Fitch Affirms Fluor's IDR at 'A-'; Outlook to Positive

Business Wire, July 3, 2008

CHICAGO -- Fitch has affirmed the ratings for Fluor Corporation and revised the Rating Outlook to Positive.

-- Issuer Default Rating (IDR) at 'A-';

-- Senior unsecured bank facilities at 'A-';

-- Senior unsecured notes at 'A-';

-- Commercial paper at 'F2'.

Approximately $325 million of debt was outstanding at March 31, 2008.

The revision of the Rating Outlook to Positive reflects Fluor's solid operating performance, low financial leverage, declining write-offs related to cost-overruns on projects, improving liquidity, and growing backlog in its Oil and Gas segment. The company has the capacity to further build its competitive position and financial profile as it executes on its attractive project portfolio and takes advantage of continued strong demand in the energy sector. An eventual upgrade in the ratings would depend on Fluor's ability to realize higher revenue, earnings and cash flow, combined with stronger liquidity, the maintenance of existing low levels of debt, and limited project write-offs. The Outlook would return to Stable if the company is unable to build and sustain improved credit metrics, possibly as a result of weaker than expected operating results or an unanticipated increase in discretionary spending.

The ratings are supported by Fluor's franchise presence in its engineering and construction markets, the diversification provided by a broad mix of clients, and the ability to undertake large, complex projects. The company's exposure to economic cycles is partly offset by its relatively stable construction services businesses. Much of Fluor's recent growth is attributable to the Oil and Gas segment where backlog has tripled during the past two years to $20 billion. The increase is related to high demand in global energy markets that has supported projects for production facilities, pipelines, refineries and petrochemical plants. Fluor expects the current level of new awards to be sustained at least through 2008. New award activity in Fluor's other segments has been relatively stable but the Power and the Industrial and Infrastructure segments could see benefits from long-term demand trends in mining and power generation.

A gradual rise in Fluor's margins reflects the company's disciplined bidding and risk management policies. Margins also reflect the impact of the company's strong revenue growth which allows Fluor to be selective about the terms of its contracts. While margins may not increase substantially over current levels, favorable contract terms may help control the risk of cost overruns that represent the primary credit concern. Project write-offs have declined in recent periods as Fluor has gradually completed certain projects in the Industrial and Infrastructure and Government segments. In Fitch's view, the write-offs reflect challenges specific to those projects rather than any shortcomings in Fluor's risk management process. Nevertheless, the risk of cost overruns, which are inherent to Fluor's business and represent the primary rating concern, could prompt a review of the ratings if they are unusually high.

The ratings and Outlook also incorporate Fitch's expectation that Fluor will continue to maintain a strong balance sheet and low leverage. A strong financial profile is an important part of the company's ability to win new contracts and provide for working capital funding and other financial support such as performance bonds and letters of credit. Fluor has supported its growing project portfolio by managing working capital requirements effectively, including client advances. At March 31, 2008, Fluor reported $1.9 billion of cash and marketable securities, approximately half of which was funded by client advances. Liquidity has also been supported by Fluor's conservative cash deployment that has helped to limit the company's use of debt. A potential credit concern would be the impact on liquidity and leverage from future discretionary spending for acquisitions or share repurchases. Although Fluor has not relied on acquisitions to support growth, it would be willing to make a large acquisition, as demonstrated by its offer in 2006 to acquire British Nuclear Fuels for $750 million. Another potential use of cash by Fluor is represented by $307 million of convertible senior unsecured notes due in 2024 that represent most of the company's debt. As a result of the rise in Fluor's stock price, the notes have increased significantly in market value and are currently redeemable at the holders' option. Fluor has committed to repurchase the principal amount of the notes for cash and has the option of using cash or equity for the remainder. Through March 31, 2008, only $23 million of the notes had been redeemed since they were issued in 2004.

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