Fluor Corporation 2000 Annual Report

Fluor Daniel made significant progress during the year toward achieving its goals for improved performance and profitability. Implementation of a rigorous business model methodology, along with substantial actions to enhance its project execution platform, has positioned the company for meaningful improvement.

Importantly, while backlog remained essentially level with a year ago at $6.7 billion, increased selectivity produced a 32 percent improvement in backlog gross margin. New awards for the year increased 28 percent to $6.1 billion, and the outlook is for continued strengthening across Fluor Daniel’s target markets.

However, Fluor Daniel’s financial performance was impacted by a cost overrun on a lump-sum power project, which reduced earnings by $60 million. Despite this disappointment, selected risk projects offer significant opportunity for improved profitability. Fluor Daniel has placed the highest priority on enhancing its systems and capabilities to capitalize on these opportunities, while mitigating the potential for negative surprises. For 2000, Fluor Daniel’s operating profit was $128 million, compared with $160 million in 1999.

Market conditions are showing distinct improvement. The global economic outlook continues to be favorable, and oil and commodity prices have strengthened, providing clients with increased cash flow for new capital projects. The strengthening outlook for new awards, along with a sharp rise in front-end studies, is providing a strong signal for future growth in backlog and earnings.

Energy & Chemicals
During the year, Fluor Daniel took action to leverage synergies across common clients and reduce its operating cost structure by combining its chemicals business with the Oil, Gas & Power unit. Renamed Energy & Chemicals, it serves the upstream production, refining, power generation and chemical markets. This consolidation increases efficiencies by leveraging resources and skill sets that are commonly needed to execute projects across these diverse industries. It also reduces vulnerability to business cycles through greater resource sharing across a broader scope of market opportunities.

Conditions strengthened in the traditional energy market in the second half of the year, with rising oil prices and improving global economic activity. The domestic power market remained strong, and the petrochemicals market is beginning to show signs of renewed activity. Many new projects will be large, complex and often in geographically challenging locations. These are precisely the kinds of projects where Fluor Daniel’s global reach, scale and historical execution experience provide differentiated capability and value.

Recovery of the upstream market for new oil and gas production continued in 2000, with several significant projects emerging. Fluor Daniel has been active on major pipeline projects and, more recently, has established an Offshore Services Division to expand participation in this growing market.

Environmental regulations, primarily in North America and Europe, are driving significant investment in the downstream refining market, where Fluor Daniel’s experience and technological expertise position it as a leader in these clean fuels projects. The company is providing these services at one of the largest oil refineries in Germany, enhancing its competitive position for additional work in Europe. In addition, Fluor Daniel is a significant participant in the development of several oil sands projects in Canada and is the lead EPC contractor for a $1 billion crude oil upgrader project in Venezuela.

Duke/Fluor Daniel, our joint venture company serving the power industry, has established clear leadership in this rapidly growing market fueled by strong demand for new power generating capacity, primarily in the U.S. The outlook for new awards remains strong, with many projects being negotiated on a sole source basis.

Robust economic growth during the past two years, combined with the effect of rising oil prices, is beginning to stimulate early signs of recovery in the chemicals market. In particular, Fluor Daniel received a project management award for a major petrochemical project in China and was named managing contractor for another significant petrochemical project in the Middle East, with additional project opportunities continuing to develop.

Infrastructure
Fiscal 2000 was an extremely active proposal and development period for Fluor Daniel’s Infrastructure business unit. We are well positioned in the early stages of a long-term infrastructure expansion cycle in the U.S. and the U.K.

Two years ago, the U.S. Federal Government enacted a $200+ billion transportation funding bill called TEA 21, which is now generating a high level of activity across the U.S., particularly in the area of large, complex design/build projects where the unit has proven so successful in recent years. In late June, Fluor Daniel completed the first segment of the Conway Bypass project significantly ahead of schedule.

Additionally, the U.K. is embarking on a major upgrade and expansion program for its national rail network. As a result, our current contract to provide program management services to Britain’s Railtrack is being expanded to further assist them in accelerating their £40+ billion program. In addition, a number of significant rail projects in the U.K. and Europe, which are using the public/private partnership model successfully employed by Fluor Daniel are continuing to move ahead. The Infrastructure unit has expanded its presence in Europe to respond to these increasing opportunities.

In September 2000, Fluor Daniel completed its assignment on the Inchon Airport in Korea and began work on another major expansion of the JFK International Arrivals Terminal in New York. Additional opportunities for airport terminal projects in the U.S. and Asia are under evaluation.

Fluor Daniel’s first project executed in the Czech Republic is expected to be complete two months ahead of schedule and has already achieved more than 2 million safe manhours. Under a lump sum contract, Fluor Daniel is constructing a hydroprocessing complex for Ceska Rafinerska a.s. where integration of multiple process technologies has substantially reduced costs.

Fluor Daniel, one of the nation’s leading developers of turnkey transportation projects, is responsible for development, design, and construction of the 28-mile Conway Bypass. This is the first highway project in South Carolina to use a design-build approach. The initial segment was opened 17 months ahead of schedule.

Duke/Fluor Daniel provided complete turnkey engineering, procurement, construction and commissioning services for a 500-megawatt combined-cycle generating facility in Edinburg, Texas. This state-of-the-art merchant facility, operational on June 10, 2000, will play a major role in helping meet the rapidly growing Rio Grande Valley’s demand for electricity.

Manufacturing & Life Sciences
During the year, Fluor Daniel’s Life Sciences and Manufacturing units were consolidated to leverage the resources of both organizations, achieve new efficiencies, and create a solid platform for future growth. This consolidation capitalizes on synergies with the unit’s specialized construction management expertise for pharmaceutical and biotechnology facilities and augments its EPC services to the microelectronic, foods and beverage, and consumer products industries. Employing a new account management process, Manufacturing & Life Sciences focused on establishing strong key client relationships in targeted markets. The unit’s fundamental value proposition is the delivery of early certainty for function, cost and schedule.

A significant project during the year was the Pfizer Global Development Facility in New London, CT. When completed, this new world-class $270 million facility will be the center of Pfizer’s worldwide regulatory compliance activities. Leading-edge technology will course through the entire building, facilitating a fast-paced, discovery-fueled environment. This business unit also selectively executes sophisticated commercial and institutional projects such as the publicly celebrated Aladdin Hotel and Casino in Las Vegas –– a $1.4 billion rebuild which was completed on schedule in August.

Establishing itself as one of the top three service providers in the high-growth microelectronics market, Fluor Daniel is now a preferred EPC contractor for the world’s largest semiconductor manufacturers. In 2000, evergreen contracts for three key clients accounted for a significant increase in business volume, with services primarily focused on installing advanced toolsets for new, state-of-the-art manufacturing facilities.

A long-time leader in serving biotechnology customers, Fluor Daniel’s preeminent skill base also provides a solid offering to its pharmaceutical clients who are increasingly moving into the biotechnology arena. Fluor Daniel successfully focused its efforts on establishing a firm base with three key pharmaceutical clients during 2000. Particular emphasis was placed on the secondary market for “fill and finish,” where a high level of technological expertise is required.

Mining
Following a year of restructuring, downsizing and refocusing in 1999, Fluor Daniel’s Mining unit achieved an impressive turnaround in 2000, with a return to profitability and a solid increase in backlog. It successfully completed the world’s largest grassroots copper mining facility, located in Indonesia.

Improving commodity prices and increasing global economic growth is continuing to support a long-term recovery in mining. Consolidation of mining companies into fewer but larger organizations has dampened near-term growth in new investment. However, it is also driving a new mindset in the industry aimed at reducing cyclicality and closer partnering with contractors, particularly as clients reduce the level of their in-house capabilities. Discussions are underway with a number of clients regarding the formation of strategic alliances.

Fluor Constructors International
Fluor Constructors International, Inc. (FCII) is the union craft arm of Fluor Corporation, providing construction management and direct-hire construction expertise to Fluor Daniel and other companies in North America. Additionally, FCII staffs international projects and has employees working around the world.

FCII has executed projects in virtually every business sector, performing stand-alone construction and providing maintenance services to clients in the United States and Canada. The company has served a diverse range of government agencies as well. FCII is one of only a few construction and maintenance contractors to be ISO-9002 certified.

Fluor Corporation, One Enterprise Drive, Aliso Viejo, CA 92656-2606 U.S.A. Tel: 949.349.2000 Fax: 949.349.5271 © 2000 Fluor Corporation. All Rights Reserved. Fluor is a registered service mark of Fluor Corporation.