Fluor plans to rebound by reducing fixed-price risk on P3s
Fluor Corp., one of the nation’s largest players in public-private partnerships, aims to reduce risk exposure on infrastructure projects as it sells $1 billion of assets under a new strategic plan, officials said.
“Fluor Corporation has had rough times in its 107-year history, but has always come through those and emerged stronger than before,” executive chairman Alan Boeckmann told analysts in a call last week. “So it's in that vein that we worked to define the steps to creating a new Fluor.”
The company's leaders say it will shed some assets and focus on its core North American infrastructure business.
Under its strategic plan, the Irving, Texas-based engineering and construction giant will sell its Government unit that works primarily on federal nuclear projects and site cleanups such as the Savannah River Project in South Carolina and the Idaho clean-up site. The government division accounts for about 17% of the company's $19 billion of revenues.
Fluor’s AMECO (American Equipment Co.) that supplies railway and industrial equipment is also for sale. Unloading the two units is expected to raise about $1 billion. The company is also selling equity in unspecified projects and planning to reduce costs by $100 million per year.
Fluor has taken quarterly charges of more than $1 billion in the past year and seen its market value fall by two-thirds since 2014, even with stock buybacks.
On Friday, Moody’s Investors Service downgraded the company to the lowest investment-grade rating of Baa3 with a stable outlook from Baa2, negative.
“Fluor's credit profile is constrained by the elevated risks associated with some of its large and complex projects along with its historically low margins, which provide little room for lower than expected productivity and other unforeseen issues that have begun to arise more consistently on its fixed-price projects,” Moody’s said. “This has led to a deterioration in its operating performance after it had increased its borrowings to ramp up spending on strategic investments and shareholder returns a few years ago, and has resulted in credit metrics that are weak for its current rating.”
S&P Global Ratings lowered Fluor to BBB with a negative outlook from BBB-plus on Aug. 19.
Fluor officials said last week that the company’s goal is to retain an investment-grade rating, an important factor in P3 projects when private equity is involved.
“We plan to monetize certain real estate assets and some of our P3 investments,” Boeckmann said. “Ownership of equity stakes is not core to Fluor's operations.”
Analysts have noted the risk that fixed-cost projects pose for Fluor and other large engineering and construction companies. Fixed-cost projects include public infrastructure as well as Fluor’s energy facilities, such as liquefied natural gas refineries.
“We believe volatility in the company's credit measures increased because of the higher percentage of fixed-price projects in its backlog,” S&P analyst Robyn Shapiro noted in the report on Fluor’s downgrade. “Fluor's customers and the industry have increasingly moved away from cost-reimbursable work in an attempt to reduce risk. Thus, the percentage of fixed-price work in Fluor's backlog was 49% as of June 30, 2019, an increase from 37% as of Dec. 31, 2017, and 19% four years earlier.”
The company said it will only seek lump-sum projects where the terms and conditions have an appropriate allocation of risk between client and contractor. Projects will be subject to Fluor's initial bid approvals followed by a later final bid approval by the company's executive team.
“It's worth noting here that even with the divestiture of our government business, the fixed-price projects will remain with Fluor until they are complete,” chief executive Carlos Hernandez said.
Hernandez, the firm's longtime chief legal officer, was promoted in May following the resignation of David Seaton following a series of disappointing financial results.
With 2018 revenue of $19.2 billion and more than 53,000 employees worldwide, Fluor plans to focus its infrastructure business in North America, particularly in states where it already has relationships with transportation departments. Those states include Texas, Arizona, California, Virginia and North Carolina, the company said.
“Right now, we have a number — we've got, maybe, 17, 18 projects in that business and we are pretty busy in Infrastructure right now,” Hernandez said. “So I expect it will maintain that level or something comparable to that going forward, as we finish existing projects. We are about to start a new project here in Dallas, the I-635 project. It was I think, a $1.7 billion project. So that's a significant — we've gotten a lot of work in Texas, and it's one of our core markets right now.”
A Fluor joint venture recently secured a $263 million contract from the North Carolina Department of Transportation to update and expand an interstate highway. The joint venture will build seven new bridges and add two new lanes in each direction within a seven-and-a-half-mile stretch of Interstate 26.
Fluor is also working toward a late-December opening of the $1.66-billion Loop 202 South Mountain Freeway in Phoenix, the largest highway construction project and highway public-private-partnership in Arizona history.
The 22-mile route that spans the Salt River by using twin 2,600-ft-long bridges required extensive utility work as well as approvals from the Gila River Indian Community.
Fluor’s projects have ranged from the $1.8 billion San Francisco-Oakland Bay Bridge east span to the $3.1 billion Tappan Zee Bridge project in New York.
In March, Fluor and its partners launched construction of the $4.9 billion Los Angeles International Airport’s People Mover project scheduled for completion in 2023. Fluor is part of a consortium called LAX Integrated Express Solutions (LINXS) that includes ACS Infrastructure Development, Balfour Beatty, Bombardier Transportation, Dragados USA, Flatiron and Hochtief PPP Solutions.
Fluor’s rail projects include the $2.1 billion Eagle Commuter Rail P3 in Denver, the $5.6 billion Purple Line light rail P3 in Maryland and the $2.3 billion design-build MBTA Green Line in Boston. The Denver project was the first commuter rail P3 in the nation.
Some of those projects have run into trouble. The Eagle P3 partners are involved in litigation with Denver’s Regional Transportation District over who should bear the cost of delays due to regulatory issues on rail crossing equipment.
“New P3 awards are expected to improve margins,” Hernandez said. “Infrastructure is a strong Fluor brand for megaprojects. And we have taken on initiatives to reduce our risk and shrink our footprint by focusing on states with an established track record and our ability to leverage DOT relationships.”
The shift toward more fixed-cost contracts in recent years was the result of intense competition that increased customers' bargaining power as well as a change in the mix of projects to those typically completed on a fixed-price basis, according to Moody’s Investors Service.
“Fixed-price projects should theoretically provide an opportunity for higher margins, but they also present much greater downside risks,” Moody’s analysts led by Michael Corelli noted in a Sept. 10 report.
“Competition among engineering and construction companies led them to bid aggressively on projects and they were then hurt by lower-than-expected labor productivity, unforeseen execution issues and unusual weather events,” Corelli said. “The inability of management to anticipate these issues or include contingencies for unexpected events in their bids indicate shortcomings in risk management and execution.”
Fluor announced $668 million of project charges in the second quarter of 2019, raising its total to more than $1 billion of charges in the past year, according to Moody’s.