SmartMoney.com
Sparking a Rally
Wednesday September 3, 5:37 pm ET
By Lawrence Carrel
Shaw Group Inc. (NYSE:SGR - News)
Share price as of Tuesday's close: $8.75
Share price now: $10.47
Change: 19.7%
Volume: 3.6 million shares, daily average 1.1 million shares
Last time this low: July 11, 2003
52-week high: $19.34
52-week low: $6.80
Forward P/E before announcement: 8.3
Forward P/E after announcement: 9.9
WORD OF A multimillion-dollar agreement to
build a power plant in New York City electrified
Shaw Group's (NYSE:SGR - News) stock on
Wednesday.
While lawmakers wrangle over who was at fault
for the blackout that darkened a large swath of
North America last month, Shaw seems to be
doing its part to be sure the lights don't go out on
Broadway again. Shares of the provider of
construction and engineering services sizzled 20%
higher to $10.47 after the company revealed that
its Stone & Webster subsidiary won a contract to
help build a 1,000-megawatt facility in the Big
Apple. The value of the deal could total as much
as $570 million.
Shaw, which booked revenue of $824 million for
its May quarter, depends on the electricity
industry for a big chunk of its business. But in the
wake of deregulation and the Enron debacle,
Shaw's shares have plunged from an all-time high
of $62.37 in April 2001. As electricity prices have tumbled, many power companies have put off expansion plans or
even canceled huge projects all together. And those projects are Shaw's bread and butter. Prior to Wednesday's
announcement, Shaw had seen its share price dive 47% year-to-date.
But since the Aug. 14 blackout, Shaw's stock has surged 44% on optimism that utilities will finally initiate power-grid
upgrades.
"We've been in the front lines working with the utilities by providing consulting services and diagnostic software to
help determine the root cause for the blackout," says Shaw Group spokeswoman Laurie LaChiusa. "It hasn't yet
produced revenue, but this is something that in the long term we could see some benefit from."
For now, Shaw, based in Baton Rouge, La., will focus on providing engineering, procurement and construction services
for the first phase of the New York project — a 500-megawatt power plant that will use both natural gas and fuel oil.
The plant will be located in the Astoria section of Queens. The project's financing is expected to be in place by the end
of 2003, and the facility is expected to go online by May 1, 2006. This is the second New York City power plant Shaw
is working on. Currently, it's completing construction for another power plant in Queens.
That's very good news for New York, a power-hungry market with limited capacity. During the blackout, parts of the
city suffered without electricity for more than 24 hours. But it's even better for Shaw. Over the past 12 months the
company has repeatedly lowered its earnings guidance, and in February Standard & Poor's dropped Shaw's bond rating to
junk status.
But questions remain whether the latest New York contract will be enough to help Shaw conquer its growing debt load.
"The key takeaway is the Astoria project helps, but not enough to help Shaw address the liquid-yield-option-notes debt,
which is putable in May of 2004," says First Albany analyst Sanjay Shrestha.
According to Karen David-Green at Credit Lyonnais Securities, Shaw issued $790 million worth of the liquid yield
option notes, known as Lyons, in May 2001. The zero-coupon convertible notes are both callable by the issuer and
putable by the investor. It's likely, says David-Green, that Shaw will be compelled to redeem about $277 million worth
of the notes next May. (David-Green doesn't own shares of Shaw Group; Credit Lyonnais Securities has a
commercial-lending relationship with Shaw, but not an investment-banking relationship.)
Continues Shrestha: "That means if the holder calls the Lyons debt, the company would have to come up with $278
million.... While at first glance it appeared to us that the company could now address the [debt], following further
analysis and discussions with analysts in the industry we remain concerned that this announcement is unlikely to
alleviate liquidity concerns."
Shrestha says even with the company's $165 million in unrestricted cash and a portion of its $95 million in restricted
cash, Shaw will still potentially need anywhere from $15 million to $70 million to meet debt obligations. As a
consequence he thinks this will force the company to issue more debt or equity in 2004, diluting the stake of current
shareholders.
Shaw brushed aside Shrestha's concerns. "In July we indicated that with the cash flow we expect to generate and with
the cash on hand we can pay the debt with cash," says spokeswoman LaChiusa. "We are evaluating all options as well.
We can issue stock or do a debt refinancing."
Quote:
"In the announcement Shaw put out today, it's important to note it's not something people weren't expecting," says
Shrestha of First Albany. "This was part of guidance. This is in line with expectations and not a price that popped up
and shocked everyone. The debt issue is pretty significant, and we would encourage investors to capitalize on this move
and liquidate their positions on strength as the company still needs to issue debt or equity to address the Lyons debt."
(Shrestha doesn't own shares of Shaw Group; First Albany doesn't have an investment-banking relationship with the
company.)
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