CB&I announced Tuesday it will recognize a pre-tax charge of approximately $317 million or $2.38 per share in the second quarter for forecasted cost overruns associated with two major LNG projects in the UK.
Continued poor labor productivity, weather delays, and the need to supplement critical subcontractor areas will adversely impact the schedule and necessitate substantial expenditures well above previous estimates. These additional costs, which will be concentrated in the next three to four months, are required to complete the projects and meet the urgent need for natural gas imports into the UK prior to the upcoming heating season.
"We are extremely disappointed with the negative impact these two projects had on the Company's profitability," said Philip K. Asherman, President and CEO. "We have been working diligently for nearly two years to mitigate increasing labor costs and weather delays, while maintaining our commitment to have these facilities ready for first gas in time for the upcoming heating season. In order to meet the project objectives, it became clear in the second quarter that we would have to compensate for inadequate subcontractor performance and an increasingly difficult trade union environment."
The project charges will cause CB&I to be out of compliance with its lender agreements. The company believes that based on the strength of its backlog and solid financial condition, it will successfully obtain the necessary amendments.
With both projects scheduled for first gas early in the fourth quarter and with continued strong performance from the balance of the backlog, the Company's updated annual earnings guidance is $0.40 to $0.60 per share. CB&I will provide finalized quarterly results on July 30.
The South Hook project was awarded to CB&I in November 2004 and Isle of Grain was awarded in March 2005. When fully operational, these two new facilities will be the receiving point for nearly 35 percent of the natural gas supply into the UK.
Excluding these two UK projects, the performance from the Company's backlog continues to improve across all market sectors. CB&I believes this will continue throughout 2009 given strong market conditions, current project forecasts and a significant reduction in higher-risk projects as an overall percentage of the total backlog. During the past year, the Company has adjusted its portfolio mix from approximately 90% higher-risk projects down to 55%. It is targeting a portfolio of no more than 20 to 25% higher-risk work by the end of 2009.