Washington Grp Intl, Inc (WGII) - Description of business

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Company Description
Unless otherwise indicated, the terms “we,” “us” and “our” refer to Washington Group International, Inc. (“Washington Group International”) and its consolidated subsidiaries; references to 2006 are to our fiscal year ended December 29, 2006; references to 2005 are to our fiscal year ended December 30, 2005; and references to 2004 are to our fiscal year ended December 31, 2004 . We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other information with the Securities and Exchange Commission (the “SEC”). The public can obtain copies of these materials by visiting the SEC’s Public Reference Room at 100 F Street, NE, Washington DC 20549, or by calling the SEC at 1-800-SEC-0330, or by accessing the SEC’s website at http://www.sec.gov. In addition, as soon as reasonably practicable after such materials are filed with or furnished to the SEC, we make copies available to the public free of charge on or through our website at http://www.wgint.com. The information on our website is not incorporated into, and is not part of, this report. We have adopted a Code of Business Conduct and Ethics (the “Code”) which requires all employees, officers and directors of Washington Group International to act, at all times and places, as law-abiding, responsible and responsive citizens. The Code is published on our website at http://www.wgint.com under Corporate Information: Investor Relations, Company Overview, and Corporate Governance. A copy of the Code is available by contacting us through our website under Investor Relations, or by writing to the Investor Relations Department at the corporate headquarters. We intend to disclose certain amendments to our Code, or any waivers of our Code granted to Executive Officers and Directors, on our website within four business days following the date of such amendment or waiver. Our principal executive offices are located at 720 Park Boulevard, Boise, Idaho 83712. Our telephone number is (208) 386-5000. GENERAL We are an international provider of a broad range of design, engineering, construction, construction management, facilities and operations management, environmental remediation and mining services. We offer our various services separately or as part of an integrated package throughout the life cycle of a customer’s project. ·   In providing design and engineering services, we participate in the conceptualization and planning stages of projects that are part of our customers’ overall capital programs. We develop the physical designs and determine the technical specifications. We also devise project configurations to maximize both construction and operating efficiency. ·   As a contractor, we are responsible for the construction and completion of each contract in accordance with its specifications and contracting terms (primarily schedule and total cost). In this capacity, we often manage the procurement of materials, subcontractors and craft labor. Depending on the project, we may function as the primary contractor or as a subcontractor to another firm. ·   On some projects, we function as a construction manager, engaged by the customer to oversee other contractors’ compliance with design specifications and contracting terms. ·   Under operations and maintenance contracts, we provide staffing, technical support, repair, renovation, predictive and preventive services to customer facilities globally. We also offer other facility services, such as general building maintenance and asset management. In addition, we provide inventory and ·   product logistics for manufacturing plants, information technology support, equipment servicing and tooling changeover. On some projects, particularly those of significant size and requiring specialized technology, we partner with other firms, both to increase our opportunity to win the contract and to manage development and execution risk. Partners may include, among others, specialized process engineering firms, engineers, constructors, operations contractors or equipment manufacturers. These partnerships may be structured as joint ventures or consortia, with each participating firm having an economic interest relative to the scope of its work. We enter into four basic types of contracts with our customers: ·   Under a “fixed-price” contract, we provide the customer a total project for an agreed-upon price, subject to project circumstances and changes in scope. We commonly refer to fixed-price contracts under which the total project cost is determined up front as “lump-sum” contracts. Large design-build infrastructure projects are typically awarded on a lump-sum basis. ·   Under a “fixed-unit-price” contract, the customer pays us for materials, labor, overhead, equipment rentals or other costs at fixed rates as each unit of work is performed. Mining projects are typically awarded on a fixed-unit-price basis. ·   Under a “target-price” contract, we provide the customer with a total project at a target price agreed upon by the customer, subject to project circumstances and changes in scope. Should costs exceed the target within the agreed-upon scope, we will generally absorb a portion of those costs to the extent of our expected fee or profit; however, the customer reimburses us for the costs that we incur if costs continue to escalate beyond our expected fee. An additional fee may be earned if costs are below the target. ·   Under a “cost-type” contract, a customer reimburses us for the costs that we incur (primarily materials, labor, overhead and subcontractor services), plus a fee. The fee portion of the contract may be a percentage of the costs incurred and/or may be based on the achievement of specific performance incentives or milestones. The fee portion may also be subject to a maximum limit. Engineering, construction management and environmental and hazardous substance remediation contracts, including most of our work for United States (“US”) government customers, are typically awarded pursuant to a cost-type contract. We generally refer to the first two contract types described above as “fixed-type contracts” and the last two contract types as “cost-reimbursable.” Some fixed-price contracts require the contractor to provide a surety bond to its customer or a letter of credit. This general industry practice provides indemnification to the customer if the contractor fails to perform its obligations. Surety companies consider factors such as capitalization, available working capital, past performance and management expertise to determine the amount of bonds they are willing to issue on behalf of a particular engineering and construction company. We participate in construction joint ventures, often as sponsor and manager of projects, which are formed for the sole purpose of bidding, negotiating and completing specific projects. We participate in two incorporated mining ventures: MIBRAG mbH (“MIBRAG”), a company that operates lignite coal mines and power plants in Germany, and Westmoreland Resources, Inc. (“Westmoreland Resources”), a coal mining company in Montana. BACKGROUND We were originally incorporated in Delaware on April 28, 1993 under the name Kasler Holding Company. In April 1996, we changed our name to Washington Construction Group, Inc. On September 11, 1996, we purchased Morrison Knudsen Corporation and changed our name to Morrison Knudsen Corporation. The purchase was I-1 structured as a merger and was an integral part of a bankruptcy plan of reorganization. We have no remaining obligations under that plan of reorganization. On March 22, 1999, we and BNFL Nuclear Services, Inc. (“BNFL”) acquired the government and environmental services businesses of CBS Corporation (now Viacom, Inc.). We refer to these businesses, together with other government services operations, as the “Government Services Business.” On August 25, 2004, we agreed to acquire BNFL’s interest in the Government Services Business and effective December 30, 2005, we settled all remaining acquisition payments resulting in the termination of BNFL’s interest in our Government Services Business. On July 7, 2000, we purchased from Raytheon Company and Raytheon Engineers & Constructors International, Inc. (“RECI”), the capital stock of the subsidiaries of RECI and specified other assets of RECI and assumed specified liabilities of RECI. The businesses that we purchased, that we refer to as “RE&C,” provide engineering, design, procurement, construction, operation, maintenance and other services on a global basis. Following the RE&C acquisition, we changed our name to Washington Group International, Inc. On May 14, 2001, due to near-term liquidity problems resulting from our acquisition of RE&C, we filed for protection under Chapter 11 of the US Bankruptcy Code. On December 21, 2001, the bankruptcy court entered an order confirming the Second Amended Joint Plan of Reorganization of Washington Group International, Inc., et al., as modified (the “Plan of Reorganization”). The Plan of Reorganization became effective and we emerged from bankruptcy protection on January 25, 2002. The US Bankruptcy Court for the District of Nevada retains jurisdiction to interpret the Plan of Reorganization and to resolve outstanding claims and third party disputes relating thereto. A reorganization plan committee (the “Plan Committee”) was established by the bankruptcy court to evaluate claims of unsecured creditors, prosecute any disputed unsecured claims, determine each unsecured creditor’s distribution under the Plan of Reorganization and generally monitor implementation of the Plan of Reorganization. BUSINESS UNITS We operate our business through six business units, each of which comprises a separate reportable business segment: Power, Infrastructure, Mining, Industrial/Process, Defense and Energy & Environment. Power Our power business unit specializes in design, engineering, construction, modification and maintenance of power generating facilities and the systems that transmit and distribute electricity. Customers include regulated and deregulated utilities, industrial co-generators, independent power producers, original equipment manufacturers (“OEMs”) and governments. These customers generate power in a wide variety of methods, including coal, oil and gas-fired power plants, combustion turbine in both simple cycle and combined cycle configurations, nuclear power, hydroelectric power and waste-to-energy. We provide our services to customers in the US and around the world under both fixed-price and cost-reimbursable, and the work we have pursued recently has reflected an array of commercial arrangements. (See Item 1, “Business - General,” earlier in Part I of this report for a description of types of contracts and corresponding risks). The Power business unit provides a range of services that includes: Basic Services ·   General planning ·   Siting and licensing ·   Environmental permitting ·   Engineering, procurement and construction, startup ·   Expansion, retrofit and modification ·   Operations and maintenance ·   Decontamination and decommissioning I-2 Basic Markets ·   New generation •   Combustion turbine (natural gas, oil) •   Coal •   Nuclear ·   Modifications and maintenance •   Fossil: clean air retrofits •   Repowering •   Nuclear: major component replacement •   Maintenance: fossil and nuclear ·   Engineering services •   Planning studies and ongoing operations for fossil and nuclear •   Transmission, distribution, and substations The power industry is in a period of major capital expenditures, led by regulatory-driven retrofits of large clean air systems on targeted coal-fired plants and the gradual reemergence of demand for new capacity, which has prompted a reinvigorated interest in both coal and nuclear technologies. Projects abound in the US and the key global markets of China, the Middle East, and Eastern and Central Europe. Reflecting this growth, there is a growing shortage of qualified professional and field labor personnel, leading to industry-wide challenges to meet talent needs. Stimulating much of this growth in the US market are legislative changes enacted by the federal government in 2005. The Environmental Protection Agency’s (“EPA”) promulgation of the Clean Air Interstate Rule and the Clean Air Mercury rule has intensified the market for emissions control retrofits, and the Energy Policy Act has provided significant economic stimulus to clean coal programs, integrated gasification combined cycle facilities, renewable energy technologies, and new nuclear facilities.   The international power industry is also very active. Among the strongest of these markets is the development of vast reserves in the Canadian oil sands region, which ultimately may give North American generators a dependable and stable supply of oil and gas for existing and future operations. We have had a substantial presence in the region for several years, supporting a clean air system retrofit on coking facilities at a production site, and we were recently awarded an engineering, procurement and construction (“EPC”) contract for a 160-megawatt cogeneration station that will supply both electricity and wet steam in support of production operations. Economic growth demands in Asia, particularly in China, India and Southeast Asia, are spawning new, but highly competitive, programs for capacity additions. The nuclear market in China is forecasted to be particularly strong, and we have been engaged by a local utility to enhance their project management program. Environmental concerns in some regions - China, motivated by public image and a growing internal green movement and Central and Eastern Europe, motivated by standards for admission to the European Union - are stimulating clean air system retrofit projects on older coal-fired plants. The Power business unit pursues a strategy of providing superior performance in new generation projects, major modifications, and long-term technical services while minimizing its exposure to long-term capital risk. New power generation is at the core of our business, and we continue to increase our market presence in each of the technologies at the backbone of the commercial power industry. We have ongoing combustion turbine, combined cycle projects in Wisconsin and Puerto Rico, an ongoing coal-fired project in Wisconsin and a new award of a 400-megawatt coal-fired project in Arizona. We anticipate that the emerging nuclear renaissance will not award a grassroots nuclear generation project until 2009; however, we have in place agreements with two prominent nuclear technology suppliers to support their efforts to gain Nuclear Regulatory Commission design certification and to detail their design standards. We are in a consortium that is studying the restart of a partially constructed unit, and we are managing the largest grassroots nuclear fuel supply construction project in the US I-3 today, which also is the first new nuclear facility licensed under the Nuclear Regulatory Commission’s new one-step licensing process. Propelled by either the new EPA regulations, previously signed consent decrees, independent state legislation, or proactive owners, a substantial number of large system retrofits to control sulfur oxides and nitrous oxides have been announced or are under consideration. We continue to secure new awards in this market, including the retrofit of flue gas desulphurization systems for clients in Maryland, Pennsylvania, West Virginia and Wisconsin. We are also continuing work on other emissions control projects in Michigan, Pennsylvania, Wisconsin, and Alberta, Canada. The existing fleet of nuclear power plants in North America is being revitalized with life-extension strategies that involve significant equipment modifications. Among the most common life-extension strategies is the replacement of steam generators and reactor vessel heads. Through a 50 percent owned joint venture with Framatome-ANP, Inc., we specialize in these replacements and have established ourselves as a leading competitor in the US for this market, holding three world records for short outage durations and winning industry recognition for the Best Nuclear Projects of 2005 and 2006, plus the Energy Construction Project of the Year for 2005. At present we have ongoing projects in California, Florida and New Jersey, plus a consulting assignment in Canada, and in 2006 we were awarded a new assignment in Pennsylvania. In some cases, the competitive nature of the power generation industry has led to stronger ties between customers seeking engineering solutions to improve output and contractors assuming the responsibility of in-house specialists. We are engaged in several alliance-type relationships at various levels of maturity, including a pacesetting program that has established a full services contract for a total generation system that exceeds 11,000 megawatts, and outsourcing agreements with two utilities in which we are providing engineering services as needed at a total of more than 90 generating facilities. Another growing market in the US power industry is the full spectrum of power delivery systems, i.e., transmission, distribution, substations and systems control. The Federal Energy Regulatory Commission and the North American Electric Reliability Coalition are both focused on improving the reliability of the power grid. Having realized a successful campaign of revitalizing and rebuilding the electric infrastructure in Iraq, we are refocusing this expertise in this US market. As a result, we have been awarded services contracts with two major power distributors. Infrastructure Our Infrastructure business unit provides a full range of infrastructure services to clients globally, including design, engineering, consulting, project management, construction management, construction, project development, design-build and operations and maintenance. The Infrastructure business unit performs as a general contractor or as a joint venture partner with other contractors on domestic and international projects. Typically, design, engineering, consulting, project management, construction management, and operations and maintenance type contracts are performed on a cost-reimbursable basis, while design-build and construction contracts are performed on a fixed-price, target price or cost reimbursable basis. Infrastructure serves both private and public sector customers across three major markets: ·   Rail and transit : Services include design, project development, construction, and operation and maintenance of light rail, subways, commuter/inter-city railroads, railroads, freight transport, people movers, bus rapid transit, electrification and multimodal facilities. Our current significant projects in this market include: •   Hudson-Bergen Light Rail Transit System: We are operating under multiple contracts with a value exceeding $1.2 billion to design, build, operate and maintain the Hudson-Bergen Light Rail Transit System in New Jersey. The design-build phase was completed in 2006. The term of our •   contract to operate and maintain the system extends to 2011, with two five-year extension options. •   Metro Gold Line Eastside Extension: A $615 million design-build contract for a six-mile-long extension to the Metro Gold Line light rail system in Los Angeles, California. This contract with the Los Angeles Metropolitan Transportation Authority (“MTA”) is being performed by a joint venture led by us. ·   Highways and bridges : Services include design, design-build, construction, operation and maintenance of interstates/freeways, arterial highways/streets, interchanges, bridges, tunnels and intelligent transportation systems. The Infrastructure business unit has made the strategic decision to no longer participate in the public agency highway fixed price “construction only” market sector. The contract and change order administration practices of the client agencies, together with an increase in the number of smaller local bidders has lowered available margins to unacceptable levels. Our significant projects in this market include: •   SR-125: A joint venture led by us to design and build the 10-mile privately-funded toll road section of the public-private State Route 125 South Expressway project in San Diego, California, and a 3.5-mile publicly-funded segment of State Route 125 with a total contract value of approximately $390 million. •   I-215/91/60 Riverside Interchange: A joint venture led by us to perform a design sequence contract to upgrade and widen a 7.8 mile section of I-215 and connecting highways for the California Department of Transportation in Riverside, California with an approximate contract value of $240 million. Both of these projects were in a loss position at the end of 2006. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations -Business Unit Results- Infrastructure,” in Item 7 of this report. We are growing our lower risk program management and operations and maintenance capabilities in the highway and bridge market. Our current significant projects in this area include: •   Connecting Idaho GARVEE Program Management: Under a $1 billion program with the Idaho Transportation Department, we lead a team to provide $200 million of highway design and construction management services for highway work throughout the state. •   Florida Toll Services: We are leading an $85 million joint venture operating 100 miles of toll road for the Orlando-Orange County Expressway Authority including full-service toll collection operations and maintenance services. ·   Water resource and hydropower : Services include design and construction of hydroelectric power, water supply, flood control, locks and dams, irrigation and drainage, hydraulic structures and environmental and safety analysis. A significant project in this market includes: •   Olmsted Dam: An $855 million cost-reimbursable-plus-base-and-award-fee joint venture for the construction of a 2,700-foot concrete dam across the lower Ohio River. During 2006, the Infrastructure business unit continued its work for the US Army Corps of Engineers providing design, engineering, and construction services in the Middle East. Infrastructure provided procurement, engineering, and construction services for water treatment, pump stations, and sewer rehabilitation projects in Iraq. Infrastructure also performed repair, installation, and operations and maintenance services for a hospital in Iraq. I-4 We anticipate growth in domestic infrastructure markets. Federal highway funding is subject to authorization from the Safe, Accountable, Flexible, Efficient, Transportation Equity Act: A Legacy for Users (“SAFETEA-LU”) which is expected to provide long-term funding. State tax revenues are anticipated to increase, which will provide for matching funds for capital programs as well. Certain markets continue to have viable projects and the design-build method of delivery, with its reliance on private capital and potential opportunities for public-private partnerships, continues to grow in popularity. Mining The Mining business unit provides a full range of services, concentrating on contract mining and mines management, design/build and engineering, procurement, and construction or construction management to the precious and base metals, energy minerals, and industrial minerals markets globally. These services include a broad spectrum of tasks from mine planning and feasibility studies through engineering, construction, operations planning and execution, to mine reclamation and closure. Currently, the Mining business unit is providing services to the phosphate industry in Canada and the US, coal mines in the US and Germany, silica and ballast quarry operations in the US, a silver, zinc and lead mine in Bolivia, a gold mine in Mexico, a nickel-cobalt project in Cameroon, and bauxite mines in Jamaica. Mining contracts are typically one to ten years in length and are normally renewed in subsequent bidding cycles throughout the useful life of the mine, which can typically range from 5 to 30 years. Mining contracts are generally fixed-unit price, cost reimbursable, or target price. In addition to the Mining business unit’s contracted services, we hold ownership interests in two mining ventures: ·   MIBRAG (50 percent) is located in Germany and operates two surface lignite coal mines that provide lignite to two utility-owned power generation plants, as well as small commercial plants and three company-owned power plants. Power generated by the company-owned plants is primarily utilized by the mining operations and surplus power is sold at wholesale to the utilities. The mines have lignite reserves and contracts in place for 20 to 40 years of supply. Because of the significance of MIBRAG to our results of operations for the year ended December 29, 2006, the financial statements of MIBRAG have been included in this report on Form 10-K as Exhibit 99.1. ·   Westmoreland Resources (20 percent) is a Montana surface coal mine providing sub-bituminous coal to utilities in the upper Midwest.   See Note 4, “Ventures,” of the Notes to Consolidated Financial Statements in Item 8 of this report. Industrial/Process Our Industrial/Process business unit is a single-source provider of integrated engineering, construction, operations, maintenance, logistics and program management services. A key component of Industrial/Process’ approach is close alignment with our customers to support their business objectives and develop long-term, value-added partnerships and to balance the markets we serve in order to effectively deal with economic cycles that impact industrial and consumer spending. Services are provided using a variety of commercial terms, including various forms of cost-type, target price and lump sum contracting. The unit’s continuing goal is to maintain an evenly balanced commercial mix between cost-type and fixed-priced contracts in order to optimize the risk/reward profile and improve cash flow. Organized in three divisions, the Industrial/Process business unit is focused on the following strategic areas: Oil, Gas and Chemicals, Facility Management, and Industrial Services & Life Sciences. I-5 ·   Oil, Gas & Chemicals. The Oil, Gas & Chemicals division provides services to several markets, including oil production, gas treating, gas monetization, gas storage, refineries and bulk/specialty chemicals producers. Our services span a wide range of offerings including engineering, procurement, construction and operations and maintenance. Customers include ExxonMobil, ConocoPhillips, ChevronTexaco, BP, Qatar Petroleum, DuPont, Georgia Gulf, El Paso, Dow Corning, PolyOne and Abu Dhabi National Oil Company, among others. ·   Facility Management. Our Facility Management division provides life-cycle services allowing our customers to focus on core business activities. As a facility management market leader for industrial customers, we offer management solutions that include operations, production maintenance and facility management across a diverse set of industries to customers seeking to outsource non-core business functions. Customers include many long-term clients such as Caterpillar, DuPont, IBM, Nissan, Micron and Tektronix. ·   Industrial Services & Life Sciences. Our Industrial Services & Life Sciences divisions provide life-cycle services, including design, engineering, construction, quality assurance, logistics, quality programs, and validation for the automotive, manufacturing, food, consumer product, cement, pulp and paper industries. We have long-term alliance partnerships with Anheuser-Busch, Kraft and General Mills/Pillsbury in the foods market. We provide facility and process design solutions for breweries and producers of baked goods, cake mix, cereal, prepared entrees, snack foods, soups and yogurt. In the automotive markets, customers include General Motors, Ford, Daimler/Chrysler and Hyundai. In Life Sciences, we provide design, engineering, construction, validation and maintenance services to the biotechnology and pharmaceutical industries. An integrated delivery platform is provided in the areas of biologics, chemical synthesis, dosage form and devise manufacturing to create innovative production solutions. Customers include Amgen, Sanofi-Pateur, Pfizer, Schering Plough, Merck, Eli Lilly, Johnson & Johnson, Novartis and Wyeth. Defense The Defense business unit is structured to meet the needs of our major customer, the US government, and, more specifically, the Departments of Defense and Homeland Security. Our Defense business unit manages, integrates and delivers life-cycle services for domestic and international programs under three major markets: Threat Reduction, Defense Services and Homeland Security. ·   Threat Reduction. In the Threat Reduction market, we focus on global proliferation prevention and elimination of chemical, biological, radiological, nuclear and high explosives materials and weapon systems. We are a global leader in the elimination of chemical weapons and agents. We provide life-cycle demilitarization services to federal clients, including chemical and biological warfare material elimination and nuclear weapons delivery systems disarmament. This market includes support for the Department of Defense in the destruction of the US chemical weapons stockpile. We are the system contractor for three of the US Army’s four incineration-based chemical weapons destruction facilities. We are also responsible for the start-up, pilot plant testing, operations and maintenance and closure of two additional neutralization-based plants, dealing with intact chemical weapons. All of these facilities are designed to destroy chemical weapons that have been stored for many years in underground bunkers. In ·   addition, we have expanded our global reach through destruction of a chemical agent stockpile in Albania. We provide demilitarization services, funded by the US government, to the former Soviet Union, and have been awarded significant participation in the Cooperative Threat Reduction Integrated Contract thereunder. This contract is financed by the US to prevent proliferation of, and safely eliminate, weapons of mass destruction located in the former Soviet Union. Work performed includes elimination of strategic missiles and related delivery systems, conversion of the Seversk, Russia plutonium production facility into a peacetime electrical power production plant, and construction support for the chemical weapons disposal facility in Shchuch’ye, Russia. We are also assisting the Azerbaijan and Uzbekistan governments in establishing material detection and interdiction capabilities for weapons of mass destruction A major objective of Threat Reduction is optimizing the value of existing contracts, while our business development efforts are focused on evaluating adjacent market opportunities and selecting higher probability market sectors for development and penetration in the US and abroad. ·   Defense Services. Defense Services, principally, addresses Department of Defense needs, offering a wide array of services including engineering, procurement, construction, operation, management and technical services with an objective of reducing the Department’s risk in mission execution due to infrastructure vulnerabilities. We support Department of Defense entities and agencies that operate or maintain major facilities, providing classified and unclassified architectural engineering services, engineering, procurement and construction services, as well as support services. We provide similar services to the Department of State and various intelligence agencies of the US government. We lead one of six teams that provide a wide range of support services under a $10 billion indefinite delivery/indefinite quantity, rapid response contract to the US Air Force under their Contract Augmentation Program (“AFCAP”). ·   Homeland Security. Homeland Security provides integrated solutions that reduce vulnerability to terrorist acts or similar hostile acts and that mitigate the consequences of such acts, with emphasis on high-value security systems, force protection and emergency preparedness and response services. We provide threat analysis and mitigation services to a variety of clients, domestic and international. We support one of the highest US priorities, the security of the nation and the safety of US citizens and assets abroad. The market for our services is principally derived from US Federal requirements and international governments and agencies that have similar security concerns and strategic assets that require protection. Concerns about border security have emerged as an area of global interest. We are positioning to serve those needs. With the creation of the Department of Homeland Security, we devote our considerable experience in security research and technologies to compete for resulting business. We are pursuing multiple opportunities for securing transportation systems and other critical infrastructure. Washington Group International is certified by the US Department of Homeland Security to provide anti-terrorism services for cargo-container facilities at ports in the US. The Defense business unit applies our comprehensive skills to create cost-effective solutions to operational challenges, drawing resources from all of Washington Group International’s business units. Such integration is essential to compete successfully in existing and emerging markets. We perform virtually all Defense work on a cost-reimbursable basis. Energy & Environment Our Energy & Environment business unit provides services to the US Department of Energy, which is responsible for maintaining the nation’s nuclear weapons stockpile, performing legacy environmental cleanup and remediation, and leading the development of next generation nuclear power. The services provided include construction, contract management, supply-chain management, quality assurance, waste management, facilities management, decontamination and decommissioning, environmental cleanup and restoration services. Energy & I-6 Environment provides safety management consulting and waste and environmental technology, engineered products, including radioactive waste containers and technical support services.   The Energy & Environment business unit also provides products and services to commercial clients, including the design and manufacture of engineered canisters to ship and store spent nuclear fuel, safety planning, integrated safety management consulting, facility operation, hazardous material management and licensing. The Energy & Environment business unit primarily serves the US Department of Energy in the environmental management market segment, while also serving the National Nuclear Security Agency by managing nuclear operations and the Department of Defense in selected engineering, design, construction, environmental cleanup, and remediation projects. There are currently three market units within Energy & Environment: Management Services, Projects and Consulting Services. We are positioning a fourth market unit, International, to provide the services of the existing three market units to international customers, primarily in the United Kingdom. ·   Management Services. Management Services focuses on Department of Energy site management and support contracts, under which key personnel are supplied to effectively manage existing site operations, infrastructure and human resources. Our current emphasis is managing complex, high-hazard facilities and operations using our experience in technology, commercial nuclear operations, safety and operations in a regulatory environment. Management Services has long-term management contracts with the Department of Energy. We serve three major programs within the Department of Energy, Environmental Management, Science and the National Nuclear Security Agency. The Environmental Management program consists of the environmental cleanup activities (radioactive and hazardous waste), resulting from the US government’s nuclear weapons program. Our key existing contracts include the Savannah River Site in South Carolina, the West Valley Nuclear Services Site in New York, the Idaho Cleanup Project in Idaho, the River Corridor Project in Washington   and the Waste Isolation Pilot Project in New Mexico. The Science program consists of facility and infrastructure management, such as our contract at the Idaho National Laboratory. The National Nuclear Security Agency consists of the Department of Energy’s defense programs and weapons production activities, such as our contracts at Los Alamos National Laboratory and production facilities at the Savannah River Site. These contracts range in term from five to ten years and may include options to renew for up to five years. ·   Projects. Projects provides life-cycle services to the Department of Energy and its prime contractors, as well as to other US government agencies. We utilize our skills in environmental remediation, design of complex high-hazard facilities and construction capability to service this market. We provide nuclear and high-hazard facility engineering, procurement and construction; nuclear and high-hazard facility deactivation, decommissioning, decontamination and dismantlement; and environmental characterization, design and remediation. Our work includes mid-level design, construction and environmental projects for the Department of Defense. We offer a broad portfolio of services and technologies to the Department of Energy, the Department of Defense and the EPA, with five distinct clients within the agencies. In the Department of Energy, we serve Environmental Management and the National Nuclear Security Agency. In the Department of Defense, our customers include the US Air Force Center for Environmental Excellence (“AFCEE”), the US Army Corps of Engineers and the US Navy Facilities Engineering Command. The Defense and Infrastructure business units are executing AFCEE contracts in Iraq. ·   Consulting Services . Consulting Services provides services to most Department of Energy sites. These services are also provided to other governmental agencies or commercial clients. The core products and services include safety analysis, regulatory services, criticality and radiological engineering, safeguards and security management and environmental services. We self-perform for our sites, support other sites and are equipped to provide services throughout the life cycle of a project. ·     Consulting Services is primarily concentrated in the Washington Safety Management Solutions LLC. Washington Safety Management Solutions LLC takes the expertise developed through our experience in the Department of Energy Management Services business and develops programs that are utilized at other Department of Energy and governmental sites and with commercial clients. The Department of Energy facilities are our principal customers. ·   International. International addresses new markets for our core services internationally, primarily in the United Kingdom, which is actively seeking such services to address their environmental legacies. We are currently providing cleanup support to several sites in the United Kingdom and are supporting project work with the Atomic Weapons Establishment. We believe we are well-positioned to compete for this work given our experience and the scope of our projects in the hazardous environmental management field in the US. For financial information about each of our business units, geographic areas in which we operate, and additional disclosures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Business Unit Results” in Item 7 of this report and Note 10, “Operating Segment, Geographic and Customer Information,” of the Notes to Consolidated Financial Statements in Item 8 of this report. MATERIAL CUSTOMERS During 2006, ten percent or more of our total consolidated revenue was derived from contracts and subcontracts performed by the Power, Infrastructure, Industrial/Process, Defense and Energy & Environment business units for the following customers:     Percent of Consolidated Revenue   Department of Defense     27 % Department of Energy     23 % Although we presently have positive relationships with the Department of Defense and the Department of Energy, the loss of these customers, or significant reductions in government funding, could have a material adverse effect primarily on our Defense and Energy & Environment business units as well as on our company as a whole. See Item 1A, “Risk Factors,” later in this report. GOVERNMENT CONTRACTS AND BACKLOG Government funded contracts continue to be a significant part of our business.   We derived 51 percent of our consolidated operating revenue in 2006 from contracts with the US government, including 10 percent from work performed in Iraq. We also have a number of US government contracts that extend beyond one year and for which government funding has not yet been approved. All US government contracts and some foreign contracts are subject to unilateral termination at the convenience of the customer. Backlog represents the total value of all awarded contracts that have not been completed and will be recognized as revenue or as equity in income over the life of the project. Backlog includes our proportionate share of non-consolidated construction joint venture contracts. Backlog for government contracts includes only two years’ worth of the portions of such contracts that are currently funded or that we are highly confident will be funded. Backlog associated with mining service contracts and ventures is limited to the revenue and equity in income to be recognized during the next five years. The reported backlog excludes $3.1 billion of government contracts for work to be performed beyond December 2008 and $0.8 billion of mining service contracts and equity in income from mining ventures beyond 2011. We have indefinite delivery/indefinite quantity (“ID/IQ”) contracts that are signed contracts under which we perform work only when the client issues specific task orders. The terms of these contracts include a maximum I-7 contract value and a specified time period that may include renewal option periods at the client’s discretion. While we believe that we will continue to receive work over the entire term, because of the uncertainty of the renewals and our dependence on the issuance of individual task orders for new projects, we cannot be assured that we will ultimately realize the maximum contract value for any particular contract. Only those task orders that are signed and funded are included in backlog. Backlog at December 29, 2006, totaled $5.6 billion compared with backlog of $4.9 billion at December 30, 2005. Approximately $1.8 billion of the backlog at December 29, 2006, was comprised of US government contracts that are subject to termination by the government, $0.5 billion of which had not yet been funded. Historically, we have not experienced significant reductions in funding of US government contracts once they have been awarded. Terminations for the convenience of the government generally provide for recovery of contract costs and related earnings. Approximately $2.9 billion, or 52 percent, of backlog at December 29, 2006, is expected to be recognized as contract revenue or as equity in income in 2007, compared to $2.4 billion, or 50 percent, at December 30, 2005. Although backlog reflects business that we consider to be firm, cancellations or scope adjustments may occur.  Composition of backlog (In millions) Year Ended December 29, 2006 Year Ended December 30, 2005 Cost-type and target-price contracts $4,484.7 80% $3,465.8 71% Fixed-price and fixed-unit-price contracts 1,120.1 20% 1.414.5

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