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As we look to the future, we see a world that has undergone many changes over the years. There have been ups and downs in the technology sector. The economy has been strong at some points, erratic at others. New global markets have emerged, bringing with them noteworthy shifts in political, social, and economic alliances.
Shaw has successfully managed these uncertainties. We have not been afraid to adapt and evolve, and we know how to prosper in unpredictable times. That will never change. And it is why we believe Shaw will continue to win for many years to come.
The Shaw Group, Inc. is the world's only vertically integrated provider of complete industrial piping systems and of comprehensive engineering, procurement, construction, and maintenance services to the power generation industry. It is the largest supplier of fabricated industrial piping systems in the United States and one of the leading suppliers worldwide. The company also performs work for the process industries, including petrochemical and chemical processing and petroleum refining, and for the environmental and public infrastructure sectors. A Fortune 1000 company, Shaw currently has offices and operations in North and South America, Europe, the Middle East, and Asia-Pacific.
Building a Pipe Fabrication Company: 1987-1994
James M. Bernhard, Jr., founded the Shaw Group in 1987. After graduating from college in the early 1970s, he worked his way through the ranks of various Baton Rouge pipe fabrication and contracting companies. This experience gave him an expert's education in the operations of the pipe fabrication industry.
The fabrication of complex piping systems for power generation facilities and process facilities, including petrochemical and chemical processing and petroleum refining, is complex and demanding. Materials such as steel, titanium and aluminum are the raw materials of fabrication. These materials are formed into pipes with diameters as large 72 inches and walls as thick as seven inches. Some of these pipes become parts of "critical piping systems" used in high-pressure, high-temperature or corrosive applications. Such systems must withstand pressures up to 2,700 pounds per square inch and temperatures up to 1,020 degrees Fahrenheit. These critical systems are used in power generation.
By the mid-1980s, the U.S. pipe fabrication industry was experiencing significant difficulties. Power plant construction was at a low ebb domestically, as was refinery construction due to a decline in oil and gas exploration. At the same time, pipe fabrication was a craft performed by skilled welders brought to construction sites for that sole purpose. This handicraft approach kept piping prices high, and contributed to a large-scale exodus from the industry.
Bernhard believed that the industry could again become successful in the United States. He wanted to transform pipe fabrication from a craft industry to an industry that produced its product in factories using machinery to the extent possible. Such a change in fabrication practices, he believed, would reduce piping costs and allow the domestic pipe fabrication businesses to become profitable again.
To implement his ideas, Bernhard founded The Shaw Group in 1987 and purchased the Benjamin F. Shaw Company, a century-old pipe fabricator. In 1998, its first full year of operation, Shaw reported revenue of $29.3 million. By 1993 when the company went public, its revenue had increased to $120.7 million.
Becoming a Total Piping Resource: 1994-1997
The company began an aggressive but focused acquisition strategy with the proceeds of its initial public offering (IPO). In 1994, Shaw adopted the goal of becoming a "total piping resource." In pursuit of this end, it began a major expansion of its technical capabilities. It purchased Fronek Company to give it the nucleus of engineering and design capabilities in April. During the same month, it purchased a company that fabricated pipe supports. The company also began to purchase huge pipe-bending machines from the Danish company Cojafex.
Part of Bernhard's strategy was to substitute machinery for skilled humans. The Cojafex machine was an integral part of that strategy. Even when much of a custom-piping system was produced in a factory, the pipes themselves had to be shaped by expert pipe cutters and welders. The machine eliminated this human labor. This state-of-the-art piece of equipment could bend a pipe as much as 16 inches in diameter with walls as thick as 2.5 inches to the specifications of the customer. Although the Cojafex bending technology was not the sole similar machine on the market, it was the most advanced. The deployment of this machine gave Shaw a competitive advantage over other pipe fabricators.
Until 1994, Shaw supplied international customers by fabricating piping systems in its U.S. facilities and shipping them to the foreign site. U.S. fabricators could compete with foreign ones because labor costs were lower in the United States than in Germany and Japan, the home nations of some of their major competitors. U.S. manufacturers benefited from the greater availability of raw materials to them. The exchange rate of the dollar also contributed to the lower cost of U.S. produced systems.
International demand for pipe products, especially for use in the construction of power plants, continued to outstrip domestic demand in the early 1990s. Shaw, therefore, expanded internationally. Late in 1993, the company entered into a joint venture agreement to build and operate a pipe fabrication facility in Bahrain. From there, it could supply all Arab states of the Gulf Cooperation Council without paying tariffs. A year later, it purchased the 50 percent of a Venezuelan subsidiary it did not already own. This facility allowed Shaw to benefit from lower labor costs in competition for international projects.
Shaw continued its strategy of expanding its capabilities through focused acquisitions in 1996. In January, it acquired a fabrication facility and other assets in Oklahoma. The company followed this in March with the purchase of Alloy Piping Products (APP) located in Shreveport, Louisiana, a leading manufacturer of specialty pipe fittings--products such as elbows and caps that connect pipes or in some way modify them so they can be integrated into a system. It also added pipe insulation manufacturing to its capabilities by purchasing Pipe Shields, Inc. of California.
In 1997 and 1998, Shaw made two acquisitions that significantly increased the company's pipe-bending resources. First, it acquired NAPTech, Inc. of Utah, a piping systems and module designer and fabricator. NAPTech had experienced financial difficulties, including increasing net losses and liquidity problems. Nevertheless, it possessed three Cojafex bending machines, one capable of bending pipes with a diameter of up to 66 inches and a wall thickness of up to five inches. Shaw purchased Cojafex as a whole in 1998, thus taking control of the development and sales of a crucial pipe fabrication technology. Shaw considered these machines crucial enough to the pipe fabrication process that it stopped selling them to some competitors.
The company continued its international expansion. In October 1997, it bought a U.K. pipe fabrication company. The next month, it purchased Prospect Industries PLC also located in the United Kingdom. Prospect was deeply in debt, so purchase negotiations were not difficult. With this purchase, came piping systems fabrication subsidiaries in Virginia and the United Kingdom. It also established a base in the Asia-Pacific region with Prospect's subsidiary, Aiton Australia Pty. Ltd., a piping system, boiler refurbishment and project management enterprise. Shaw expanded its Venezuelan operations early in 1998 by purchasing a construction company. These acquisitions gave the company a total of four pipe fabrication facilities in regions outside the United States--a significant competitive advantage.
Becoming a Power Plant Builder: 1997-2000
The purchase in 1997 of two industrial construction and maintenance companies signaled the expansion of Shaw's business strategy to planning and constructing entire power and process plants. In pursuit of this expanded strategy, it acquired a construction and maintenance company specializing in offshore facilities in 1998.
This string of acquisitions greatly increased Shaw's financial resources and returns. Its current assets increased from $80.6 million in 1995 to $251 million in 1998. Sales increased from $113.2 million in 1994 to $506.1 million in 1998, while net income increased from $3.4 million to $19.2 million during the same period. In recognition of this growth, Shaw moved from the NASDAQ to the NYSE in 1996.
By the end of its 1999 fiscal year, Shaw had become a major supplier of pipe systems both domestically and internationally. It had provided services to some of the world's foremost multinational conglomerates, including AlliedSignal, Chevron, Mitsubishi, Monsanto, Raytheon, Hitachi, and Toshiba. It had formed strategic alliances with ABB, Air Products and Chemicals, Alstrom, BASF, Bechtel, Dow, General Electric, Orion Refining Company, Parsons Corporation, and Praxair, Inc.
Moreover, the demand for power plants, always strong internationally, had increased in the United States. The decommissioning of some nuclear plants had decreased domestic electrical supply; demand for electricity was increasing, and wholesale power markets had been deregulated. These events generated a surge in the construction of domestic power plants. Shaw benefited from this trend. Power generation projects amounted to only 30 percent of the company's backlog in 1997 and 1998. Such projects, some of them foreign, accounted for 64 percent of an $818.3 million backlog at the end of its 1999 fiscal year.
Despite its success in pipe design, engineering, fabrication and installation, Shaw had difficulties making the transition to providing engineering, procurement and construction (EPC) services for entire power plants. In part, these difficulties resulted from Shaw's inexperience in power plant construction, especially when it competed with large, established EPC contractors. Chairman Bernhard told ENR in 2002 that there was an additional problem: power plant engineers were reluctant to subcontract with Shaw to do engineering work on projects for which Shaw was the prime contractor, and Shaw lacked appropriate engineering capabilities of its own.
Shaw resolved this problem in 2000 by acquiring Stone & Webster (S&W), a century-old provider of EPC services to the power plant industry. S&W had experienced financial difficulties for much of the previous decade. In the mid-1990s, it completed a major downsizing resulting from a dependence on the nuclear power industry after construction of nuclear plants had virtually stopped and from losses generated by non-core assets, such as real estate.
By 1998, the company again experienced financial difficulties resulting in part from losses of Asian construction contracts when that region experienced a severe financial crisis. The company was experiencing such severe liquidity problems that it agreed in May 2000 to sell most of its assets to Jacobs Engineering Group. The agreement with Jacobs called for Jacobs to provide S&W with an immediate $50 million credit line to allow S&W to resolve its immediate liquidity problems. It also called for S&W to enter into Chapter 11 bankruptcy proceedings--a move that would protect S&W from potential law suits or adverse actions by its creditors.
The bankruptcy process, however, required that S&W's assets be disposed of by means of an auction administered by the bankruptcy court. This opened the way for Shaw to attempt to win S&W's assets. In July, Shaw won these assets after 20 rounds of bids lasting 18 hours. Shaw's final cash and stock bid was equal to about $163 million.
Not only did S&W bring EPC capabilities to Shaw, but the acquisition placed Shaw among the foremost companies with experience in the decommissioning and decontamination (D&D) of nuclear plants. S&W had built 17 of the reactors constructed in the United States in the 1970s and 1980s. It had done various kinds of work on 99 of the 104 nuclear facilities in the nation. Immediately before its bankruptcy, it was doing D&D work. This particular project was terminated because of the company's financial difficulties, but this was another new area opened to Shaw.
Shaw also took over a number of public infrastructure and environmental remediation projects started by S&W. In the environmental area, projects included remediation for former nuclear weapons production facilities and work on various Super Fund sites. In the infrastructure area, Shaw took over projects such as the construction and management of a water supply tunnel and the engineering and construction of a water treatment plant.
Financially, too, the S&W acquisition had a major effect on Shaw. Its current assets increased from $252.1 million in 1999 to $1.1 billion in 2001, the first full year it owned S&W. During the same period, its sales increased from $494 million to $1.5 billion, and its net income increased from $18.1 million to $61 million. Its total backlog increased from $818.3 million to $4.5 billion. Shaw debuted as number 835 on the Fortune 1000 in 2002.
Shaw quickly put its new capabilities and financial strength to work. In September 2000, after three years of discussions, Shaw formed a 50-50 joint venture, EntergyShaw, with the electric utility Entergy, to design and construct standardized power plants that could meet Entergy's increasing power needs. The partners also hoped the projected 10 to 15 percent cost savings of the plants would make them attractive to other North American and European customers.
In February 2001, the company contracted with BASF to engineer and manage the construction of an ethylene plant in China. Shaw agreed, in turn, to contract the construction of the plant to an independent Chinese company. This project allowed Shaw to profitably use some process industry equipment left with S&W when a contract was canceled.
The next month, Shaw announced an agreement with PG&E's National Energy Group for the construction of four separately sited gas-fired power plants, capable of producing a total of 4,400 megawatts of electricity on completion. Work on two of them started in 2001. Shaw initiated or extended similar agreements with other power generators, including NRG Energy and FPL Energy.
Into the 21st Century: Diversification
The continuation of the boom in power plant construction that had fueled much of Shaw's growth during the late 1990s began to show signs of weakening by 2002. The California energy crisis and consequent bankruptcy of two of the largest utilities in the nation, threats of volatile power prices and even blackouts in other states, and the collapse of the energy trading industry all raised questions about the longevity of the energy deregulation trend. This policy had stimulated the construction boom domestically.
Internationally, too, power plant construction had declined. The Asian financial crisis of the late 1990s had terminated many projects, and construction in that area had not yet recovered. The generalized economic uncertainty of the early 21st century contributed to construction declines in other regions as well.
Shaw had enough backlog at the beginning of 2002 to keep it busy for about 18 months, but it faced the twin dangers that some of the projects it had on its books would be canceled and that future projects would be harder to find. This prospect came as no surprise to the company. After all, Shaw came into being in the mid-1980s, at a time when construction of domestic power plants was not robust. In fact, such construction had always been notoriously cyclical.
In an effort to diversify Shaw's business focus beyond the power plant sector and to provide it with a diversified mix of income opportunities, the company agreed in January 2002 to bring The IT Group out of bankruptcy. The IT Group was a leading domestic and international firm specializing in environmental remediation, serving the government, commercial engineering and construction, solid waste, real estate restoration, and consulting sectors. The IT Group was especially strong in the government market.
When combined with the environmental business Shaw had acquired with its previous year's purchase of S&W, this new acquisition, approved by the Bankruptcy Court in April, gave Shaw a strong position in the environmental remediation industry. Shaw gained two major advantages from this. First, the business cycles of the environmental industry did not correlate with the cycles of the power production industry, thus Shaw's revenue stream became somewhat protected from the cyclical nature of that industry. Second, many of the contracts that came with The IT Group purchase were governmental. Usually contracted on a cost-plus-fixed-fee basis, an arrangement that was not as profitable to the contractor as were other alternatives, these government contracts, nevertheless, provided the contractor with a steady, reliable source of income.
As it entered the new century, The Shaw Group could look back with satisfaction at the massive growth it had achieved in its brief existence. Its most important challenge was to diversify its revenue sources from the very cyclical business of building or supplying components for power generation facilities. The company had begun to do just that.
Principal Subsidiaries:Cojafex BV (100%); EntergyShaw, LLC (50%); Manufacturas Shaw South America CA (100%); Power Technologies, Inc. (100%); Shaw Alloy Piping Products, Inc. (100%); Shaw Aiton Australia Pty. Ltd. (100%); Shaw Environmental & Infrastructure, Inc. (100%); Shaw Group U.K. Ltd. (100%); Shaw Pipe Shields, Inc. (100%); Stone & Webster Consultants, Inc. (100%); Stone & Webster, Inc. (100%).
Principal Competitors:Bechtel Group Inc.; Fluor Corporation; Jacobs Engineering Group Inc.; Foster Wheeler Ltd.; ABB Ltd.