was for the extension of a maintenance contract with a chemical company in Tennessee. We also booked a number of maintenance projects for industrial and power customers.

Backlog declined 7% to $2.4 billion, down from $2.5 billion at the end of last quarter. The Power group had two awards during the quarter. The first award was for a flue gas desulfurization project at a coal-fired power plant in Kentucky. Fluor will be providing full EPC services for the project. During the quarter the Power group also received additional scope on a coal-fired power plant it is constructing for a new mining company in Nevada.

I also want to update you on the status of TXU's Oak Grove project. Last quarter we booked an initial award for the two 800 megawatt coal-fired units at Oak Grove. We are proceeding with this work on this contract; we will book the balance of the EPC amount when we receive full notice to proceed after TXU has received the air permits for the site.

Backlog for the Power segment remained flat with the prior period at $1.1 billion. We anticipate that backlog in the Power group will grow in 2007 as our clients release work from new coal-fired power plants and additional scrubber projects are awarded.

Now moving on to corporate items. G&A for the quarter was $32.6 million, which compares to $25.1 million a year ago and $54.3 million last quarter. During the quarter we had $3.6 million in expenses due to the adoption of FAS 123R, and $3.1 million related to the relocation of our corporate headquarters from California to Texas. We expect to have approximately $2 million of additional costs in the fourth quarter related to the move.

The reduction of expenses this quarter were also the result of reduced incentive compensation cost as a result of lower operating profit expectations for the year. As a reminder, the year-ago period included a $10.4 million gain on a real estate transaction.

We had net interest expense of $137,000 for the quarter compared with a $1.1 million net income a year ago, primarily due to interest related to the consolidation of non-recourse project finance debt in 2006. The tax rate for the quarter benefited from several items, including the utilization of net operating loss and capital loss carryforwards. These adjustments brought the year-to-date tax rate to about 31%. As a result, the income tax line in the current quarter reflected a $13 million benefit compared with a $26 million income tax expense a year ago.

Now let's shift to the balance sheet and discuss cash and other financial items. Consolidated cash balance at the end of September was $895 million, up substantially from $585 million last quarter. Operations generated $430 million in cash during the quarter, including the collection of substantial receivables from FEMA. Approximately $100 million of these proceeds were used to pay down our commercial paper balance to zero.

Our debt to total capital ratio for the third quarter was 22%, down from 24% last quarter. Excluding the impact of the non-recourse project finance debt of $116 million, our debt to total capital ratio goes from 22% down to 17%.

During the quarter, to support the growth in the business that is ahead of us, we expanded our credit facility from $800 million to $1.5 billion. Capital expenditures for the nine months [ended] September 30 were $188 million, which compares to $145 million a year ago. Expenditures to date include $36 million related to our new headquarters. We also continued to invest in construction equipment to support our operations globally. We expect capital expenditures to approach $240 million for the full year. Depreciation in the quarter was $30 million, and this was $86 million for the nine months.

Before we open the call for questions, I'd like to give you some detail regarding our outlook for the remainder of 2006 and for 2007.

Considering the third quarter results and the current outlook for the overall Fluor portfolio, earnings guidance for 2006 remains at the recently revised range of $2.40 to $2.60 per share. Looking ahead to 2007, earnings are estimated to be in the range of $3.50 to $3.80 per share, consistent with initial guidance for 2007 that we released on October 24.

This range reflects the positive outlook in all segments except Government, which is forecasting to have substantially lower revenue and operating profit, especially from Fernald, FEMA and Iraq programs.

While we do not provide specific guidance on new awards in backlog, I can say that we do expect 2007 to be at least as strong as 2006, and believe the backlog will continue to grow to new record levels.

With that, Alan and I will be happy to respond to questions.

(OPERATOR INSTRUCTIONS). Michael Dudas, Bear, Stearns.

I'd like you to touch a little bit on Global Services. It doesn't get as much visibility amongst the other business units, but seems that the margins and growth have been quite good. What can we foresee and what is the mix of that business going forward? And relative to sustainability of margins and growth on the top line -- even looking more on the equipment side -- is that a big driver given some of the big projects you guys are looking at internally?

As you know, Global Services is a collection of businesses that have sprung from our core competencies that were used to support all the rest of our portfolio. In each case, we have managed that group to not just support Fluor Corporation, but to create a third party market in each of their offerings. They've done so extremely well. I would say particularly in the O&M side where we have a tremendous amount of site maintenance, small capital and turnaround work.

But with the rising backlog of Fluor Corporation and the wave of construction that is going to be in our backlog on and through '07, '08, and '09, the support that the Company will get, particularly in AMECO, which is the Construction, Equipment and Tools group; in TRS, which is our temporary agency personnel arm; and in our procurement and construction organization within Global Services, they are clearly going to be -- continue to rise with the tide and be proactive in supporting our groups and getting the business benefit from that.

So they have done a great job of expanding their market and not just relying on Fluor. But they certainly do get the benefit and the lift from working directly with our units.

And my follow-up question is, Alan, you mentioned in your prepared remarks about the power market and the progress on TXU and your selectivity. Is the function of the selectivity technology guarantees? Are you looking at where the permits are more likely to get awarded relative to not? Is it the type of customer that you have dealt with in the past? What are some of the things that is going to get your fair share of this -- it seems like a pretty burgeoning market. I guess how different is that from what you got in the market share back in the combined cycle gas-fired power plant days?

I think our market share -- let me start with the last part of your question -- will be commensurate with what we've got in the gas-fired side. And our selectivity revolves around a number of factors. When you look at today's challenges, when we go on any job right now in this market, we are pretty much in a sole source negotiating position. But we are working directly with our client cooperatively to define the risks, define the costs and get a lot of those behind us before we enter into a joint agreement; therefore, mitigating the risk for both parties.

In addition, we are fairly selective, even though these jobs occur all over the U.S., there are some construction labor markets that are more risky than others. And so we are very selective with respect to the geography that we are operating in, and if we have a good client that is putting a plant in an area that's got that sort of substantial risk, we will work with them to come up with ways of mitigating that risk and not have it necessarily directly in the lump sum.

So there is just a whole host of things that we are doing in that market collectively with our clients, to reduce the risk and be more selective.

Is there any technology issues?

There are some. But the technology issues today we think are pretty straightforward, particularly in coal. There is some questions out there about future restrictions on emissions. But the plants that are getting permitted right now are not necessarily going to be subject to those.

Barry Bannister, Stifel Nicolaus.

The guidance is a little perplexing in the fourth quarter. If we look at where the [mean] of the analysts who had bothered to update their estimates are, that would be $0.86. We add the year-to-date $2.05, that's around $2.91, and you are saying $2.40 to $2.60 -- seems a little light. Are you anticipating some further charges, maybe on the freeways? Or are you just being conservative?

First of all, let me be really specific. We are not expecting any further charges on any of the projects that we just mentioned or on any others, for that matter.

The effect in the fourth quarter is a combination of two very specific factors. Number one, we will have significantly lower earnings on just a normal run rate basis in the Government group in '04 -- in the fourth quarter, sorry. In addition to that, we will be experiencing higher than normal G&A costs, which are fairly typical in our fourth quarter to represent things that we do fund at the end of the quarter. And so the combination of those is going to be less. But I do believe as we look at that range, I will admit to it being conservative and admit the fact that we're probably going to be in the upper part of that.

And when I look at your cash, could you give me three little data points on the cash -- one, what is the international versus domestic? Two, are you anticipating a big ramp in working capital or CapEx in '07, and you expanded your revolver because of that and you are holding more cash because of that? And three, would you entertain any buybacks or are you just not willing to part with the cash?

Let me answer those. In terms of the mix of our cash, we are roughly two-thirds international and one-third domestic currently, ballpark. We do expect working capital requirements to ramp up in '07 as our business grows and as we burn substantial growth in backlog that we have experienced.

As you look at the increase in our credit line, to $1.5 billion, that was for several reasons. Probably the biggest wish was to give us additional letter of credit capacity, which we used to support the business as opposed to just borrowing debt capacity. That's a multi-purpose line and we will certainly utilize more on the LC side as opposed to the cash side.

We do have over 4 million shares left in our buyback program. We continue to evaluate buybacks quite frequently and we will certainly look at that in 2007 as you progress through the year and as we see what kind of cash balances that we develop domestically.

And then just a housekeeping issue. I'm trying to understand this margin -- Oil and Gas did great. Obviously there was some feed in there that expanded it. But when I take Hamaca out of the profits, $31 million out, and I take Hamaca out of the revenues, $294 million a year ago, I am coming up with a 4.4 margin comparison. I believe in your write-up you said 5.8. Am I missing something?

The 5.8 did have Hamaca in it.

So if I take out Hamaca, you actually did a 6.3 versus 4.4 -- and that's a pretty phenomenal margin.

We had improvement in performance on margin year-to-year without a doubt. This quarter did have some other positive effects of some completed projects and some front-end work. But absolutely, we are improving the margins in that group with the -- not only have we added to backlog on a revenue bases, we've added to backlog in terms of a healthier margin in that backlog, as well.

I'm not asking for guidance in '08, but if you look at your Oil and Gas margin, which is obviously a linchpin in the quarter, is there anything that prevents it from getting to a 6% full year run rate? Maybe by '08, even if not '07 as your volume ramps up and you adjust to the higher levels?

Well, I would say -- I can understand coming to that conclusion and it could be. The challenge we're going to have is as we move on through these -- we've been booking some rather large awards and we'll continue to do that. As we do be the feed part of those and the front engineering, we tend to have higher margins in that portion of the work than we do in the construction side.

So as these projects really get fully loaded into their construction part of their cycle we will see a little bit of a downturn in the margins on that, although against even a bigger revenue base. So margins may come down just a bit as we get into the construction side of these projects. But I think our absolute EPS effect is going to continue to go up with this backlog.

Sanjay Shrestha, First Albany.

It's actually Graham Madison in for Sanjay. Just looking at the power side, affecting your [backlog] (indiscernible) in 2007 and probably into '08 as well, how do you see the margins moving with that? Would that be more backloaded towards the second half of the year?

Well, first of all I guess, let me even go back to Mike's question at the very beginning. We take a very conservative approach to booking, power projects in particular. But in any lump sum project. We will not book that project until we have permits and we have full notice to proceed. When we do that, we will book the full effect of that project. But the fact that it is lump sum turnkey, we will take reserves against the completion of that project until we have all these risks mitigated. So the takeup on a percent complete basis will accelerate at the very end up that project, based on it being a successful project. So the first 80% of that project will be on a lower ratio basis, just because of that effect.

And then just moving back to Global Services, I apologize if I missed this, but in terms of the margin outlook going forward, will we see these probably recovering towards fourth quarter and into 2007? Or would 6.5 be the run rate going forward?

Your question is for Global Services?

Yes.

I think what we've seen in 2006 is a pretty good run rate going forward.

Yes, I would agree.

Richard Rossi, Ferris, Baker Watts.

You mentioned that you are obviously not bidding on government work at a fixed price basis any more, which is understandable. How much of the current backlog is fixed-price in the Government area?

Well, if I excluded embassies --

Which are almost done.

Which are almost done -- it is actually quite small. And the projects themselves that make it up are quite small, they're task order type things. So I'm not aware of anything that's of any significance at all beyond embassies. We quit bidding embassies in early '05, and the work that we've taken on under our contingency ops contracts, there are a few of them that are smaller lump sums, but they are quite small.

And looking out at your '07 outlook, how much of the business that is generating that outlook is already in the backlog?

Well, we don't divulge our stretch number each year, but I will tell you this --

Is it normal at this point? If I recall, it's pretty normal at this point of year, 60%?

We normally will range between 40% and 60% in a given year and depending on where the market is. This year we probably have a line of sight on what we have to close on much better than we've ever had in the past.

Right. Some of that is a mix shift. I think we have a better line of sight on Oil and Gas. And most of our other businesses -- in Government we probably have less line of sight --

Government is a bigger stretch --

Due to the mix change because we've moved to more of a book and burn type business as opposed to the long-term Fernald and Hanford contracts.

But in the government area you're expecting so much less that it's far less of a risk in terms of the outlook.

Yes, the Government group has done a great job in getting position for a lot of these contingency operations business. But you can't forecast that. That's the challenge.

And one final thing. Those Oil and Gas margins are obviously impressive and one would expect that backlog contains higher margins, but as this work has become more segment ties between the front-end and then the EPC part of it. When we look at these numbers relative to history, and then a percentage of completion accounting-wise, is it that we're going to see -- I guess what I'm saying is historically you had a whole project, you were booking on a percentage of completion. The fact that the design work was up front at a higher margin had less of an impact on the margin you showed in Oil and Gas than it may now. I mean is that a correct way of looking at it?

That's true. What's occurred here over the last ten years or so is clients themselves working with us have gotten into a much more structured program that is really around front-end loading. They do a much better job now than a decade earlier in defining the project, making sure the risks are identified before we get into the full EPC. That's driven us, because the way the contracts come out and mirror that, to have a two-phase booking for these projects. Now that the front ends have gotten so significant.

The EPC will be on a lower margin basis. But the good news is it's on a much, much higher absolute --

There's no question that there should be a higher profit, just be profitability.

Jamie Cook, Credit Suisse.

Mike, first a question for you -- well, you and Alan. You commented on why your fourth quarter guidance -- and you mentioned that we are going to have higher SG&A or higher G&A, I'm sorry, in the fourth quarter. But is it still in the range of $190 million to $200 million which is the guidance you provided last quarter? For G&A? Even with the lower -- because you had the help in this quarter from the lower compensation expense, too.

Jamie, it is towards the bottom end of that range.

Towards the bottom end?

Yes, as we are looking for total year.

Well then, I guess my problem is even if we have seen the bottom end of that range and I assume the other reason why your fourth quarter is lower because you said government is going to be significantly lower -- if I assume the bottom end in that you don't earn anything in government services, they still can't get to your number for the fourth quarter. So I'm just wondering if there is anything else I'm missing or is this just blatant conservativism?

I don't think you are missing anything. I also don't think it's blatant conservativism. Ken and I would be happy to go through your model with you offline. But I'm not sure how you get to that conclusion.

And then my second question, Alan, can you just sort of comment -- there was a lot of news coming out of TXU yesterday. They made comments that I think they are going to add 16 to 23 gigawatts of new coal-fired generation. What are the implications for Fluor?

And then just longer-term, is there any reason why we shouldn't assume -- I guess when you look at this power cycle versus what we saw in the late '90s, 2000 -- is there any reason why we shouldn't be able to achieve margins in power similar to last cycle? Or giving your selectivity process, could we even achieve better margins?

I think we achieved very good margins in that last cycle. I would expect them to be commensurate on this cycle. There's just a few differences in this market, Jamie. The difference is, obviously, these projects are much larger. They will go over a longer period of time for the takeup. And they are much more dependent on a much more rigorous air permit cycle than what we've found in the gas-fired side.

So there's slower to come into backlog. There will be a longer takeup period. But the net effect when you take a look over the whole cycle, I think will be just as positive as that last one was.

And then anything -- just commenting on TXU's announcements yesterday with the 16 to 23 gigawatts of coal?

Well, they clearly are being very aggressive in this market and going forward. I think they really do have the benefit the way they're doing it of a first mover status, particularly when it comes to negotiating things like supplier contracts for boilers, for turbines, and doing it on a multi-project basis rather than a one-off. So I think they've got a very good strategy. We clearly have a great relationship with them. We have had strong performance over the years. And I think we will look to be a significant partner with them as they go forward.

Richard Paget, Morgan Joseph.

I wonder if you could talk a little bit more about the incentive comp. I know this quarter it was down. Is this something that could be deferred and maybe part of the reason why fourth quarter G&A is going to be up? Your other -- your Oil and Gas segment is still doing well. Are you still paying those out? If maybe you could kind of give us a little bit more detail on that -- how that breaks down.

Well, philosophically, we accrue for our incentive compensation on a quarterly basis so that we don't have a one quarter hit on that. And we look during the year as to what that's going to be. Obviously with the hit that we took on embassies and on the other two projects, the net results of the Corporation will be down for the year, and so we made an adjustment in the third quarter for that.

We accrue on a total basis for the total Corporation, based on the Company's results. All of our executives have their compensation at risk for the total performance of the Corporation. And then we subsegment [a day] after that after we determine how the total Company does for the other parts of the Company.

No, I don't believe that that is going to be -- there's no deferral on that. It will take up an accrual again in the fourth quarter for what we believe will be the incentive compensation. It will have the effect of embassies and the other two projects in it. And it is a pretty straightforward calculation.

In the I&I segment, backing out the highway charges, margins were pretty strong there. Any positive getting those up? And what should we think about margins going forward?

Well, I think if you just look at the I&I group as compared to last year, we've continued to improve in that whole are, both in terms of new awards -- it's been a very strong year in new awards, they've been very selective and also highly successful in their pursuits. But they have also done a great shop of putting it on the bottom line.

We had the unfortunate highway project where we're not the lead on that, and that has been a lesson learned for us. But I think all in all, that group is looking to be extremely strong. I think there will be another significant increase in their performance in terms of the bottom line as we move into '07.

So four to six should be the range versus the kind of two plus or minus?

I'd think they'd moved up from last year.

They may have moved up, but I would say more in the three to four range.

Yes, the challenge that we have in that group is they do a lot of construction management, which tends to be a lower margin. It's a great return on assets and a great opportunity for increased EPS, but the margins on it would tend to look lower.

Brian Chin, Citigroup.

Just going back to the TXU announcement, they said that they were going to sell off 600 megawatts of Oak Grove in an equity sell down. Does that present any sort of issues with the contract that you've got with them?

No, it sure doesn't.

(OPERATOR INSTRUCTIONS). Ian Macpherson, Simmons & Co.

Alan, I was wondering if I could ask you for a little additional color on the outlook for Oil and Gas. Marathon announced that they were -- they had awarded Fluor some seed work on a refinery expansion in Detroit.

That's correct.

And they're undertaking a feasibility study for similar work in Kentucky. Can you talk about the scope of future EPC work might be for those projects?

Well, we have also done some front-end work for them on their Garyville facility. These projects are going through that normal cycle of doing a front-end engineering and development and then will be released into full EPC.

On those projects we typically are assuming a lead position of overall contractor. We will bring in subcontractors, others to do portions of that job. They're all very large projects. But we will be responsible for the total projects and also then take a fair amount of that total EPC into our backlog.

So they're very aggressive, have got a great program going forward. They are doing a lot of very disciplined work on defining the projects before they release them and it's a great partnership.

Have you been hired on the [Catlistburg] feasibility study? Or so far just the Detroit feed work?

Right now all I can tell you about is what's been announced, and that's the Detroit feedwork and the Garyville.

And then on Garyville I saw that the Board approved that. Originally it looked like it was a $2.2 billion project, now they're saying $3.2 billion. Has your scope of EPC work increased proportionately by that amount?

I can't give you the exact amount, but it's a sizable project for us. And it will be a booking that will come in the next quarter or two.

One more follow-up, if you don't mind, for Mike -- realizing we have had some weird things going on with the tax rate year-to-date now and with the third quarter -- can we sort of assume your normalized 37.5% type range when we look at your '07 earnings guidance?

Yes, that 37%, 38% range is a good tax rate for '07.

John Rogers, D.A. Davidson.

Alan, you mentioned some of the project close-outs in the quarter. I was just wondering, especially in the Oil and Gas sector, where they significant and can you give us a ballpark number?

None of them were really large. But it was a positive affect there. I guess the basic message is we have seen substantial improvement in the operating margin -- profit margin in Oil and Gas and we will continue to see that. But I wouldn't take this quarter as an absolute run rate.

And then looking at your backlog, is there a significant change in terms of the proportion of procurement or anything else that might distort those margins?

Really not. I will just go back to my statement, as we've started to book the full EPC of these, it will tend to have a visible affect on taking the margins down a bit. But it's still very healthy margins, particularly for the large block of revenue that's going to flow.

And then, I guess for Mike -- your comments on SG&A levels or corporate levels for the full year, you said that the lower end towards $190 million? Did I hear that right?

Yes.

And tax rate in the fourth quarter -- will that then fall -- what are you, just around 31% for the nine months?

It will be up. It will be a more normalized rate in the fourth quarter, which will bring our year-to-date rate to probably 32%, 33%.

Barry Bannister, Stifel Nicolaus.

Revenues were about $200 million light from what the consensus expected. And I am noticing that your backlog obviously is growing. So are you severely people-constrained? Or was that just because you had more high margin, lower revenue content feed in the quarter?

It was just timing. [To] the last part of your comment.

And then as we look at '07 G&A, would you say that if next year is a good year or at least meets or even beats your guidance, that your incentive pay would rise to offset the lack of headquarters movement expense? And would G&A be flat year-over-year or up or what?

It could be flat to down slightly. We are kind of looking at 180 to 190 range for 2007.

And then can you give us some order of magnitude? You keep alluding to the fact that government has a number of jobs going away. We've seen this at other engineers. A, will government lose money in the fourth quarter? And B, what is the order of magnitude of the revenues that are no longer present in '07 so we can at least have a starting point for our '07 revenue estimates in this important segment?

We generally don't forecast profit.

By segment --

-- segment on a quarterly basis. But certainly the profitability would be down substantially in the fourth quarter. The revenues from Katrina, from Iraq, and Fernald were quite substantial through the first nine months of this year. So we don't have an exact number that we forecasted or published. But it will be a significant drop in revenues in 2007.

Right. I think the figure we were thinking of was $4 to $500 million but we may be -- is it bigger than a breadbox?

It's bigger than that.

Yes, it will be larger than that.

And then lastly, Duke Cliffside, and then another large pulverized coal plant in Minnesota are running about 30% over their initial cost estimates, and Public Service Commissions are raising a ruckus about it. As a way of assessing the political risk, do you think that Texas Utilities -- which is now, I guess, going to be your largest coal customer -- has public service commission risk if the costs rise, not through any fault of your own, but by the fact that this is the largest cost increase in a generation to build power plants?

Well, again, if you compare those projects, TXU has, again, a number of things going for them. Number one, they're looking and negotiating costs with suppliers on a program basis rather than a one-off project basis. That gives them a significant advantage.

Secondly, we are working with them on these projects to define those costs before we go for approval and before we give full notice to proceed, we will have fixed prices for all of the component parts. We'll have a very good handle on engineering. Really the only variable of this outfit at that point in time is the efficiency of the construction labor. So I don't think we're going to have the same issue that we're talking about -- we're not the contractor on Cliffside so I really can't speak to that.

Great quarter, by the way.

[Chris Sheehan, Carda Capital Advisors].

Gentlemen, I know you have put a number around the G&A for the fourth quarter and the government revenue for next year. Can you give us any sense of what the magnitude of the revenue decrement might be for the fourth quarter of this year?

No, we really don't give guidance on a quarter-by-quarter basis by segment, but it certainly will be down substantially.

No dollar amount at all you can put about -- just a sort of order of magnitude?

No, we prefer not to and our philosophy is not to give quarter-to-quarter guidance within each group.

And at this time I am showing we have no further questions. I would now like to turn it back over to Alan Boeckmann for any additional or closing remarks.

Thank you, operator, and thanks to all of you today for participating on our call. I really want to reiterate that the underlying earnings potential for our Company, I think it is substantial. Based on our recently completed internal operating plan reviews for '07 and the overall outlook that we see for the Company, when you combine that with the markets that we're addressing, we feel it's extremely positive.

Overall we continue to feel encouraged by the spending trends of capital in our major markets. And despite the recent reaction of financial markets to a decline in oil prices, most of our oil and gas investments are predicated on oil in the $30 to $40 per barrel range. We see no slowdown in our clients' investment plans.

We are on a record pace of new awards. We've already exceeded the full year total from last year, and last year was a record for the Company. We've exceeded by more than $2 billion in just the first three quarters of '06. Our backlog has grown to an unprecedented level at $19.8 million and we expect that growth to continue.

Most importantly, with embassies and these other projects behind us, I firmly believe that our financial results will grow at a commensurate level to our growth in backlog. We greatly appreciate your interest in Fluor and your continued support and confidence in our company. Have a good day.

And that does conclude today's conference. We thank everyone for joining and have a great day.