**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.   20549**

 

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** **

**FORM 10-K**

 

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**Annual Report Pursuant toSection 13 or 15(d) of the Securities Exchange Act of 1934**

 
| **For the Fiscal Year Ended December 31, 2004** | ** ** | **Commission File Number 1-12054** |
|-------------------------------------------------|------------|------------------------------------|

 

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**WASHINGTON GROUP INTERNATIONAL, INC.**

 

**720 PARK BOULEVARD, BOISE, IDAHO 83712**

 

**A Delaware CorporationIRS Employer Identification No. 33-0565601208 / 386-5000**

 

**SECURITIESREGISTERED PURSUANT TO SECTION 12(b) andSECTION 12(g) OF THE ACT**

 

Securities registeredpursuant to Section 12(b) of the Exchange Act: **None**

 

Securitiesregistered pursuant to Section 12(g) of the Exchange Act:

 
| **Title of  class**                     | ** ** | **Title of  class**              |
|-----------------------------------------|------------|----------------------------------|
| Common Stock,  $.01 par value per share | ** ** | Preferred Stock  Purchase Rights |

 

**COMPLIANCEWITH REPORTING REQUIREMENTS**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for the past90 days.   ý   Yes  o  No

 

Indicate by check markwhether the registrant has filed all documents and reports required to be filedby Section 12, 13, or 15(d) of the Exchange Act subsequent to the distributionof securities under a plan confirmed by a court.   ý   Yes    o  No

** **

**DISCLOSUREPURSUANT TO ITEM 405 OF REGULATION S-K**

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.**  **ý

 

Indicate by check markwhether the registrant is an accelerated filer. ý   Yes    o No

 

**AGGREGATEMARKET VALUE OF COMMON STOCK HELD BY NON-AFFILIATES**

At February 18, 2005, theaggregate market value of the registrant’s common stock held by non-affiliatesof the registrant, based on the closing price on February 18, 2005, as reportedon the NASDAQ National Market®, was approximately $1,096,864,765. At July 2,2004 (the last business day of the registrant’s most recently completed secondfiscal quarter), the aggregate market value of the registrant’s common stockheld by nonaffiliates of the registrant, based on the closing price on July 2,2004, as reported by the NASDAQ National Market®, was approximately$892,572,095.

 

The number of shares of common stock outstanding as ofFebruary 18, 2005 was 25,595,718.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

Portions of theregistrant’s definitive proxy statement for its annual meeting of stockholdersto be held on May 19, 2005, which is expected to be filed with the Securitiesand Exchange Commission not later than April 19, 2005, are incorporated byreference into Part III of this report on Form 10-K. In the event such proxystatement is not filed by April 19, 2005, the required information will befiled as an amendment to this report on Form 10-K no later than that date.

 

 

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**WASHINGTONGROUP INTERNATIONAL, INC.**

 

**Form 10-K**

**AnnualReport**

**For theFiscal Year Ended December 31, 2004**

 

**TABLE OFCONTENTS**

 
|       | Note  Regarding Forward-Looking Information                                                                             |       |
|------------|-------------------------------------------------------------------------------------------------------------------------|------------|
|       |                                                                                                                    |       |
|       | **PART I**                                                                                                              |       |
|       |                                                                                                                    |       |
| Item 1.    | Business                                                                                                                |       |
| Item 2.    | Properties                                                                                                              |       |
| Item 3.    | Legal Proceedings                                                                                                       |       |
| Item  4.   | Submission  of Matters to a Vote of Security Holders                                                                    |       |
|       |                                                                                                                    |       |
| ** ** | **PART II**                                                                                                             | ** ** |
| ** ** | ** **                                                                                                              | ** ** |
| Item  5.   | Market  for the Registrant’s Common Equity, Related Stockholder Matters And Issuer  Purchases of Equity Securities |       |
| Item 6.    | Selected Financial  Data                                                                                                |       |
| Item  7.   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                             |       |
| Item 7A.   | Quantitative  and Qualitative Disclosure About Market Risk                                                              |       |
| Item  8.   | Financial  Statements and Supplementary Data                                                                            |       |
| Item  9.   | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                                   |       |
| Item 9A.   | Controls and  Procedures                                                                                                |       |
| Item 9B.   | Other Information                                                                                                       |       |
|       |                                                                                                                    |       |
|       | **PART  III**                                                                                                           |       |
|       |                                                                                                                    |       |
| Item  10.  | Directors  and Executive Officers of the Registrant                                                                     |       |
| Item 11.   | Executive Compensation                                                                                                  |       |
| Item  12.  | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                        |       |
| Item  13.  | Certain  Relationships and Related Transactions                                                                         |       |
| Item  14.  | Principal  Accountant Fees and Services                                                                                 |       |
|       |                                                                                                                    |       |
|       | **PART IV**                                                                                                             |       |
|       |                                                                                                                    |       |
| Item  15.  | Exhibits  and Financial Statement Schedule                                                                              |       |
|       |                                                                                                                    |       |
|       | **SIGNATURES**                                                                                                          |       |

 

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**NOTEREGARDING FORWARD-LOOKING INFORMATION**

 

This report containsforward-looking statements. You can identify forward-looking statements by theuse of terminology such as “may,” “will,” “anticipate,” “believe,” “estimate,” “expect,”“future,” “intend,” “plan,” “could,” “should,” “potential” or “continue,” orthe negative or other variations thereof, as well as other statements regardingmatters that are not historical fact. These forward-looking statements include,among others, statements concerning:

 

•                  Ourbusiness strategy and competitive advantages

 

•                  Ourexpectations as to potential revenues from designated markets or customers

 

•                  Ourexpectations as to operating results, cash flows, return on invested capitaland net income

 

•                  Ourexpectations as to new work and backlog

 

•                  Themarkets for our services and products

 

•                  Ouranticipated contractual obligations, capital expenditures and fundingrequirements

 

Forward-lookingstatements are only predictions. The forward-looking statements in this reportare subject to risks and uncertainties, including, among others, the risks anduncertainties identified in this report and other operational, business,industry, market, legal and regulatory developments, which could cause actual eventsor results to differ materially from those expressed or implied by theforward-looking statements. Important factors that could prevent us fromachieving the expectations expressed include, but are not limited to, ourfailure to:

 

•                  Manageand avoid delays or cost overruns on existing and future contracts

 

•                  Maintainrelationships with key customers, partners and suppliers

 

•                  Successfullybid for, and enter into, new contracts on satisfactory terms

 

•                  Successfullymanage and negotiate change orders and claims with respect to existing andfuture contracts

 

•                  Manageand maintain our operations and financial performance and the operations andfinancial performance of our current and future operating subsidiaries andjoint ventures

 

•                  Respondeffectively to regulatory, legislative and judicial developments, including anylegal or regulatory proceedings, affecting our existing contracts, includingcontracts concerning environmental remediation and restoration

 

•                  Obtainand maintain any required governmental authorizations, franchises and permits,all in a timely manner, at reasonable costs and on satisfactory terms andconditions

 

•                  Satisfythe restrictive covenants imposed by our revolving credit facility and suretyarrangements

 

•                  Maintainaccess to sufficient working capital through our existing revolving creditfacility or otherwise

 

•                  Maintainaccess to sufficient bonding capacity

 

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Some other factors thatmay affect our businesses, financial position or results of operations include:

 

•                  Accidentsand conditions, including industrial accidents, labor disputes, geologicalconditions, environmental hazards, weather and other natural phenomena

 

•                  Specialrisks of international operations, including uncertain political and economicenvironments, acts of terrorism or war, potential incompatibilities withforeign joint venture partners, foreign currency fluctuations and controls,civil disturbances and labor issues

 

•                  Specialrisks of contracts with the government, including the failure of applicablegoverning authorities to take necessary actions to secure or maintain fundingfor particular projects with us, the unilateral termination of contracts by thegovernment and reimbursement obligations to the government for funds previouslyreceived

 

•                  Theoutcome of legal proceedings

 

•                  Maintenanceof government-compliant cost systems

 

•                  Theeconomic well-being of our private and public customer base and its ability andintentions to invest capital in engineering and construction activities

 

**PART I**

 

**ITEM 1. BUSINESS**

 

Unless otherwiseindicated, the terms “we,” “us” and “our” refer to Washington GroupInternational, Inc. (“Washington Group International”) and its consolidatedsubsidiaries; references to 2004 are references to our fiscal year endedDecember 31, 2004; references to 2003 are references to our fiscal year endedJanuary 2, 2004; and references to 2002 are references to our one month endedFebruary 1, 2002 combined with our eleven months ended January 3, 2003.

 

Our common stockcurrently trades on the NASDAQ National Market® under the ticker symbol “WGII.”We also have outstanding three tranches of warrants to purchase shares of ourcommon stock which trade in the over-the-counter market on the OTC Bulletin Board®.All of the warrants expire on January 25, 2006. The Tranche A warrants, whichhave an exercise price of $28.50 per share, trade under the ticker symbolWGIIW.OB; the Tranche B warrants, which have an exercise price of $31.74, tradeunder the ticker symbol WGIIZ.OB; and the Tranche C warrants, which have anexercise price of $33.51 per share, trade under the ticker symbol WGIIL.OB.

 

We file annual reports onForm 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K andother information with the Securities and Exchange Commission (the “SEC”). Thepublic can obtain copies of these materials by visiting the SEC’s PublicReference Room at 450 Fifth Street, NW, Washington DC 20549, or by calling theSEC at 1-800-SEC-0330, or by accessing the SEC’s website at http://www.sec.gov.In addition, as soon as reasonably practicable after such materials are filedwith or furnished to the SEC, we make copies available to the public free ofcharge on or through our website at http://www.wgint.com. The information onour website is not incorporated into, and is not part of, this report.

 

We have adopted a Code ofBusiness Conduct and Ethics (the “Code”) which requires all employees, officersand directors of Washington Group International, Inc. to act, at all times andplaces, as law-abiding, responsible, and responsive citizens. The Code ispublished on our website at http://www.wgint.com under Company Information:Investor Relations, Company Overview. A copy of the Code is available bycontacting us through our website under Investor Relations, or by writing tothe Investor Relations Department at the corporate headquarters.

 

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Our principal executive offices are located at 720Park Boulevard, Boise, Idaho 83712. Our telephone number is (208) 386-5000.

*** ***

**GENERAL**

 

We are an internationalprovider of a broad range of design, engineering, construction, constructionmanagement, facilities and operations management, environmental remediation andmining services. We offer our various services separately or as part of anintegrated package throughout the life cycle of a customer’s project.

 

•                  Inproviding engineering and design services, we participate in theconceptualization and planning stages of projects that are part of ourcustomers’ overall capital programs. We develop the physical designs anddetermine the technical specifications. We also devise project configurationsto maximize both construction and operating efficiency.

 

•                  Asa contractor, we are responsible for the construction and completion of eachcontract in accordance with its specifications and contracting terms (primarilyschedule and total cost). In this capacity, we often manage the procurement ofmaterials, subcontractors and craft labor. Depending on the project, we mayfunction as the primary contractor or as a subcontractor to another firm.

 

•                  Onsome projects, we function as a construction manager, engaged by the customerto oversee other contractors’ compliance with design specifications andcontracting terms.

 

•                  Underoperations and maintenance contracts, we provide staffing, technical support,repair, renovation, predictive and preventive services to customer facilitiesglobally. We also offer other facility services, such as general buildingmaintenance and asset management. In addition, we provide inventory and productlogistics for manufacturing plants, information technology support, equipmentservicing and tooling changeover.

 

On some projects,particularly those of significant size and requiring specialized technology orknow-how, we partner with other firms, both to increase our opportunity to winthe contract and to manage development and execution risk. Partners mayinclude, among others, specialized process engineering firms, engineers,constructors, operations contractors or equipment manufacturers. Thesepartnerships may be structured as joint ventures or consortia, with eachparticipating firm having an economic interest relative to the scope of itswork.

 

We enter into four basictypes of contracts with our customers:

 

•                  Undera “fixed-price” contract, we provide the customer a total project for anagreed-upon price, subject to project circumstances and changes in scope. Wecommonly refer to fixed-price contracts under which the total project cost isdetermined up front as “lump-sum” contracts. Large design-build infrastructureprojects are typically awarded on a lump-sum basis.

 

•                  Undera “fixed-unit-price” contract, the customer pays us for materials, labor,overhead, equipment rentals or other costs at fixed rates as each unit of workis performed. Highway infrastructure and mining projects are typically awardedon a fixed-unit-price basis.

 

•                  Undera “target-price” contract, we provide the customer with a total project at atarget price agreed upon by the customer, subject to project circumstances andchanges in scope. Should costs exceed the target within the agreed-upon scope,we will generally absorb a portion of those costs to the extent of our expectedfee or profit; however, the customer reimburses us for the costs that we incurif costs continue to escalate beyond our expected fee. An additional fee may beearned if costs are below the target.

 

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•                  Undera “cost-type” contract, a customer reimburses us for the costs that we incur(primarily materials, labor, overhead and subcontractor services), plus apredetermined fee. The fee portion of the contract may be a percentage of thecosts incurred and/or may be based on the achievement of specific performanceincentives or milestones. The fee portion may also be subject to a maximum.Engineering, construction management and environmental and hazardous substanceremediation contracts, including most of our work for U.S. governmentcustomers, are typically awarded pursuant to a cost-type contract.

 

Both anticipated income and economic risk are greaterunder fixed-price and fixed-unit-price contracts than under target-price andcost-type contracts. We follow strict guidelines in bidding for and enteringinto all four types of contracts.

 

Some fixed-price contracts require the contractor toprovide a surety bond to its customer. This general industry practice providesindemnification to the customer if the contractor fails to perform itsobligations. Surety companies consider factors such as capitalization,available working capital, past performance and management expertise todetermine the amount of bonds they are willing to issue to a particularengineering and construction firm.

 

**BACKGROUND**

 

We were originallyincorporated in Delaware on April 28, 1993 under the name Kasler HoldingCompany. In April 1996, we changed our name to Washington Construction Group,Inc. On September 11, 1996, we purchased Morrison Knudsen Corporation, which werefer to in this report as “Old MK,” and changed our name to Morrison KnudsenCorporation. Our purchase of Old MK was structured as a merger with and into usand was an integral part of the reorganization of Old MK under a plan ofreorganization that Old MK filed in the U.S. Bankruptcy Court for the Districtof Delaware. We have no remaining obligations under that plan ofreorganization.

 

On March 22, 1999, we andBNFL Nuclear Services, Inc. (“BNFL”) acquired the government and environmentalservices businesses of CBS Corporation (now Viacom, Inc.). In this report, werefer to these businesses as the “Westinghouse Businesses.” The WestinghouseBusinesses currently make up a significant part of our Energy & Environmentbusiness unit and a small part of our Defense business unit. See Note 17 “Agreementto acquire BNFL’s Interest in the Westinghouse Businesses,” of the Notes toConsolidated Financial Statements in Item 8 of this report, for a discussionregarding our August 24, 2004 agreement to acquire BNFL’s 40% interest in theWestinghouse Businesses.

 

On July 7, 2000, wepurchased from Raytheon Company and Raytheon Engineers & ConstructorsInternational, Inc. (“RECI” and, collectively with Raytheon Company, the “Sellers”),the capital stock of the subsidiaries of RECI and specified other assets ofRECI and assumed specified liabilities of RECI. The businesses that wepurchased, which we refer to in this report as “RE&C,” provide engineering,design, procurement, construction, operation, maintenance and other services ona global basis. Following the acquisition, on September 15, 2000, we changedour name to Washington Group International, Inc.

 

On May 14, 2001, due tonear-term liquidity problems resulting from our acquisition of RE&C, wefiled for protection under Chapter 11 of the U.S. Bankruptcy Code. On December21, 2001, the bankruptcy court entered an order confirming the Second AmendedJoint Plan of Reorganization of Washington Group International, Inc., et al.,as modified (the “Plan of Reorganization”). The Plan of Reorganization becameeffective and we emerged from bankruptcy protection on January 25, 2002. For adiscussion of the RE&C acquisition and the resulting bankruptcy, see Note3, “Acquisition, Reorganization Case and Fresh-start Reporting” of the Notes toConsolidated Financial Statements in Item 8 of this report.

 

The U.S. Bankruptcy Courtfor the District of Nevada retains jurisdiction to interpret the Plan ofReorganization and to resolve outstanding claims and third party disputesrelating thereto. A reorganization plan committee (the “Reorganization PlanCommittee”) was established by the bankruptcy court to evaluate claims ofunsecured creditors, prosecute any disputed unsecured claims, determine eachunsecured creditor’s distribution under the Plan of Reorganization, andgenerally monitor implementation of the Plan of Reorganization.

 

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We are responsible forall fees and expenses incurred in connection with the administration of the Planof Reorganization, including fees and expenses of the Reorganization PlanCommittee, the United States Trustee appointed by the bankruptcy court, andtheir and our counsel.

 

**BUSINESS UNITS**

 

We operate our businessthrough six business units, each of which comprises a separate reportablebusiness segment: Power, Infrastructure, Mining, Industrial/Process, Defenseand Energy & Environment.

 

***Power***

 

OurPower business unit specializes in engineering, design, construction,modification, and maintenance of power generating facilities and the systemsthat transmit and distribute their electricity. Customers include regulated and deregulated utilities, industrialco-generators, independent power producers, original equipment manufacturers(OEMs), and governments. These customers generate power in a wide variety ofmethods, including coal-, oil- and gas-fired power plants, combustion turbinein both simple cycle and combined cycle configurations, and nuclear power,hydroelectric, and waste-to-energy. We provide our services to customers in theUnited States and around the world on target-price, fixed-price and cost-typebases, and the work we have pursued recently has reflected an array ofcommercial arrangements. (See “Business — General” above for a description oftypes of contracts and corresponding risks.) The Power business unit provides arange of services that includes:

 

# ***Basic Services***

•                  General planning

•                  Siting and licensing

•                  Environmental permitting

•                  Engineering and construction, startup

•                  Expansion, retrofit, and modification

•                  Operations and maintenance

•                  Decontamination and decommissioning

 

# ***Basic Markets***

•                  New generation

•                  Combustion turbine (natural gas, oil)

•                  Coal

•                  Other: waste-to-energy, wind, biomass,geothermal

•                  Modifications and maintenance

•                  Fossil: clean air retrofits

•                  Repowering

•                  Nuclear: major component replacement

•                  Engineering services

•                  Fossil and nuclear

•                  Transmission, distribution, substations

 

In2002, the market for new power plants in the United States suffered a severedownturn as regional reserves grew to excessive levels and the economy slumped.We expect that it may take four to six years for these reserve margins todissipate before a need for additional capacity will stimulate a new wave ofpower development, although some new generation will be commissioned inspecific pockets of need. In the interim, the power industry anticipated thatthe passage of pending federal legislation in the forms of the Federal EnergyBill and one of the contenders for Clean Air Act regulation would revitalizethe market. Though these bills may yet pass, their timing is uncertain andtheir market impacts may not be felt for some time to come, if at all.

 

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Consequently,the Power business unit embarked on a strategy to maintain our presence in allof our principal markets while minimizing our exposure to long-term capitalrisk. In new power generation, we are limiting the opportunities we pursue tothose we determine pose an acceptable level of risk, particularly withestablished customers. The mix of traditional Power business unit customers andthe customers of our other business units with power needs has led to awardsfor new power plants in Siberia (conversion of plutonium reactor to coal-firedplant) and Iraq (over 700 megawatts (“MW”) in new plants and refurbishments aspart of the reconstruction effort). An ongoing engineering, procurement andconstruction (“EPC”) contract for a 550 MW combined cycle is nearly complete,and plant startup and turnover will be accomplished during 2005. Most recently,in the third quarter of 2004, we were awarded a $153 million EPC contract for anew combined cycle plant in Puerto Rico.

 

Despitethe lack of new federal Clean Air legislation, the power market is beingpropelled by consent decrees, independent state legislation, and the promisedenforcement of New Source Review Standards by the Environmental ProtectionAgency. A substantial number of large system retrofits to control sulfur oxidesand nitrous oxides have been announced or are under consideration, and we havesecured awards in all phases of implementing these retrofits. During thirdquarter of 2004, we were awarded a $180 million contract forengineering/design, balance of plant procurement, construction, and start-up oftwo wet flue gas desulphurization systems and one selective catalytic reductionsystem at a Wisconsin fossil fuel power generation facility.

 

Theabundance of power supply in the United States, combined with the manifestationof electricity as a commodity, has forced most power suppliers to compete forthe sale of kilowatts and improve the efficiency of existing resources. Manynuclear plant owners are seeking extensions of existing licenses rather thandecommissioning units with up to 40 years of service. Among the most commonlife-extension strategies is the replacement of steam generators and reactorvessel heads. Through a 50%-owned joint venture with Framatome-ANP, Inc., wespecialize in these replacements and have established ourselves as a leadingcompetitor in the United States for this market. A notable achievement in 2004was the successful completion of three concurrent nuclear plant outage projectsin Florida, South Carolina, and Minnesota. Three additional major outages arescheduled for 2005 at nuclear plants in Florida, Missouri, and Arkansas.

 

Thecompetitive nature of the power generation industry is developing a trendtoward stronger ties between customers seeking engineering solutions to improveoutput and contractors assuming the responsibility of in-house specialists. Wehave secured several alliance-type relationships at various levels of maturity,including a pacesetting program that has established a full services contractfor a total generation system that exceeds 11,000 MWs, and outsourcingagreements with two utilities in which we are providing engineering services asneeded at a total of more than 90 generating facilities.

 

Theimpetus for efficient and clean power generation extends globally.  Most visible in the international arena todayis our ongoing work for the reconstruction of Iraq’s power infrastructure,where we have designed and built new generation and we are rehabilitatingexisting generation and transmission and distribution systems. Over $310 millionwas authorized and funded for these projects during 2004.  Work on these projects began in 2004 and willcontinue through 2005.

 

***Infrastructure***

 

Our Infrastructure business unit provides a full rangeof infrastructure services to clients globally, including project development,design-build-operate-maintain, consulting, engineering, design, projectmanagement, construction management, construction, and operations andmaintenance. The business unit generally performs as a general contractor or asa joint venture partner with other contractors on domestic and internationalprojects. Typically, consulting, engineering, design, project management,construction management and operations and maintenance type contracts areperformed on a cost-type basis, while design-build and construction contractsare performed on a fixed-price basis.

 

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***Infrastructure serves both private andpublic sector customers across four major markets:***

*** ***

•                  *Rail and transit*: Design, construction, operation andmaintenance of light rail, subways, commuter/inter-city railroads, railroads,freight transport, people movers, bus rapid transit, electrification andmultimodal facilities. Our current significant projects in this market include:

•                  Hudson-BergenLight Rail Transit System: We are operating under a contract with a valueexceeding $500 million to design, build, operate and maintain the Hudson-BergenLight Rail Transit System in New Jersey. The design-build phase is scheduled tobe completed in 2005, and the operations and maintenance in 2015.

•                  MetroGold Line:  A $600.4 million design/buildcontract for a six-mile-long extension to the Metro Gold Line light rail systemin Los Angeles. The contract was awarded by the Los Angeles MetropolitanTransportation Authority (MTA) to a joint venture led by us.

 

•                  *Highways and bridges*: Design and construction ofinterstates/freeways, arterial highways/streets, interchanges, bridges, tunnelsand intelligent transportation systems. The Infrastructure business unit hasmade the strategic decision to no longer participate in the public agencyhighway “construction only” market sector. The contract and change order administration practices of the clientagencies, together with an increase in the number of smaller local bidders haslowered available margins to unacceptable levels. Our significant projects inthis market include:

•                  SR-125:A joint venture led by us to design and build the 10-mile privately-funded tollroad section of the public-private State Route 125 South Expressway project inSan Diego, California, under a $270 million contract and a 3.5-milepublicly-funded segment of State Route 125 under a $90 million design-buildcontract.

•                  I-215Southern Beltway: An $82.2 million contract with the Nevada Department ofTransportation to construct an interchange and six-lane connector near LasVegas.

•                  RiversideInterchange: A joint venture led by us to perform a $186 million expansion andupgrade of a 7.8 mile section of 1-215 and connecting highways for theCalifornia Department of Transportation in Riverside, California.

 

We recognized losses onall three of these projects during 2004. *See* “Management’s Discussion andAnalysis of Financial Condition and Results of Operations – 2004 Compared to2003 – Infrastructure,” in item 7 of this report.

 

•                  *Water resource and hydropower*: Design and construction ofhydroelectric power, water supply, flood control, locks and dams, irrigationand drainage, hydraulic structures and environmental and safety analysis. Asignificant project in this market includes:

•                  OlmstedDam: A $564 million cost-reimbursable-plus-award-fee joint venture for theconstruction of a 2,700-foot concrete dam across the lower Ohio River awardedin January 2004.

 

•                  *Airports*: Design, construction, development and operation ofairport, airside and landside infrastructure, security and environmentalservices. A current project in this market is:

•                  AddisonAirport: As part of a joint venture, we manage and operate Addison Airport nearDallas, Texas.

 

The Infrastructurebusiness unit is also leading our effort on two contracts with the U.S. ArmyCorps of Engineers (the “USACOE”) to provide a variety of design, engineeringand construction services to the Transatlantic Programs Center of the USACOEthroughout Central Asia, North Africa and the Middle East. The contracts areindefinite delivery/indefinite quantity (“ID/IQ”) contracts that do notidentify a specific quantity of services, but do set ceilings on the totalamount of work that can be awarded to a company during the life of thecontract. To date, we have been awarded ID/IQ contracts providing for potentialtask order awards up to $3.1 billion, including a $500 million ID/IQ contractfor power projects. Under the ID/IQ contracts, we bid for specific assignmentsto support the USACOE in Iraq and 24 other countries. Through December 31,2004, 

 

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we have been awarded taskorders amounting to $899.7 million of which $615.4 million of work has beencompleted with a remaining $284.3 million in backlog.

 

We anticipate modest growth in domestic infrastructuremarkets. Federal highway funding is subject to authorization from theTransportation Equity Act for the 21st Century (“TEA-21”), whilebudget deficits at the state level limit availability of funds for capitalprograms. Certain markets continue to have viable projects, and thedesign-build method of delivery, with its reliance on private capital andpotential opportunities for public-private partnerships, continues to grow inpopularity.

 

***Mining***

 

The Mining business unitprovides a full range of services, concentrating on contract mining and minesmanagement; design/build and engineering, procurement, and construction orconstruction management to the precious metals, energy minerals, industrialminerals and metals markets globally. These services include a broad spectrumof tasks from mine planning and feasibility studies through engineering,construction, operations planning and execution, to mine reclamation andclosure.

 

Currently, the Miningbusiness unit is providing services to the phosphate industry in Canada and theUnited States, coal mines in the United States, Venezuela and Germany, andcopper and gold mines in the United States and Mexico. In January 2005, theMining business unit was awarded a 10-year $360 million contract to performmine development and contract mining for a silver, zinc and lead mine inBolivia. Mining contracts are typically one to ten years in length, that arenormally renewed in subsequent bidding cycles throughout the useful life of themine, which can typically range from 5 to 30 years.  Mining contracts are generally fixed-unitprice, cost-type, or target price.

 

In addition to the Miningbusiness unit’s contracted services, we hold ownership interests in two miningventures:

 

•                  MIBRAGmbH (50%) (“MIBRAG”) is located in Germany and operates two surface lignitecoal mines that provide lignite to two utility-owned power generation plants,as well as small commercial plants and three company-owned power plants. Powergenerated by the company-owned plants is primarily utilized by the miningoperations, and surplus power is sold at wholesale to the utilities. The mineshave lignite reserves and contracts in place for 20 to 40 years of supply.Because of the significance of MIBRAG to us for the 2004, 2003 and 2002 fiscalyears, the financial statements of MIBRAG mbH have been included in this reporton Form 10-K as Exhibit 99.1

 

•                  WestmorelandResources, Inc. (20%) is a Montana surface coal mine providing sub-bituminouscoal to utilities in the upper Midwest.

 

See Note 5, “Ventures” ofthe Notes to Consolidated Financial Statements in Item 8 of this report.

 

***Industrial/Process***

 

Our Industrial/Processbusiness unit is a single-source provider of integrated engineering,construction, operations, maintenance, logistics and program managementservices. A key component of Industrial/Process’ approach is close alignmentwith its clients to support their business objectives and develop long-term,value-added partnerships and to balance the markets we serve in order toeffectively deal with economic cycles that impact industrial and consumerspending.

 

Services are providedusing a variety of commercial terms, including various forms of cost-type,target price and lump sum contracting. Industrial/Process’ current projects areprimarily cost-type. The unit’s goal over the next few years is to achieve amore evenly balanced commercial mix between cost-type and fixed-priced contractsin order to optimize the risk/reward profile and improve cash flow.

 

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Organized in threedivisions, the Industrial/Process business unit is focused on the followingstrategic areas: Life Sciences, Industrial Services and Process.

 

•                  *Life Sciences.* Provides design, engineering, construction,validation and maintenance services to the biotechnology and pharmaceuticalindustries. An integrated delivery platform is provided in the areas ofbiologics, chemical synthesis, dosage form, and devise manufacturing to createinnovative production solutions.

 

Current clients includeAventis Pasteur, Pfizer, Merck, Eli Lilly, Johnson & Johnson, Novartis andWyeth.

 

•                  *Industrial Services.* Our Industrial Services division provideslife-cycle services, including design, engineering, construction, operations,maintenance, facility management, logistics and quality programs, for theautomotive, manufacturing, food and pulp and paper industries.

 

In the automotivemarkets, clients include General Motors, Ford, Daimler/Chrysler and Hyundai.

 

We have long-termalliance partnerships with Anheuser-Busch, Kraft and General Mills/Pillsbury inthe foods market. We provide facility and process design solutions forbreweries and producers of baked goods, cake mix, cereal, prepared entrees,snack foods, soups and yogurt.

 

We provide managementsolutions including operations, maintenance, facility management, qualityprograms and logistics services across a diverse set of industries to customersseeking to outsource non-core business functions. Customers include manylong-term clients such as BP, Caterpillar, DuPont, IBM, Nissan and Tektronix.

 

•                  *Process.* The Process division provides services to severalmarkets, including oil production, gas treating, gas monetization, gas storage,refineries and bulk/specialty chemicals.

 

Clients includeExxonMobil, ConocoPhillips, ChevronTexaco, DuPont, Burlington Resources, ElPaso, Dow Corning, PolyOne and Eastman Chemical, among others.

 

***Defense***

 

The structure of theDefense business unit is matched to the needs of our major customer, the U.S.Government, and, more specifically, the Department of Defense. Our Defensebusiness unit manages, integrates and delivers life-cycle services for domesticand international programs under three markets: Threat Reduction, DefenseInfrastructure Services and Homeland Security.

 

•                  *Threat Reduction.* Threat Reduction focuses on globalproliferation prevention and elimination of CBRNE (Chemical, biological,radiological, nuclear and high explosives) materials and weapon systems.  We are a global leader in the elimination ofchemical weapons and agents. We provide demilitarization services to federalclients, including chemical and biological warfare material elimination and nuclearweapons delivery systems disarmament. This market includes support for theDepartment of Defense in the destruction of the United States chemical weaponsstockpile, as the system contractor for four of the U.S. Army’s fiveincineration-based chemical weapons destruction thermal facilities.Additionally, we provide support to a fifth facility and purchase equipment forthese sites. We are also responsible for the start-up, pilot plant testing,operations and maintenance and closure of two additional neutralization-basedplants dealing with intact chemical weapons. All of these facilities aredesigned to destroy chemical 

 

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weapons that have beenstored for many years in underground bunkers.****In2004, we began chemical weapons destruction operations at the thirdincineration facility at Umatilla, Oregon.

 

We also providedemilitarization services, funded by the U.S. government, to the Commonwealthof Independent States, and have been awarded significant participation in theCooperative Threat Reduction Integrated Contract. This contract is financed bythe United States to prevent proliferation of and safely eliminate weapons ofmass destruction located in the former Soviet Union. Work performed includes eliminationof strategic missiles and related delivery systems, and conversion of theSeversk, Russia plutonium production facility into a peacetime electrical powerproduction plant. In 2004, we were selected to assist the Azerbaijan andUzbekistan governments in establishing Weapons of Mass Destruction materialdetection and interdiction capabilities.

 

A major objective ofThreat Reduction is optimizing the value of existing contracts. Since we havenow exhausted major domestic chemical demilitarization opportunities, ourbusiness development efforts are focused on evaluating adjacent marketopportunities and selecting higher probability market sectors for developmentand penetration.

 

•                  *Defense Infrastructure Services.* Defense InfrastructureServices principally addresses Department of Defense needs, offering operationservices, management/technical services and EPC services with an objective ofreducing their risk in mission execution due to infrastructure vulnerabilities.We support the Department of Defense entities and agencies that operate ormaintain major facilities, providing classified and unclassified architecturalengineering services and engineering, procurement and construction services.These same services are provided to the Department of State and variousintelligence agencies of the U.S. government.

 

•                  *Homeland Security.* Homeland Security provides integrated solutions that reducevulnerability to terrorist acts or similar hostile acts and that mitigate theconsequences of such acts, with emphasis on high-value security systems, forceprotection and emergency response services. We provide threat analysis andmitigation services to a variety of clients. We support one of the nation’shighest priorities, the security of our nation and the safety of Untied Statescitizens abroad. The market and demand for our services are principally derivedfrom federal requirements and include funding estimates for 17 federal agencies(including defense activities). With the creation of the Department of HomelandSecurity, we devote our considerable experience in security research andtechnologies to compete for resulting business. We are pursuing multipleopportunities for securing transportation systems, including enhanced securityat ports of entry and military bases, improved security of offshore transportsystems and improved intelligence and data mining for early threatidentification.

 

The Defense business unitapplies our comprehensive skills to create cost-effective solutions tooperational challenges, drawing resources from all of our business units. Suchintegration is essential to successfully compete in existing and emergingmarkets. Virtually all Defense work is performed on a cost-plus-fee basis.

 

***Energy& Environment***

 

Our Energy &Environment business unit provides services to the U.S. Department of Energy,which is responsible for maintaining the nation’s nuclear weapons stockpile,performing legacy environmental cleanup and remediation, and leading thedevelopment of next generation nuclear power. The services provided includeconstruction, contract management, supply-chain management, quality assurance,waste management, facilities management, decontamination and decommissioning,environmental cleanup and restoration services. Energy & Environment provides safety management consulting and wasteand environmental technology, engineered products, including radioactive wastecontainers and technical support services.

 

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The Energy &Environment business unit also provides products and services to commercialclients, including the design and manufacture of engineered canisters to shipand store spent nuclear fuel, safety planning, integrated safety managementconsulting, facility operation, hazardous material management and licensing.

 

The Energy &Environment business unit primarily services the U.S. Department of Energy inthe environmental management market segment, while also serving the NationalNuclear Security Agency by managing nuclear operations and the Department ofDefense in selected engineering, design, construction, environmental cleanup,and remediation projects. There are currently three market units within Energy& Environment: Management Services, Projects and Consulting Services. We arepositioning a fourth market unit, International, to provide the services of theexisting three market units to international customers, primarily in the UnitedKingdom.

 

•                  *Management Services.* The Management Services market unit focuses on Department of Energy sitemanagement and support contracts, under which key personnel are supplied toeffectively manage existing site operations, infrastructure and humanresources. Our current emphasis is managing complex, high-hazard facilities andoperations using our experience in technology, commercial nuclear operations,safety and operations in a regulatory environment.

 

Management Services haslong-term management contracts with the Department of Energy. We serve threemajor programs within the Department of Energy, Environmental Management,Science, and the National Nuclear Security Agency. The Environmental Managementprogram consists of the environmental cleanup activities (radioactive andhazardous waste), resulting from the U.S. government’s nuclear weapons program.The Science program consists of facility and infrastructure management at theIdaho National Laboratory. The National Nuclear Security Agency consists of theDepartment of Energy’s defense programs and weapons production activities atnational laboratories and production facilities including the Savannah RiverSite.

 

Our key existingcontracts include the Savannah River Site in South Carolina, the West ValleyNuclear Services Site in New York and the Waste Isolation Pilot Project in NewMexico.

 

•                  *Projects.* The Projects market unit provides life-cycleservices to the Department of Energy and its prime contractors, as well as toother U.S. government agencies. We utilize our skills in environmentalremediation, design of complex high-hazard facilities and constructioncapability to service this market.  TheProjects market unit provides nuclear and high-hazard facility engineering,procurement and construction; nuclear and high-hazard facility deactivation, decommissioning,decontamination and dismantlement; and environmental characterization, designand remediation. The Projects market also includes mid-level design,construction and environmental projects for the Department of Defense.

 

The Projects market unitoffers a broad portfolio of services and technologies to the Department ofEnergy, the Department of Defense and the Environmental Projection Agency, withfive distinct clients within the agencies. In the Department of Energy, we serve Environmental Management and theNational Nuclear Security Agency. In the Department of Defense, our customersinclude the U.S. Air Force Center for Environmental Excellence (AFCEE), theUSACOE and the U.S. Navy Facilities Engineering Command.  We are executing AFCEE contracts in Iraq.

 

•                  *Consulting Services*.  ConsultingServices provides services to most Department of Energy sites. These servicesare also sold to other governmental agencies or commercial clients. The coreproducts and services include safety analysis, regulatory services, criticalityand radiological engineering, safeguards and security management andenvironmental services. We self-perform for our sites, support other sites andare equipped to provide services throughout the life cycle of a project.

 

Consulting Services isprimarily concentrated in the Washington Safety Management Solutions LLC.  Washington Safety Management Solutions LLCtakes the expertise developed through our experience in 

 

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the Department of EnergyManagement Services business and develops programs that are utilized at otherDepartment of Energy and governmental sites and with commercial clients. TheDepartment of Energy facilities are our principal customers.

 

•                  *International.*  TheInternational market unit addresses new markets for our core services in theUnited Kingdom, which is actively seeking such services to address theirenvironmental legacies. We are currently providing cleanup support to severalsites in the United Kingdom and are supporting project work with the AtomicWeapons Establishment. We believe we are well-positioned to compete for thiswork given our experience and the scope of our projects in the hazardousenvironmental management field in the United States.

 

For financial informationabout each of our business units, geographic areas in which we operate, andadditional disclosures, see “Management’s Discussion and Analysis of FinancialCondition and Results of Operations -Business Unit Results” in Item 7 of this report and Note 12, “OperatingSegment, Geographic and Customer Information” of the Notes to ConsolidatedFinancial Statements in Item 8 of this report.

 

**MATERIAL CUSTOMERS**

 

During 2004, 10% or moreof our total consolidated revenue was derived from contracts and subcontractsperformed by the Power, Infrastructure, Industrial/Process, Defense and Energy& Environment business units for the following customers:

 
| ** **             | ** ** | **Percent of Consolidated Revenue** | ** ** |
|------------------------|------------|-------------------------------------|------------|
| Department of  Defense |       | 37%                                 | ** ** |
| Department of  Energy  |       | 14%                                 |       |

 

Although we presentlyhave good relationships with the Department of Defense and the Department ofEnergy, the loss of these customers, or significant reductions in governmentfunding, could have a material adverse effect primarily on our Defense andEnergy & Environment business units and our company as a whole. Thepercentage of total consolidated revenue derived from the Department of Defenseincreased from 24% in 2003 to 37% in 2004, primarily due to $556 million****of revenue from work in the Middle East. See Risk Factors, “Economicdownturns and reductions in government funding could have a negative impact onour business,” later in Item 1 of this report.

 

**GOVERNMENT CONTRACTS AND BACKLOG**

 

Government fundedcontracts are, and we expect will continue to be, a significant part of ourbusiness.****We derived 51% of our consolidatedoperating revenues in 2004 from contracts with the U.S. government, including19% from work performed in the Middle East. We also have a number of U.S.government contracts that extend beyond one year and for which governmentfunding has not yet been approved. All U.S. government contracts and someforeign contracts are subject to unilateral termination at the convenience ofthe customer.

 

Backlog represents thetotal value of all awarded contracts that have not been completed and will berecognized as revenue or as equity in income of unconsolidated affiliates overthe life of the project. Backlog includes our proportionate share ofconstruction joint venture contracts and the uncompleted portions of miningservice contracts and ventures for the next five years. Backlog for governmentcontracts includes only two years’ worth of the portions of such contracts thatare currently funded or that we are highly confident will be funded. Thereported backlog excludes approximately $2.1 billion of government contracts inprogress for work to be performed beyond December 2006.

 

We have ID/IQ contractsthat are signed contracts under which we perform work only when the clientissues specific task orders. The terms of these contracts include a maximumcontract value and a specified time period that may include renewal optionperiods at the client’s discretion. While we believe that we will continue to 

 

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receive work over the entire term, because of the uncertainty of therenewals and our dependence on the issuance of individual task orders for newprojects, we cannot be assured that we will ultimately realize the maximumcontract value for any particular contract. Only those task orders that aresigned and funded are included in backlog.

 

Backlog at December 31,2004 totaled $4.0 billion compared with backlog of $3.3 billion at January 2,2004. Approximately $1.6 billion of the backlog at December 31, 2004 wascomprised of U.S. government contracts that are subject to termination by thegovernment, $0.7 billion of which had not yet been funded. Historically, wehave not experienced significant reductions in funding of U.S. governmentcontracts once they have been awarded. Terminations for the convenience of thegovernment generally provide for recovery of contract costs and relatedearnings. Approximately $2.1 billion, or 53%, of backlog at December 2, 2004 isexpected to be recognized as contract revenue or as equity in income of unconsolidatedaffiliates in 2005.

 

Although backlog reflectsbusiness that we consider to be firm, cancellations or scope adjustments mayoccur.

 
| **Composition of backlog  (In millions)**   | ** ** | **December 31,  2004** | ** ** | **January 2,  2004** | ** ** |
|---------------------------------------------|------------|------------------------|------------|----------------------|------------|
| Cost-type and  target-price contracts       |       | $                      | 2,568.1    |                 | 64         | % | $ | 1,916.5 |   | 58 | % |
| Fixed-price and  fixed-unit-price contracts |       | 1,436.0                |       | 36                   | %          | 1,406.0 |   | 42 | % |
| Total backlog                               |       | $                      | 4,004.1    |                 | 100        | % | $ | 3,322.5 |   | 100 | % |

 

For financial informationabout backlog of our business units, see “Managements Discussion and Analysisof Financial Condition and Results of Operations – Business Unit New Work andBacklog,” in Item 7 of this report.

 

**COMPETITION**

 

We are engaged in highlycompetitive businesses in which customer contracts are typically awardedthrough competitive bidding processes. We compete based primarily on price,reputation and reliability with other general and specialty contractors, bothforeign and domestic, including large international contractors and small localcontractors. Success or failure in our lines of business is, in large measure,based upon the ability to compete successfully for contracts and to provide theengineering, planning, procurement, construction, operations and projectmanagement and project financing skills required to complete them in a timelyand cost-efficient manner. Some competitors have greater financial and otherresources than we do, which, in some instances, could give them a competitiveadvantage over us.

 

**EMPLOYEES**

 

Our total globalemployment varies widely with the volume, type and scope of operations underway at any given time. At December 31, 2004, we employed approximately 25,500employees. Approximately 14% of our employees are covered either by one of ourregional labor agreements, which expire between June 2006 and June 2007, or byspecific project labor agreements, each of which expires upon completion of therelevant project.

 

**RAW MATERIALS**

 

We can purchase most ofthe raw materials and components necessary to operate our businesses fromnumerous sources. We do not anticipate any unavailability of raw materials orcomponents that would have a material adverse effect on our businesses in theforeseeable future.

 

**ENVIRONMENTAL MATTERS**

 

Our environmental andhazardous substance remediation and contract mining services involve risks ofliability under federal, state and local environmental laws and regulations,including the Comprehensive Environmental Response, Compensation and LiabilityAct (“CERCLA”). We perform environmental remediation 

 

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at Superfund sites as aresponse action contractor for the Environmental Protection Agency and, in suchcapacity, are exempt from liability under any federal law, including CERCLA,unless our conduct is negligent. Moreover, we may be entitled toindemnification from agencies of the U.S. government against liability arisingout of the negligent performance of work in such capacity. We do not own any ofthe CERCLA sites.

 

We are subject to risksof liability under federal, state and local environmental laws and regulations,as well as common law. These laws and regulations and the risk of attendantlitigation can cause significant delays to a project and add significantly toits cost. Violations of these laws and regulations could subject us to civiland criminal penalties and other liabilities, including liabilities forproperty damage, costs of investigation and cleanup of hazardous or toxicsubstances on property currently or previously owned by us or arising out ofour current and past remediation, waste management and contract miningactivities.

 

For additionalinformation regarding environmental matters, see “Risk Factors -We could be subject to liability under environmental laws,” later in Item 1 ofthis report.

 

**RISK FACTORS**

 

We are subject to anumber of risks, including those enumerated below. Any or all of these riskscould have a material adverse effect on our business, financial condition,results of operations and cash flows and on the market price of our commonstock. See also “Note Regarding Forward-Looking Information,” earlier in Part Iof this report.

 

***Thedocuments governing our indebtedness restrict our ability and the ability ofsome of our subsidiaries to engage in some business transactions.***

 

On October 9, 2003, we obtained a new seniorsecured revolving credit facility (the “Credit Facility”), which provides forup to $350 million of loans and other financial accommodations. Thecredit agreement governing the Credit Facility restricts or places certainlimits on our ability and the ability of some of our subsidiaries to, amongother things:

 

•      incur or guarantee additionalindebtedness;

 

•      declare or pay dividends on, redeem orrepurchase capital stock;

 

•                  paydividends or other distributions or transfer assets or make loans between usand some of our subsidiaries;

 

•                  makeinvestments;

 

•                  incuror permit liens to exist;

 

•                  enterinto transactions with affiliates;

 

•                  makematerial changes in the nature or conduct of our business;

 

•                  mergeor consolidate with, or acquire substantially all of the stock or assets of,other companies;

 

•                  transferor sell assets; and

 

•                  engagein sale-leaseback transactions.

 

The Credit Facilitycontains covenants that are typical for credit facilities of its size, type andtenor, such as requirements that we meet specified financial ratios andfinancial condition tests. Our ability to borrow under the 

 

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Credit Facility otherwise depends upon satisfaction of these covenants.Our ability to meet these covenants and requirements may be affected by eventsbeyond our control.

 

Our failure to complywith obligations under the Credit Facility could result in an event of defaultunder the facility. A default, if not cured or waived, could permit accelerationof any outstanding indebtedness. We cannot be certain that we will be able toremedy any default. If our indebtedness is accelerated, we cannot be certainthat we will have funds available to pay the accelerated indebtedness or thatwe will have the ability to refinance the accelerated indebtedness on termsfavorable to us or at all.

 

***Weare engaged in highly competitive businesses and must typically bid againstcompetitors to obtain engineering, construction and service contracts.***

 

We are engaged in highlycompetitive businesses in which customer contracts are typically awardedthrough competitive bidding processes. We compete with other general andspecialty contractors, both foreign and domestic, including large internationalcontractors and small local contractors. Some competitors have greaterfinancial and other resources than we do, which, in some instances, could givethem a competitive advantage over us.

 

***Strikes,work stoppages and other similar events, as well as resulting increases in operatingcosts, would have a negative impact on our operations and results.***

 

We are party to severalregional labor agreements that expire between June 2006 and June 2007, as wellas project-specific labor agreements that commit us to use union building tradeson certain projects. If the industry were unable to negotiate with any of theunions, it could result in strikes, work stoppages or increased operating costsas a result of higher than anticipated wages or benefits. If the unionizedworkers engage in a strike or other work stoppage, or other employees becomeunionized, we could experience a disruption of our operations and higherongoing labor costs, which could adversely affect portions of our businessesand our financial position, results of operations and cash flows. See “Employees”earlier in Part I of this report.

 

***Oursuccess depends on attracting and retaining qualified personnel in acompetitive environment.***

 

We are dependent upon ourability to attract and retain highly qualified managerial, technical andbusiness development personnel. Competition for key personnel is intense. Wecannot be certain that we will retain our key managerial, technical andbusiness development personnel or that we will attract or assimilate keypersonnel in the future. Failure to retain or attract such personnel couldmaterially adversely affect our businesses, financial position, results ofoperations and cash flows.

 

***Economicdownturns and reductions in government funding could have a negative impact onour businesses.***

 

Demand for the servicesoffered by us has been, and is expected to continue to be, subject tosignificant fluctuations due to a variety of factors beyond our control,including economic conditions. During economic downturns, the ability of bothprivate and governmental entities to make expenditures may declinesignificantly. We cannot be certain that economic or political conditions willbe generally favorable or that there will not be significant fluctuationsadversely affecting our industry as a whole or key markets targeted by us. Inaddition, our operations are, in part, dependent upon government funding.Significant changes in the level of government funding could have anunfavorable impact on our business, financial position, results of operationsand cash flows.

 

***Ourfixed-price contracts subject us to the risk of increased project costs.***

 

Our fixed-price contractsinvolve risks relating to our inability to receive additional compensation inthe event the costs of performing those contracts prove to be greater thananticipated. Our cost of performing the contracts may be greater thananticipated due to uncertainties inherent in estimating contract completioncosts, contract modifications by customers resulting in claims, failure ofsubcontractors and joint venture partners to perform and 

 

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other unforeseen eventsand conditions. At December 31, 2004, approximately 36%, or $1.4 billion, ofour backlog represented fixed-price and fixed-unit-price contracts. Any one ormore of these risks could result in reduced profits or increased losses on aparticular contract or contracts.

 

***TheU.S. government can audit and disallow claims for compensation under ourgovernment contracts, and can terminate those contracts without cause.***

 

Government contracts,primarily with the U.S. Departments of Energy and Defense, are, and areexpected to continue to be, a significant part of our business. We derivedapproximately 51% of our consolidated revenues in 2004 from contracts funded bythe U.S. government. Allowable costs under government contracts are subject toaudit by the U.S. government. To the extent that these audits result indeterminations that costs claimed as reimbursable are not allowable costs orwere not allocated in accordance with federal government regulations, we couldbe required to reimburse the U.S. government for amounts previously received.In addition, if we were to lose and not replace our revenues generated by oneor more of the U.S. government contracts, our businesses, financial condition,results of operations and cash flows could be adversely affected.

 

We have a number ofcontracts and subcontracts with agencies of the U.S. government, principallyfor environmental remediation, restoration and operations work, which extendbeyond one year and for which government funding has not yet been approved. Wecannot be certain that funding will be approved. All contracts with agencies ofthe U.S. government and some commercial and foreign contracts are subject tounilateral termination at the convenience of the customer. In the event of atermination, we would not receive projected revenues or profits associated withthe terminated portion of those contracts.

 

In addition, governmentcontracts are subject to specific procurement regulations, contract provisionsand a variety of other socioeconomic requirements relating to the formation,administration, performance and accounting of these contracts. Many of thesecontracts include express or implied certifications of compliance withapplicable laws and contract provisions. As a result of our governmentcontracting, claims for civil or criminal fraud may be brought by thegovernment for violations of these regulations, requirements or statutes. Wemay also be subject to *qui tam*litigation brought by private individuals on behalf of the government under theFederal Civil False Claims Act, which could include claims for up to trebledamages. Further, if we fail to comply with any of these regulations, requirementsor statutes, our existing government contracts could be terminated, we could besuspended from government contracting or subcontracting, including federallyfunded projects at the state level, and our ability to participate in foreignprojects funded by the United States could be adversely affected. If one ormore of our government contracts are terminated for any reason, or if we aresuspended from government work, we could suffer a significant reduction inexpected revenues.

 

***Ourdependence on one or a few customers could adversely affect us.***

 

One or a few clients havein the past and may in the future contribute a significant portion of ourconsolidated revenues in any one year or over a period of several consecutiveyears. In 2004, approximately 37% of our revenues were from the U.S. Departmentof Defense and approximately****14% of ourrevenues were from the U.S. Department of Energy. As our backlog frequentlyreflects multiple projects for individual clients, one major customer maycomprise a significant percentage of our backlog at any point in time. Forexample, the U.S. Department of Defense, with which we have 97 contracts,represented an aggregate of 24% of our backlog at December 31, 2004, and theU.S. Department of Energy, with which we have 223 contracts, represented anaggregate of 16% of our backlog at December 31, 2004.

 

Because these significantcustomers generally contract with us for specific projects, we may lose thesecustomers from year to year as their projects with us are completed. If we donot replace them with other customers or other projects, our business could bematerially adversely affected.

 

Additionally, we havelong-standing relationships with many of our significant customers. Ourcontracts with these customers, however, are on a project-by-project basis, andthe customers may unilaterally reduce or 

 

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discontinue their purchases at any time. The loss of business from anyone of such customers could have a material adverse effect on our business orresults of operations.

 

***Ourbacklog is subject to unexpected adjustments and cancellations and is,therefore, an uncertain indicator of our future earnings.***

 

As of December 31, 2004,our backlog was approximately $4.0 billion. We cannot assure that the revenueprojected in our backlog will be realized or, if realized, will result inprofits. Projects may remain in our backlog for an extended period of timeprior to project execution and, once project execution begins, it may occurunevenly over the current and multiple future periods. Although we have notexperienced any significant cancellations, project terminations, suspensions orreductions in scope may occur from time to time with respect to contractsreflected in our backlog. Such backlog reductions would adversely affect therevenue and profit we actually receive from contracts reflected in our backlog.

 

***Ourbusinesses involve many project-related and contract-related risks.***

 

Our businesses aresubject to a variety of project-related risks, including changes in politicaland other circumstances, particularly since contracts for major projects areperformed over extended periods of time. These risks include the failure ofapplicable governing authorities to take necessary actions, opposition by thirdparties to particular projects and the failure by customers to obtain adequatefinancing for particular projects. Due to these factors, losses on a particularcontract or contracts could occur, and we could experience significant changesin operating results on a quarterly or annual basis.

 

We may also be adverselyaffected by various risks and hazards, including industrial accidents, labordisputes, geological conditions, environmental hazards, acts of terrorism orwar, weather and other natural phenomena such as earthquakes and floods.

 

***Ourdependence on subcontractors and equipment manufacturers could adversely affectus.***

 

We rely on third-partysubcontractors as well as third-party equipment manufacturers to complete ourprojects. To the extent that we cannot engage subcontractors or acquireequipment or materials, our ability to complete a project in a timely fashionor at a profit may be impaired. If the amount we are required to pay for thesegoods and services exceeds the amount we have estimated in bidding forfixed-price, fixed-unit-price or target-price contracts, we could experiencelosses in the performance of these contracts. In addition, if a subcontractoror a manufacturer is unable to deliver its services, equipment or materialsaccording to the negotiated terms for any reason, including the deteriorationof its financial condition, we may be required to purchase the services,equipment or materials from another source at a higher price. This may reducethe profit to be realized or result in a loss on a project for which theservices, equipment or materials were needed.

 

***If weguarantee to a customer the timely completion or performance standards of aproject, we could incur additional costs to meet our guarantee obligations.***

 

In certain instances,including in some of our fixed-price contracts, we guarantee a customer that wewill complete a project by a scheduled date. We sometimes also provide that theproject, when completed, will achieve certain performance standards. If wesubsequently fail to complete the project as scheduled, or if the projectsubsequently fails to meet the guaranteed performance standards, we may be heldresponsible for cost impacts to the client resulting from any delay or thecosts to cause the project to achieve the performance standards. In most caseswhere we fail to meet contract-defined performance standards, we may be subjectto agreed-upon liquidated damages. To the extent that these events occur, thetotal costs for the project would exceed our original estimates and we couldexperience reduced profits or in some cases, a loss for that project.

 

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***Thesuccess of our joint ventures is dependent on the performance of our jointventure partners of their contractual obligations.***

 

We enter into variousjoint ventures as part of our engineering and construction business and projectspecific joint ventures. Success of these joint ventures depends largely on thesatisfactory performance by our partners of their contractual obligations. Ifour joint venture partners fail to perform their contractual obligations as aresult of financial or other difficulties, we may be required to makeadditional investments and provide additional services to ensure the adequateperformance and delivery of the contracted services. These additionalobligations could result in reduced profits or in losses for us.

 

***Ourinternational operations involve special risks.***

 

We pursue projectopportunities internationally through foreign and domestic subsidiaries as wellas through agreements with domestic and foreign joint venture partners. Ourinternational operations accounted for approximately 26% of our revenues in2004, including 19% from work performed in the Middle East. Our foreignoperations are subject to special risks, including:

 

•      unstable political, economic, financialand market conditions;

 

•      potential incompatibility with foreignjoint venture partners;

 

•      foreign currency controls andfluctuations;

 

•      trade restrictions;

 

•      restrictions on repatriating foreignprofits back to the United States;

 

•      increases in taxes;

 

•      civil disturbances and acts of terrorism,violence or war in the United States or elsewhere; and

 

•      changes in labor conditions, labor strikesand difficulties in staffing and managing international operations.

 

Events outside of ourcontrol may limit or disrupt operations, restrict the movement of funds, resultin the deprivation of contract rights, increase foreign taxation or limitrepatriation of earnings. In addition, in some cases, applicable law and jointventure or other agreements may provide that each joint venture partner isjointly and severally liable for all liabilities of the venture.

 

***Ourinternational operations may require our employees or subcontractors to travelto high security risk countries, which may result in employee injury,repatriation costs or other unforeseen costs.***

 

As a global provider ofengineering, construction and management services, we dispatch employees and subcontractorsto various countries around the world. A country may represent a high securityrisk because of its political, social or economic upheaval such as war, civilunrest or ongoing acts of terrorism. Senior level employees and other keyemployees and subcontractors have been, and may continue to be, deployed toprovide services in high security risk countries. As a result, it is possiblethat our employees or subcontractors may suffer injury or death, repatriationproblems or other unforeseen costs and risks in the course of theirinternational projects, which could negatively impact our operations.

 

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***Wecould be subject to liabilities as a result of our performance.***

 

The nature of ourengineering and construction businesses exposes us to potential liabilityclaims and contract disputes that may reduce our profits.

 

We engage in engineeringand construction activities for large industrial facilities where design,construction or systems failures can result in substantial injury or damage tothird parties. Any liability in excess of our insurance limits at locationsengineered or constructed by us, where our products are installed or where ourservices are performed could result in significant liability claims against us,which claims may reduce our earnings. In addition, if a customer disputes ourperformance of project services, the customer may decide to delay or withholdpayment to us. If we were ultimately unable to collect on these payments, our profitswould be reduced.

 

***Wecould be subject to liability under environmental laws and regulations.***

 

We are subject to avariety of environmental, health and safety laws and regulations governing,among other things, discharges to air and water, the handling, storage anddisposal of hazardous or solid waste materials and the remediation ofcontamination associated with releases of hazardous substances. These laws andregulations and the risk of attendant litigation can cause significant delaysto a project and add significantly to its cost. Violations of theseenvironmental, health and safety laws and regulations could subject us and ourmanagement to civil and criminal penalties and other liabilities. These lawsand regulations may become more stringent, or be more stringently enforced, inthe future.

 

Various federal, stateand local environmental laws and regulations, as well as common law, may imposeliability for property damage and costs of investigation and cleanup ofhazardous or toxic substances on property currently or previously owned by usor arising out of our waste management or environmental remediation activities.These laws may impose responsibility and liability without regard to knowledgeof or causation of the presence of contaminants. The liability under these lawsis joint and several. We have potential liabilities associated with our pastwaste management and contract mining activities and with our current and priorownership of various properties.

 

***Changesin environmental laws, regulations and programs, could reduce demand for ourenvironmental services, which could negatively impact our revenues.***

 

Our environmentalbusiness is driven by federal, state, local and foreign laws, regulations andprograms related to pollution and environmental protection. Accordingly, arelaxation or repeal of these laws and regulations, or changes in governmentalpolicies regarding the funding, implementation or enforcement of theseprograms, could result in a decline in demand for environmental services thatcould negatively impact our revenues.

 

***Expirationof the Price-Anderson Act’s indemnification authority could have adverseconsequences on our Power and Energy & Environment business units.***

 

Our Power and Energy& Environment business units provide engineering, construction andoperations and maintenance services in the nuclear power market, andapproximately 11% of our backlog is derived from nuclear services. ThePrice-Anderson Act promotes and regulates the nuclear power industry in theUnited States. It comprehensively regulates the manufacture, use and storage ofradioactive materials, and promotes the nuclear power industry by offeringbroad indemnification to nuclear power plant operators and certain Departmentof Energy contractors like us. While the Price-Anderson Act’s indemnificationprovisions are broad, it has not been determined whether they apply to allliabilities that might be incurred by a radioactive materials cleanupcontractor. The Price-Anderson Act’s provisions with respect to indemnificationof Department of Energy contractors under newly signed contracts extendsthrough December 31, 2006. Congress has extended the expiration date of the Actin the past, and it is expected that it will extend the expiration date in thefuture beyond December 31, 2006.  Ourbusiness units could be adversely affected if the Price-Anderson Act is notextended 

 

I-19

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beyond December 31, 2006 due to either the unwillingness of plantoperators to retain us or our inability to obtain adequate indemnification andinsurance because of the unavailability of the protections of thePrice-Anderson Act.

 

***Actualresults could differ from the estimates and assumptions used to prepare ourfinancial statements.***

 

In order to preparefinancial statements in conformity with generally accepted accountingprinciples, our management is required to make estimates and assumptions as ofthe date of the financial statements. These estimates and assumptions affectthe reported values of assets, liabilities, revenues and expenses, anddisclosures of contingent assets and liabilities. Areas requiring significantestimates by our management include:

 

•                  determinationof new work awards and backlog;

 

•                  recognitionof contract revenue, costs, profit or losses in applying the principles ofpercentage-of-completion accounting;

 

•                  recognitionof recoveries under contract change orders or claims;

 

•                  collectibilityof billed and unbilled accounts receivable and the need and amount of anyallowance for doubtful accounts;

 

•                  theamount of reserves necessary for self-insured risks;

 

•                  thedetermination of liabilities under pension and other post-retirement benefitprograms;

 

•                  estimatedamounts for expected project losses, reclamation costs, warranty costs or othercontract closing costs;

 

•                  recoverabilityof goodwill;

 

•                  provisionsfor income taxes and any related valuation allowances; and

 

•                  accrualsfor other estimated liabilities, including litigation reserves.

 

***Ouruse of percentage-of-completion accounting could result in a reduction orelimination of previously reported profits.***

 

As more fully discussedin “Management’s Discussion and Analysis of Financial Condition and Results ofOperations - Overview” in Item7 of this report and in Note 1, “Significant Accounting Policies” of the Notesto Consolidated Financial Statements in Item 8 of this report, a substantialportion of our revenues are recognized using the percentage-of-completionmethod of accounting. Generally, the percentage-of-completion accountingpractices we utilize result in our recognizing contract revenues and earningsratably, based on the proportion of costs incurred to total estimated contractcosts or on the proportion of labor hours or labor costs incurred to totalestimated labor hours or labor costs. For certain long-term contracts,completion is measured on estimated physical completion or units of production.

 

The cumulative effect ofrevisions to contract revenues and estimated completion costs, includingincentive awards, penalties, change orders, claims and anticipated losses, isrecorded in the accounting period in which the amounts are known and can bereasonably estimated. Such revisions could occur at any time and the effectscould be material. A change order is included in total estimated contractrevenue when it is probable that the change order will result in a bona fideaddition to contract value and can be reliably estimated. Claims are includedin total estimated contract revenue, only to the extent that contract costsrelated to the claim have been incurred, 

 

I-20

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when it is probable that the claim will result in a bona fide additionto contract value and can be reliably estimated. No profit is recognized onclaims until final settlement occurs.

 

Although we have ahistory of making reasonably dependable estimates of the extent of progresstowards completion of contract revenue and of contract completion costs on ourlong-term engineering and construction contracts, due to uncertainties inherentin the estimation process, it is possible that actual completion costs may varyfrom estimates, and it is possible that such variances could be material to ouroperating results.

 

***If wehave to write off a significant amount of intangible assets, our earnings willbe negatively impacted.***

 

Goodwill is included onour balance sheet and is a significant asset, totaling $307.8 million atDecember 31, 2004. If our goodwill were to be significantly impaired, we wouldbe required to write-off the impaired amount. The write-off would negativelyimpact our earnings; however, it would not impact our cash flows. See Note 1, “SignificantAccounting Policies” of the Notes to Consolidated Financial Statements in Item8 of this report.

 

***Our stockholderrights plan, our organizational documents, some of our agreements andprovisions of Delaware law could inhibit a change in control.***

 

We are subject to variousrestrictions and other requirements that may have the effect of delaying,deterring or preventing a change in control of us, such as:

 

•      ourstockholder rights plan;

 

•      provisionsin our certificate of incorporation and bylaws;

 

•      someof our agreements, including the disbursing agreement that we entered into inconnection with our emergence from bankruptcy; and

 

•      Section203 of the Delaware General Corporation law.

 

Under our stockholderrights plan, each share of our common stock is accompanied by a right thatentitles the holder of that share, upon the occurrence of specified events thatmay be intended to effect a change in control, to purchase either additionalshares of our common stock or shares of an acquiring company’s common stock ata price equal to one-half of the current market price of the relevant shares.

 

A number of provisions inour certificate of incorporation and bylaws also may make a change in controlmore difficult, including, among others, removal of directors only for cause,the elimination of our stockholders’ ability to fill vacancies on the board ofdirectors and to call special meetings and supermajority stockholderamendments. In addition, our certificate of incorporation authorizes theissuance of up to 100 million shares of our common stock and 10 million sharesof our preferred stock. Our board of directors has the power to determine theprice and terms under which additional capital stock may be issued and to fixthe terms of preferred stock. Existing stockholders will not have preemptiverights with respect to any of those shares.

 

On January 25, 2002, thedate on which we emerged from bankruptcy protection pursuant to our Plan ofReorganization, we issued 5,000,000 shares of our common stock and warrants toacquire an additional 8,520,424 shares of our common stock, to a disbursingagent for the benefit of unsecured creditors in our bankruptcy. As of February18, 2005, 3,458,726 shares of our common stock and 5,893,962 of warrants hadbeen distributed to various unsecured creditors. Pending the distribution ofthe remaining shares to the unsecured creditors, the disbursing agreementrequires the disbursing agent to vote the shares held by the disbursing agentas recommended by our board of directors, unless the reorganization plancommittee established in connection with our bankruptcy directs it to vote the sharesin proportion to the votes cast and abstentions claimed by all otherstockholders eligible to vote on the particular matter.

 

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Since March 6, 2003, ourcommon stock has been quoted on the NASDAQ National Market®. As a result,Section 203 of the Delaware General Corporation Law is applicable to us andgenerally limits the ability of major stockholders to engage in specifiedtransactions with us that may be intended to effect a change in control.

 

***Conversionof our outstanding exercisable securities will dilute the ownership interestsof our existing stockholders and could adversely affect the market price of ourcommon stock.***

 

Pursuant to emergencefrom bankruptcy, we issued warrants to acquire shares of our common stock andwe have issued stock options to our chairman and key employees under ourlong-term incentive program. As of December 31, 2004, we have 8,378,000warrants outstanding and 6,005,000 options outstanding. All of the warrantsexpire in January 2006. The exercise of these warrants and options will dilutethe ownership interests of our existing stockholders. Furthermore, any sales inthe public market of the common stock issuable upon exercise of these warrantsand options could adversely affect the prevailing market price of our commonstock.

 

***Thesignificant demands on our cash resources could affect our ability to achieveour business plan.***

 

We have substantialdemands on our cash resources in addition to operating expenses and interest expense,principally capital expenditures. See “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations -Financial Condition and Liquidity,” in Item 7 of this report.

 

Our ability to fundworking capital requirements will depend upon our future operating performance,which, in turn, will be affected by prevailing economic conditions andfinancial, business and other factors, many of which are beyond our control. Ifwe are unable to fund our businesses, we will be forced to adopt an alternativestrategy that may include:

 

•      reducing or delaying capital expenditures;

 

•      limiting our growth;

 

•      seeking additional debt financing orequity capital;

 

•      selling assets; or

 

•      restructuring or refinancing ourindebtedness.

 

We cannot provideassurance that any of these strategies could be affected on favorable terms orat all.

 

***Adequatebonding is necessary for us to successfully win new work awards on some typesof contracts.***

 

In line with industrypractice, we are often required to provide performance and surety bonds tocustomers under fixed-price contracts. These bonds indemnify the customershould we fail to perform our obligations under the contract. If a bond isrequired for a particular project and we are unable to obtain an appropriatebond, we cannot pursue that project. We have bonding capacity but, as istypically the case, the issuance of a bond is at the surety’s sole discretion.Moreover, due to events that affect the insurance and bonding marketsgenerally, bonding may be more difficult to obtain in the future or may only beavailable at significant additional cost. There can be no assurance that bondswill continue to be available to us on reasonable terms. Our inability toobtain adequate bonding and, as a result, to bid on new work could have amaterial adverse effect on our businesses, financial condition, results ofoperations and cash flows.

 

***Unavailabilityof insurance coverage could have a negative impact on our operations andresults.***

 

We maintain insurancecoverage as part of our overall risk management strategy and due torequirements to maintain specific coverage in our financing agreements and inmost of our construction contracts. Although we 

 

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have been able to obtain insurance coverage to meet our requirements inthe past, there is no assurance that such insurance coverage will be availablein the future.

 

**ITEM 2. PROPERTIES**

 

We do not own significantreal property for operations. Our principal administrative office facilitieslocated in Boise, Idaho; Aiken, South Carolina; Denver, Colorado; Princeton,New Jersey; Birmingham, Alabama; and Arlington, Virginia are leased underlong-term, noncancelable leases expiring at various dates through 2012. As ofDecember 31, 2004, we owned more than 2,300 units of heavy and light mobileconstruction, environmental remediation and contract mining equipment. Weconsider our construction, environmental remediation and mining equipment andleased administrative and engineering facilities to be well maintained andsuitable for our current operations.

 

As of December 31, 2004,our principal facilities were as follows:

 
| **Property location**  | ** ** | **Facility Sq. Ft.** | ** ** | **Owned/Leased** | ** ** | **Segment/  Business Unit*** | ** ** | **Usage**                                                | ** ** |
|------------------------|------------|----------------------|------------|------------------|------------|------------------------------|------------|----------------------------------------------------------|------------|
|                   |       |                 |       |             |       |                         |       |                                                     |       |
| Aiken, SC              |       | 96,250               |       | Leased           |       | 6,5                          |       | Business unit headquarters/engineering                   |       |
| Arlington, VA          |       | 25,009               |       | Leased           |       | 2,5,6,7                      |       | Business unit headquarters/regional office               |       |
| Bellevue, WA           |       | 16,991               |       | Leased           |       | 2,4                          |       | Area office                                              |       |
| Birmingham, AL         |       | 140,635              |       | Leased           |       | 4,8                          |       | Business unit headquarters/regional office               |       |
| Boise, ID              |       | 50,511               |       | Leased           |       | 7                            |       | Records/retention center                                 |       |
| Boise, ID (a)          |       | 190,583              |       | Leased           |       | 1,2,4,6,7,8                  |       | Corporate/business unit headquarters                     |       |
| Boothwyn, PA           |       | 14,400               |       | Leased           |       | 4                            |       | Office                                                   |       |
| Bucharest,  Romania    |       | 48,438               |       | Leased           |       | 1,2,4,5,8                    |       | Engineering                                              |       |
| Carlsbad, NM           |       | 200,260              |       | Leased           |       | 6                            |       | Office/warehouse/container fabrication                   |       |
| Cleveland, OH          |       | 88,775               |       | Leased           |       | 4,5,8                        |       | Engineering                                              |       |
| Denver, CO             |       | 227,987              |       | Leased           |       | 1,2,3,4,5,6,7,8              |       | Business unit headquarters/regional office               |       |
| Downers Grove,  IL     |       | 13,888               |       | Leased           |       | 1,4                          |       | Office/engineering                                       |       |
| Hato Rey, Puerto  Rico |       | 16,100               |       | Leased           |       | 4                            |       | Office/engineering                                       |       |
| Highland, CA           |       | 17,400               |       | Owned            |       | 2                            |       | Regional office/equipment yard                           |       |
| Irvine, CA             |       | 13,752               |       | Leased           |       | 2,4,8                        |       | Area office/engineering                                  |       |
| Joliet, IL             |       | 43,560               |       | Leased           |       | 2                            |       | Storage yard/warehouse                                   |       |
| Las Vegas, NV          |       | 217,800              |       | Leased           |       | 2                            |       | Storage yards                                            |       |
| Los Alamos, NM         |       | 14,600               |       | Leased           |       | 6                            |       | Long-term project office                                 |       |
| Monmouth  Junction, NJ |       | 10,000               |       | Leased           |       | 1,4                          |       | Office/warehouse                                         |       |
| New York, NY           |       | 28,331               |       | Leased           |       | 1,2,8                        |       | Area office                                              |       |
| Perris, CA             |       | 413,820              |       | Leased           |       | 2                            |       | Office/precast concrete fabrication                      |       |
| Petaluma, CA           |       | 43,800               |       | Owned            |       | 2                            |       | Office/precast concrete fabrication                      |       |
| Princeton, NJ          |       | 368,245              |       | Leased           |       | 1,2,4,6,8                    |       | Business unit headquarters/regional  offices/engineering |       |
| San Ramon, CA          |       | 13,056               |       | Leased           |       | 2                            |       | Regional office                                          |       |
| Warrington,  England   |       | 51,836               |       | Leased           |       | 4,6                          |       | Office                                                   |       |
| Whitehall, AR          |       | 129,640              |       | Leased           |       | 6                            |       | Warehouse                                                |       |

 

I-23

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----

* Segment/business unit:

1 -Power

2 -Infrastructure

3 -Mining

4 -Industrial/Process

5 -Defense

6 -Energy & Environment

7 – Corporate

8 – Operations centers used by all business units

 

(a)          An extension through2015 of the lease for the Boise, ID corporate and business unit headquarterswas signed in January 2005.

 

**ITEM3.  LEGAL PROCEEDINGS**

 

We are a defendant in various lawsuits resulting fromallegations that third parties sustained injuries and damage from theinhalation of asbestos fibers contained in materials used in constructionprojects. In addition, based on proofs of claims filed with the court duringthe pendency of our bankruptcy proceedings, we are aware of other potentialasbestos claims against us. We never were a manufacturer of asbestos orproducts which contain asbestos. Asbestos-related lawsuits against us resultfrom allegations that third parties sustained injuries and damage from theinhalation of asbestos fibers contained in materials used in constructionprojects and that we allegedly were negligent, the typical negligence claimbeing that we had a duty but failed to warn the plaintiff or claimant of, orfailed to protect the plaintiff or claimant from, the dangers of asbestos. Weexpect that additional asbestos claims will be filed against us in the future.

 

Previously, we had determined that all of the asbestosclaims relating to Old MK are fully insured and most, but potentially not all,of the asbestos claims relating to RE&C are fully insured. The potentiallyuninsured asbestos claims relate to a company acquired by RE&C in 1986. Werecently reviewed the 1986 stock purchase agreement, pursuant to which RE&Chad acquired that company, and have recently obtained and reviewed theinsurance policies obtained by the prior owners of the company. Based on thesereviews, we believe we are entitled to the benefit of the insurance coverageobtained by the prior owners. We have tendered the claims related to theacquired company to such insurance carriers, but we do not yet know if thecarriers will accept the claims.

 

The outcome of these claims, including the adequacy ofinsurance coverage, cannot be predicted with certainty. Prior to receiving andreviewing the insurance policies, we believed that the annual range ofreasonably possible additional loss, including related legal costs, was zero to$1.2 million. After analyzing the recently obtained insurance policies andreviewing the solvency of the insurance carriers, we believe the most likelyannual loss to be at the lower end of the range.

 

As previously reported, we were sued in the SupremeCourt of New York, County of Kings in connection with construction managementand inspection services performed by Washington Infrastructure, Inc. for a newschool facility for the School Construction Authority of the City of New Yorkby the prime contractor. This suit, *Trataros Construction,Inc. et al. v. The New York City School Construction Authority et al.*,Index No. 20213/01, has been in the discovery stage for years and there havebeen no material developments in the proceedings in some time. To the extentthere are additional material developments in this suit, we will discuss themin future reports under the Exchange Act.

 

We also incorporate by reference the informationregarding legal proceedings set forth under the caption “Legal Matters” in Note13, “Contingencies and Commitments” of the Notes to Consolidated FinancialStatements in Item 8 of this report.

 

Our reorganization case is *In reWashington Group International, Inc. and Related Cases*, Docket No.BK-N 01-31627-GWZ, in the U.S. Bankruptcy Court for the District of Nevada.

 

I-24

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The litigation related to the Old MK 401(k) Plandiscussed under the caption “Legal Matters” and referred to as “ERISALitigation” in Note 13, “Contingencies and Commitments” of the Notes toConsolidated Financial Statements in Item 8 of this report refers to *John B. Blyler, et al., v. William J. Agee, et al.*, Case No.CIV97-0332-S-BLW, in the U.S. District Court for the District of Idaho.

 

The *qui tam*lawsuit discussed under the caption “Legal Matters” and referred to as “TarCreek Litigation” in Note 13, “Contingencies and Commitments” of the Notes toConsolidated Financial Statements in Item 8 of this report refers to *United States ex. rel. Lovelace et. al. v. Washington Group International, Inc.,* Case No.00-CV-61 EA(M) in the U.S. District Court for the Northern District ofOklahoma.

 

The lawsuit relating toour USAID-financed projects in Egypt discussed under the caption “Legal Matters”and referred to as “Litigation and Investigation related to USAID EgyptianProjects” in Note 13, “Contingencies and Commitments” of the Notes toConsolidated Financial Statements in Item 8 of this report refers to *United States of American v. Washington Group International, Inc., etal.,* Case No.  CIV-04545S-EJLin the U.S. District Court for the District of Idaho.

 

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

We submitted no matters to a vote of our stockholdersduring the fourth quarter of 2004.

 

I-25

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**PART II**

 

**ITEM 5.****               MARKET FOR THEREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES**

 

***Market information***

 

On January 25, 2002, the date on which we emerged frombankruptcy protection pursuant to our Plan of Reorganization, all of ourthen-existing equity securities, including our common stock, were canceled andextinguished, and 25,000,000 shares of newly issued common stock were issued,including 5,000,000 shares allocated to the unsecured creditor pool.

 

From its issuance on January 25, 2002 until March 6,2003, our common stock traded in the over-the-counter market. The price of ourcommon stock was quoted by the Pink Sheets® quotation service under the tickersymbol “WNGXQ” until July 30, 2002 when the OTC Bulletin Board® began quotationof our common stock under the ticker symbol “WGII.” Our common stock begantrading on the NASDAQ National Market® under the ticker symbol “WGII” on March6, 2003.

 

At the close of business on February 18, 2005, we had25,595,718 shares of common stock issued and outstanding. Of the 5,000,000shares allocated to the unsecured creditor pool, 3,458,726 shares have beendistributed to various unsecured creditors and the remaining 1,541,274 shareswill be distributed as the claim pool is resolved. As part of the Plan ofReorganization, 8,520,424 stock purchase warrants were issued and awarded tothe unsecured creditor pool of which, at the close of business on February 18,2005, 5,893,962 warrants had been distributed to various unsecured creditorsand the remaining 2,626,462 warrants will be distributed as the claim pool isresolved. In connection with a legal settlement with an unsecured creditor,26,010 shares of common stock and 44,320 warrants have been returned to us. See the discussion under the caption “LegalMatters - ERISA Litigation” in Note 13, “Contingencies and Commitments,” of theNotes to Consolidated Financial Statements in Item 8 of this report forinformation about the Blyler v. Agee settlement.

 

The following tables set forth the high and low pricesper share of our common stock for each quarterly period in 2004 and 2003.

 

**Common stock market prices**

** **
| **2004 quarters ended (2)** | ** ** | **April 2  2004** | ** ** | **July 2  2004** | ** ** | **October 1  2004** | ** ** | **December 31  2004** | ** ** |
|-----------------------------|------------|-------------------|------------|------------------|------------|---------------------|------------|-----------------------|------------|
| High                        |       | $                 | 40.20      |             | $          | 38.40               |       | $                     | 36.50      |   | $ | 41.34 |   |
| Low                         |       | 32.57             |       | 31.47            |       | 30.75               |       | 31.40                 |       |
|                             |            |                   |            |                  |            |                     |            |                       |            |  |  |  |  |

 
| **2003 quarters ended** | ** ** | **April 4  2003 (1)** | ** ** | **July 4  2003 (2)** | ** ** | **October 3  2003 (2)** | ** ** | **January 2  2004 (2)** | ** ** |
|-------------------------|------------|-----------------------|------------|----------------------|------------|-------------------------|------------|-------------------------|------------|
| High                    |       | $                     | 17.75      |                 | $          | 23.15                   |       | $                       | 27.95      |   | $ | 34.33 |   |
| Low                     |       | 14.35                 |       | 17.38                |       | 21.59                   |       | 26.85                   |       |
|                         |            |                       |            |                      |            |                         |            |                         |            |  |  |  |  |

 

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(1)          Our common stock begantrading on the NASDAQ National Market® on March 6, 2003. Previously, our stockwas reported by the OTC Bulletin Board®. The high common stock price for thisquarter was reported by the NASDAQ National Market®. The low common stock pricefor this quarter was reported by the OTC Bulletin Board®. The over-the-counterquotations reflect inter-dealer prices, without retail mark-up, mark-down orcommission and may not necessarily represent actual transactions.

(2)          The high and low pricesare the high and low bid prices per share of our common stock, as reported bythe NASDAQ National Market®.

 

II-1

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***Holders***

 

The number of holders of our voting common stock atFebruary 28, 2005 was approximately 6,100. This number does not include allbeneficial owners of our common stock held in the name of a nominee.

 

***Dividends***

 

We have not paid a cash dividend since the firstquarter of fiscal 1994 and do not intend to pay cash dividends in the nearterm. Our credit facility has specified restrictions on dividend payments. Fora more detailed discussion, see Note 8, “Credit Facility” of the Notes toConsolidated Financial Statements in Item 8 of this report.

 

***Recent Sales of Unregistered Equity Securities***

 

We did not sell any unregistered equity securitiesduring 2004.

 

II-2

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**ITEM 6.  SELECTED FINANCIAL DATA**

*(In millions, except per share data)*

 

As of February 1, 2002, in connection with ouremergence from bankruptcy protection, we adopted fresh-start reporting pursuantto the guidance provided by the American Institute of Certified PublicAccountants Statement of Position (“SOP”) 90-7, *FinancialReporting by Entities in Reorganization Under the Bankruptcy Code*.In connection with the adoption of fresh-start reporting, we created a newentity for financial reporting purposes. The effective date of our emergencefrom bankruptcy is considered to be the close of business on February 1, 2002for financial reporting purposes. In the tables below, the periods presentedthrough February 1, 2002 have been designated “Predecessor Company.”

 

Effective December 29, 2001, we changed our fiscalyear to the 52/53 weeks ending on the Friday closest to December 31 from the52/53 weeks ending on the Friday closest to November 30.

 
| ** **                                       | ** ** | ** **                         | ** ** | ** **                       | ** ** | ** **                                  | ** ** | **Predecessor Company**                  | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|---------------------------------------------|------------|------------------------------------------|------------|
| ** **                                       | ** ** | **Year Ended  December 31,  2004** | ** ** | **Year Ended  January 2,  2004** | ** ** | **Eleven  Months  Ended  January 3,  2003** | ** ** | **One  Month  Ended  February 1,  2002** | ** ** | **One  Month  Ended  December 28,  2001** | ** ** | **Year Ended  November 30,  2001** | ** ** | **Year Ended  December 1,  2000 (a)** | ** ** |
| **OPERATIONS  SUMMARY**                          | ** ** | ** **                         | ** ** | ** **                       | ** ** | ** **                                  | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                          |       | $                                  | 2,915.4    |                             | $          | 2,501.2                                     |       | $                                        | 3,311.6    |   | $ | 349.9 |   | $ | 308.3 |   | $ | 4,041.6 |   | $ | 3,090.8 |   |
| Gross profit  (loss)                             |       | 150.0                              |       | 176.3                            |       | 149.0                                       |       | 11.1                                     |       | .2 |   | 97.7 |   | (94.7 | )(b) |
| Equity in income  of unconsolidated affiliates   |       | 26.9                               |       | 25.5                             |       | 27.4                                        |       | 3.1                                      |       | 1.3 |   | 17.9 |   | 13.1 |   |
| Operating income  (loss)                         |       | 118.0                              |       | 150.5                            |       | 131.7                                       |       | 9.4                                      |       | (31.8 | ) | 18.3 |   | (1,351.5 | )(c) |
| Extraordinary  item –gain on debt discharge |       | —                             |       | —                           |       | —                                      |       | 567.2                                    | (d)        | — |   | — |   | — |   |
| Net income  (loss)                               |       | 51.1                               |       | 42.1                             |       | 37.7                                        |       | 522.2                                    |       | (26.0 | ) | (85.0 | ) | (859.4 | ) |
| Income per  common share:                        |       |                               |       |                             |       |                                        |       |                                     |       |   |   |   |   |   |   |
| Basic                                            |       | 2.02                               |       | 1.68                             |       | 1.51                                        |       | —                                   | (e)        | — | (e) | — | (e) | — | (e) |
| Diluted                                          |       | 1.86                               |       | 1.66                             |       | 1.51                                        |       | —                                   | (e)        | — | (e) | — | (e) | — | (e) |
| Shares used to  compute income per common share: |       |                               |       |                             |       |                                        |       |                                     |       |   |   |   |   |   |   |
| Basic                                            |       | 25.3                               |       | 25.0                             |       | 25.0                                        |       | —                                   | (e)        | — | (e) | — | (e) | — | (e) |
| Diluted                                          |       | 27.4                               |       | 25.3                             |       | 25.0                                        |       | —                                   | (e)        | — | (e) | — | (e) | — | (e) |
|                                             |       |                               |       |                             |       |                                        |       |                                     |       |   |   |   |   |   |   |
| **FINANCIAL  POSITION SUMMARY AT END OF PERIOD** |       |                               |       |                             |       |                                        |       |                                     |       |   |   |   |   |   |   |
| Current assets                                   |       | $                                  | 949.3      |                             | $          | 789.0                                       |       | $                                        | 731.1      |   | $ | 1,072.4 |   | $ | 1,191.8 |   | $ | 1,203.0 |   | $ | 1,581.3 |   |
| Total assets                                     |       | 1,588.2                            |       | 1,410.5                          |       | 1,415.4                                     |       | 1,783.4                                  |       | 2,133.9 |   | 2,140.4 |   | 2,656.0 |   |
| Current  liabilities                             |       | 621.9                              |       | 532.5                            |       | 585.7                                       |       | 962.3                                    |       | 596.1 |   | 625.9 |   | 1,958.6 |   |
| Liabilities  subject to compromise               |       | —                             |       | —                           |       | —                                      |       | —                                   |       | 1,950.3 |   | 1,928.2 |   | — |   |
| Long-term debt                                   |       | —                             |       | —                           |       | —                                      |       | 40.0                                     |       | — |   | — |   | 692.9 |   |
| Minority interests                               |       | 47.9                               |       | 48.5                             |       | 56.1                                        |       | 78.0                                     |       | 75.8 |   | 76.5 |   | 79.7 |   |
| Stockholders’  equity (deficit)             |       | 732.9                              |       | 660.9                            |       | 596.8                                       |       | 550.0                                    |       | (576.9 | ) | (551.5 | ) | (464.9 | ) |

 

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(a)          OnJuly 7, 2000, we acquired RE&C in a transaction accounted for as apurchase; accordingly, the results of operations of RE&C have been includedin our operations from the date of the acquisition. See Items 1 and 7 of thisreport and Note 3, “Acquisition, Reorganization Case and Fresh-start Reporting”of the Notes to Consolidated Financial Statements in Item 8 of this report.

 

(b)         Grossprofit (loss) during the year ended December 1, 2000 includes $141.0 ofadjustments to the allocation of the RE&C purchase price to the net assetsacquired for items that we believe were additional misstatements, based on subsequentinformation we obtained, but that were not included in an arbitration 

 

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claimagainst the Sellers, including adjustments to estimates at completion oncontracts and increases in self-insurance reserves.

 

(c)          Operatingloss during the year ended December 1, 2000 includes adjustments for itemsdiscussed in (b) and a $444.1 impairment of an arbitration claim receivablefrom the Sellers. In addition, we analyzed for impairment the assets acquiredin the acquisition of RE&C, including goodwill. Based upon the results ofour analysis, we recorded an impairment of $747.5 of acquired assets.

 

(d)         Extraordinaryitem consists of the gain on debt discharge of $1,460.7, less the value ofcommon stock and warrants issued of $550.0, net of income tax of $343.5, uponemergence from bankruptcy. See Note 3, “Acquisition, Reorganization Case andFresh-start Reporting” of the Notes to Consolidated Financial Statements inItem 8 of this report.

 

(e)          Netincome per share is not presented for these periods as it is not meaningfulbecause of the revised capital structure of the Successor Company.

 

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**ITEM 7.****               MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION****AND RESULTSOF OPERATIONS**

## ** **

*The following management’sdiscussion and analysis of our financial condition and results of operationsshould be read in conjunction with the consolidated financial statements andnotes thereto in Item 8 of this report. The following analysis containsforward-looking statements about our future expectations and potentialrevenues, and operating results. See “Note Regarding Forward-Looking Statements”for a discussion of the risks and uncertainties affecting these statements and “RiskFactors” in Item 1 of this report.*

 

References in ourmanagement’s discussion and analysis to 2004 are for the year ended December31, 2004.  References to 2003 are for theyear ended January 2, 2004. References to 2002 are for the one month endedFebruary 1, 2002, which preceded our emergence from bankruptcy protection,combined (on a pro forma basis) with the post-emergence eleven months endedJanuary 3, 2003.

 

**OVERVIEW**

 

Weare an international provider of a broad range of design, engineering,construction, construction management, facilities and operations management,environmental remediation and mining services. We offer our various servicesseparately or as part of an integrated package throughout the life cycle of acustomer’s project. We serve our clients through six business units: Power,Infrastructure, Mining, Industrial/Process, Defense and Energy &Environment.

 

We are subject tonumerous factors, which have an impact on our ability to obtain new work. ThePower business unit is dependent on the domestic demand for new powergenerating facilities and the modification of existing power facilities.Infrastructure is affected by the availability of public sector funding fortransportation projects and availability of bonding. Mining is affected by demandfor coal and other extractive resources. The Industrial/Process business unitis affected in general by the growth prospects in the U.S. economy and moredirectly by the capital spending plans of its large customer base. Finally, theDefense and Energy & Environment business units are almost entirelydependent on the spending levels of the U.S. government, in particular, theDepartments of Defense and Energy.

 

**CRITICAL ACCOUNTING POLICIES ANDRELATED CRITICAL ACCOUNTING ESTIMATES**

 

Ouraccounting and financial reporting policies are in conformity with accountingprinciples generally accepted in the United States of America (“GAAP”). Thepreparation of our consolidated financial statements in conformity with GAAPrequires us to make estimates and judgments that affect the reported amounts ofassets and liabilities and disclosure of contingent assets and liabilities atthe balance sheet date, and the reported amounts of revenue and expenses duringthe reporting period. Although our significant accounting policies aredescribed in Note 1, “Significant Accounting Policies” of the Notes to Consolidated FinancialStatements in Item 8 of this report, the following discussion is intended todescribe those accounting policies most critical to the preparation of ourconsolidated financial statements. The development and selection of thecritical accounting policies, related critical accounting estimates and thedisclosure below have been reviewed with the audit review committee of ourboard of directors. There were no changes in our critical accounting policiesduring the year ended December 31, 2004.

 

***Revenuerecognition.*** Wefollow the provisions of SOP 81-1, *Accountingfor Performance of Construction-Type and Certain Production-Type Contracts.*Werecognize revenue on engineering and construction-type contracts using thepercentage-of-completion method of accounting whereby revenue is recognized asperformance under the contract progresses. For most of our fixed-price andtarget-price contracts, we use a cost-to-cost approach to measure progresstowards completion. Under the cost-to-cost method, we make periodic estimatesof our progress towards completion by comparing costs incurred to date withtotal estimated contract costs. Revenue is then calculated on a cumulativebasis (project-to-date) as the total contract value multiplied by the currentpercentage complete. Revenue for a reporting period is calculated as thecumulative project-to-date revenue less project revenue recognized in priorperiods. However, we defer profit recognition on fixed-price and 

 

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certain target-priced construction contracts until progress issufficient to estimate the probable outcome, which generally does not occuruntil the project is at least 20% complete. Fixed-price contracts accounted for28% of our total revenue for the year ended December 31, 2004.

 

Forcontracts that include significant materials or equipment costs, we use anefforts expended method to measure progress towards completion based on laborhours, labor dollars or some other measurement of physical completion. Forcertain long-term contracts involving mining and environmental and hazardoussubstance remediation, progress towards completion is measured using the unitsof production method. Revenues from reimbursable or cost-plus contracts arerecognized on the basis of costs incurred during the period plus the feeearned. Service-related contracts, including operations and maintenancecontracts, are accounted for over the period of performance, in proportion tothe costs of performance, evenly over the period or over units of production.Award fees associated with U.S. government contracts are initially estimatedand recognized based on prior historical performance until the client hasconfirmed the final award fee. Performance-based incentive fees are included incontract value when a basis exists for the reasonable prediction of performancein relation to established targets. When a basis for reasonable prediction doesnot exist, performance-based incentive fees are recognized when actuallyawarded by the client.

 

Theamount of revenue recognized depends on whether the contract or project isdetermined to be an “at-risk” or an “agency” relationship between the clientand us. Determination of the relationship is based on characteristics of thecontract or the relationship with the client. For “at-risk” relationships, thegross revenue and the costs of materials, services, payroll, benefits,non-income tax and other costs are recognized in our statement of income. For “agency”relationships, where we act as an agent for our client, only fee revenue isrecognized, meaning that direct project costs and the related reimbursementfrom the client are netted.

 

Theuse of the percentage-of-completion method for revenue recognition requires theuse of various estimates, including among others, the extent of progresstowards completion, contract completion costs and contract revenue. Profitmargins to be recognized are dependent upon the accuracy of estimatedengineering progress, materials quantities, achievement of milestones and otherincentives, penalty provisions, labor productivity and other cost estimates.Such estimates are dependent upon various judgments we make with respect tothose factors, and some are difficult to accurately determine until the projectis significantly underway. Progress is evaluated each reporting period. Werecognize adjustments to profitability on contracts utilizing thepercentage-of-completion method on a cumulative basis, when such adjustmentsare identified. We have a history of making reasonably dependable estimates ofthe extent of progress towards completion, contract revenue and contractcompletion costs on our long-term engineering and construction contracts.However, due to uncertainties inherent in the estimation process, it ispossible that actual completion costs may vary from estimates. In limitedcircumstances, we may use the completed-contract method for specific contractsfor which reasonably dependable estimates cannot be made or for which inherenthazards make the estimates doubtful. The completed contract method was notutilized during any of the periods presented.

 

***Change orders and claims.*** Once contract performance is underway, weoften experience changes in conditions, client requirements, specifications,designs, materials and work schedule. Generally, a “change order” will benegotiated with our customer to modify the original contract to approve boththe scope and price of the change. Occasionally, however, disagreements ariseregarding changes, their nature, measurement, timing and other characteristicsthat impact costs and revenue under the contract. When a change becomes a pointof dispute between our customer and us, we then consider it as a claim.

 

Costsrelated to change orders and claims are recognized when they are incurred.Change orders are included in total estimated contract revenue when it isprobable that the change order will result in a bona fide addition to contract valueand can be reliably estimated. Claims are included in total estimated contractrevenue, only to the extent that contract costs related to the claim have beenincurred, when it is probable that the claim will result in a bona fideaddition to contract value and can be reliably estimated. No profit isrecognized on claims until final settlement occurs. This can lead to asituation where costs are recognized in one period and revenue is recognizedwhen customer agreement is obtained or claim resolution occurs, which can be insubsequent periods. We recognized $30.4 million, $35.2 million and $15.4million of claim revenue during 2004, 2003 and 2002, 

 

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respectively. Substantially all claims were settled and collectedduring each respective period for which claim revenue was recognized.Additional contract related costs, including subcontractors’ share of claimsettlements, of $1.9 million, $9.0 million, and $2.6 million for 2004, 2003,and 2002, respectively, reduced the impact on operating income of the claimsettlements disclosed above.

 

***Estimated losses on uncompleted contracts and changesin contract estimates.*** We record provisions for estimated losses on uncompleted contracts inthe period in which such losses are identified. The cumulative effect ofrevisions to contract revenue and estimated completion costs are recorded inthe accounting period in which the amounts become evident and can be reasonablyestimated. These revisions include such items as the effects of change ordersand claims, warranty claims, liquidated damages or other contractual penalties,adjustments for audit findings on U.S. government contracts and contractcloseout settlements. It is possible that there will be future and currentlyunknown significant adjustments to our estimated contract revenues, costs andgross margins for contracts currently in process, particularly in the laterstages of the contracts. These adjustments are common in the constructionindustry and inherent in the nature of our contracts. These adjustments could,depending on the magnitude of the adjustments and/or the number of contractsbeing completed, materially, positively or negatively, affect our operatingresults in an annual or quarterly reporting period.

 

***Goodwill.***Effective February 1, 2002, in conjunctionwith fresh-start reporting, we used the purchase method of accounting toallocate our reorganization value of $550 million to our net assets, based onestimates of fair value, with the excess being recorded as goodwill. As ofDecember 31, 2004, we have $307.8 million of goodwill. Pursuant to Statement ofFinancial Accounting Standards (“SFAS”) No. 142, *Goodwill andOther Intangible Assets,*goodwillis no longer amortized but is to be tested for impairment at least annually. Weregularly evaluate whether events and circumstances have occurred which mayindicate a possible impairment of goodwill and perform the annual impairmenttest for all of our reporting units each October. In conducting the impairmenttest, we apply various techniques to estimate the fair value of our reportingunits. These techniques are inherently subjective, and the resulting values arenot necessarily representative of the values we might obtain in a sale of ourreporting units to a willing third party. Based on our annual review of therecoverability of goodwill as of October 31, 2004, we determined that ourgoodwill is not impaired. However, our businesses are cyclical and subject tocompetitive pressures. Therefore it is possible that the goodwill values of ourbusiness units could be adversely impacted in the future by these or otherfactors and that a significant impairment adjustment, which would reduceearnings and potentially affect debt covenants, could be required in suchcircumstances.

 

***Litigation claims and contingencies.*** In the normal course of business, we aresubject to a variety of contractual guarantees and litigation. In general,guarantees can relate to project scheduling, project completion, plantperformance or meeting required standards of workmanship. Most of ourlitigation involves us as a defendant in workers’ compensation, personalinjury, contract, environmental, environmental exposure, professional liabilityand other similar lawsuits. We maintain insurance coverage for some aspects ofour business and operations. In addition, we have elected to retain a portionof insured losses that may occur through the use of various deductibles, limitsand retentions under our insurance programs. This situation may subject us tosome future liability for which we are only partially insured, or completelyuninsured. Self-insurance reserves are established and maintained for uninsuredbusiness risks.

 

Governmentfunded contracts are, and are expected to continue to be, a significant part ofour business. We derived 51% of our consolidated operating revenues in 2004from contracts with the U.S. government, including 19% from work performed inthe Middle East. Allowable costs under U.S. government contracts are subject toaudit by the government. To the extent that these audits result indeterminations that costs claimed as reimbursable are not allowable costs orwere not allocated in accordance with federal regulations, we could be requiredto reimburse the government for amounts previously received. We also have anumber of U.S. government contracts which extend beyond one year and for whichgovernment funding has not yet been approved. All U.S. government contracts andsome foreign contracts are subject to unilateral termination at the convenienceof the customer. However, we have not experienced any unilateral termination ofU.S. government contracts within the recent past.

 

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Estimatingliabilities and costs associated with such claims, guarantees, litigation andaudits and investigations requires judgment and assessment based onprofessional knowledge and experience of our management and legal counsel. Inaccordance with SFAS No. 5, *Accounting forContingencies*, amounts are recorded as charges to earnings when wedetermine that it is probable that a liability has been incurred and the amountof loss can be reasonably estimated. The ultimate resolution of any suchexposure may vary from earlier estimates as further facts and circumstancesbecome known. We maintain reserves for both self-insured claims that are knownas well as for self-insured claims that are believed to have been incurredbased on actuarial analysis, but have not yet been reported to our claimsadministrators. We include any adjustments to such insurance reserves in ourconsolidated results of operations.

 

**OTHER SIGNIFICANT ACCOUNTINGPOLICIES AND TERMS**

 

The following summary ofsignificant accounting policies and terms is presented to provide a better understandingof our industry, our consolidated financial statements and discussion andanalysis of our results of operations and financial position and liquidity.

 

**New work**represents the monetary value of a contract entered into with a client that isbinding on both parties and reflects the revenue, or equity in income ofunconsolidated affiliates, expected to be recognized from that contract.

 

**Backlog**represents the total accumulation of new work awarded less the amount ofrevenue, or equity in income of unconsolidated affiliates, recognized to dateon contracts at a specific point in time. It comprises the total value ofawarded contracts that are not complete and the revenue, or equity in income ofunconsolidated affiliates, that is expected to be recognized over the remaininglife of the projects in process. We believe backlog is a key predictor offuture earnings potential. Although backlog reflects business that we considerto be firm, cancellations or reductions may occur and may reduce backlog and futurerevenues. We have a significant number of clients that consistently extend oradd to the scope of existing contracts. We do not include any estimate of thisongoing work in backlog until awarded.

 

There are three uniqueaspects of our approach to recording new work and backlog:

 

•                  ***Government contracts***-Most of our government contracts cover several years. However, funding for thecontracts is subject to annual appropriations by Congress. To account for therisk that future amounts may not be appropriated, we only include the mostimmediate two years of forecast revenue in our backlog. Therefore, as timepasses and appropriations occur, additional new work is recorded on existinggovernment contracts. At December 31, 2004, U.S. government funded contractscomprised approximately 40% of our total backlog.

 

•                  ***Mining contracts***-Mining contracts span varying periods of time up to the life of the resource.For new work and backlog purposes, we limit the amount recorded to five years.Similar to our practices with government contracts, as time passes, werecognize additional new work as commitments for that future work are firmedup. At December 31, 2004, mining contracts comprised approximately 13% of ourtotal backlog.

 

•                  ***At-risk and agency contracts***-The amount of new work and related backlog recognized depends on whether thecontract or project is determined to be an “at-risk” or “agency” relationshipbetween the client and us. For “at-risk” relationships, the expected grossrevenue is included in new work and backlog. For relationships where we act asan agent for our client, only the expected net fee revenue is included in newwork and backlog. At December 31, 2004, agency contracts comprisedapproximately 7% of our total backlog.

 

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**Jointventures and equity investments** are utilized when contractsare executed jointly through partnerships and joint ventures with unrelatedthird parties.

 

•                  ***Joint ventures***. A large part of ourwork on large construction and engineering projects is performed throughunincorporated joint ventures with one or more partners. For those in which wecontrol the joint venture by contract terms or other means, the assets,liabilities and results of operations of the joint venture are fullyconsolidated in our financial statements, and the minority interests of thirdparties are separately deducted in our financial statements. For thoseconstruction joint ventures in which we do not control the joint venture, wereport our pro rata portion of revenue and costs, but the balance sheetreflects only our net investment in the project. Joint ventures not involvingconstruction or engineering activities, and which we do not control, arereported using the equity method of accounting in which we record our portionof the joint venture’s net income or loss as equity in income or loss ofunconsolidated affiliates and our investment on the balance sheet reflects ouroriginal investment, at cost, as adjusted for our equity in the income or lossof the joint venture.

 

•                  ***Partially owned subsidiary companies.***For incorporated ventures in which we have a controlling interest, the assets,liabilities and results of operations of the subsidiary company are fullyconsolidated in our financial statements, and the minority interests of thirdparties are separately deducted in our financial statements. However, for thosein which we do not have a controlling interest but do have significantinfluence, we use the equity method of accounting in which we record ourportion of the subsidiary company’s net income or loss as equity in income orloss of unconsolidated affiliates and our investment on the balance sheetreflects our original investment, at cost, as adjusted for our equity in theincome or loss of the subsidiary company.

 

**Normalprofit** is an accounting concept that results from therequirement that an acquiring company record all contracts of an acquiree thatare in-process at the date of acquisition, including construction contracts, atfair value based on estimated normal profit margins. As such, an asset forfavorable contracts or a liability for unfavorable contracts is recorded inpurchase accounting. These assets or liabilities are then reduced based onrevenues recorded over the remaining contract lives, effectively resulting inthe recognition of a reasonable or normal profit margin on contract activityperformed subsequent to the acquisition. Because of the acquisition of RE&Cand the below market profit status of many of the significant acquired contracts,we recorded significant liabilities in purchase accounting. The reduction ofthese liabilities has an impact on our recorded net income, but has no impacton our cash flows. Most of the contracts with normal profit attributes are nowcompleted and only minor amounts remain to be recognized annually.

 

**Accountsreceivable** represent amounts billed to clients that have notbeen paid. On large fixed-price construction contracts, contract provisions mayallow the client to withhold from 5% to 10% of invoices until the project iscompleted, which may be several months or years. These amounts withheld,referred to as retentions, are recorded as receivables and are separatelydisclosed in the financial statements.

 

**Unbilledreceivables**include costs incurred on projects, together withany profit recognized on projects using the percentage-of-completion method,and represents work performed but not yet billed pursuant to contract terms orbilled after the accounting period cut-off occurred.

 

**Billingsin excess of cost and estimated earnings on uncompleted contracts**represent amounts actually billed to clients, and perhaps collected, in excessof costs incurred and profits recognized on a project. Also, in limitedsituations, we negotiate substantial advance payments as a contract condition.These advance payments are reflected in billings in excess of cost andestimated earnings on uncompleted contracts. Provisions for losses oncontracts, reclamation reserves on mining contracts and reserves for punch-listcosts, demobilization and warranty costs on contracts that have achievedsubstantial completion and reserves for audit and contract closing adjustmentson U.S. government contracts are also included in billings in excess of costand estimated earnings on uncompleted contracts.

 

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**Estimateat completion** is a financial forecast of a project thatindicates the best current estimate of total revenues and profits at the pointin time when the project will be completed. If a project estimate at completionindicates that a project will incur a loss, a provision for the entire loss onthe contract is recognized currently.

 

**Generaland administrative expenses** include executive and corporatefunctions, such as legal, human resources and finance and accounting.

 

**Self-insurancereserves** are maintained for uninsured business risks. Wecarry substantial premium-paid, traditional insurance for our various businessrisks; however, we do self-insure the lower level deductibles for workers’compensation and general, automobile and professional liability. As such, wecarry self-insurance reserves on our balance sheet. The current portion of theself-insurance reserves is included in other accrued liabilities.

 

**Minorityinterest** reflects the equity investment by third parties incertain subsidiary companies and joint ventures that we have consolidated inour financial statements, and is comprised primarily of BNFL’s interest in theWestinghouse Businesses.

 

**Government contract costs** are incurred under some of our contracts, primarily in our Defense,Energy & Environment, and Infrastructure business units. We have contractswith the U.S. government that contain provisions requiring compliance with theU.S. Federal Acquisition Regulations and the U.S. Cost Accounting Standards.The allowable costs we charge to those contracts are subject to adjustment uponaudit by various agencies of the U.S. government. Audits of indirect costs arecomplete through 2000. Audits of 2001 and 2002 indirect costs are in process.We have prepared and submitted cost impact statements for 1989 through 1998that have been audited by the U.S. government. We are currently negotiating theresolution of certain proposed audit adjustments to the cost impact statements.We are also in the process of preparing cost impact statements for 1999 through2004. While we have recorded reserves for amounts we believe may be owed to theU.S. government under cost reimbursable contracts, actual results may differfrom our estimates.  We believe that theresults of indirect cost audits and cost impact assessments will not have amaterial adverse effect on our financial position, results of operations orcash flows.

 

**Pension and post-retirement benefit obligations** include defined benefit pension plans thatprimarily cover certain groups of employees of the WestinghouseBusinesses.  We make actuarially-computedcontributions as necessary to adequately fund benefits for these plans. We alsoprovide benefits under company-sponsored retiree health care and life insuranceplans for certain groups of employees of the Westinghouse Businesses. Theretiree health care plans require retiree contributions and contain othercost-sharing features. The retiree life insurance plan provides basic coverageon a noncontributory basis.  We alsosponsor certain frozen benefit plans for certain groups of employees andretirees other than the Westinghouse Businesses. Depending on the plan, theretirees are entitled to health care, life insurance, or retirementbenefits.  Some of the plans requireretiree contributions.

 

**REORGANIZATION CASE ANDFRESH-START REPORTING**

 

On May 14, 2001, due tonear-term liquidity problems resulting from our acquisition of RE&C,Washington Group International and several but not all of its direct andindirect subsidiaries filed voluntary petitions to reorganize under Chapter 11of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District ofNevada (Case No. BK-N-01-31627). The various legal entities that filed for bankruptcyare collectively referred to hereafter as the “Debtors.” The individualbankruptcy cases were administered jointly. Each of the Debtors continued tooperate its business and manage its property as a debtor-in-possession pursuantto sections 1107 and 1108 of the U.S. Bankruptcy Code during the pendency ofthe cases. For a more detailed discussion, see our current report on Form 8-Kfiled May 29, 2001.

 

On December 21, 2001, thebankruptcy court entered an order confirming the Plan of Reorganization. For amore detailed discussion, see our current report on Form 8-K filed January 4,2002.

 

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On the January 25, 2002(the “Effective Date”), we emerged from bankruptcy protection pursuant to ourPlan of Reorganization. We also entered into a secured $350 million, 30-monthrevolving credit facility to fund our working capital requirements and obtainedbonding capacity to take on new projects. Under our Plan of Reorganization, onthe Effective Date, all our equity securities existing prior to the EffectiveDate were canceled and extinguished; we issued an aggregate 25,000,000 sharesof common stock; we issued warrants to purchase an additional aggregate8,520,424 shares of common stock; we filed an amended and restated certificateof incorporation and adopted amended and restated bylaws; we adopted new stockoption plans and granted options under those plans for an aggregate 4,417,000shares of common stock, including options granted to Dennis R. Washington, ourchairman, to purchase an aggregate 3,224,100 shares of common stock; and weentered into various other agreements.

 

During the pendency ofthe bankruptcy cases, we continued to negotiate a settlement of our outstandinglitigation with the Sellers with respect to the RE&C acquisition. Weentered into the Raytheon Settlement regarding the issues and disputes betweenthe parties, which settlement was incorporated into our Plan of Reorganization.See also Note 3, “Acquisition, Reorganization Case and Fresh-start Reporting”of the Notes to Consolidated Financial Statements in Item 8 of this report.

 

Under the RaytheonSettlement, the Sellers agreed that, with respect to their bankruptcy claim,the Sellers would be considered unpaid, unsecured creditors having rights inthe unsecured creditor class, but that, upon completion of our reorganization,they would waive any rights to receive any distributions to be given tounsecured creditors with allowed claims. In exchange, we agreed to dismiss alllitigation against the Sellers related to the acquisition, and to discontinuethe purchase price adjustment and binding arbitration process. We released allclaims based on any act occurring prior to our emergence from bankruptcyprotection, including all claims against the Sellers, their affiliates andtheir directors, officers, employees, agents and specified professionals. TheSellers released all claims based on any act occurring prior to our emergencefrom bankruptcy protection, including any claims related to any contracts orprojects not assumed by us during the bankruptcy cases, against us and ourdirectors, officers, employees, agents and professionals. No cash was exchangedas a result of the settlement.

 

As of February 1, 2002,we adopted fresh-start reporting pursuant to the guidance provided by SOP 90-7.In connection with the adoption of fresh-start reporting, we created a newentity for financial reporting purposes. The effective date of our emergencefrom bankruptcy protection is considered to be the close of business onFebruary 1, 2002 for financial reporting purposes. The periods presentedthrough February 1, 2002 have been designated “Predecessor Company.”

 

These events arediscussed in greater detail in Note 3, “Acquisition, Reorganization Case andFresh-start Reporting” of the Notes to Consolidated Financial Statements inItem 8 of this report and are discussed in our annual reports on Form 10-K forthe fiscal years ended December 1, 2000, November 30, 2001 and January 3, 2003.

 

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**BUSINESS UNIT NEW WORK ANDBACKLOG**

 

New work for eachbusiness unit, which represents additions to backlog for the period, ispresented below:

 
| ** **                  | ** ** | **Three months ended** | ** ** | **Year ended**       | ** ** |
|-----------------------------|------------|------------------------|------------|----------------------|------------|
| **NEW WORK  (In millions)** | ** ** | **December 31,  2004** | ** ** | **January 2,  2004** | ** ** | **December 31,  2004** | ** ** | **January 2,  2004** | ** ** |
| Power                       |       | $                      | 266.1      |                 | $          | 154.9 |   | $ | 854.0 |   | $ | 706.5 |   |
| Infrastructure              |       | 136.1                  |       | 205.1                |       | 959.8 |   | 868.2 |   |
| Mining                      |       | (50.0                  | )          | 108.0                |       | 216.3 |   | 265.3 |   |
| Industrial/Process          |       | 87.7                   |       | 64.6                 |       | 434.5 |   | 405.6 |   |
| Defense                     |       | 291.1                  |       | 161.5                |       | 723.4 |   | 500.2 |   |
| Energy &  Environment   |       | 114.7                  |       | 58.0                 |       | 442.1 |   | 434.5 |   |
| Other                       |       | (1.9                   | )          | (4.6                 | )          | (6.1 | ) | 5.3 |   |
| Total new work              |       | $                      | 843.8      |                 | $          | 747.5 |   | $ | 3,624.0 |   | $ | 3,185.6 |   |

 

The following tablesummarizes our changes in backlog for each of the periods presented:

 
| ** **                            | ** ** | **Three months ended** | ** ** | **Year ended**       | ** ** |
|---------------------------------------|------------|------------------------|------------|----------------------|------------|
| **CHANGES IN BACKLOG  (In millions)** | ** ** | **December 31,  2004** | ** ** | **January 2,  2004** | ** ** | **December 31,  2004** | ** ** | **January 2,  2004** | ** ** |
| Beginning  backlog                    |       | $                      | 3,928.2    |                 | $          | 3,201.8 |   | $ | 3,322.5 |   | $ | 2,755.1 |   |
| New work                              |       | 843.8                  |       | 747.5                |       | 3,624.0 |   | 3,185.6 |   |
| Backlog sold and  other adjustments   |       | —                 |       | —               |       | — |   | (91.5 | ) |
| Revenue and  equity income recognized |       | (767.9                 | )          | (626.8               | )          | (2,942.4 | ) | (2,526.7 | ) |
| Ending backlog                        |       | $                      | 4,004.1    |                 | $          | 3,322.5 |   | $ | 4,004.1 |   | $ | 3,322.5 |   |

 

Backlog at December 31,2004, October 1, 2004 and January 2, 2004 consisted of:

 
| **BACKLOG  (In millions)** | ** ** | **December 31, 2004** | ** ** | **October 1, 2004** | ** ** | **January 2, 2004** | ** ** |
|----------------------------|------------|-----------------------|------------|---------------------|------------|---------------------|------------|
| Power                      |       | $                     | 716.4      |                | $          | 641.1               |       | $ | 496.7 |   |
| Infrastructure             |       | 1,121.3               |       | 1,182.1             |       | 1,053.5             |       |
| Mining                     |       | 516.1                 |       | 601.5               |       | 435.2               |       |
| Industrial/Process         |       | 293.5                 |       | 305.9               |       | 254.4               |       |
| Defense                    |       | 869.7                 |       | 713.8               |       | 641.6               |       |
| Energy &  Environment  |       | 487.1                 |       | 483.8               |       | 441.1               |       |
| Total backlog              |       | $                     | 4,004.1    |                | $          | 3,928.2             |       | $ | 3,322.5 |   |

 

***Newwork and backlog***

 

At December 31, 2004, ourbacklog was $4,004.1 million, an increase of $75.9 million and $681.6 millionfrom the third quarter and the beginning of 2004, respectively. Backlog ongovernment contracts includes only two years’ worth of the portions of suchcontracts that are currently funded or which management is highly confident willbe funded. In this regard, the reported backlog at December 31, 2004 excludes$2.1 billion of government contracts in progress for work to be performedbeyond December 2006. Approximately $2.1 billion, or 52.6%, of backlog atDecember 31, 2004 is expected to be recognized as contract revenue or as equityin income of unconsolidated affiliates in 2005. Our backlog at the end of 2004consisted of approximately 64% cost-type and 36% fixed-price contracts comparedwith 58% cost-type and 42% fixed-price contracts at the end of 2003.

 

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New work for the threemonths and year ended December 31, 2004 includes the following significantcontracts:

 
| **(In millions)**                                                                            | ** ** | **Three months  Ended  December 31, 2004** | ** ** | **Year ended  December 31, 2004** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------|------------|
| **Power**                                                                                    |       |                                       |       |                              |       |
| Middle East task  orders                                                                     |       | $                                          | 197.4      |                              | $          | 314.2 |   |
| Plant  modification contract in Wisconsin                                                    |       | —                                     |       | 180.3                             |       |
| Engineering,  procurement and construction contract in Puerto Rico                           |       | —                                     |       | 154.8                             |       |
| **Infrastructure**                                                                           |       |                                       |       |                              |       |
| Light rail  extension in California                                                          |       | —                                     |       | 300.3                             |       |
| Middle East task  orders                                                                     |       | 51.9                                       |       | 215.2                             |       |
| Highway  interchange in California                                                           |       | —                                     |       | 186.0                             |       |
| **Mining**                                                                                   |       |                                       |       |                              |       |
| Copper mining  contract in Nevada                                                            |       | —                                     |       | 118.4                             |       |
| **Industrial  Process**                                                                      |       |                                       |       |                              |       |
| Facilities  operation and management contract                                                |       | —                                     |       | 67.0                              |       |
| Food/Beverage  facility construction contract                                                |       | —                                     |       | 54.0                              |       |
| **Defense**                                                                                  |       |                                       |       |                              |       |
| Threat reduction  project in the former Soviet Union                                         |       | 156.2                                      |       | 251.3                             |       |
| Chemical  demilitarization contract continuations                                            |       | 129.5                                      |       | 434.2                             |       |
| **Energy  & Environment**                                                                |       |                                       |       |                              |       |
| Department of  Energy operations, maintenance and management services contract continuations |       | 47.7                                       |       | 148.7                             |       |
| Commercial  consulting services                                                              |       | 27.3                                       |       | 117.0                             |       |
|                                                                                              |            |                                            |            |                                   |            |  |  |

 

II-13

----

 

**RESULTS OF OPERATIONS**

 

On January 25, 2002, weemerged from Chapter 11 bankruptcy proceedings and implemented fresh-startreporting effective February 1, 2002. Accordingly, all assets and liabilitieswere adjusted to reflect their respective fair values. The consolidatedfinancial statements after that date are those of a new reporting entity andare not comparable to the pre-emergence periods. However, to better describethe results of a complete operating cycle, we have combined the eleven monthsended January 3, 2003 (post-emergence) with the month ended February 1, 2002(pre-emergence). Comparisons of pre-emergence financial data to post-emergencefinancial data are not meaningful. The following table is included solely tofacilitate our analysis and discussion of results of operations.

 
| ** **                                                                                     | ** ** | **Three months ended** | ** ** | **Year ended**       | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| **(In millions)**                                                                              | ** ** | **December 31,  2004** | ** ** | **January 2,  2004** | ** ** | **December 31,  2004** | ** ** | **January 2,  2004** | ** ** | **Pro forma (a)  January 3,  2003** | ** ** |
| Revenue                                                                                        |       | $                      | 761.4      |                 | $          | 620.9 |   | $ | 2,915.4 |   | $ | 2,501.2 |   | $ | 3,661.5 |   |
|                                                                                           |       |                   |       |                 |       |   |   |   |   |   |   |   |   |   |   |   |
| Gross profit                                                                                   |       | $                      | 35.9       |                 | $          | 37.4 |   | $ | 150.0 |   | $ | 176.3 |   | $ | 160.1 |   |
| Equity in income  of unconsolidated affiliates                                                 |       | 6.5                    |       | 5.9                  |       | 26.9 |   | 25.5 |   | 30.5 |   |
| General and  administrative expenses                                                           |       | (18.0                  | )          | (20.2                | )          | (60.4 | ) | (57.5 | ) | (52.3 | ) |
| Other operating  income                                                                        |       | 1.5                    |       | 4.9                  |       | 1.5 |   | 6.2 |   | 2.8 |   |
| Operating income                                                                               |       | 25.9                   |       | 28.0                 |       | 118.0 |   | 150.5 |   | 141.1 |   |
| Investment  income                                                                             |       | 1.0                    |       | .4                   |       | 2.7 |   | 1.8 |   | 1.3 |   |
| Interest expense                                                                               |       | (3.1                   | )          | (4.3                 | )          | (14.6 | ) | (24.6 | ) | (28.0 | ) |
| Write-off of  deferred financing fees                                                          |       | —                 |       | (9.8                 | )          | — |   | (9.8 | ) | — |   |
| Other income  (expense), net                                                                   |       | (1.9                   | )          | (.7                  | )          | (1.5 | ) | (2.1 | ) | 1.3 |   |
| Income before  reorganization items, income taxes, minority interests and extraordinary  items |       | 21.9                   |       | 13.6                 |       | 104.6 |   | 115.8 |   | 115.7 |   |
| Reorganization  items                                                                          |       | —                 |       | (1.2                 | )          | 1.2 |   | (4.9 | ) | (75.2 | ) |
| Income tax  expense                                                                            |       | (5.5                   | )          | (5.5                 | )          | (39.5 | ) | (46.9 | ) | (26.1 | ) |
| Minority  interests in income of consolidated subsidiaries                                     |       | (3.9                   | )          | (4.7                 | )          | (15.2 | ) | (21.9 | ) | (21.7 | ) |
| Income (loss)  before extraordinary items                                                      |       | 12.5                   |       | 2.2                  |       | 51.1 |   | 42.1 |   | (7.3 | ) |
| Extraordinary  item: debt discharge, net of tax                                                |       | —                 |       | —               |       | — |   | — |   | 567.2 |   |
| Net income                                                                                     |       | $                      | 12.5       |                 | $          | 2.2 |   | $ | 51.1 |   | $ | 42.1 |   | $ | 559.9 |   |

 

----

(a)          For an explanation ofpro forma adjustments, see “Reconciliation of GAAP to Pro forma SummaryFinancial Data” provided below.

 

II-14

----

 

**RECONCILIATION OF GAAP TO PROFORMA SUMMARY FINANCIAL DATA**

 

Our financial results forthe year ended January 3, 2003 presented and discussed herein are pro forma innature. The results of operations for the year ended January 3, 2003 combinethe results of the reorganized company for the eleven months ended January 3,2003 with pre-emergence results for the one month ended February 1, 2002.

 
| **(In millions)**                                                            | ** ** | **Eleven months  ended  January 3, 2003** | ** ** | **(Predecessor Company)  One month  ended  February 1, 2002** | ** ** | **Pro forma  Twelve months  ended  January 3, 2003** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------------------|------------|---------------------------------------------------------------|------------|------------------------------------------------------|------------|
| Revenue                                                                      |       | $                                         | 3,311.6    |                                                          | $          | 349.9                                                |       | $ | 3,661.5 |   |
|                                                                         |       |                                      |       |                                                          |       |                                                 |       |
| Gross profit                                                                 |       | $                                         | 149.0      |                                                          | $          | 11.1                                                 |       | $ | 160.1 |   |
| Equity in income  of unconsolidated affiliates                               |       | 27.4                                      |       | 3.1                                                           |       | 30.5                                                 |       |
| General and  administrative expenses                                         |       | (48.1                                     | )          | (4.2                                                          | )          | (52.3                                                | )          |
| Restructuring  charges                                                       |       | —                                    |       | (.6                                                           | )          | (.6                                                  | )          |
| Other operating  income                                                      |       | 3.4                                       |       | —                                                        |       | 3.4                                                  |       |
| Operating income                                                             |       | 131.7                                     |       | 9.4                                                           |       | 141.1                                                |       |
| Investment  income                                                           |       | .9                                        |       | .4                                                            |       | 1.3                                                  |       |
| Interest expense                                                             |       | (26.8                                     | )          | (1.2                                                          | )          | (28.0                                                | )          |
| Other income  (expense), net                                                 |       | 1.8                                       |       | (.5                                                           | )          | 1.3                                                  |       |
| Income before  income taxes, minority interests and bankruptcy related items |       | 107.6                                     |       | 8.1                                                           |       | 115.7                                                |       |
| Reorganization  items                                                        |       | (3.1                                      | )          | (72.1                                                         | )          | (75.2                                                | )          |
| Income tax  (expense) benefit                                                |       | (46.2                                     | )          | 20.1                                                          |       | (26.1                                                | )          |
| Minority  interests in income of consolidated subsidiaries                   |       | (20.6                                     | )          | (1.1                                                          | )          | (21.7                                                | )          |
| Income (loss)  before extraordinary items                                    |       | 37.7                                      |       | (45.0                                                         | )          | (7.3                                                 | )     |
| Extraordinary  item: debt discharge, net of tax                              |       | —                                    |       | 567.2                                                         |       | 567.2                                                |       |
| Net income                                                                   |       | $                                         | 37.7       |                                                          | $          | 522.2                                                |       | $ | 559.9 |   |

 

Reorganization items forthe year ended January 3, 2003, consisted of charges to earnings of $(36.0)million related to “fresh-start” accounting and professional fees and expensesrelated to the bankruptcy proceeding of $(39.2) million, which together totaled$(75.2) million, or $(51.4) million after tax.

 

***THREEMONTHS ENDED DECMEBER 31, 2004 COMPARED TO THE THREE MONTHS ENDED JANUARY 2,2004***

*** ***

***Revenue and operating income***

*** ***

***Revenue for thethree months ended December 31, 2004 increased $140.5 million or 23% from thecomparable period in 2003. The increase in revenue is principally due to workperformed under task orders with the USACOE in the Middle East, revenue fromseveral new projects including new domestic power contracts, two new largehighway projects in California, new mining contracts, a new decontamination anddemolition contract and new threat reduction contracts, primarily in the formerSoviet Union. In addition, revenue increased related to two large Department ofEnergy management service contracts. These increases in revenue were partiallyoffset by a decline in revenue from the completion of several large designbuild infrastructure projects and chemical demilitarization contracts. Revenuefrom task orders in the Middle East for the three months ended December 31,2004 and January 2, 2004, totaled $111.0 million and $55.6 million,respectively.***

 

II-15

----

 

***Operatingincome for the three months ended December 31, 2004 decreased $2.1 million fromthe comparable period in 2003. Operating income for the three months endedDecember 31, 2004 was impacted by several items in the Infrastructure businessunit including a $10.7 million contract loss on a $186 million highway projectin California which is less than 20% complete, an $8.2 million charge relatedto a legal matter on completed U.S. government funded international contractsdating back to the early 1990s and decreased earnings from engineeringservices. These losses were partially offset by $16.7 million of earnings fromtask orders in the Middle East. The Infrastructure charges were also partiallyoffset by improved performance on two Department of Energy management servicescontracts. Operating income for the three months ended January 2, 2004 includeda $6.8 million net recovery of a claim on a completed infrastructureconstruction contract and favorable earnings from the closeout and completionof two additional infrastructure contracts. In the three months ended January2, 2004, we recorded a $5.4 million charge associated with unbilled indirectcosts related to a completed chemical demilitarization project.***

*** ***

***General and administrative expense***

*** ***

***General andadministrative expense for the three months ended December 31, 2004 declined$2.2 million from the comparable period in 2003. During the three months endedJanuary 2, 2004, we recorded an expense of $6.2 million related to theextension of the term of previously granted options of our chairman, Dennis R.Washington. During the three months ended December 31, 2004, we incurred highercosts associated with complying with the Sarbanes-Oxley Act.***

*** ***

***Write-off of deferred financing fees***

*** ***

***During thethree months ended January 2, 2004, we entered into an agreement replacing oursenior secured revolving credit facility with a new credit facility. Inconnection with the termination of the senior secured revolving creditfacility, we wrote off the remaining unamortized balance of the relateddeferred financing fees totaling $9.8 million. No such write-off occurred in2004.***

*** ***

***Income tax expense***

*** ***

***The effectiveincome tax rate for the three months ended December 31, 2004 and January 2,2004 was 25.2% and 44.5%, respectively. The decline in the effective tax rateduring the three months ended December 31, 2004, was due primarily to theimpact from the ratification of the 2004 Protocol to U.S.-Netherlands IncomeTax Treaty, which reduced our income tax expense by $3.6 million.***

*** ***

***2004 COMPARED TO 2003***

*** ***

***Revenueand operating income***

*** ***

Revenue for 2004increased $414.2 million or 17%, compared to 2003. The increase was principallydue to substantial infrastructure and power work performed under task orderswith the USACOE in the Middle East totaling $556.3 million, an increase of$497.1 million from 2003, and revenue from new large highway projects, newdomestic power contracts and new threat reduction contracts, primarily in theformer Soviet Union. The increase in revenue was partially offset by a declinein revenue due to the completion of certain major contracts in the Power,Infrastructure, Defense and Energy & Environment business units.

 

Operating income for 2004declined $32.5 million from 2003. Operating income was impacted by several items including contract losseson three highway projects totaling $44.3 million, the winding down orcompletion of certain major projects in the Power, Infrastructure and Energy& Environment business units and a fourth quarter charge of $8.2 millionrelated to a legal matter on completed U.S. government funded internationalcontracts. In addition, operating income in 2003 included the recognition ofcontract incentives, claim settlements and contract renegotiations. The declinein operating income was partially offset by an increase in earnings from taskorder work in the Middle East, earnings from new power and threat reductioncontracts and the favorable 

 

II-16

----

 

renegotiation andimproved performance on several Energy & Environment contracts.  A summary of the significant changes inoperating income is included in the following table:

 
| **Operating  Income for 2003**                                                                    | ** ** | **$**  | **150.5** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|--------|-----------|------------|
| Significant  increases (decreases) in 2004 operating income:                                      |       |   |      |
| Increase in  earnings from Middle East task orders                                                |       | 41.7   |      |
| Increase in  earnings from other new contracts                                                    |       | 19.1   |      |
| Increase in  earnings from ongoing projects                                                       |       | 13.1   |      |
| Decline in  earnings from completion of contracts                                                 |       | (44.3  | )         |
| Significant  highway project losses                                                               |       | (44.3  | )         |
| Increase in  business unit business development overhead and general and administrative  expenses |       | (10.2  | )         |
| Other, including  charges for legal issues                                                        |       | (7.6   | )         |
| Net decrease for  2004                                                                            |       | (32.5  | )         |
| **Operating  income for 2004**                                                                    | ** ** | **$**  | **118.0** | ** ** |

 

Revenue and operating income from theMiddle East task orders successively declined during the second and thirdquarters of 2004 as compared to the first quarter of 2004 principally due tothe substantial completion of a large task order in the first quarter. Duringthe fourth quarter of 2004, revenue remained essentially unchanged from thesecond and third quarters; however, earnings increased significantly due to theresolution of funding and other related contingencies. In addition, the pace ofawards of new task orders by the USACOE and other U.S. agencies slowed in thefirst and second quarters of 2004 as funding for task orders was diverted fromreconstruction to security efforts in the Middle East. During the third andfourth quarters of 2004, awards of new task orders increased. We are unable topredict with certainty, the timing, probability and level of new work to beawarded which may cause future results to vary materially from our currentresults from these task orders.

 

The diversification of our business maycause margins to vary between periods due to the inherent risks and rewards onfixed-price contracts causing unplanned gains and losses on contracts. Operatingresults may also vary between periods due to changes in the mix and timing ofour projects, which contain various risk and profit profiles and are subject touncertainties in the estimation process.

 

For a more detailed discussion of ourrevenue and operating income, see “Business Unit Results,” later in thisManagement’s Discussion and Analysis.

 

***Equityin income of unconsolidated affiliates***

*** ***

Equity in income of unconsolidatedaffiliates for 2004 increased by $1.4 million from 2003 generally due to improvedperformance. Equity earnings in 2004 from the MIBRAG mining venture in Germany,which accounts for a significant portion of our unconsolidated affiliates, werecomparable to 2003. The quantity of coal shipments by MIBRAG in 2004 declinedby 9% compared to 2003 resulting from planned maintenance outages by MIBRAG’spower plant customers that were of longer duration than those experienced in2003. An increase in the average sales price per ton offset, in part, thedecline in coal shipments. However, operating expenses, some related to lowervolume, also offset the impact of lower shipments. A strengthening of the euroof approximately 10%, as compared to the U.S. dollar, offset an increase inMIBRAG’s municipal tax liability.

 

***Generaland administrative expenses***

*** ***

General and administrative expenses for2004 increased $2.9 million from 2003. The increase was principally due tocosts associated with complying with the Sarbanes-Oxley Act and higherinternational business development costs. The increase was partially offset bya reduction in expense of $5.4 million as compared to 2003 related to theextension of the term of previously granted options of our chairman Dennis R.Washington.

 

II-17

----

 

***Otheroperating income (expense), net***

*** ***

Other operating income (expense), net of$1.5 million in 2004, primarily consisted of a recovery related to a legalsettlement. Other operating income (expense), net of $6.2 million in 2003included a gain of $4.9 million from the April 2003 sale of the TechnologyCenter, a gain of $3.2 million from the sale of coal leases, a gain of $1.5million from the resolution of certain contingent issues related to the October2002 sale of EMD offset by a charge of $3.4 million related to a legal settlement.

 

***Interestexpense***

*** ***

Interest expense for 2004 declined $10.0million from 2003 due to improved terms under a new credit facility enteredinto in October 2003, as compared to the prior credit facility. On March 19,2004 and again on August 5, 2004, we successfully amended the credit facilityto include more favorable terms and reduce interest expense over the remainingterm of the agreement.

 

***Write-offof deferred financing fees***

 

On October 9, 2003, we entered into anagreement replacing our prior senior secured revolving credit facility with anew credit facility. In connection with the termination of the senior securedrevolving credit facility, we wrote off the remaining unamortized balance ofthe related deferred financing fees totaling $9.8 million.  No such write-off occurred in 2004.

 

***Reorganization items***

 

Reorganization items of $1.2 million for2004 consisted of a reduction in estimated professional expenses to settleoutstanding claims from our bankruptcy. During 2003, we recognized a charge of$4.9 million as a result of estimated additional professional fees and expensesto be incurred primarily by the unsecured creditors’ committee to settleoutstanding claims in connection with our reorganization.

 

***Incometax expense***

 

Thecomponents of the effective tax rate for the various periods are shown in thetable below:

 
| ** **           | ** ** | **Year ended**        | ** ** |
|----------------------|------------|-----------------------|------------|
| ** **           | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
| Federal tax rate     |       | 35.0                  | %          | 35.0 | % |
| State tax            |       | 3.1                   |       | 3.2 |   |
| Nondeductible  items |       | 2.1                   |       | 2.8 |   |
| Foreign tax          |       | (2.9                  | )          | 1.3 |   |
| Effective tax  rate  |       | 37.3                  | %          | 42.3 | % |

 

Theeffective tax rate for 2004 decreased from 2003, primarily due to the impact oflower foreign taxes.  Foreign taxes for2004 decreased substantially from 2003 due to a $3.6 million impact from theratification of the 2004 Protocol to U.S.-Netherlands Income Tax Treaty.

 

***Minorityinterests***

 

Minorityinterests in income of consolidated subsidiaries for 2004 declined by $6.7million from 2003. The majority of our minority interests relates to BNFL’s 40%ownership of the Westinghouse Businesses, which are included in the Energy& Environment business unit. Increases or decreases in income of ourmajority-owned subsidiaries result in a corresponding increase or decrease inthe minority interest share of income from those operations. During 2004, aconsolidated joint venture recorded a $10.7 million contract loss, of which$3.7 million related to the minority interest.

 

II-18

----

 

***2003 COMPARED TO 2002***

*** ***

***Revenueand operating income***

*** ***

Revenue for 2003 declined$1,160.3, or 32%, compared to 2002 due to a number of anticipated events,including the completion of several major projects and the sale in October 2002of the Electro-Mechanical Division (“EMD”) within the Energy & Environmentbusiness unit. The Power business unit experienced a decline in revenueprimarily from the completion of four power generation projects acquired in theRE&C acquisition. Revenue from the Infrastructure business unit declinedprimarily from the substantial completion of certain large projects, includinga dam and hydropower project in the Philippines. In addition, ourIndustrial/Process business unit was affected by a weakness in the domestic andinternational economies, causing a reduction in demand and capital spending forour services in this market.

 

Although revenuedeclined, operating income for 2003 increased slightly by $9.4 million, or 7%,from 2002 primarily from performance incentives and lower than expected costsincurred by the Power business unit related to the completion of a steamgenerator replacement contract and the settlement of contract claims andimproved operating performance in the Infrastructure business unit. The Energy& Environment business unit experienced a decline in operating income primarilyfrom the sale of EMD. Additionally, general and administrative expenseincreased in 2003 primarily due to expense associated with the extension of ourchairman’s stock options recognized in the fourth quarter. The overall declinein revenue from projects completed or near completion mentioned above hadlittle impact on operating income in 2002, as several of these major projectscontributed nominal operating earnings during 2002. Operating income includedthe recognition of normal profit of $2.3 million and $30.9 million in 2003 and2002, respectively, due to the completion of acquired contracts assigned normalprofit. Normal profit has no affect on our cash flows.

 

***Equityin income of unconsolidated affiliates***

 

Equity in income ofunconsolidated affiliates for 2003 declined $5.0 million from 2002. We accountfor MIBRAG mbH on the equity method. In 2002, the MIBRAG mbH mining venture inGermany, which accounts for a significant portion of the equity in income ofunconsolidated affiliates, recognized a one-time award of power cogenerationcredits, of which our share was $6.0 million.

 

***Generaland administrative expenses***

 

General andadministrative expenses for 2003 increased $5.2 million compared to 2002. OnNovember 14, 2003, our chairman, Dennis R. Washington, agreed to continue toserve in that role through January 2007. In return, our board of directorsapproved the extension of the term of his previously granted outstandingoptions to 2012. The exercise price of certain of his options was below ourstock’s closing price at November 14, 2003, giving rise to $6.2 million ofstock compensation expense with a corresponding increase to additional paid-incapital.

 

***Otheroperating income (expense), net***

 

Other operating income(expense), net of $6.2 million for 2003 included a gain of $4.9 million fromthe April 2003 sale of the Technology Center and wind-up of related contractissues, a gain of $3.2 million from the sale of coal leases, a gain of $1.5million from the resolution of certain contingent issues related to the October2002 sale of EMD offset by a charge of $3.4 million related to a legalsettlement. In 2002, we recognized a gain of $3.4 million related to the saleof EMD.

 

II-19

----

 

***Interestexpense***

 

Interest expense in 2003declined $3.4 million from 2002, primarily due to more favorable terms underour new credit facility that we entered into on October 9, 2003. Interestexpense for 2003 consisted of $9.7 million of amortization of deferred financingfees paid in connection with the new credit facility and our prior seniorsecured revolving credit facility and $14.9 million of cash and accruedinterest expense consisting primarily of letter of credit fees, commitmentfees, fronting fees and administrative fees paid to the agent bank. Deferredfinancing fees paid in connection with the new credit facility are beingamortized over the 48-month term of the facility. Letter of credit fees andcommitment fees are recorded as interest expense.

 

***Write-offof deferred financing fees***

 

On October 9, 2003, weentered into an agreement replacing our prior senior secured revolving creditfacility with a new credit facility. In connection with the termination of thesenior secured revolving credit facility, we wrote off the remainingunamortized balance of the related deferred financing fees totaling $9.8million.

 

***Incometax expense***

 

Thecomponents of the effective tax rate for the various periods are shown in thetable below:

 
| ** **           | ** ** | ** **                      | ** ** | ** **                                | ** ** | **Predecessor Company**                | ** ** |
|----------------------|------------|---------------------------------|------------|-------------------------------------------|------------|----------------------------------------|------------|
| ** **           | ** ** | **Year ended  January 2, 2004** | ** ** | **Eleven months  ended  January 3, 2003** | ** ** | **One month  ended  February 1, 2002** | ** ** |
| Federal tax rate     |       | 35.0                            | %          | 35.0                                      | %          | 35.0                                   | %          |
| State tax            |       | 3.2                             |       | 3.5                                       |       | 2.8                                    |       |
| Nondeductible  items |       | 2.8                             |       | 3.0                                       |       | .4                                     |       |
| Foreign tax          |       | 1.3                             |       | 2.7                                       |       | —                                 |       |
| Effective tax  rate  |       | 42.3                            | %          | 44.2                                      | %          | 38.2                                   | %          |

 

Theeffective tax rate for the year ended January 2, 2004 decreased compared to theeffective tax rate for the eleven months ended January 3, 2003,primarily due to the impact of higher pre-tax earnings and lower non-deductibleitems and foreign taxes. A higher level of pre-tax earnings reduces the impactnon-deductible items and foreign taxes have on the effective tax rate. Thedecrease in the effective tax rate for state taxes resulted from an increase inthe amount of foreign earnings not subject to state tax.

 

***Minorityinterests***

 

Minority interests inincome of consolidated subsidiaries for 2003 increased by $0.2 million from2002. The majority of our minority interests relates to BNFL’s 40% ownership ofthe Westinghouse Businesses that are included in the Energy & Environmentbusiness unit. Increases in income of our majority-owned subsidiaries cause anincrease in the minority interest share of income from those operations.

 

***Reorganizationitems***

 

During 2003, werecognized a charge of $4.9 million as a result of estimated additionalprofessional fees and expenses to be incurred by the unsecured creditors’committee to settle outstanding claims in connection with our reorganization.During 2002, $75.2 million of reorganization charges were recognized. Thisincluded $35.1 million in adjustments to reflect all assets and liabilities attheir respective fair values in fresh-start reporting. The remainder of thereorganization items was primarily for professional fees incurred in connectionwith the bankruptcy proceedings, including the defense of the appeals to ourPlan of Reorganization. Cash paid for reorganization items totaled $9.9 millionand $39.6 million for 2003 and 2002, respectively.

 

II-20

----

*** ***

***Extraordinaryitem***

 

During January 2002, anextraordinary gain of $567.2 million was recorded as a result of the dischargeof liabilities of $1,460.7 million as part of our Plan of Reorganization, lessthe fair value of common stock and warrants issued of $550.0 million and incometaxes of $343.5 million.

 

**BUSINESS UNIT RESULTS**

*(Inmillions)*

 
| ** **                                          | ** ** | **Three months ended** | ** ** | **Year ended**       | ** ** |
|-----------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| **Revenue**                                         | ** ** | **December 31  2004**  | ** ** | **January 2,  2004** | ** ** | **December 31,  2004** | ** ** | **January 2,  2004** | ** ** | **January 3,  2003  (Pro forma)** | ** ** |
| Power                                               |       | $                      | 190.7      |                 | $          | 119.4 |   | $ | 634.0 |   | $ | 511.8 |   | $ | 1,005.6 |   |
| Infrastructure                                      |       | 196.6                  |       | 184.1                |       | 891.1 |   | 585.9 |   | 789.4 |   |
| Mining                                              |       | 29.3                   |       | 18.9                 |       | 109.8 |   | 84.2 |   | 68.5 |   |
| Industrial/Process                                  |       | 100.0                  |       | 95.2                 |       | 394.7 |   | 430.3 |   | 594.9 |   |
| Defense                                             |       | 135.2                  |       | 127.5                |       | 495.3 |   | 506.1 |   | 557.1 |   |
| Energy &  Environment                           |       | 111.5                  |       | 80.4                 |       | 396.6 |   | 385.5 |   | 637.2 |   |
| Intersegment,  eliminations and other               |       | (1.9                   | )          | (4.6                 | )          | (6.1 | ) | (2.6 | ) | 8.8 |   |
| Total revenue                                       |       | $                      | 761.4      |                 | $          | 620.9 |   | $ | 2,915.4 |   | $ | 2,501.2 |   | $ | 3,661.5 |   |
| ** **                                          | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating  income (loss)**                        |       |                   |       |                 |       |   |   |   |   |   |   |
| Power                                               |       | $                      | 14.6       |                 | $          | 8.3 |   | $ | 34.8 |   | $ | 39.0 |   | $ | 24.1 |   |
| Infrastructure                                      |       | (15.8                  | )          | 16.1                 |       | (16.2 | ) | 32.3 |   | 21.3 |   |
| Mining                                              |       | 6.7                    |       | 9.6                  |       | 33.4 |   | 33.5 |   | 32.3 |   |
| Industrial/Process                                  |       | 1.6                    |       | (1.3                 | )          | 17.8 |   | 2.5 |   | (5.7 | ) |
| Defense                                             |       | 12.6                   |       | 8.2                  |       | 40.1 |   | 49.8 |   | 44.1 |   |
| Energy &  Environment                           |       | 23.0                   |       | 13.2                 |       | 73.1 |   | 69.9 |   | 89.8 |   |
| Intersegment and  other unallocated operating costs |       | 1.2                    |       | (5.9                 | )          | (4.6 | ) | (19.0 | ) | (12.5 | ) |
| General and  administrative expenses                |       | (18.0                  | )          | (20.2                | )          | (60.4 | ) | (57.5 | ) | (52.3 | ) |
| Total operating  income                             |       | $                      | 25.9       |                 | $          | 28.0 |   | $ | 118.0 |   | $ | 150.5 |   | $ | 141.1 |   |

 

**RECONCILIATION OF GAAP SEGMENTINFORMATION TO PRO FORMA FINANCIAL INFORMATION**

 

GAAPrequires us to report our results for the reorganized entity separately fromthose that existed prior to the reorganization. Following is post-emergencesegment information for the eleven months ended January 3, 2003 andpre-emergence segment information for the month ended February 1, 2002, as wellas pro forma combined segment information for the year ended January 3, 2003.

 
| **(In millions)  Revenue**            | ** ** | **Eleven months ended  January 3, 2003** | ** ** | **One month ended  February 1, 2002** | ** ** | **Year ended  January 3, 2003  (Pro forma)** | ** ** |
|---------------------------------------|------------|------------------------------------------|------------|---------------------------------------|------------|----------------------------------------------|------------|
| Power                                 |       | $                                        | 920.1      |                                  | $          | 85.5                                         |       | $ | 1,005.6 |   |
| Infrastructure                        |       | 707.2                                    |       | 82.2                                  |       | 789.4                                        |       |
| Mining                                |       | 63.3                                     |       | 5.2                                   |       | 68.5                                         |       |
| Industrial/Process                    |       | 534.9                                    |       | 60.0                                  |       | 594.9                                        |       |
| Defense                               |       | 495.0                                    |       | 62.1                                  |       | 557.1                                        |       |
| Energy &  Environment             |       | 584.7                                    |       | 52.5                                  |       | 637.2                                        |       |
| Intersegment,  eliminations and other |       | 6.4                                      |       | 2.4                                   |       | 8.8                                          |       |
| Total revenue                         |       | $                                        | 3,311.6    |                                  | $          | 349.9                                        |       | $ | 3,661.5 |   |

 

II-21

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| **(In millions)  Operating income (loss)**          | ** ** | **Eleven months ended  January 3, 2003** | ** ** | **One month ended  February 1, 2002** | ** ** | **Year ended  January 3, 2003  (Pro forma)** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------|------------|---------------------------------------|------------|----------------------------------------------|------------|
| Power                                               |       | $                                        | 23.9       |                                  | $          | .2                                           |       | $ | 24.1 |   |
| Infrastructure                                      |       | 18.1                                     |       | 3.2                                   |       | 21.3                                         |       |
| Mining                                              |       | 29.1                                     |       | 3.2                                   |       | 32.3                                         |       |
| Industrial/Process                                  |       | (6.0                                     | )          | .3                                    |       | (5.7                                         | )          |
| Defense                                             |       | 42.2                                     |       | 1.9                                   |       | 44.1                                         |       |
| Energy &  Environment                           |       | 84.1                                     |       | 5.7                                   |       | 89.8                                         |       |
| Intersegment and  other unallocated operating costs |       | (11.6                                    | )          | (.9                                   | )          | (12.5                                        | )          |
| General and  administrative expense, corporate      |       | (48.1                                    | )          | (4.2                                  | )          | (52.3                                        | )          |
| Total operating  income                             |       | $                                        | 131.7      |                                  | $          | 9.4                                          |       | $ | 141.1 |   |

 

## **2004 COMPARED TO 2003**

## ** **

## ***Power***

## ** **

Revenue for 2004 increased $122.2million, or 24%, from 2003. The increase in revenue was primarily due to workin the Middle East totaling $152.0 million and new major domestic fossil andnuclear power projects including the construction of new generation powerplants in Wisconsin and Puerto Rico, reactor containment vessel head and steamgenerator replacement projects in South Carolina, Minnesota and Florida, and aplant modification and maintenance project in Wisconsin. The increase inrevenue for 2004 was partially offset by a decline in revenue from the windingdown and completion of two new generation power projects in Massachusetts in2003 totaling $112.1 million, and the completion of several other projectsincluding a plant modification project in Michigan and a steam generatorreplacement project in Maryland.

 

Operating income for 2004 declined $4.2million from 2003 due to the completion of several projects including thefavorable performance on a steam generator replacement project and a plantmodification project in 2003 that together totaled $24.4 million. The declinein operating income was partially offset by earnings on a new generation powerproject of $7.6 million, favorable performance from a steam generatorreplacement project of $6.9 million and earnings from power projects performedin the Middle East of $7.0 million.

 

***Infrastructure***

 

Revenue for 2004 increased$305.2 million, or 52%, from 2003. The increase was due to revenue from taskorder contracts in the Middle East with the USACOE and other U.S. agenciestotaling $401.5 million, revenue from three new highway projects in Californiaand Nevada, and a new light rail project in California. The increase in revenuewas partially offset by a decline of $138.3 million from the substantialcompletion of several large projects.

 

The Infrastructure businessunit incurred an operating loss of $16.2 million for 2004 compared to operatingincome of $32.3 million in 2003, a decline in earnings of $48.5 million. Duringthe year, Infrastructure performed $401.5 million in work in the Middle Eastwhich generated earnings of $38.9 million. However, during the year, threefixed price highway projects with a total value of approximately $450 millionexperienced significant cost growth resulting from design changes, costescalation and quantity growth, and project delays which resulted in higherthan estimated costs. Infrastructure recognized losses on these projects of$44.3 million. As discussed in our summary of critical accounting policies, weprovide for estimated losses on contracts when such losses are identified andcan be estimated. However, we do not recognize revenue for change orders orclaims until it is probable that they will result in additions to the contractvalue; in many cases, this does not happen until an actual settlement isreached. As evidenced above, the combination of these accounting policies canresult in volatility in operating income with a charge recognized in one periodand change order or claim revenue recognized in a subsequent period.Negotiations are ongoing with all three clients for change orders or claims andwe expect a 

 

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portion of the losses willbe recovered. In addition, the earnings for Infrastructure’s engineeringservices division were down by approximately $15 million as a result of fewerengineering hours resulting in unabsorbed fixed costs, costs associated with rightsizing the operation, and the inability to negotiate change orders with certainclients prior to year-end.  We expectthis division to recover in 2005. Lastly, an $8.2 million charge was takenrelated to a potential settlement associated with legal issues surroundingcompleted U.S. government funded international contracts. Operating income for2004 included claim settlements of $14.2 million compared with $12.1 million in2003.

 

Due to the dynamic nature ofthe work we have performed in the Middle East under cost reimbursable contractswith the U.S. government, as is the case with all contractors, costs incurredon these contracts are subject to review and audit by the U.S. government.Additionally, two cost reimbursable task orders experienced $54.2 million ofcost growth from original estimates. As of December 31, 2004, $31.5 million ofthe increased costs had been approved, both as to scope and price, by theUSACOE through the issuance of contract modifications and an additional $20.7million of incurred costs were recognized as revenue in 2004 because we believeit is probable the costs will be recovered under the cost reimbursablearrangements. Subsequent to December 31, 2004, additional contractmodifications have been received for $16.4 million of the $20.7 million. Basedon all currently available information, we believe we have established adequatereserves for estimated unallowable, non-recoverable, or disputed costs incurredto date.

 

***Mining***

 

Revenue for 2004 increased $25.6 million,or 30%, from 2003 as a result of revenue provided from new mining contracts,including a copper mine in Nevada, and a phosphate mine in Canada. The increasein revenue was partially offset by a decline of $5.5 million from thecompletion of two mining contracts in Wyoming and Nevada.

 

Operating income for 2004 was essentiallyunchanged from 2003. Operating income for 2004 benefited from earnings on newcontracts, improved performance and higher production on existingcontracts.  Operating income for 2003included a $3.2 million gain from the sale of coal leases in the fourth quarterof 2003.  Equity earnings in 2004 fromthe MIBRAG mining venture in Germany, which accounts for a significant portionof operating income, were comparable to 2003. The quantity of coal shipments byMIBRAG in 2004 declined by 9% compared to 2003 resulting from plannedmaintenance outages by MIBRAG’s power plant customers that were of longerduration than those experienced in 2003. An increase in the average sales priceper ton offset, in part, the decline in coal shipments. In addition, loweroperating expenses, primarily related to lower volume, also offset the impactof lower shipments. A strengthening of the euro as compared to the U.S. dollar,of about 10%, offset an increase in MIBRAG’s municipal tax liability.

 

***IndustrialProcess***

 

Revenue for 2004 declined $35.6 million,or 8%, from 2003. The decline was due to the winding down or completion ofseveral automotive contracts, the completion of a refinery shutdown project andseveral other contracts. The decline was partially offset by an increase inrevenue from a food processing facility construction contract, a new majorfacilities management contract and the recognition of a $10.0 million claimsettlement.

 

Operating income for 2004 increased by$15.3 million from 2003 primarily due to a $9.8 million net claim settlementand $3.9 million from the expiration of the warranty period on a major processcontract. Operating income for 2004 includes $13.2 million of claim settlementsas compared to no claim settlements recognized in 2003.

 

***Defense***

 

Revenue for 2004 declined $10.8 million,or 2%, from 2003 primarily from closure activities on a chemicaldemilitarization contract in 2003 that resulted in a decrease in revenue of$66.1 million and the completion of construction activities and slower start-uprequirements at another chemical demilitarization contract. The decline 

 

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in revenue was partially offset by anincrease in revenue attributable to an increase in scope of work on threatreduction contracts in the Former Soviet Union and revenue from a new powerenhancement contract.

 

Operating income for 2004 declined by$9.7 million from 2003. The decline in operating income was primarily theresult of certain events occurring in 2003 including favorable claimsettlements on construction projects totaling $13.6 million (as compared tozero in 2004), which was partially offset by a charge in the fourth quarterassociated with unbilled indirect costs related to a completed chemicaldemilitarization project of $5.4 million. Earnings in 2004 from chemicaldemilitarization projects and threat reduction projects in the Former SovietUnion have improved marginally.

 

***Energy& Environment***

 

Revenue for 2004 increased $11.1 million,or 3%, from 2003. The increase in revenue was primarily due to improvedperformance at two large DoE management service contracts and at a design-buildproject, and revenue from a new decontamination and demolition contract. Theincrease in revenue was partially offset by a decline in revenue from thewinding down of a large design-build contract and a reduction in volume at anengineered-products business.

 

Operating income for 2004 increased $3.2million from 2003. Operating income in 2004 increased $23.0 million from thefavorable renegotiation of one contract and improved performance at two otherDoE management services contracts. The increase in 2004 operating income waspartially offset by a $5.2 million decline in earnings from the winding down ofa large design-build contract, an $8.8 million impact from a reduction involume at an engineered-products business and increased business developmentcosts associated with pursuit of new DoE procurements.

 

***Intersegmentand others***

 

Intersegment operatingloss of ($4.6) million in 2004 primarily consisted of residual costs from ournon-union subsidiary of $4.1 million.

 

Intersegment operatingloss of ($19.0) million in 2003 included residual costs from our non-unionsubsidiary of $8.4 million and bonding fees of $5.3 million, a $5.4 millioncharge resulting from an underaccrual of employee benefits related to periodsprior to our emergence from bankruptcy protection, a charge of $3.4 millionrelated to a legal settlement, all partially offset by a gain of $4.9 millionfrom the sale of the Technology Center.

 

## **2003 COMPARED TO 2002**

## ** **

***Power***

 

Revenue for 2003 declined$493.8 million, or 49%, from 2002. The decline in revenue was primarily due tothe winding down and completion of four contracts purchased in the RE&Ctransaction (the “Reformed Contracts”) and the completion of two emissionsprojects and a simple cycle project, partially offset by revenue from the startof a new power generation project and a steam generator replacement project.Revenue from the four Reformed Contracts declined $419.1 million in 2003compared to 2002.

 

Operating income for 2003increased $14.9 million from 2002 primarily due to $15.2 million of earnings onthe successful early completion of the second of two steam generatorreplacements as compared to a $7.2 million loss from cost overruns on the firstreplacement in 2002. Additionally, in 2003, we earned $6.2 million inconnection with a settlement and renegotiation of a plant modification contractand $6.2 million from a new steam generator project. Operating income on thefour Reformed Contracts and a simple cycle project declined $14.9 million in2003 as compared to 2002 as a result of the wind-up and completion of theprojects. Operating income included no normal profit in 2003 compared to $3.2million recognized in 2002.

 

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*** ***

***Infrastructure***

 

Revenue for 2003 declined$203.5 million, or 26%, from 2002. The decline in revenue was primarilyattributable to the substantial completion in 2002 of a toll road project inColorado, a Philippine dam and hydropower project and a large rail project inCalifornia. Revenue for 2003 included $59.2 million of activity in the fourthquarter of 2003 from the USACOE task orders under a new indefinite delivery,indefinite quantity contract with the USACOE in Iraq, Afghanistan and Kuwait.

 

Operating income for 2003increased $11.0 million from 2002. Results for 2003 were positively impacted byincreased profit projections on two large toll road projects in Colorado, theresolution of a claim of $6.8 million (net of $7.0 million of additionalcontract related expenses) on a Philippine dam and hydropower project, otherclaim and insurance settlements of $7.9 million (net of $2.0 million ofadditional contract expenses) and income from the USACOE task orders. Thesepositive results were partially offset by the recognition of unfavorablecontract adjustments of $6.3 million on a rail project in California, a highwayproject in Nevada and a pump station in Nevada. Operating income of $21.3million for 2002 included $26.6 million on a light rail project and $5.0million primarily attributable to the recovery of a claim on a completedconstruction project. Results for 2002 were negatively impacted by unfavorablecontract adjustments of $23.4 million on the Philippine dam and hydropowerproject and contract adjustments on two highway projects of $5.1 million.Operating income for 2003 included $2.3 million from the recognition of normalprofit compared to $25.5 million for the comparable period of 2002.

 

***Mining***

 

Revenue for 2003increased $15.7 million, or 23%, from 2002. The increase in revenue was due towork on new projects, including a phosphate mining project in Canada, increasedactivity at a reclamation project in the State of Washington, a productionsupport contract in Wyoming and a gold mine in Nevada.

 

Operating income for 2003increased $1.2 million from 2002. Operating income included $25.7 million and$30.5 million in 2003 and 2002, respectively, from equity in income ofunconsolidated affiliates, which is comprised primarily of our portion of theresults of operations of the MIBRAG mbH mining venture in Germany. Our share ofequity earnings from MIBRAG mbH declined $4.9 million in 2003 compared to 2002as a result of $12.0 million of income recognized by MIBRAG mbH in the fourthquarter of 2002, of which our share was $6.0 million, from a one-time award ofpower cogeneration credits. Favorable results from other mining operations in2003 accounted for the overall increase in operating income over the prioryear. Operating income for 2003 included a $3.2 million gain from the sale ofcoal leases during the fourth quarter of 2003, improved performance at twomining operations over the prior year and income from new projects.

 

***Industrial/Process***

 

Revenue for 2003 declined$164.6 million, or 28%, from 2002. The decline was primarily due to thesoftness of the domestic and international economies and related reduction incapital spending by our Fortune 100 client base. Revenue was also down comparedto 2002 as a result of the completion of a large, turnkey process facility aswell as the completion of several large automotive contracts.

 

Operating income for 2003increased $8.2 million compared to 2002 primarily due to a combination ofbetter utilization of professional resources and a reduction in business unitoverhead costs partially offset by a lower volume of work. In addition,operating income in 2002 included the recognition of an unfavorable contractadjustment totaling $2.5 million on an international methanol plantconstruction project. Operating income included no normal profit in 2003compared to $1.6 million recognized in 2002.

 

II-25

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***Defense***

 

Revenue for 2003 declined$51.0 million, or 9%, from 2002. Revenue in 2003 declined $117.0 million due tothe completion of two major construction projects in 2002 and by $29.5 milliondue to the completion of the closure activities on a chemical demilitarizationproject. These effects were offset by higher revenues of $72.0 million on theother five chemical demilitarization projects as they transition fromconstruction to the systemization and operations phases of the projects, and $24.4million from cooperative threat reduction projects in the former Soviet Union,principally due to the award of two new projects.

 

Operating income in 2003increased $5.7 million over the comparable period of 2002 and included $15.1million from the increase in scope and fees on four threat reduction operationsand maintenance contracts, an $8.0 million claim settlement on the closeout ofa fixed-price construction project, $5.6 million from an additional claimsettlement and $4.4 million favorable settlement of government indirect costrates. Operating income in 2003 included a fourth quarter charge associatedwith unbillable indirect costs related to a recently completed chemicaldemilitarization project of $5.4 million. The costs primarily related to theperiod December 2000 through December 2003. In 2002, the Defense business unitnegotiated a $7.2 million settlement in connection with reforming aconstruction contract and recognized $7.0 million of additional profit relatedto favorable progress on a chemical demilitarization contract, both obtained inthe acquisition of RE&C. In addition, the Defense business unitsuccessfully completed a chemical demilitarization project within the costestimate and on schedule. As a result, we recognized additional profit of $8.9million.

 

***Energy& Environment***

 

Revenue for 2003 declined$251.7 million, or 40%, from 2002. The decline was the result of the sale inOctober 2002 of EMD, which had recognized revenue totaling $144.0 million in2002, and the winding down of a large construction contract and anenvironmental remediation contract together totaling $125.7 million.

 

Operating income for 2003declined $19.9 million from 2002. The decline was due to the sale of EMD whichhad operating income of $24.9 million in 2002, and a reduction of $7.0 millionof operating income in 2003 from the winding down of a large cost-type contractbeginning in the second quarter of 2003. The renegotiation of a large cost-typecontract in 2003 resulted in a reduction of operating income of $9.4 million ascompared to 2002. Partially offsetting the decline in operating income was anincrease of $19.5 million in 2003 from the renegotiation of two largeoperations, maintenance and management contracts.

 

***Intersegmentand other***

 

Intersegment operatingloss of $(19.0) million in 2003 primarily included residual costs from ournon-union subsidiary of $8.4 million and bonding fees of $5.3 million, a $5.4million charge resulting from an under accrual of employee benefits related toperiods prior to our emergence from bankruptcy protection, a charge of $3.4million related to a legal settlement, all partially offset by a gain of $4.9million from the sale of the Technology Center.

 

Intersegment operatingloss of $(12.5) million for 2002 includes the operations of the TechnologyCenter, a business held for sale. It also includes residual costs from ournon-union subsidiary of $7.0 million and bonding fees of $4.6 million,including amortization of the bonding facility fee paid upon emergence from bankruptcyprotection.

 

**FINANCIALCONDITION AND LIQUIDITY**

 

We have threeprincipal sources of liquidity: (1) cash generated by operations; (2) existingcash, cash equivalents and short-term investments; and (3) available capacityunder our Credit Facility. We had cash, cash equivalents, and short-terminvestments of $316.3 million at December 31, 2004, of which $61.5 million wasrestricted for use in the normal operations of our consolidated joint ventureprojects or was restricted under our self-insurance programs. At December 31,2004, we had no borrowing and $123.9 million in face amount of 

 

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letters of creditoutstanding under the Credit Facility, leaving a borrowing capacity of $226.1million under the facility. For more information on our financing activities,see “Credit Facility” below.

 

Our cash flows areprimarily impacted from period to period by fluctuations in working capital andpurchase of construction and mining equipment required to perform ourcontracts. Working capital is affected by numerous factors including:

 

•                  ***Business unit mix.***  Our working capital requirements are uniqueby business unit, and changes in the type, size and stage of completion ofcontracts performed by our business units can impact our working capitalrequirements. Also, growth in the business requires working capital investmentand the purchase of construction and mining equipment.

 

•                  ***Commercial terms.***  The commercial terms of our contracts withcustomers and subcontractors may vary by business unit, contract type andcustomer type and utilize a variety of billing and payment terms.  These could include client advances,milestone payment schedules, monthly or bi-monthly billing cycles, andperformance base incentives. Additionally, some customers have requirements onbilling documentation including documentation from subcontractors, which mayincrease the level of billing complexity and cause delays in the billing cycleand collection cycle from period to period.

 

•                  ***Contract life cycle.***  Our contracts typically involve initial cashfor working capital during the start-up phase, reach a cash neutral positionand eventually experience a reduction of working capital during the wind-downand completion of the project.

 

•                  ***Delays in execution. ***At times, we may experiencedelays in scheduling and performance of our contracts and encounter unforeseenevents or issues that may negatively affect our cash flow.

 

***Cashflows***

*(Inmillions)*

* *
| **Liquidity and capital resources** | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
|-------------------------------------|------------|-----------------------|------------|---------------------|------------|
| Cash and cash  equivalents          |       | $                     | 286.1      |                | $          | 188.8 |   |
| Short-term  investments             |       | 30.2                  |       | 50.0                |       |
| Total                               |       | $                     | 316.3      |                | $          | 238.8 |   |

 
| **Cash flow activities**      | ** ** | **Year ended  December 31, 2004** | ** ** | **Year ended  January 2, 2004** | ** ** |
|-------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| Net cash  provided (used) by: |       |                              |       |                            |       |
| Operating  activities         |       | $                                 | 113.4      |                            | $          | 79.6 |   |
| Investing  activities         |       | 3.1                               |       | (9.6                            | )          |
| Financing  activities         |       | (19.2                             | )          | (52.4                           | )          |
|                               |            |                                   |            |                                 |            |  |  |

 

The discussionbelow highlights significant aspects of our cash flows.

 

•                  ***Operating activities:***

 

In 2004, our operating activities provided $113.4million of cash compared to $79.6 million provided in 2003. Cash from operatingactivities in 2004 included net income of $51.1 million and several significantnon-cash charges including non-cash income tax expense of $34.6 million anddepreciation and amortization of $21.9 million. Included in 2004 operatingearnings were estimated losses of $44.3 million on three large highwayconstruction projects. The recognition of these losses during 2004 did not havea significant impact on our cash flows; however, cash will be required infuture periods to fund the cost growth on these contracts as work progresses.We anticipate future change orders and claim recoveries on these projectswhich, if received, will partially mitigate the negative cash impact of theseprojects. Cash flow for 2004 was impacted by an increase of working capitalrequirements for the 

 

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USACOE task ordersin the Middle East, in both our Infrastructure and Power business units. AtDecember 31, 2004, capital invested in contracts in the Middle East amounted to$51.6 million. The majority of the investment consists of accounts receivableand unbilled amounts that are anticipated to be billed and collected during thefirst quarter of 2005 as additional funding is made available to the USACOE.During 2004 we made state and foreign tax payments of  $7.4 million and interest of  $12.1 million

 

In 2003, operating activities provided $79.6 millionof cash compared to $79.5 million provided in 2002. Cash in both yearsincreased from favorable results of operations that included severalsignificant non-cash items, including depreciation, non-cash income taxes andthe amortization and write-off of deferred financing fees. Operating activitiesfor 2003 used $43.1 million of cash for working capital, $14.3 million forinterest payments associated with our credit facilities, $5.7 million for stateand foreign income tax payments and $9.9 million paid for reorganization items.Cash used for working capital in 2003 was primarily the result of our use ofadvance payments from customers of $34.4 million to complete several power andindustrial/process projects. Cash paid for professional fees associated withour reorganization in 2003 declined $29.8 million from 2002 primarily due tothe significant legal and professional fees incurred in connection with ouremergence from bankruptcy protection. Professional fees paid in 2003 areprimarily associated with expenses of the unsecured creditors’ committee forsettlement of outstanding claims in connection with our reorganization.

 

•                  ***Investing activities:***

 

During 2004, investing activities provided $3.1million of cash. We used $35.2 million for equipment purchases, principally fornew contracts in the Infrastructure and Mining business units. The uses wereoffset by $21.3 million of proceeds from the sale of property and equipmentincluding $13.6 million of equipment sales from the dam and hydropower projectin the Philippines. All of the equipment in the Philippines has been sold. Inaddition, we had net sales of $19.8 million of short-term investments. In 2003,investing activities used $9.6 million of cash, consisting of $17.7 million ofproceeds from the sale of the Technology Center and $34.9 million in proceedsfrom the sales of property and equipment, including $17.2 million from the saleof excess equipment from the dam and hydropower project in the Philippines.These proceeds were partially offset by $12.2 million used for the acquisitionof equipment. During 2003, we invested in $50.0 million of short-terminvestments.

 

•                  ***Financing activities:***

 

During 2004, we distributed $25.5 million to ourpartners in consolidated joint ventures, primarily BNFL. In addition, wereceived $10.2 million in proceeds from the exercise of stock options andwarrants and paid $3.9 million of financing fees in amending our creditfacility. In 2003, cash used by financing activities of $52.3 million included$42.1 million in distributions to partners in our consolidated joint ventures(including approximately $27 million to BNFL) and $11.4 million of financingfees paid in connection with the Credit Facility.  In 2003, we received $1.2 million from theexercise of stock options.

 

In 2004, distributions to minority interests declinedby $16.6 million from the comparable period of 2003. During 2004 an increase inworking capital requirements primarily in the Middle East for certainconsolidated joint ventures in the Infrastructure business unit resulted incontributions by minority interest partners in excess of distributions. In2003, distributions were made to joint venture partners upon the windup andcompletion of some large infrastructure joint ventures.

 

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***Incometaxes***

 

We anticipate thatcash payments for income taxes for 2005 and later years will be substantiallyless than income tax expense recognized in the financial statements. Thisdifference results from expected tax deductions for goodwill amortization andfrom use of net operating loss (“NOL”) carryovers. As of December 31, 2004, wehave remaining tax goodwill of approximately $59 million resulting from theacquisition of the Westinghouse Businesses and $579 million resulting from theacquisition of RE&C. The amortization of this tax goodwill is deductibleover remaining periods of 9.2 and 10.5 years, respectively, resulting in annualtax deductions of approximately $61 million, net of minority interest. Thefederal NOL carryovers as of December 31, 2004 were approximately $212 million,most of which are subject to an annual limitation of approximately $27 million.Unused available NOL carryovers from previous years plus the 2005 annuallimitation of $27 million, would allow us to use as much as $82 million of theNOL carryovers in 2005 or beyond, if not used. Until the tax goodwilldeductions and the NOL carryovers are exhausted, we will not pay cash taxes(other than a minimal impact for alternative minimum tax) on the first $88million of federal taxable income before tax goodwill amortization andapplication of NOL carryovers each year.

 

***Cashflows for 2005***

 

As in 2004, weexpect to generate positive cash flows from operations in 2005. Specific issueswhich are relevant to understanding 2005 cash flows include:

 

•                  ***Income taxes:*** Because of anticipatedutilization of tax goodwill amortization of $61 million, and the availabilityof $82 million of NOL carryovers, we will not pay federal taxes, other than aminimal impact for alternative minimum tax. Our partners in joint ventures areresponsible for their share of the income tax liabilities of the jointventures. We anticipate the payment of state and foreign income taxes.

 

•                  ***Property and equipment:*** Capitalexpenditures for current construction and mining projects, along with normalcapital expenditures to upgrade our information systems hardware and software,are expected to be approximately $25 to $35 million. Additional capital may berequired for new projects obtained during the year. Additionally, in the normalcourse of business, we sell a portion of our construction and mining equipmentfleet each year, depending on estimated future requirements.

 

•                  ***Pension and post-retirement benefit obligations:***We expect to fund$12.5 million to our defined benefit pension and post-retirement benefit plansduring 2005 as compared to $12.0 million funded in 2004. We estimate financialstatement expense under these plans to be approximately $12.0 million in 2005as compared to $13.5 million in 2004.

 

•                  ***Financing activities:***On December31, 2004, we had outstanding approximately 8.4 million warrants to purchasecommon stock. These warrants will expire in January 2006. Additionally, we haveissued common stock options that are currently exercisable. At December 31,2004, the market price of our common stock exceeded the exercise price of thewarrants and options. If the warrants or options are exercised, we wouldreceive proceeds to the extent of the exercise price of the warrants oroptions. For a complete discussion of these, see Note 16, “Capital Stock, StockPurchase Warrants and Stock Compensation Plans” of the Notes to ConsolidatedFinancial Statements in Item 8 of this report.

 

•                  ***MIBRAG mbH:*** During the first quarterof 2003, MIBRAG mbH, our German mining venture that primarily operates lignitecoal mines in Germany, reached an agreement with one of its customers tocontribute to a retrofit of the customer’s power plant because the quality ofthe coal MIBRAG mbH is delivering had fallen below specifications in the coalsupply contract. MIBRAG mbH has agreed to contribute 45 million euros towardthe retrofit, of which 21.5 million euros were paid in 2003, 14.5 million euroswere paid in the first quarter of 2004 and 9 million euros have been paid inthe first quarter of 2005. The coal supply contract was assumed by MIBRAG mbHin a privatization transaction in 1994. MIBRAG mbH believes the Germangovernment guaranteed that the coal quality was sufficient to fulfill 

 

II-29

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the terms of the contractassumed. Discussions are ongoing with government representatives regardingpotential contributions from the government to reduce the contribution ofMIBRAG mbH to the retrofit. MIBRAG mbH will amortize the cost over theremaining 17 years of the coal supply contract. In addition, higher coal saleshave required a review of the timing of capital expenditures, and someacceleration of expenditures may be required to meet commitments. As a resultof these two issues, distributions received in 2004 and 2003 of $8.0 millionand $6.6 million, respectively, were lower than normal. We currently anticipatedistributions of $10 million to $15 million in 2005.

 

***Financialcondition and liquidity***

 

We expect to usecash to, among other things, satisfy contractual obligations, fund workingcapital requirements and make capital expenditures. For additional informationon contractual obligations and capital expenditures, see “ContractualObligations” below and “Property and Equipment” above.

 

We believe thatour cash flows from operations, existing cash, cash equivalents, and short-terminvestments,  and available capacityunder our revolving credit facility will be sufficient to meet our reasonablyforeseeable liquidity needs.

 

In line with industry practice, we are often requiredto provide performance and surety bonds to customers under fixed-pricecontracts. These bonds indemnify the customer should we fail to perform ourobligations under the contract. If a bond is required for a particular projectand we are unable to obtain an appropriate bond, we cannot pursue that project.We have existing bonding capacity but, as is customary, the issuance of a bondis at the sureties’ discretion. Moreover, due to events that affect theinsurance and bonding markets generally, bonding may be more difficult toobtain in the future or may only be available at significant additional cost.While there can be no assurance that bonds will continue to be available onreasonable terms, we believe that we have access to the bonding necessary toachieve our operating goals.

 

We continuallyevaluate alternative capital structures and the terms of our credit facilities.We may also, from time to time, pursue opportunities to complement existingoperations through business combinations and participation in ventures, whichmay require additional financing and utilization of our capital resources.

 

***Off-balance sheetarrangements***

 

Wedo not have any off-balance sheet arrangements that have or are reasonablylikely to have a current or future effect on financial condition, revenues orexpenses, results of operations, liquidity, capital expenditures or capitalresources that are material to investors.

 

***Contractualobligations***

 

As of December 31,2004, we had the following contractual obligations:

 
| ** **                                   | ** ** | **Payments due by period** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|
| **Contractual obligations  (In millions)**   | ** ** | **2005**                   | ** ** | **2006-  2007** | ** ** | **2008-  2009** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
| Operating lease  obligations (a)             |       | $                          | 36.1       |   | $ | 57.7 |   | $ | 22.1 |   | $ | 19.7 |   | $ | 135.6 |   |
| Purchase  obligations (b)                    |       | 8.5                        |       | 17.0 |   | 16.8 |   | 8.7 |   | 51.0 |   |
| Credit facility  (c)                         |       | 9.0                        |       | 16.9 |   | 4.9 |   | — |   | 30.8 |   |
| Pension and  post-retirement obligations (d) |       | 12.5                       |       | 24.9 |   | 22.8 |   | — |   | 60.2 |   |
| Total                                        |       | $                          | 66.1       |   | $ | 116.5 |   | $ | 66.6 |   | $ | 28.4 |   | $ | 277.6 |   |

 

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----

(a)          Operatinglease obligations do not include minimal non-cancelable sub-lease rentalstotaling approximately $5.9 million. In January 2005, a seven year extension,through 2015, of the Boise, ID Corporate and Business Unit headquarters leasewas signed for an additional total lease commitment of approximately $19.8million.

(b)         Purchaseobligations include future cash payments pursuant to an outsourcing agreementfor certain information technology services. Commitments pursuant tosubcontracts and other purchase orders related to engineering and constructioncontracts are not included since such amounts are expected to be funded undercontract billings.

(c)          Representspayments for letter of credit, commitment and administrative fees for ourCredit Facility.

(d)         Dueto practicality, pension and post-retirement payments are not presented beyond2009.

 

We have nolong-term debt, capital leases or other material long-term liabilities,reflected on our balance sheet.

 

In the normalcourse of business, we cause letters of credit and surety bonds to be issuedgenerally in connection with contract performance obligations that are notrequired to be recorded in our consolidated balance sheets. We are obligated toreimburse the issuer of our letters of credit or surety bonds for any paymentsmade thereunder. The table below presents the expiration of our estimatedoutstanding commitments on letters of credit and surety bonds outstanding as ofDecember 31, 2004 for each of the next five years and thereafter. Althoughletters of credit under the Credit Facility expire upon termination of theCredit Facility, the presentation is prepared based on the expiration period ofour contractual obligations with the customer or beneficiary. At December 31,2004, $123.9 million of the outstanding letters of credit were issued under theCredit Facility. We have pledged cash and cash equivalents as collateral forour reimbursement obligation with respect to $34.0 million in face amount ofspecified letters of credit that were outstanding at December 31, 2004 outsideof our Credit Facility. Our commitments under performance bonds generally endconcurrent with the expiration of our contractual obligation. The face amountof the surety bonds expiring by period is presented below. Our actual exposureis limited to estimated cost to complete our bonded contracts which wasapproximately $1,208 million at December 31, 2004.

 
| **Other commercial commitments  (in millions)** | ** ** | **Letters of credit** | ** ** | **Surety bonds** | ** ** | **Total** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|------------------|------------|-----------|------------|
| Commitments  expiring by period                 |       |                  |       |             |       |      |       |
| 2005                                            |       | $                     | 55.0       |             | $          | 589.6     |       | $ | 644.6 |   |
| 2006                                            |       | 5.6                   |       | 165.2            |       | 170.8     |       |
| 2007                                            |       | 10.3                  |       | 435.5            |       | 445.8     |       |
| 2008                                            |       | —                |       | 277.3            |       | 277.3     |       |
| 2009                                            |       | —                |       | 5.9              |       | 5.9       |       |
| Thereafter                                      |       | 87.0                  |       | 811.1            |       | 898.1     |       |
| Total other  commercial commitments             |       | $                     | 157.9      |             | $          | 2,284.6   |       | $ | 2,442.5 |   |

 

# ***Guarantees***

# *** ***

We have guaranteed theindemnity obligations of the Westinghouse Businesses relating to the sale ofEMD to Curtiss-Wright Corporation for the potential occurrence of specifiedevents, including breaches of representations and warranties and/or failure toperform certain covenants or agreements. Generally, the indemnificationprovisions expire by October 2005 and are capped at $20 million. In addition,the indemnity provisions relating to environmental conditions obligate theWestinghouse Businesses to pay Curtiss-Wright Corporation up to a maximum $3.5million for environmental losses they incur over $5 million until October 2007.The Westinghouse Businesses are also responsible for environmental losses thatexceed $1.3 million related to a specified parcel of the sold property throughOctober 2012. If the Westinghouse Businesses are unable to perform theirindemnity obligations, BNFL has agreed to indemnify us for 40% of losses weincur as a result of our guarantee. We believe that the indemnification provisionswill not have a material adverse effect on our financial position, results ofoperations or cash flows.

 

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*** ***

***CreditFacility***

 

The Credit Facilityprovides for up to $350 million in the aggregate for loans and other financialaccommodations allocated pro rata between a Tranche A facility in the amount of$115 million and a Tranche B facility in the amount of $235 million. We amendedthe Credit Facility on March 19, 2004 and again on August 5, 2004, to includemore favorable terms on the Tranche B facility. As amended, the scheduledtermination dates for Tranche A and Tranche B are October 9, 2007 and August 5,2008, respectively. The borrowing rate for Tranche A is the greater of LIBOR or2%, plus an additional margin of 3.50%. The borrowing rate for Tranche B isLIBOR, plus an additional margin of 2.50%. As of December 31, 2004, theeffective borrowing rate was 5.90% for Tranche A and 4.90% for Tranche B. TheCredit Facility also provides for other fees, including commitment and letterof credit fees, normal and customary for such credit agreements. Under thecurrent terms of the agreement, letters of credit are allocated pro ratabetween the facilities on the same basis as loans. Letter of credit fees arecalculated using the applicable LIBOR margins of 3.50% for Tranche A and 2.50%for Tranche B plus an issuance fee. The average issuance fee for both trancheswas 0.25%. Commitment fees are calculated on the remaining borrowing capacityof each tranche after subtracting all loans and letters of credit. TheCommitment fee is 1.50% for Tranche A and 2.50% for Tranche B. At December 31,2004, $123.9 million in face amount of letters of credit were issued andoutstanding and no borrowings were outstanding leaving a borrowing capacity of$226.1 million under the Credit Facility. The Credit Facility containsfinancial covenants requiring the maintenance of specified financial andoperating ratios, and specified events of default that are typical for a creditfacility of this size, type and tenor. The Credit Facility also containsaffirmative and negative covenants that limit our ability and the ability ofsome of our subsidiaries to incur debt or liens, provide guarantees, makeinvestments, merge with or acquire other companies, and pay dividends. AtDecember 31, 2004, we were in compliance with all of the financial covenantsunder the Credit Facility. The Credit Facility is secured by substantially allof the assets of Washington Group and our wholly owned domestic subsidiaries.

 

***EarningsBefore Interest, Taxes, Depreciation and Amortization (“EBITDA”)***

 

Weview EBITDA as a performance measure of operating liquidity, and as such webelieve that the GAAP financial measure most directly comparable to it is net cashprovided by operating activities (see reconciliation of EBITDA to net cashprovided by operating activities below). EBITDA is not an alternative to andshould not be considered instead of, or as a substitute for, earnings fromoperations, net income or loss, cash flows from operating activities or otherstatements of operations or cash flow data prepared in conformity with GAAP, oras a GAAP measure of profitability or liquidity. In addition, our calculationof EBITDA may or may not be comparable to similarly titled measures of othercompanies.

 

EBITDAis used by our management as a supplemental financial measure to evaluate theperformance of our business that, when viewed with our GAAP results and theaccompanying reconciliations, we believe provides a more complete understandingof factors and trends affecting our business than the GAAP results alone. Wealso regularly communicate our EBITDA to the public through our earningsreleases because it is a financial measure commonly used by analysts that coverour industry to evaluate our performance as compared to the performance ofother companies that have different financing and capital structures oreffective tax rates. In addition, EBITDA is a financial measure used in thefinancial covenants of our Credit Facility and therefore is a financial measureto evaluate our compliance with our financial covenants. Management compensatesfor the above-described limitations of using a non-GAAP financial measure byusing this non-GAAP financial measure only to supplement our GAAP results toprovide a more complete understanding of the factors and trends affecting ourbusiness.

 

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Components of EBITDA arepresented below:

 
| ** **                               | ** ** | **Year ended**        | ** ** |
|------------------------------------------|------------|-----------------------|------------|
| **(In millions)**                        | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** | **January 3, 2003** | ** ** |
| Net income                               |       | $                     | 51.1       |   | $ | 42.1 |   | $ | 559.9 |   |
| Taxes                                    |       | 39.5                  |       | 46.9 |   | 26.1 |   |
| Interest expense  (a)                    |       | 14.6                  |       | 34.4 |   | 28.0 |   |
| Depreciation and  amortization  (b) |       | 18.2                  |       | 29.0 |   | 25.4 |   |
| Total (c)                                |       | $                     | 123.4      |   | $ | 152.4 |   | $ | 639.4 |   |

 

----

(a)          Interest expense for theyear ended January 2, 2004 includes the write-off of deferred financing fees of$9.8 million that occurred in the fourth quarter of 2003 in connection withrefinancing the Senior Secured Revolving Credit Facility.

(b)         Depreciation andamortization includes $10.1 million for the year ended January 2, 2004 and$30.1 million for the year ended January 3, 2003 of depreciation on equipmentused on a large dam and hydropower construction project in the Philippines,which we completed in 2003. We began selling the equipment during the thirdquarter of 2002 and the sales have been completed as of December 31, 2004.Depreciation and amortization includes amortization of normal profit of $.6million, $2.3 million and $30.9 million, respectively, for 2004, 2003 and 2002.

(c)          EBITDA for the yearended December 31, 2004 includes reorganization income of $1.2 million whichhad minimal tax expense. EBITDA for the year ended January 2, 2004 includesreorganization charges of $(4.9) million, which provided minimal tax benefit.For the year ended January 3, 2003, EBITDA includes $(36.1) million, after taxbenefit of $3.1 million, for reorganization charges and extraordinary gain ondebt discharge of $567.72 million after tax.

 

**RECONCILIATION OF EBITDA TO NETCASH PROVIDED BY OPERATING ACTIVITIES**

 

We believe that net cashprovided by operating activities is the financial measure calculated andpresented in accordance with GAAP that is most directly comparable to EBITDA.The following tables reconcile EBITDA to net cash provided by operatingactivities for each of the periods for which EBITDA is presented.

 
| ** **                                                              | ** ** | **Year ended**        | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------|------------|
| **(In millions)**                                                       | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** | **January 3, 2003** | ** ** |
| EBITDA                                                                  |       | $                     | 123.4      |   | $ | 152.4 |   | $ | 639.4 |   |
| Interest expense  (a)                                                   |       | (14.6                 | )          | (34.4 | ) | (28.0 | ) |
| Tax expense                                                             |       | (39.5                 | )          | (46.9 | ) | (26.1 | ) |
| Reorganization  items                                                   |       | (1.2                  | )          | 4.9 |   | 75.2 |   |
| Extraordinary  item – gain on debt discharge                       |       | —                |       | — |   | (567.2 | ) |
| Cash paid for  reorganization items                                     |       | (2.5                  | )          | (9.9 | ) | (39.6 | ) |
| Amortization of  financing fees                                         |       | 3.2                   |       | 19.6 |   | 11.7 |   |
| Non-cash income  tax expense                                            |       | 34.6                  |       | 43.1 |   | 31.2 |   |
| Minority  interest in net income of consolidated subsidiaries           |       | 15.2                  |       | 21.9 |   | 21.7 |   |
| Equity in income  of unconsolidated affiliates, less dividends received |       | (17.3                 | )          | (17.1 | ) | (18.9 | ) |
| Loss (gain) on  sale of assets, net                                     |       | (1.0                  | )          | (7.7 | ) | (5.4 | ) |
| Changes in net  operating assets and liabilities and other              |       | 13.1                  |       | (46.3 | ) | (14.6 | ) |
| Net cash  provided by operating activities                              |       | $                     | 113.4      |   | $ | 79.6 |   | $ | 79.4 |   |

 

II-33

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| ** **                                                                              | ** ** | ** ** | ** ** | ** ** | ** ** | **Year ended**      | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|---------------------|------------|
| **(In millions)**                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | **January 3, 2003** | ** ** |
| Cash provided by  operating activities for the eleven months ended January 3, 2003 |       |       |       |       |       | $                   | 72.8       |   |
| Plus: Cash  provided by operating activities for the month ended February 1, 2002  |       |       |       |       |       | 6.6                 |       |
| Cash provided by  operating activities for the year ended January 3, 2003               |       |       |       |       |       | $                   | 79.4       |   |

 

----

(a)          Includes the write-offof deferred financing fees of $9.8 million that occurred in the fourth quarterof 2003 in connection with refinancing the Senior Secured Revolving CreditFacility.

 

## **ACCOUNTING STANDARDS**

## ** **

***Adoption of accounting standards***

 

InJanuary 2003, the FASB issued Interpretation No. 46, *Consolidationof Variable Interest Entities* (“FIN 46”), which is an interpretationof Accounting Research Bulletin No. 51, *Consolidated FinancialStatements*. FIN 46 requires a variable interest entity to beconsolidated by a company that is considered to be the primary beneficiary ofthat variable interest entity. In December 2003, the FASB issued FIN 46(revised December 2003), *Consolidation of VariableInterest Entities* (“FIN 46-R”) to address certain FIN 46implementation issues. We adopted FIN 46-R at the end of the first quarter of2004. The impact of FIN 46-R on our consolidated financial statements includes:

 

•                  ***Special purpose entities.*** We completed our assessment and determinedwe have no investment in special purpose entities as defined by FIN 46-R.

 

•                  ***Non-special purpose entities.*** As is common to our industry, we haveexecuted contracts jointly with third parties through partnerships and jointventures. The adoption of FIN 46-R was not material to our financial position,results of operations or cash flows for non-special purpose entities. The entryinto any significant joint venture or partnership agreements in the future thatwould require consolidation under FIN 46-R, could have a material impact on ourfuture consolidated financial statements.

 

In December 2003, theMedicare Prescription Drug, Improvement and Modernization Act of 2003 (2003Medicare Act) was signed into law. The 2003 Medicare Act expanded Medicare toinclude, for the first time, coverage for prescription drugs. Because ofvarious uncertainties related to our response to the 2003 Medicare Act and theappropriate accounting for this event, we elected to defer financialrecognition of this legislation until the FASB issued final accountingguidance. In May 2004, the FASB issued Staff Position No. 106-2, *Accounting and Disclosure Requirements Related to the MedicarePrescription Drug, Improvement and Modernization Act of 2003* (“FSP106-2”)*.* FSP 106-2 was effective for us in thethird quarter of 2004. We have concluded that enactment of the 2003 MedicareAct was not material and not a significant event pursuant to SFAS No. 106, *Employers’ Accounting for Postretirement Benefits Other Than Pensions*.

 

In December 2004, theFASB issued FASB Staff Position No. 109-1, *Application of FASBStatement No. 109, Accounting for Income Taxes, to the Tax Deduction onQualified Production Activities Provided by the American Jobs Creation Act of2004*, (“FSP 109-1”), which provides guidance on applying FASBStatement No. 109, *Accounting for IncomeTaxes*, to the tax deduction on qualified production activitiesprovided under the American Jobs Creation Act of 2004 (“the Act”).  In addition, FASB issued FASB Staff PositionNo. 109-2, *Accounting and Disclosure Guidance for the ForeignEarnings Repatriation Provision within the American Jobs Creation Act of 2004*,(“FSP-109-2”), which provides guidance on the Act’s provision for a one timetax benefit of the repatriation of foreign earnings. We have concluded that theimpact of FSP-109-1 and FSP 109-2, for us, was not material and will not bematerial in the foreseeable future.

 

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***Recently issued accounting standards***

 

In December 2004, theFASB issued SFAS No. 123 (Revised), *Share-Based Payment*(“SFAS 123-R”). SFAS 123-R replaces SFAS 123 and supersedes APB Opinion No. 25 *Accounting for Stock Issued to Employees* (“APB No. 25”).Adoption of SFAS 123-R will require us to record a non-cash expense for ourequity-related compensation plans using the fair value method. Historically wehave recorded our compensation cost in accordance with APB No. 25, which doesnot require the recording of an expense for our equity related compensationplans if stock options were granted at a price equal to the fair market valueof our common stock on the grant date. SFAS 123-R is effective for us beginningthe third quarter of 2005. Based on the options outstanding as of December 31,2004 and granted in February 2005, we estimate the adoption SFAS 123-R willresult in an additional expense of approximately $3.5 million during the thirdand fourth quarters of the fiscal year 2005.

 

In December 2004, theFASB issued SFAS No. 153, *Exchanges of Non-monetaryAssets — An Amendment of APB Opinion No. 29*. APB Opinion No. 29provided an exception to the basic measurement principle (fair value) forexchanges of similar productive assets. That exception required that somenon-monetary exchanges, although commercially substantive, be recorded on acarryover basis. SFAS No. 153 eliminates the exception to fair value forexchanges of similar productive assets and replaces it with a general exceptionfor exchange transactions that do not have commercial substance — that is,transactions that are not expected to result in significant changes in the cashflows of the reporting entity. SFAS No. 153 is effective for us in the thirdquarter of 2005 but is not expected to have a significant impact on ourfinancial position, result of operations or cash flows.

 

## **ITEM7A**. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKETRISK

***(Inmillions)***

*** ***

***Interestrate risk***

 

Our exposure to marketrisk for changes in interest rates relates primarily to our short-terminvestment portfolio and credit facility. Our short-term investment portfolioconsisted primarily of highly liquid instruments sold or re-priced as tointerest rate in periods less than three months. In February 2005, we liquidatedour entire short-term investment portfolio and invested the proceeds in cashequivalents. Substantially all cash and cash equivalents at December 31, 2004of $286.1 million were held in highly liquid instruments.

 

From time to time, we mayeffect borrowings under bank credit facilities or otherwise for generalcorporate purposes, including working capital requirements and capitalexpenditures. Borrowings under our Credit Facility, of which there currentlyare none, bear interest at the applicable LIBOR or prime rate, plus anadditional margin and, therefore, are subject to fluctuations in interestrates.

 

***Foreigncurrency risk***

 

We conduct our business in various regions of theworld. Our operations are, therefore, subject to volatility because of currencyfluctuations, inflation changes and changes in political and economicconditions in these countries. We are subject to foreign currency translationand exchange issues, primarily with regard to our mining venture, MIBRAG mbH,in Germany. At December 31, 2004 and January 2, 2004, the cumulativeadjustments for translation gains (losses), net of related income tax benefits,were $34.8 million and $25.5 million, respectively. While we endeavor to enterinto contracts with foreign customers with repayment terms in U.S. dollars inorder to mitigate foreign exchange risk, our revenues and expenses aresometimes denominated in local currencies, and our results of operations may beaffected adversely as currency fluctuations affect our pricing and operating costsor those of our competitors. We may engage from time to time in hedgingoperations, including forward foreign exchange contracts, to reduce theexposure of our cash flows to fluctuations in foreign currency rates. We do notengage in hedging for speculative investment reasons. We can give no assurancesthat our hedging operations will eliminate or substantially reduce risksassociated with fluctuating currencies.

 

II-35

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**ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

#### **INDEX TO FINANCIAL STATEMENTS**

#### ** **

## **WASHINGTON GROUPINTERNATIONAL, INC. AND SUBSIDIARIES**

## ** **

ConsolidatedFinancial Statements and Financial Statement Schedule as of

December 31, 2004and January 2, 2004, and for the years ended December 31, 2004 and

January 2, 2004,the eleven months ended January 3, 2003, and the one month ended

February 1, 2002

 

 

| Report  of Independent Registered Public Accounting Firm                                                           |   |
|--------------------------------------------------------------------------------------------------------------------|--------|
| Consolidated  Statements of Income                                                                                 |   |
| Consolidated  Statements of Comprehensive Income                                                                   |   |
| Consolidated Balance Sheets                                                                                        |   |
| Consolidated  Statements of Cash Flows                                                                             |   |
| Consolidated  Statements of Stockholders’ Equity (Deficit)                                                    |   |
| Notes to  Consolidated Financial Statements                                                                        |   |
| Quarterly Financial Data  (Unaudited)                                                                              |   |
| Schedule  II - Valuation, Qualifying and Reserve Accounts                                                          |   |
| Management’s  Annual Report on Internal Control over Financial Reporting                                      |   |
| Attestation  Report of Independent Registered Public Accounting Firm on Internal Control  Over Financial Reporting |   |
| Financial  Statements of Mitteldeutsche Braunkohlengesellschaft mbH                                                |   |

 

II-36

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors and Stockholders ofWashington Group International, Inc.

 

Wehave audited the accompanying consolidated balance sheets of Washington GroupInternational, Inc. and subsidiaries (the “Company”) as of December 31, 2004and January 2, 2004, and the related consolidated statements of income,comprehensive income, cash flows, and stockholders’ equity (deficit) for theyears ended December 31, 2004 and January 2, 2004, and the eleven months endedJanuary 3, 2003 (Successor Company operations) and the one month ended February1, 2002 (Predecessor Company operations).  Our audits also included thefinancial statement schedule listed in the Index at Item 8.  Thesefinancial statements and financial statement schedule are the responsibility ofthe Company’s management.  Our responsibility is to express an opinion onthe financial statements and financial statement schedule based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States).  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

Asdiscussed in Note 3 to the consolidated financial statements, on December 21,2001, the bankruptcy court entered an order confirming the Plan of Reorganizationwhich became effective after the close of business of January 25, 2002.  Accordingly, the accompanying financialstatements have been prepared in conformity with AICPA Statement of Position90-7, *Financial Reporting for Entities in Reorganizationunder the Bankruptcy Code*, for the Successor Company as a new entitywith assets, liabilities, and a capital structure having carrying values notcomparable with prior periods as described in Note 1.

 

Inour opinion, such consolidated financial statements present fairly, in allmaterial respects, the financial position of Washington Group International,Inc. and subsidiaries as of December 31, 2004 and January 2, 2004, and theresults of their operations and their cash flows for the years ended December31, 2004 and January 2, 2004, and the eleven months ended January 3, 2003(Successor Company operations) and the one month ended February 1, 2002(Predecessor Company operations), in conformity with accounting principlesgenerally accepted in the United States of America.  Also, in our opinion,such financial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein.

 

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of the Company’sinternal control over financial reporting as of December 31, 2004, based on thecriteria established in *Internal Control—IntegratedFramework* issued by the Committee of Sponsoring Organizations of theTreadway Commission and our report dated March 11, 2005 expressed anunqualified opinion on management’s assessment of the effectiveness of theCompany’s internal control over financial reporting and an unqualified opinionon the effectiveness of the Company’s internal control over financialreporting.

 

 
| /s/ DELOITTE &  TOUCHE, LLP |   |   |
|---------------------------------|--------|--------|
| Deloitte & Touche,  LLP     |   |
| Boise, Idaho                    |   |
| March 11, 2005                  |   |

 

II-37

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## **CONSOLIDATED STATEMENTS OF INCOME**

*(In thousands except per sharedata)*

 
| ** **                                                                                   | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  January 2,  2004** | ** ** | **Eleven months  ended  January 3,  2003** | ** ** | **(Predecessor Company)  One month  ended  February 1,  2002** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------|------------|
| Revenue                                                                                      |       | $                                  | 2,915,382  |                             | $          | 2,501,151                                  |       | $                                                              | 3,311,614  |   | $ | 349,912 |   |
| Cost of revenue                                                                              |       | (2,765,351                         | )          | (2,324,802                       | )          | (3,162,578                                 | )          | (338,792                                                       | )          |
| Gross profit                                                                                 |       | 150,031                            |       | 176,349                          |       | 149,036                                    |       | 11,120                                                         |       |
| Equity in income  of unconsolidated affiliates                                               |       | 26,917                             |       | 25,519                           |       | 27,342                                     |       | 3,109                                                          |       |
| General and  administrative expenses                                                         |       | (60,404                            | )          | (57,520                          | )          | (48,138                                    | )          | (4,180                                                         | )          |
| Restructuring  charges                                                                       |       | —                             |       | —                           |       | —                                     |       | (625                                                           | )          |
| Other operating  income                                                                      |       | 1,443                              |       | 6,182                            |       | 3,420                                      |       | —                                                         |       |
| Operating income                                                                             |       | 117,987                            |       | 150,530                          |       | 131,660                                    |       | 9,424                                                          |       |
| Interest income                                                                              |       | 2,778                              |       | 1,748                            |       | 926                                        |       | 400                                                            |       |
| Interest expense  (a)                                                                        |       | (14,625                            | )          | (24,587                          | )          | (26,784                                    | )          | (1,193                                                         | )          |
| Write-off of  deferred financing fees                                                        |       | —                             |       | (9,831                           | )          | —                                     |       | —                                                         |       |
| Other income  (expense), net                                                                 |       | (1,509                             | )          | (2,101                           | )          | 1,874                                      |       | (563                                                           | )          |
| Income before  reorganization items, income taxes, minority interests and extraordinary item |       | 104,631                            |       | 115,759                          |       | 107,676                                    |       | 8,068                                                          |       |
| Reorganization  items                                                                        |       | 1,245                              |       | (4,900                           | )          | (3,174                                     | )          | (72,057                                                        | )          |
| Income tax  (expense) benefit                                                                |       | (39,525                            | )          | (46,888                          | )          | (46,217                                    | )          | 20,078                                                         |       |
| Minority  interests in income of consolidated subsidiaries                                   |       | (15,214                            | )          | (21,908                          | )          | (20,584                                    | )          | (1,132                                                         | )          |
| Income (loss)  before extraordinary item                                                     |       | 51,137                             |       | 42,063                           |       | 37,701                                     |       | (45,043                                                        | )          |
| Extraordinary  item – gain on debt discharge, net of tax of $343,539                    |       | —                             |       | —                           |       | —                                     |       | 567,193                                                        |       |
| Net income                                                                                   |       | $                                  | 51,137     |                             | $          | 42,063                                     |       | $                                                              | 37,701     |   | $ | 522,150 |   |
| Income per  share:                                                                           |       |                               |       |                             |       |                                       |       |                                                           |       |
| Basic                                                                                        |       | $                                  | 2.02       |                             | $          | 1.68                                       |       | $                                                              | 1.51       |   | — | (b) |
| Diluted                                                                                      |       | 1.86                               |       | 1.66                             |       | 1.51                                       |       | —                                                         | (b)        |
| Common shares  used to compute income per share:                                             |       |                               |       |                             |       |                                       |       |                                                           |       |
| Basic                                                                                        |       | 25,281                             |       | 25,007                           |       | 25,000                                     |       | —                                                         | (b)        |
| Diluted                                                                                      |       | 27,444                             |       | 25,322                           |       | 25,005                                     |       | —                                                         | (b)        |

----

(a)          Contractualinterest expense not recorded during bankruptcy proceedings for the one monthended February 1, 2002, was $7,090.

(b)         Netincome per share is not presented for this period, as it is not meaningfulbecause of the revised capital structure of the company after reorganization.

* *

*Theaccompanying notes are an integral part of the consolidated financialstatements.*

 

II-38

----

 

**CONSOLIDATED STATEMENTS OFCOMPREHENSIVE INCOME**

*(In thousands)*

 
| ** **                                                   | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  January 2,  2004** | ** ** | **Eleven months  ended  January 3,  2003** | ** ** | **(Predecessor Company)  One month  ended  February 1,  2002** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------|------------|
| Net income                                                   |       | $                                  | 51,137     |                             | $          | 42,063                                     |       | $                                                              | 37,701     |   | $ | 522,150 |   |
| Other  comprehensive income (loss), net of tax:              |       |                               |       |                             |       |                                       |       |                                                           |       |
| Foreign currency  translation adjustments                    |       | 9,348                              |       | 15,844                           |       | 9,652                                      |       | 80                                                             |       |
| Amounts  reclassified to net income in fresh-start reporting |       | —                             |       | —                           |       | —                                     |       | 20,268                                                         |       |
| Minimum pension  liability adjustment and other              |       | (991                               | )          | (1,154                           | )          | (603                                       | )          | —                                                         |       |
| Other  comprehensive income, net of tax                      |       | 8,357                              |       | 14,690                           |       | 9,049                                      |       | 20,348                                                         |       |
| Comprehensive  income                                        |       | $                                  | 59,494     |                             | $          | 56,753                                     |       | $                                                              | 46,750     |   | $ | 542,498 |   |

 

*Theaccompanying notes are an integral part of the consolidated financialstatements.*

 

II-39

----

 

**CONSOLIDATED BALANCE SHEETS**

*(In thousands except per sharedata)*

 
| ** **                                                                      | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| **ASSETS**                                                                      |       |                  |       |                |       |
| **Current  assets**                                                             |       |                  |       |                |       |
| Cash and cash  equivalents                                                      |       | $                     | 286,078    |                | $          | 188,835 |   |
| Short-term investments                                                          |       | 30,200                |       | 50,000              |       |
| Accounts  receivable, including retentions of $14,973 and $13,663, respectively |       | 250,251               |       | 248,456             |       |
| Unbilled  receivables                                                           |       | 214,437               |       | 142,250             |       |
| Investments in  and advances to construction joint ventures                     |       | 24,321                |       | 26,346              |       |
| Deferred income  taxes                                                          |       | 94,343                |       | 89,320              |       |
| Other                                                                           |       | 49,642                |       | 43,804              |       |
| Total current  assets                                                           |       | 949,272               |       | 789,011             |       |
| ** **                                                                      | ** ** | ** **            | ** ** | ** **          | ** ** |
| **Investments  and other assets**                                               | ** ** | ** **            | ** ** | ** **          | ** ** |
| Investments in  unconsolidated affiliates                                       |       | 179,347               |       | 145,144             |       |
| Goodwill                                                                        |       | 307,817               |       | 359,903             |       |
| Deferred income  taxes                                                          |       | 64,479                |       | 26,644              |       |
| Other assets                                                                    |       | 18,078                |       | 18,928              |       |
| Total  investments and other assets                                             |       | 569,721               |       | 550,619             |       |
| ** **                                                                      | ** ** | ** **            | ** ** | ** **          | ** ** |
| **Property  and equipment**                                                     | ** ** | ** **            | ** ** | ** **          | ** ** |
| Construction  equipment                                                         |       | 81,432                |       | 94,234              |       |
| Other equipment  and fixtures                                                   |       | 31,954                |       | 28,500              |       |
| Buildings and  improvements                                                     |       | 11,543                |       | 10,212              |       |
| Land and  improvements                                                          |       | 2,491                 |       | 2,491               |       |
| Total property  and equipment                                                   |       | 127,420               |       | 135,437             |       |
| Less accumulated  depreciation                                                  |       | (58,207               | )          | (64,544             | )          |
| Property and  equipment, net                                                    |       | 69,213                |       | 70,893              |       |
| Total assets                                                                    |       | $                     | 1,588,206  |                | $          | 1,410,523 |   |

* *

*The accompanying notes are anintegral part of the consolidated financial statements.*

 

II-40

----

 

**CONSOLIDATED BALANCE SHEETS  (continued)**

*(In thousands except per sharedata)*

 
| ** **                                                                                                         | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                     |       |                  |       |                |       |
| **Current  liabilities**                                                                                           |       |                  |       |                |       |
| Accounts payable  and subcontracts payable, including retentions of $30,154 and $21,184,  respectively             |       | $                     | 206,180    |                | $          | 176,300 |   |
| Billings in  excess of cost and estimated earnings on uncompleted contracts                                        |       | 204,263               |       | 170,182             |       |
| Accrued  salaries, wages and benefits, including compensated absences of $48,908 and  $45,765, respectively        |       | 149,502               |       | 131,216             |       |
| Other accrued  liabilities                                                                                         |       | 61,919                |       | 54,781              |       |
| Total current  liabilities                                                                                         |       | 621,864               |       | 532,479             |       |
| **Non-current  liabilities**                                                                                       | ** ** | ** **            | ** ** | ** **          | ** ** |
| Self-insurance  reserves                                                                                           |       | 67,945                |       | 58,674              |       |
| Pension and  post-retirement benefit obligations                                                                   |       | 103,398               |       | 99,076              |       |
| Other  non-current liabilities                                                                                     |       | 14,158                |       | 10,941              |       |
| Total  non-current liabilities                                                                                     |       | 185,501               |       | 168,691             |       |
| **Contingencies  and commitments**                                                                                 |       |                  |       |                |       |
| **Minority  interests**                                                                                            |       | 47,920                |       | 48,469              |       |
| **Stockholders’  equity**                                                                                     | ** ** | ** **            | ** ** | ** **          | ** ** |
| Preferred stock,  par value $.01 per share, 10,000 shares authorized                                               |       | —                |       | —              |       |
| Common stock,  par value $.01 per share, 100,000 shares authorized; 25,474 and 25,046 shares  issued, respectively |       | 255                   |       | 250                 |       |
| Capital in  excess of par value                                                                                    |       | 542,514               |       | 528,484             |       |
| Stock purchase  warrants                                                                                           |       | 28,167                |       | 28,647              |       |
| Retained  earnings                                                                                                 |       | 130,901               |       | 79,764              |       |
| Treasury stock,  26 shares, at cost                                                                                |       | (1,012                | )          | —              |       |
| Accumulated  other comprehensive income                                                                            |       | 32,096                |       | 23,739              |       |
| Total  stockholders’ equity                                                                                   |       | 732,921               |       | 660,884             |       |
| Total  liabilities and stockholders’ equity                                                                   |       | $                     | 1,588,206  |                | $          | 1,410,523 |   |

 

*The accompanying notes are anintegral part of the consolidated financial statements.*

 

II-41

----

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

*(Inthousands)*

 
| ** **                                                                                                                   | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  January 2,  2004** | ** ** | **Eleven months  ended  January 3,  2003** | ** ** | **(Predecessor Company)  One month  ended  February 1,  2002** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------|------------|
| **Operating  activities**                                                                                                    |       |                               |       |                             |       |                                       |       |                                                           |       |
| Net income                                                                                                                   |       | $                                  | 51,137     |                             | $          | 42,063                                     |       | $                                                              | 37,701     |   | $ | 522,150 |   |
| Reorganization  items                                                                                                        |       | (1,245                             | )          | 4,900                            |       | 3,174                                      |       | 36,979                                                         |       |
| Adjustments to  reconcile net income to net cash provided by operating activities:                                           |       |                               |       |                             |       |                                       |       |                                                           |       |
| Reorganization  items:                                                                                                       |       |                               |       |                             |       |                                       |       |                                                           |       |
| Cash paid for  reorganization items                                                                                          |       | (2,493                             | )          | (9,869                           | )          | (19,091                                    | )          | (20,548                                                        | )          |
| Fresh-start  adjustments                                                                                                     |       | —                             |       | —                           |       | —                                     |       | 35,078                                                         |       |
| Extraordinary  item-gain on debt  discharge                                                                                  |       | —                             |       | —                           |       | —                                     |       | (567,193                                                       | )          |
| Depreciation of  property and equipment                                                                                      |       | 18,714                             |       | 31,369                           |       | 50,742                                     |       | 5,612                                                          |       |
| Amortization and  write-off of financing fees                                                                                |       | 3,225                              |       | 19,565                           |       | 11,091                                     |       | 624                                                            |       |
| Normal profit                                                                                                                |       | (594                               | )          | (2,331                           | )          | (27,425                                    | )          | (3,518                                                         | )          |
| Non-cash income  tax expense                                                                                                 |       | 34,603                             |       | 43,057                           |       | 40,309                                     |       | (9,147                                                         | )          |
| Minority  interests in net income of consolidated subsidiaries                                                               |       | 15,214                             |       | 21,908                           |       | 20,584                                     |       | 1,132                                                          |       |
| Equity in income  of unconsolidated affiliates, less dividends received                                                      |       | (17,296                            | )          | (17,091                          | )          | (15,717                                    | )          | (3,109                                                         | )          |
| Self-insurance  reserves                                                                                                     |       | 7,772                              |       | (11,259                          | )          | 20,611                                     |       | 7,921                                                          |       |
| Compensation  related to stock options                                                                                       |       | 1,164                              |       | 6,174                            |       | —                                     |       | —                                                         |       |
| Common stock and  warrants received in legal settlement                                                                      |       | (1,443                             | )          | —                           |       | —                                     |       | —                                                         |       |
| Loss (gain) on  sale of assets, net                                                                                          |       | (1,031                             | )          | (7,682                           | )          | (5,599                                     | )          | 227                                                            |       |
| Other                                                                                                                        |       | 10,313                             |       | 1,901                            |       | 8,857                                      |       | (7,635                                                         | )          |
| Changes in other  assets and liabilities:                                                                                    |       |                               |       |                             |       |                                       |       |                                                           |       |
| Accounts  receivable and unbilled receivables                                                                                |       | (73,980                            | )          | 605                              |       | 150,644                                    |       | 41,883                                                         |       |
| Investments in  and advances to construction joint ventures                                                                  |       | 2,040                              |       | (7,531                           | )          | 14,936                                     |       | 4,138                                                          |       |
| Other current  assets                                                                                                        |       | (5,841                             | )          | 2,869                            |       | 15,607                                     |       | (5,212                                                         | )          |
| Accounts payable  and subcontracts payable, accrued salaries, wages and benefits and other  accrued liabilities              |       | 40,511                             |       | (4,629                           | )          | (102,270                                   | )          | 20,027                                                         |       |
| Billings in  excess of cost and estimated earnings                                                                           |       | 32,603                             |       | (34,408                          | )          | (131,291                                   | )          | (52,821                                                        | )          |
| Net cash  provided by operating activities                                                                                   |       | 113,373                            |       | 79,611                           |       | 72,863                                     |       | 6,588                                                          |       |
| **Investing  activities**                                                                                                    | ** ** | ** **                         | ** ** | ** **                       | ** ** | ** **                                 | ** ** | ** **                                                     | ** ** |
| Property and  equipment additions                                                                                            |       | (35,217                            | )          | (12,213                          | )          | (22,957                                    | )          | (3,903                                                         | )          |
| Property and  equipment disposals                                                                                            |       | 21,270                             |       | 34,881                           |       | 19,326                                     |       | 2,339                                                          |       |
| Purchases of  short-term investments                                                                                         |       | (617,200                           | )          | (313,701                         | )          | —                                     |       | —                                                         |       |
| Sales of  short-term investments                                                                                             |       | 637,000                            |       | 263,701                          |       | —                                     |       | —                                                         |       |
| Advances to  unconsolidated affiliates                                                                                       |       | (2,739                             | )          | —                           |       | —                                     |       | —                                                         |       |
| Proceeds from  sale of businesses                                                                                            |       | —                             |       | 17,700                           |       | 77,133                                     |       | —                                                         |       |
| Net cash  provided (used) by investing activities                                                                            |       | 3,114                              |       | (9,632                           | )          | 73,502                                     |       | (1,564                                                         | )          |
| **Financing  activities**                                                                                                    | ** ** | ** **                         | ** ** | ** **                       | ** ** | ** **                                 | ** ** | ** **                                                     | ** ** |
| Payments on  senior secured credit facilities                                                                                |       | —                             |       | —                           |       | —                                     |       | (20,000                                                        | )          |
| Payment of  financing fees                                                                                                   |       | (3,914                             | )          | (11,438                          | )          | —                                     |       | (34,749                                                        | )          |
| Net borrowings  (repayments) under credit agreement                                                                          |       | —                             |       | —                           |       | (40,000                                    | )          | 40,000                                                         |       |
| Distributions to  minority interests, net (including $30,853 related to sale of EMD in eleven  months ended January 3, 2003) |       | (25,501                            | )          | (42,105                          | )          | (63,374                                    | )          | (227                                                           | )          |
| Proceeds from  exercise of stock options and warrants                                                                        |       | 10,171                             |       | 1,207                            |       | —                                     |       | —                                                         |       |
| Net cash used by  financing activities                                                                                       |       | (19,244                            | )          | (52,336                          | )          | (103,374                                   | )          | (14,976                                                        | )          |
| Increase  (decrease) in cash and cash equivalents                                                                            |       | 97,243                             |       | 17,643                           |       | 42,991                                     |       | (9,952                                                         | )          |
| Cash and cash  equivalents at beginning of period                                                                            |       | 188,835                            |       | 171,192                          |       | 128,201                                    |       | 138,153                                                        |       |
| Cash and cash  equivalents at end of period                                                                                  |       | $                                  | 286,078    |                             | $          | 188,835                                    |       | $                                                              | 171,192    |   | $ | 128,201 |   |

 

Supplementaldisclosure of cash flow information (Note 14)

*The accompanying notes are anintegral part of the consolidated financial statements.*

 

II-42

----

 

**CONSOLIDATED STATEMENTS OFSTOCKHOLDERS’ EQUITY (DEFICIT)**

*(In thousands)*

 
| **Period ended**                                                                    | ** ** | **Shares  of  Common stock** | ** **   | **Common  stock** | ** ** | **Capital  in  excess of  par value** | ** ** | **Stock  purchase  warrants** | ** ** | **Retained  earnings  (Accumulated  deficit)** | ** ** | **Treasury  stock** | ** ** | **Accumulated  other  comprehensive  income (loss)** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------|--------------|-------------------|------------|---------------------------------------|------------|-------------------------------|------------|------------------------------------------------|------------|---------------------|------------|------------------------------------------------------|------------|
| ** **                                                                          | **Issued** | ** **                   | **Treasury** | ** **        |
| **December  28, 2001**                                                              | ** ** | 54,486                       |         | (2,019            | )          | $                                     | 545        |                          | $          | 250,118                                        |       | $                   | 6,550      |                                                 | $          | (790,566 | ) | $ | (23,192 | ) | $ | (20,348 | ) |
| Net income,  including extraordinary gain of $567,193                               | ** ** |                         |         |              |       |                                  |       |                          |       |                                           |       | 522,150             |       |                                                 |       |   |   |
| Foreign currency  translation adjustments, net                                      |       |                         |         |              |       |                                  |       |                          |       |                                           |       |                |       |                                                 |       | 80 |   |
| Plan of  Reorganization:                                                            |       |                         |         |              |       |                                  |       |                          |       |                                           |       |                |       |                                                 |       |   |   |
| Cancel  Predecessor common stock                                                    |       | (54,486                      | )            | 2,019             |       | (545                                  | )          | (250,118                      | )          |                                           |       |                |       | 23,192                                               |       |   |   |
| Cancel  Predecessor stock purchase warrants                                         |       |                         |         |              |       |                                  |       |                          |       | (6,550                                         | )          |                |       |                                                 |       |   |   |
| Eliminate  Predecessor accumulated deficit and accumulated other comprehensive loss |       |                         |         |              |       |                                  |       |                          |       |                                           |       | 268,416             |       |                                                 |       | 20,268 |   |
| Issue Successor  common shares                                                      |       | 25,000                       |         |              |       | 250                                   |       | 521,103                       |       |                                           |       |                |       |                                                 |       |   |   |
| Issue Successor  stock purchase warrants                                            |       |                         |         |              |       |                                  |       |                          |       | 28,647                                         |       |                |       |                                                 |       |   |   |
| **February  1, 2002**                                                               |       | 25,000                       |         | —            |       | 250                                   |       | 521,103                       |       | 28,647                                         |       | —              |       | —                                               |       | — |   |
| Net income                                                                          |       |                         |         |              |       |                                  |       |                          |       |                                           |       | 37,701              |       |                                                 |       |   |   |
| Foreign currency  translation adjustments, net                                      |       |                         |         |              |       |                                  |       |                          |       |                                           |       |                |       |                                                 |       | 9,652 |   |
| Minimum pension  liability adjustment, net                                          |       |                         |         |              |       |                                  |       |                          |       |                                           |       |                |       |                                                 |       | (603 | ) |
| **January  3, 2003**                                                                |       | 25,000                       |         | —            |       | 250                                   |       | 521,103                       |       | 28,647                                         |       | 37,701              |       | —                                               |       | 9,049 |   |
| Net income                                                                          |       |                         |         |              |       |                                  |       |                          |       |                                           |       | 42,063              |       |                                                 |       |   |   |
| Shares issued  upon exercise of stock options, including tax benefits               |       | 46                           |         |              |       |                                  |       | 1,207                         |       |                                           |       |                |       |                                                 |       |   |   |
| Stock-based  compensation                                                           |       |                         |         |              |       |                                  |       | 6,174                         |       |                                           |       |                |       |                                                 |       |   |   |
| Foreign currency  translation adjustments, net                                      |       |                         |         |              |       |                                  |       |                          |       |                                           |       |                |       |                                                 |       | 15,844 |   |
| Minimum pension  liability adjustment, net                                          |       |                         |         |              |       |                                  |       |                          |       |                                           |       |                |       |                                                 |       | (1,154 | ) |
| **January  2, 2004**                                                                |       | 25,046                       |         | —            |       | 250                                   |       | 528,484                       |       | 28,647                                         |       | 79,764              |       | —                                               |       | 23,739 |   |
| Net income                                                                          |       |                         |         |              |       |                                  |       |                          |       |                                           |       | 51,137              |       |                                                 |       |   |   |
| Shares issued  upon exercise of stock options and warrants, including tax benefits  |       | 428                          |         |              |       | 5                                     |       | 12,280                        |       | (331                                           | )          |                |       |                                                 |       |   |   |
| Stock-based  compensation                                                           |       |                         |         |              |       |                                  |       | 1,164                         |       |                                           |       |                |       |                                                 |       |   |   |
| Capital  contribution to unconsolidated affiliate by majority parent                |       |                         |         |              |       |                                  |       | 868                           |       |                                           |       |                |       |                                                 |       |   |   |
| Shares and warrants  received in legal settlement                                   |       |                         |         | (26               | )          |                                  |       | (282                          | )          | (149                                           | )          |                |       | (1,012                                               | )          |   |   |
| Foreign currency  translation adjustments, net                                      |       |                         |         |              |       |                                  |       |                          |       |                                           |       |                |       |                                                 |       | 9,348 |   |
| Minimum pension  liability adjustment and other                                     |       |                         |         |              |       |                                  |       |                          |       |                                           |       |                |       |                                                 |       | (991 | ) |
| **December  31, 2004**                                                              |       | 25,474                       |         | (26               | )          | $                                     | 255        |                          | $          | 542,514                                        |       | $                   | 28,167     |                                                 | $          | 130,901 |   | $ | (1,012 | ) | $ | 32,096 |   |

 

*The accompanying notes are anintegral part of the consolidated financial statements.*

 

II-43

----

 

**WASHINGTON GROUP INTERNATIONAL,INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

*(In thousands except per sharedata)*

 

The terms “we,” “us” and “our”as used in this annual report include Washington Group International, Inc. (“WashingtonGroup”) and its consolidated subsidiaries unless otherwise indicated. On May14, 2001, Washington Group International and several but not all of itssubsidiaries filed for Chapter 11 bankruptcy protection. On January 25, 2002,we emerged from bankruptcy protection. See Note 3, “Acquisition,Reorganization Case and Fresh-start Reporting.”

 

**1.****              SIGNIFICANTACCOUNTING POLICIES**

 

***Business***

*** ***

We were originallyincorporated in Delaware on April 28, 1993 under the name Kasler HoldingCompany. In April 1996, we changed our name to Washington Construction Group,Inc. On September 11, 1996, we purchased Morrison Knudsen Corporation, which werefer to as “Old MK,” and changed our name to Morrison Knudsen Corporation. OnSeptember 15, 2000, we changed our name to Washington Group International, Inc.

 

We are an internationalprovider of a broad range of design, engineering, construction, constructionmanagement, facilities and operations management, environmental remediation andmining services to diverse public and private sector clients, including (1)engineering, construction and operations and maintenance services in nuclearand fossil power markets; (2) diverse engineering and construction andconstruction management services for the highway and bridge, airport andseaport, dam, tunnel, water resource, railway and commercial building markets;(3) design, engineering, procurement, construction and construction managementand operations and maintenance services to industrial companies; (4) contractmining, technical and engineering services for the metals, precious metals,coal, minerals and minerals processes markets; (5) comprehensive nuclear andother environmental and hazardous substance remediation services forgovernmental and private-sector clients and 6) design, engineering,construction, management and operations, and closure services for  weapons and chemical demilitarizationprograms for governmental and private-sector clients. In providing theseservices, we enter into four basic types of contracts: fixed-price or lump-sumcontracts providing for a fixed price for all work to be performed,fixed-unit-price contracts providing for a fixed price for each unit of work tobe performed; target-price contracts providing for an agreed upon price wherebywe absorb cost escalations to the extent of our expected fee or profit and are reimbursedfor costs which continue to escalate beyond our expected fee; and cost-typecontracts providing for reimbursement of costs plus a fee. Both anticipatedincome and economic risk are greater under fixed-price and fixed-unit-pricecontracts than under target-price and cost-type contracts. Engineering,construction management, maintenance and environmental and hazardous substanceremediation contracts are typically awarded pursuant to a cost-type contract.

 

We participate inconstruction joint ventures, often as sponsor and manager of projects, whichare formed for the sole purpose of bidding, negotiating and completing specificprojects. We participate in two incorporated mining ventures: MIBRAG mbH (“MIBRAG”),a company that operates lignite coal mines and power plants in Germany, andWestmoreland Resources, Inc. (“Westmoreland Resources”), a coal mining companyin Montana. We also participate in two incorporated government contractingventures, collectively the Westinghouse Businesses. Our venture partner isBritish Nuclear Services, Inc. (“BNFL”). We hold a 60% economic interest in theWestinghouse Businesses and BNFL holds a 40% economic interest. See Note 17, “Agreementto Acquire BNFL’s Interest in Westinghouse Businesses,” regarding our agreementto purchase BNFL’s 40% economic interest. On July 7, 2000, we purchased fromRaytheon Company (“Raytheon”) and Raytheon Engineers & ConstructorsInternational, Inc. (“RECI”) the capital stock of the subsidiaries of RECI andspecified other assets of RECI, and we assumed specified liabilities of RECI.The businesses that we purchased, hereinafter called “RE&C,” provideengineering, design, procurement, construction, operation, maintenance andother services on a global basis. See Note 3, “Acquisition, Reorganization Caseand Fresh-start Reporting.”

 

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***Basisof presentation***

*** ***

The consolidatedfinancial statements include the accounts of Washington Group and all of itsmajority-owned subsidiaries and certain majority-owned construction jointventures. Investments in unconsolidated construction joint ventures areaccounted for by the equity method on the balance sheet with our proportionateshare of revenue, cost of revenue and gross profit included in the consolidatedstatements of income. Investments in unconsolidated affiliates are accountedfor using the equity method. Intercompany transactions and accounts have beeneliminated.

 

As of February 1, 2002,we adopted fresh-start reporting pursuant to the guidelines provided by theAmerican Institute of Certified Public Accountants Statement of Position (“SOP”)90-7, *Financial Reporting by Entities in ReorganizationUnder the Bankruptcy Code*. In connection with the adoption offresh-start reporting, a new entity was created for financial reportingpurposes. We used the purchase method of accounting to allocate ourreorganization value of $550 million to our assets and liabilities based onestimates of fair value. Accordingly, periods subsequent to February 1, 2002 arenot comparable to prior periods. In the accompanying consolidated financialstatements and notes to consolidated financial statements, the one month periodended February 1, 2002 has been designated “Predecessor Company.” See Note 3, “Acquisition,Reorganization Case and Fresh-start Reporting.”

 

Our fiscal year is the52/53 weeks ending on the Friday closest to December 31.

 

***Revenuerecognition***

*** ***

Wefollow the provisions of SOP 81-1, *Accountingfor Performance of Construction-Type and Certain Production-Type Contracts.*We recognize revenue on engineering and construction-type contracts using thepercentage-of-completion method of accounting whereby revenue is recognized asperformance under the contract progresses. For most of our fixed-price andtarget-price contracts, we use a cost-to-cost approach to measure progresstowards completion. Under the cost-to-cost method, we make periodic estimatesof our progress towards completion by comparing costs incurred to date withtotal estimated contract costs. Revenue is then calculated on a cumulativebasis (project-to-date) as the total contract value multiplied by the currentpercentage complete. Revenue for a reporting period is calculated as thecumulative project-to-date revenue less project revenue recognized in priorperiods. However, we defer profit recognition on fixed-price and certaintarget-priced construction contracts until progress is sufficient to estimatethe probable outcome, which generally does not occur until the project is atleast 20% complete.

 

Forcontracts that include significant materials or equipment costs, we use anefforts expended method to measure progress towards completion based on laborhours, labor dollars or some other measurement of physical completion. Forcertain long-term contracts involving mining and environmental and hazardoussubstance remediation, progress towards completion is measured using the unitsof production method. Revenues from reimbursable or cost-plus contracts arerecognized on the basis of costs incurred during the period plus the feeearned. Service-related contracts, including operations and maintenancecontracts, are accounted for over the period of performance, in proportion tothe costs of performance, evenly over the period or over units of production.Award fees associated with U.S. government contracts are initially estimatedand recognized based on prior historical performance until the client hasconfirmed the final award fee. Performance-based incentive fees are included incontract value when a basis exists for the reasonable prediction of performancein relation to established targets. When a basis for reasonable prediction doesnot exist, performance-based incentive fees are recognized when actuallyawarded by the client.

 

Theamount of revenue recognized also depends on whether the contract or project isdetermined to be an “at-risk” or an “agency” relationship between the clientand us. Determination of the relationship is based on characteristics of thecontract or the relationship with the client. For “at-risk” relationships, thegross revenue and the costs of materials, services, payroll, benefits,non-income tax and other costs are recognized in our statements of income. For “agency”relationships, where we act as an agent for our client, only fee revenue isrecognized, meaning that direct project costs and the related reimbursementfrom the client are netted.

 

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Theuse of the percentage-of-completion method for revenue recognition requires theuse of various estimates, including among others, the extent of progresstowards completion, contract completion costs and contract revenue. Profitmargins to be recognized are dependent upon the accuracy of estimatedengineering progress, materials quantities, achievement of milestones and otherincentives, penalty provisions, labor productivity and other cost estimates.Such estimates are dependent upon various judgments we make with respect tothose factors, and some are difficult to accurately determine until the projectis significantly underway. Progress is evaluated each reporting period. Werecognize adjustments to profitability on contracts utilizing thepercentage-of-completion method on a cumulative basis, when such adjustmentsare identified. We have a history of making reasonably dependable estimates ofthe extent of progress towards completion, contract revenue and contractcompletion costs on our long-term engineering and construction contracts.However, due to uncertainties inherent in the estimation process, it ispossible that actual completion costs may vary from estimates. In limitedcircumstances, we may use the completed-contract method for specific contractsfor which reasonably dependable estimates cannot be made or for which inherenthazards make the estimates doubtful. The completed contract method was notutilized during any of the periods presented.

 

***Changeorders and claims***

 

Oncecontract performance is underway, we often experience changes in conditions,client requirements, specifications, designs, materials and work schedule.Generally, a “change order” will be negotiated with our customer to modify theoriginal contract to approve both the scope and price of the change.Occasionally, however, disagreements arise regarding changes, their nature,measurement, timing and other characteristics that impact costs and revenueunder the contract. When a change becomes a point of dispute between ourcustomer and us, we then consider it as a claim.

 

Costsrelated to change orders and claims are recognized when they are incurred.Change orders are included in total estimated contract revenue when it isprobable that the change order will result in a bona fide addition to contractvalue and can be reliably estimated. Claims are included in total estimatedcontract revenue, only to the extent that contract costs related to the claimhave been incurred, when it is probable that the claim will result in a bonafide addition to contract value and can be reliably estimated. Those twoconditions are satisfied when (1) the contract or other evidence provides alegal basis for the claim or a legal opinion is obtained providing a reasonablebasis to support the claim, (2) additional costs incurred were caused byunforeseen circumstances and are not the result of deficiencies in ourperformance, (3) costs associated with the claim are identifiable andreasonable in view of work performed and (4) evidence supporting the claim isobjective and verifiable. No profit is recognized on claims until final settlementoccurs. This can lead to a situation where costs are recognized in one periodand revenue is recognized when customer agreement is obtained or claimresolution occurs, which can be in subsequent periods. Historical claimrecoveries should not be considered indicative of future claim recoveries.  We recognized revenue and related additionalcontract costs from claims in the following amounts for the periods presented:

 
| ** **                                                                                  | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  January 2,  2004** | ** ** | **Eleven months  ended  January 3,  2003** | ** ** | **(Predecessor Company)  One month  ended  February 1  2002** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|---------------------------------------------------------------|------------|
| Revenue from  claims                                                                        |       | $                                  | 30,439     |                             | $          | 35,199                                     |       | $                                                             | 15,393     |   | $ | — |   |
| Less additional  contract related costs and subcontractors’ share of claim settlements |       | (1,901                             | )          | (8,998                           | )          | (2,554                                     | )          | —                                                        |       |
| Net impact on  gross profit from claims                                                     |       | $                                  | 28,538     |                             | $          | 26,201                                     |       | $                                                             | 12,839     |   | $ | — |   |

 

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Substantially all claimswere settled and collected during each respective period for which claimrevenue was recognized.

*** ***

***Estimatedlosses on uncompleted contracts and changes in contract estimates***

 

Werecord provisions for estimated losses on uncompleted contracts in the periodin which such losses are identified. The cumulative effects of revisions tocontract revenue and estimated completion costs are recorded in the accountingperiod in which the amounts become evident and can be reasonably estimated.These revisions can include such items as the effects of change orders andclaims, warranty claims, liquidated damages or other contractual penalties,adjustments for audit findings on U.S. government contracts and contractcloseout settlements.

 

# ***Segmenting contracts***

# *** ***

Occasionally a contractmay include several elements or phases, each of which were negotiatedseparately with the customer that we agreed to perform without regard to theperformance of others. We follow the criteria set forth in SOP 81-1 whensegmenting contracts. In these situations, we segment the contract and assignrevenues to the different elements or phases to achieve different rates ofprofitability based on the relative value of each element or phase to theestimated contract revenue. Values assigned to the segments are based on ournormal historical prices and terms of such services to other customers.

 

***Normalprofit***

 

Normal profit is anaccounting concept that results from the requirement that an acquiring companyrecord all contracts of an acquiree that are in-process at the date ofacquisition, including construction contracts, at fair value. As such, an assetfor favorable contracts or a liability for unfavorable contracts is recorded inpurchase accounting. These assets or liabilities are then reduced based onrevenues recorded over the remaining contract lives, effectively resulting inthe recognition of a reasonable or normal profit margin on contract activityperformed subsequent to the acquisition. Because of the acquisition of RE&Cand the below market profit status of many of the significant acquiredcontracts, we recorded significant liabilities in purchase accounting. Thereduction of these liabilities has an impact on our recorded net income, buthas no impact on our cash flows.

 

***Useof estimates***

*** ***

The preparation of ourconsolidated financial statements in conformity with generally accepted accountingprinciples necessarily requires us to make estimates and assumptions thataffect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities at the balance sheet dates and the reportedamounts of revenue and costs during the reporting periods. Actual results coulddiffer from those estimates. On an ongoing basis, we review our estimates basedon information that is currently available. Changes in facts and circumstancesmay result in revised estimates.

 

***Classificationof current assets and liabilities***

*** ***

We include in currentassets and liabilities amounts realizable and payable under contracts thatextend beyond one year. Accounts receivable at December 31, 2004 and January 2,2004 included $12,393 and $6,296, respectively, of contract retentions, whichare not expected to be collected within one year. Subcontracts payable atDecember 31, 2004, included $16,627 of retentions payable, which are notexpected to be paid within one year. Billings in excess of cost and estimatedearnings on uncompleted contracts contain amounts that, depending on contractperformance, resolution of U.S. government contract audits, negotiations,change orders, claims or changes in facts and circumstances, may not requirepayment within one year.

 

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***Cashand cash equivalents***

*** ***

Cash and cash equivalentsconsist of liquid securities with remaining maturities of three months or lessat the date of acquisition that are readily convertible into known amounts ofcash. At December 31, 2004 and January 2, 2004, cash and cash equivalentsincluded amounts totaling $61,549 and $70,667, respectively, that wererestricted for use in the normal operations of our consolidated constructionjoint ventures, by projects having contractual cash restrictions and by our self-insuranceprograms.

 

***Short-terminvestments***

*** ***

***Short-term investments consist ofinvestment grade fixed-income auction rate securities classified asavailable-for-sale.  The short-terminvestments are stated at fair value that approximated cost, therefore therewere no unrealized gains or losses related to these securities included inaccumulated other comprehensive income at December 31, 2004 and January 2,2004. The cost of securities sold was based on the specific identificationmethod. At December 31, 2004, short-term investments had contractual maturitiesgenerally ranging from 24 to 38 years; however, all securities had provisionsto be re-priced as to the interest rate or to be sold within 28 days or less.All auction rate securities were sold in February, 2005 and the proceeds werereinvested in cash equivalents.***

*** ***

***Accountsand unbilled receivables***

*** ***

Accounts receivable atDecember 31, 2004 and January 2, 2004 include allowances for doubtful accountsof $9,419 and $13,519, respectively. Unbilled receivables represent costsincurred under contracts in process that have not yet been invoiced tocustomers and arise from the use of the percentage-of-completion method ofaccounting, cost reimbursement-type contracts and the timing of billings.Substantially all unbilled receivables at December 31, 2004 are expected to bebilled and collected within one year.

 

***Creditrisk concentration***

*** ***

By policy, we limit theamount of credit exposure to any one financial institution and placeinvestments with financial institutions evaluated as highly creditworthy.Concentrations of credit risk with respect to accounts receivable and unbilledreceivables are believed to be limited due to the number, diversification andcharacter of the obligors and our credit evaluation process. Typically, we havenot required collateral for such obligations, but we may place liens againstproperty, plant or equipment constructed if a default occurs.

 

***Goodwill***

 

Goodwill is subject toannual impairment tests pursuant to SFAS No. 142,*Goodwill andOther Intangible Assets*. Effective February 1, 2002, in conjunctionwith fresh-start reporting, we used the purchase method of accounting toallocate our reorganization value to our net assets, with the excess recordedas goodwill on the basis of estimates of fair value. See Note 3, “Acquisition,Reorganization Case and Fresh-start Reporting.” For income tax purposes, wehave tax deductible goodwill in excess of financial statement goodwill and netoperating loss (“NOL”) carryovers for which a valuation allowance wasestablished in fresh-start reporting. As goodwill is deducted for income taxpurposes and as the pre-reorganization NOL carryovers are utilized,substantially all the resulting tax benefit reduces financial statementgoodwill.

 

***Propertyand equipment***

 

Property and equipmentwas stated at estimated fair value as of February 1, 2002. Subsequent majorrenewals and improvements are capitalized at cost, while maintenance andrepairs are expensed when incurred. Depreciation of construction equipment isprovided based on the straight-line and accelerated methods, after an allowancefor estimated salvage value, over estimated lives of 2 to 10 years.Depreciation of buildings is provided based on the straight-line method 

 

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over estimated lives of10 to 15 years, and improvements are amortized over the shorter of the assetlife or lease term. Depreciation of equipment is provided based on thestraight-line method over estimated lives of 3 to 12 years. Upon disposition,cost and related accumulated depreciation of property and equipment are removedfrom the accounts, and the gain or loss is reflected in results of operations.

 

***Billingsin excess of cost and estimated earnings on uncompleted contracts***

 

Billings in excess ofcost and estimated earnings on uncompleted contracts represent amounts actuallybilled to clients, and perhaps collected, in excess of costs incurred andprofits recognized on a project. Also, in limited situations, we negotiate substantialadvance payments as a contract condition. These advance payments are reflectedin billings in excess of cost and estimated earnings on uncompleted contracts.Provisions for losses on contracts, reclamation reserves on mining contractsand reserves for punch-list costs, demobilization and warranty costs oncontracts that have achieved substantial completion and reserves for audit andcontract closing adjustments on U.S. government contracts are also included inbillings in excess of cost and estimated earnings on uncompleted contracts. Thefollowing table summarizes the components of billings in excess of cost andestimated earnings on uncompleted contracts.

 
| ** **                                                                  | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| Billings in  excess of cost and estimated earnings on uncompleted contracts |       | $                     | 112,628    |                | $          | 97,982 |   |
| Estimated costs  to complete long-term contracts                            |       | 28,371                |       | 49,900              |       |
| Normal profit  reserve                                                      |       | 13,143                |       | 13,737              |       |
| Net liabilities  of construction joint ventures                             |       | 27,708                |       | —              |       |
| Other reserves                                                              |       | 22,413                |       | 8,563               |       |
|                                                                        |       | $                     | 204,263    |                | $          | 170,182 |   |

 

The caption “Netliabilities of construction joint ventures” above, represents our share ofunconsolidated construction joint ventures that had an excess of liabilitiesover assets primarily due to accrued contract losses. See Note 5, “Ventures.”

 

***Self-insurancereserves***

 

Self-insurance reservesrepresent reserves established through a program under which we self-insurecertain business risks. We carry substantial premium-paid, traditionalinsurance for our various business risks; however, we self-insure the lowerlevel deductibles for workers’ compensation and general, automobile andprofessional liability. Our total self-insurance reserves at December 31, 2004and January 2, 2004 are $79,429 and $71,656, respectively. The current portionof the self-insurance reserves of $11,484 and $12,982, respectively, atDecember 31, 2004 and January 2, 2004 is included in other accrued liabilities.

 

***Foreigncurrency translation***

 

The functional currencyfor foreign operations is generally the local currency. Translation of assetsand liabilities to U.S. dollars is based on exchange rates at the balance sheetdate. Translation of revenue and expenses to U.S. dollars is based on aweighted-average rate during the period. Translation gains or losses, net ofincome tax effects, are reported as a component of other comprehensive income(loss), except for translation gains or losses related to short-term durationconstruction and engineering projects which are recognized currently. Gains orlosses from foreign currency transactions are included in the results ofoperations of the period in which the transaction is completed.

 

***Incometaxes***

 

Deferred income taxassets and liabilities are recognized for the effects of temporary differencesbetween the carrying amounts and the income tax basis of assets and liabilitiesusing enacted tax rates. A valuation allowance is established when it is morelikely than not that net deferred tax assets will not be realized. Tax creditsare generally recognized in the year they arise.

 

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***Incomeper share***

 

Basic income per share iscalculated based on the weighted-average number of outstanding common sharesduring the applicable period. Diluted income per share is based on theweighted-average number of outstanding common shares plus the weighted-averagenumber of potential outstanding common shares. Income per share is computedseparately for each period presented.

 

For the eleven monthsended January 3, 2003, the 8,520 outstanding stock purchase warrants and 5,033outstanding stock options were not included in the computation of dilutedearnings per share because the exercise price was greater than the averagemarket price of the warrants and options, and, therefore, the effect would beantidilutive. During the year ended January 2, 2004, the weighted averagenumber of outstanding warrants and options excluded from the computation ofdiluted earnings per share was 7,749****and 3,270,respectively. During the year ended December 31, 2004, the weighted averagenumber of outstanding warrants and options excluded from the computation ofdiluted earnings per share was not significant.

 

Our emergence frombankruptcy in January 2002 resulted in the cancellation of all of ourthen-outstanding capital stock, stock options and stock purchase warrants andthe issuance of new shares of capital stock, stock purchase warrants and stockoptions. As such, we believe the presentation of income (loss) per share forthese canceled instruments is not meaningful. For a detailed discussion of ourbankruptcy proceedings and emergence from bankruptcy protection, see Note 3, “Acquisition,Reorganization Case and Fresh-start Reporting.”

 

***Stock-basedcompensation***

 

We have used theintrinsic value method to account for stock-based employee compensation underthe recognition and measurement principles of Accounting Principles Bulletin (“APB”)Opinion No. 25, *Accounting for Stock Issued to Employees*,and related interpretations for all periods presented. Our stock-based employeecompensation plans are described in Note 16, “Capital Stock, Stock PurchaseWarrants and Stock Compensation Plans.” The following table presents the proforma effect on net income and income per share as if we had applied the fairvalue recognition provisions of the SFAS No. 123, *Accountingfor Stock-Based Compensation*, to stock-based employee compensation.

 
| ** **                                                                                                      | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  January 2,  2004** | ** ** | **Eleven months  ended  January 3,  2003** | ** ** | **(Predecessor Company)  One month  ended  February 1,  2002** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------|------------|
| Net income as  reported                                                                                         |       | $                                  | 51,137     |                             | $          | 42,063                                     |       | $                                                              | 37,701     |   | $ | 522,150 |   |
| Deduct:  Stock-based employee compensation expense determined under fair value based  method for all awards (1) |       | (7,010                             | )          | (15,923                          | )          | (25,888                                    | )          | 10,995                                                         |       |
| Add: Compensation  cost recognized using intrinsic value method                                                 |       | 1,164                              |       | 6,174                            |       | —                                     |       | —                                                         |       |
| Tax effects                                                                                                     |       | 2,282                              |       | 3,805                            |       | 10,104                                     |       | (4,291                                                         | )          |
| Pro forma net  income                                                                                           |       | $                                  | 47,573     |                             | $          | 36,119                                     |       | $                                                              | 21,917     |   | $ | 528,854 | (2) |
| Income per share  (3)                                                                                           |       |                               |       |                             |       |                                       |       |                                                           |       |
| As reported -  basic                                                                                            |       | $                                  | 2.02       |                             | $          | 1.68                                       |       | $                                                              | 1.51       |   | — |   |
| As reported -  diluted                                                                                          |       | 1.86                               |       | 1.66                             |       | 1.51                                       |       | —                                                         |       |
| Pro forma -  basic                                                                                              |       | 1.88                               |       | 1.44                             |       | .88                                        |       | —                                                         |       |
| Pro forma -  diluted                                                                                            |       | 1.73                               |       | 1.43                             |       | .88                                        |       | —                                                         |       |

 

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(1)          Wepresent pro forma compensation cost assuming all stock options granted willvest, with pro forma recognition of actual forfeitures as they occur. Ouremergence from bankruptcy protection in January 2002 and the resultingcancellation of all of our previously existing stock options therefore gaverise to a reversal of compensation expense on a pro forma basis for the onemonth ended February 1, 2002. Upon emergence from bankruptcy protection, wegranted options of which one-third immediately vested. Due to this vesting, asignificant portion of the total pro forma compensation cost associated withthese options is presented on a pro forma basis during the eleven months endedJanuary 3, 2003 with the remainder substantially recognized during the yearended January 2, 2004.

(2)          Proforma income before extraordinary item was $(38,339) for the one month endedFebruary 1, 2002.

(3)          Incomeper share is not presented for the Predecessor Company period, as it is notmeaningful because of the revised capital structure of the company after reorganization.

 

See Note 16, “CapitalStock, Stock Purchase Warrants and Stock Compensation Plans” for a discussionof the assumptions used for the table above.

 

***Reclassifications***

 

Certain reclassificationshave been made to the accompanying consolidated financial statements for prioryears to conform to the current year presentation.  The reclassifications did not impactpreviously reported revenues, operating income, net income, total assets, totalliabilities or stockholders’ equity.

 

In February 2005, we determinedthat investments in Auction Rate Securities (“ARS”) should not be consideredcash equivalents.  ARS generally havelong-term stated maturities; however, these investments have characteristicssimilar to short-term investments because at pre-determined intervals,generally between 7 to 90 days of the purchase, there is a new auction process.At December 31, 2004, we held $30,200 of ARS that are classified as short-terminvestments.  We reclassified $50,000 ofARS at January 2, 2004 that were previously included in cash and cashequivalents to short-term investments. We have included the purchases and salesof ARS in the consolidated statements of cash flows as a component of investingactivities. The reclassification resulted in a decrease of net cash provided(used) by investing activities from $40,368 as previously reported to ($9,632)within the consolidated statement of cash flows for the year ended January 2,2004.  We have held ARS since May 2003.  All ARS were sold in February 2005.

 

**2.             ACCOUNTING STANDARDS**

 

***Adoption of accounting standards***

 

InJanuary 2003, the FASB issued Interpretation No. 46, *Consolidationof Variable Interest Entities* (“FIN 46”), which is an interpretationof Accounting Research Bulletin No. 51, *Consolidated FinancialStatements*. FIN 46 requires a variable interest entity to beconsolidated by a company that is considered to be the primary beneficiary ofthat variable interest entity. In December 2003, the FASB issued FIN 46(revised December 2003), *Consolidation of Variable InterestEntities* (“FIN 46-R”) to address certain FIN 46 implementationissues. We adopted FIN 46-R at the end of the first quarter of 2004. The impactof FIN 46-R on our consolidated financial statements includes:

 

•                  ***Special purpose entities.*** We completed our assessment and determinedwe have no investment in special purpose entities as defined by FIN 46-R.

•                  ***Non-special purpose entities.*** As is common to our industry, we haveexecuted contracts jointly with third parties through partnerships and jointventures. The adoption of FIN 46-R was not material to our financial position,results of operations or cash flows for non-special purpose entities. The entryinto any significant joint venture or partnership agreements in the future thatwould require consolidation under FIN 46-R, could have a material impact on ourfuture consolidated financial statements.

 

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In December 2003, theMedicare Prescription Drug, Improvement and Modernization Act of 2003 (2003 MedicareAct) was signed into law. The 2003 Medicare Act expanded Medicare to include,for the first time, coverage for prescription drugs. Because of variousuncertainties related to our response to the 2003 Medicare Act and theappropriate accounting for this event, we elected to defer financialrecognition of this legislation until the FASB issued final accountingguidance. In May 2004, the FASB issued Staff Position No. 106-2, *Accounting and Disclosure Requirements Related to the MedicarePrescription Drug, Improvement and Modernization Act of 2003* (“FSP106-2”)*.* FSP 106-2 was effective for us in thethird quarter of 2004. We have concluded that enactment of the 2003 MedicareAct was not material and not a significant event pursuant to SFAS No. 106, *Employers’ Accounting for Postretirement Benefits Other Than Pensions*.

 

In December 2004, theFASB issued FASB Staff Position No. 109-1, *Application of FASBStatement No. 109, Accounting for Income Taxes, to the Tax Deduction onQualified Production Activities Provided by the American Jobs Creation Act of2004*, (“FSP 109-1”), which provides guidance on applying FASBStatement No. 109, *Accounting for IncomeTaxes*, to the tax deduction on qualified production activitiesprovided under the American Jobs Creation Act of 2004 (“the Act”).  In addition, FASB issued FASB Staff PositionNo. 109-2, *Accounting and Disclosure Guidance for the ForeignEarnings Repatriation Provision within the American Jobs Creation Act of 2004*,(“FSP-109-2”), which provides guidance on the Act’s provision for a one timetax benefit of the repatriation on foreign earnings. We have concluded that theimpact of FSP-109-1 and FSP 109-2 for us, was not material and will not bematerial in the foreseeable future.

 

***Recently issued accounting standards***

 

In December 2004, theFASB issued SFAS No. 123 (Revised), *Share-Based Payment*(“SFAS 123-R”). SFAS 123-R replaces SFAS 123 and supersedes APB Opinion No. 25 *Accounting for Stock Issued to Employees* (“APB No. 25”).Adoption of SFAS 123-R will require us to record a non-cash expense for ourstock compensation plans using the fair value method. Historically we haverecorded our compensation cost in accordance with APB No. 25, which does notrequire the recording of an expense for our equity related compensation plansif stock options were granted at a price equal to the fair market value of ourcommon stock on the grant date. SFAS 123-R is effective for us beginning thethird quarter of 2005. Based on the options outstanding as of December 31, 2004and granted in February 2005, we estimate the adoption SFAS 123-R will resultin an additional expense of approximately $3,500 during the last six months offiscal year 2005.

 

In December 2004, theFASB issued SFAS No. 153, *Exchanges of Non-monetaryAssets — An Amendment of APB Opinion No. 29*. ABP Opinion 29 providedan exception to the basic measurement principle (fair value) for exchanges ofsimilar productive assets. That exception required that some non-monetaryexchanges, although commercially substantive, be recorded on a carryoverbasis.  SFAS No. 153 eliminates theexception to fair value for exchanges of similar productive assets and replacesit with a general exception for exchange transactions that do not have commercialsubstance — that is, transactions that are not expected to result insignificant changes in the cash flows of the reporting entity. SFAS No. 153 iseffective for us in the third quarter of 2005 but is not expected to have asignificant impact on our financial position, results of operations or cashflows.

 

**3.             ACQUISITION, REORGANIZATION CASE AND FRESH-STARTREPORTING**

 

***Acquisitionof RE&C***

 

The following discussiondescribes our acquisition of Raytheon Engineers & Constructors (“RE&C”)in 2000 and the resulting issues and events, including the establishment ofnormal profit reserves, our severe near-term liquidity problems and filing forprotection under Chapter 11 of the U.S. Bankruptcy Code, and integration andmerger costs related to the acquisition. These issues and events primarily pertainto the Predecessor Company and our financial statements for the one month endedFebruary 1, 2002.

 

***On July 7, 2000, pursuant to a stockpurchase agreement dated April 14, 2000 (the “Stock Purchase Agreement”), wepurchased RE&C from Raytheon and RECI (collectively, the “Sellers”), whichprovides engineering, design, procurement, construction, operation, maintenanceand other services on a global basis. We***

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*** ***

***financed the acquisition by obtaining new senior securedfacilities providing for an aggregate of $1,000,000 of term loans and revolvingborrowing capacity (the “RE&C Financing Facility”) and issuing $300,000 ofsenior unsecured notes due July 1, 2010 (the “Senior Unsecured Notes”).***

*** ***

RECI retained, amongother assets, all of its interest in and rights with respect to some of theexisting contracts. In addition, the Stock Purchase Agreement provided that thecontracts related to four specified construction projects would be transferredto RECI, and RE&C would enter into subcontracts to perform, on acost-reimbursed basis, all of RECI’s obligations under the contracts. Becausethe customer consents required to transfer the four contracts to RECI could notbe obtained as of closing, we agreed to remain the contract party and continuedto be directly obligated to the customers and other third parties under thecontracts relating to the four projects. Accordingly, we and the Sellers agreedthat the Sellers would provide us with full indemnification with respect to anyrisks associated with those contracts, which arrangement accomplished theoriginal intent of the Stock Purchase Agreement. Under the Stock PurchaseAgreement, we agreed that we would complete the four specified projects for theSellers’ account and the Sellers agreed to reimburse our costs to do so and toshare equally with us any positive variance between actual costs and estimatedcosts. The Sellers also agreed to indemnify us against any losses, claims orliabilities under the contracts relating to such projects, except losses,claims or liabilities resulting from our gross negligence or willfulmisconduct, against which we would indemnify the Sellers.

 

As part of theacquisition of RE&C, we undertook a comprehensive review of existing contractsthat we acquired for the purpose of making a preliminary allocation of theacquisition price to the net assets acquired. As part of this review, weevaluated, among other matters, RECI’s estimates of the costs at completion ofthe long-term contracts that were underway as of July 7, 2000 (“AcquisitionDate EAC’s”). During this process, information came to our attention thatraised questions as to whether the Acquisition Date EAC’s needed to be adjustedsignificantly. Our review process involved the analysis of an extensive amountof supporting data, including analysis of numerous, large construction projectsin various stages of completion. Based on the information available at the timeof the review, the preliminary results of this review indicated that the AcquisitionDate EAC’s of numerous long-term contracts required substantial adjustment. Theadjustments resulted in contract losses or lower than market rate margins. As aresult, in our report on Form 10-Q for the quarter ended September 1, 2000, we significantlydecreased the carrying value of the net assets acquired and increased thegoodwill associated with the transaction. Because many of the contracts weacquired contained either unrecorded losses or lower than market profits, thesecontracts were adjusted to their estimated fair value at the July 7, 2000acquisition date in order to allow for a reasonable profit margin forcompleting the contracts, and a gross margin or normal profit reserve of$233,135 was established and recorded in billings in excess of cost andestimated earnings on uncompleted contracts.

 

Our review of theRE&C contracts and the purchase price allocation process continuedthereafter, and, based on the results of that review, we expected that, as aresult of the purchase price adjustment process, the purchase price of RE&Cwould be adjusted downward by a significant amount. Subsequent to the quarterended September 1, 2000, we completed the review and made additionaladjustments to the contracts we had acquired, resulting from a more accuratedetermination of the actual contract status at the acquisition date.

 

The normal profit reservehas been reduced as work has been performed on the affected projects. Thereduction results in decreases to cost of revenue and corresponding increasesin gross profit, but has no effect on cash. The changes in the normal profitreserve for the periods indicated are as follows:

 

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| **Normal  profit reserve**           | *** *** | *** *** | *** *** |
|--------------------------------------|--------------|--------------|--------------|
| December 28,  2001 balance           |         | $            | 37,910       |   |
| Increase from  fresh-start reporting |         | 9,101        |         |
| Cost of revenue  (decrease)          |         | (3,518       | )            |
| February 1, 2002  balance            |         | 43,493       |         |
| Cost of revenue  (decrease)          |         | (27,425      | )            |
| January 3, 2003  balance             |         | 16,068       |         |
| Cost of revenue  (decrease)          |         | (2,331       | )            |
| January 2, 2004  balance             |         | 13,737       |         |
| Cost of revenue  (decrease)          |         | (594         | )            |
| December 31,  2004 balance           |         | $            | 13,143       |   |

*** ***

On February 27, 2001, wefiled a lawsuit against the Sellers seeking specific performance of thepurchase price adjustment provisions of the Stock Purchase Agreement. On March8, 2001, we amended our complaint to also seek money damages for misstatementsand omissions allegedly made by the Sellers. Our lawsuit seeking specificperformance was successful, and we and the Sellers thereafter commenced anarbitration proceeding before an independent accountant approved by the courtto determine the purchase price adjustment. A significant arbitration claim wasultimately filed against the Sellers, as discussed below.

 

On March 2, 2001, weannounced that we faced severe near-term liquidity problems as a result of ouracquisition of RE&C. On March 9, 2001, because of those liquidity problems,we suspended work on two large construction projects located in Massachusettsthat were part of the acquisition. The Sellers had provided the customer withparent performance guarantees on those two contracts, and the guaranteesremained in effect after closing the Stock Purchase Agreement. Thoseperformance guarantees required the Sellers to complete the work on thecontracts in the event RE&C (owned by us as of July 7, 2000) did notcomplete them. The contracts were fixed-price in nature, and our review of costestimates indicated that there were substantial unrecognized future costs inexcess of future contract revenues that were not reflected in RECI’sAcquisition Date EAC’s.

 

Uponour suspension of work, the Sellers undertook performance of those contractspursuant to the outstanding performance guarantees. We, however, were obligatedunder the Stock Purchase Agreement to indemnify the Sellers for losses theyincurred under those guarantees. The Sellers also assumed obligations underother contracts, primarily in the RE&C power generation constructionbusiness unit, which resulted in significant additional indemnificationobligations by us to the Sellers. As a result of costs they incurred to performunder the parent guarantees, the Sellers filed a claim against us in thebankruptcy process for approximately $940,000. As further discussed below, thisclaim was ultimately settled without payment to the Sellers in connection withour emergence from bankruptcy protection. See “Reorganization case” further inthis Note. Until such settlement, we retained all liabilities related to thecontracts, including normal profit reserves, on our balance sheet as accruedliabilities included in liabilities subject to compromise.

 

On May 14, 2001, becauseof the severe near-term liquidity problems resulting from our acquisition ofRE&C, we filed for protection under Chapter 11 of the U.S. Bankruptcy Code.At various times between May 14, 2001 and November 20, 2001, we “rejected”numerous contracts (construction contracts, leases and others), as that term isused in the legal sense in bankruptcy law. Included in these rejections werenumerous contracts that we acquired from the Sellers. On August 27, 2001, wealso rejected the Stock Purchase Agreement.

 

On December 21, 2001, thebankruptcy court entered an order confirming the Second Amended Joint Plan ofReorganization of Washington Group International, Inc., et al., as modified(the “Plan of Reorganization”). The Plan of Reorganization became effective andwe emerged from bankruptcy protection on January 25, 2002 (the “Effective Date”).

 

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During the pendency ofthe bankruptcy, we continued to negotiate with the Sellers a settlement of ouroutstanding litigation with respect to the RE&C acquisition. As a result ofthose negotiations, we reached a settlement regarding all issues and disputesbetween the parties, which settlement was incorporated into our Plan ofReorganization (the “Raytheon Settlement”).

 

Under the RaytheonSettlement, the Sellers agreed that, with respect to their bankruptcy claim,the Sellers would be considered unpaid, unsecured creditors having rights inthe unsecured creditor class, but that, upon completion of our Plan ofReorganization, they would waive any rights to receive any distributions to begiven to unsecured creditors with allowed claims. In exchange, we agreed todismiss all litigation against the Sellers related to the acquisition and todiscontinue the purchase price adjustment and binding arbitration process. Wereleased all claims based on any act occurring prior to the Effective Date ofthe Plan of Reorganization, including all claims against the Sellers, theiraffiliates and directors, officers, employees, agents and specifiedprofessionals. The Sellers released all claims based on any act occurring priorto the Effective Date of our Plan of Reorganization, including any claimsrelated to any contracts or projects not assumed by us during the bankruptcycases, against us and our directors, officers, employees, agents andprofessionals. No cash was exchanged as a result of this settlement.

 

In addition, under aservices agreement entered into as a part of the Raytheon Settlement, theSellers will direct the process for resolving pre-petition claims assertedagainst us in the bankruptcy case relating to any contract or project that werejected and that involved some form of support arrangement from the Sellers.We agreed to assist the Sellers in settling or litigating various claimsrelated to those rejected projects. We also agreed to complete work asrequested by the Sellers on those rejected projects on a cost-reimbursable basis.The Sellers may, with respect to the rejected projects described above, pursueor settle any of our claims against project owners, contractors or other thirdparties and will retain any resulting proceeds, except that for specifiedprojects, recoveries in excess of amounts paid by the Sellers will be returnedto us.

 

***While this settlement eliminated ourability to continue to seek to collect our arbitration claim, it was necessarybecause the Sellers’ large unsecured claims in the bankruptcy were substantiallyimpeding our Plan of Reorganization process. Without this settlement, asuccessful emergence from Chapter 11 would have been delayed or impossible.***

*** ***

***Reorganizationcase***

 

As previously discussed,on May 14, 2001, because of severe near-term liquidity issues Washington GroupInternational and several, but not all, of its direct and indirect wholly owneddomestic subsidiaries (the “Debtors”) filed voluntary petitions to reorganizeunder Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court forthe District of Nevada. The various individual bankruptcy cases wereadministered jointly.

 

Under Chapter 11, certainclaims against a debtor in existence prior to the filing of a petition forrelief under the federal bankruptcy laws (“Pre-petition Claims”) are stayedwhile the debtor continues business operations as a debtor-in-possession. Eachof our Debtors in this case continued to operate its business and manage itsproperty as a debtor-in-possession during the pendency of the case. Subsequentto the filing date, additional Pre-petition Claims resulted from the rejectionof executory contracts, including leases, and from the resolution of claims forcontingencies and other disputed amounts. Secured claims, primarilyrepresenting liens on the Debtors’ assets related to the RE&C FinancingFacilities, were also stayed during the pendency of the bankruptcy.

 

The Debtors receivedapproval from the bankruptcy court under first-day orders to pay and did payspecified pre-petition obligations, including employee wages and benefits,foreign vendors, tax obligations and critical vendor obligations.

 

Our ability to continueas a going-concern during the pendency of the bankruptcy was dependent uponobtaining sufficient debtor-in-possession financing in order to continueoperations while in bankruptcy, the confirmation of a plan of reorganization bythe bankruptcy court, and resolution of disputes between the Sellers and us.

 

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On May 14, 2001, weobtained a Secured Super-Priority Debtor-in-Possession Revolving CreditFacility (the “DIP Facility”) with an initial commitment of $195,000 and theability to increase the total commitment to $350,000. The DIP Facility wasavailable to provide both ongoing funding and to support letters of credit. OnJune 5, 2001, the DIP Facility lenders approved an increase in the commitmentfrom $195,000 to $220,000. The DIP Facility was available and utilized asneeded throughout the pendency of the bankruptcy and was replaced by a secured$350,000, 30-month revolving credit facility, (the “Emergence Credit Facility”),entered into on January 25, 2002.

 

During the pendency ofthe bankruptcy, we continued to negotiate with the Sellers a settlement of ouroutstanding litigation with respect to the RE&C acquisition. As a result ofthose negotiations, we entered into the Raytheon Settlement as disclosedpreviously in this Note 3.

 

On December 21, 2001, thebankruptcy court entered an order confirming the Plan of Reorganization.Substantially all liabilities of the Debtors as of the date of the bankruptcyfiling were subject to settlement under our Plan of Reorganization.

 

The Plan ofReorganization became effective and the Debtors emerged from bankruptcyprotection on the Effective Date. Our Plan of Reorganization provided for thefollowing upon the Effective Date:

 

•                  Allof our equity securities (common stock, stock purchase warrants and stockoptions) existing prior to the Effective Date were canceled and extinguished.

 

•                  $570,000of secured debt under the RE&C Financing Facilities was exchanged for$20,000 in cash and 20,000 shares of newly issued common stock of reorganizedWashington Group International (“Common Stock”) as discussed further below.

 

•                  Weentered into a registration rights agreement with each holder of a securedclaim that received Common Stock and requested to be a party to such agreement.

 

•                  Vendorand subcontractor claims directly related to contracts we assumed duringbankruptcy or upon emergence from bankruptcy that were not paid as criticalvendor payments were paid in cash in a cure amount equal to the total claim.

 

•                  Eachholder of unsecured claims at or under $5 (five thousand dollars) is to receivecash in an amount equal to its total unsecured claim (“Convenience ClassPayments”).

 

•                  Accountspayable and subcontracts payable that were not related to cure payments orConvenience Class Payments were discharged.

 

•                  Theholders of $300,000 of Senior Unsecured Notes and all other unsecured creditorswere to receive a pro rata share of 5,000 shares of Common Stock and a pro ratashare of 8,520 fully vested stock warrants to purchase additional shares ofCommon Stock. The stock warrants expire if unexercised four years after theEffective Date. A reorganization plan committee was established to evaluate andresolve objections to disputed claims of unsecured creditors and to determineeach unsecured creditor’s pro rata share of shares and warrants. The warrantsconsisted of three tranches as follows:

 
| ** ** | ** ** | **Number of shares** | ** ** | **Exercise price per share** | ** ** |
|------------|------------|----------------------|------------|------------------------------|------------|
| Tranche A  |       | 3,086                |       | $                            | 28.50      |   |
| Tranche B  |       | 3,527                |       | $                            | 31.74      |   |
| Tranche C  |       | 1,907                |       | $                            | 33.51      |   |

 

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•                  Specified members of management anddesignated employees were granted stock options pursuant to a management optionplan. The management option plan provided for nonqualified stock option grantsas of the Effective Date totaling 1,389 aggregate shares of Common Stock with aterm of 10 years and an exercise price of $24.00 per share. In addition,another 1,389 shares of Common Stock were reserved for grants after theEffective Date at exercise prices to be established by our board of directors.

 

•                  Thechairman of our board of directors, Mr. Dennis R. Washington, was granted stockoptions to purchase shares of Common Stock in three tranches. The first tranchewas to expire five years after the Effective Date. The remaining tranches wereto expire four years after the Effective Date. One-third of each tranche vestedon the Effective Date, one-third of each tranche vested on the firstanniversary of the Effective Date and the final third of each tranche vested onthe second anniversary of the Effective Date, January 25, 2004. We also agreedwith Mr. Washington that our amended certificate of incorporation and bylawswould permit his accumulation of up to 40% of the fully diluted shares ofCommon Stock in open market or privately-negotiated transactions, includingexercise of the stock options, and that we would take no action inconsistent withthose provisions. Mr. Washington’s stock options were amended in November 2003,extending the expiration dates on all three tranches to ten years from theoriginal date of grant, or January 25, 2012. The number of shares andrespective exercise prices for each tranche are as follows:

 
| ** ** | ** ** | **Number of shares** | ** ** | **Exercise price per share** | ** ** |
|------------|------------|----------------------|------------|------------------------------|------------|
| Tranche A  |       | 1,389                |       | $                            | 24.00      |   |
| Tranche B  |       | 882                  |       | $                            | 31.74      |   |
| Tranche C  |       | 953                  |       | $                            | 33.51      |   |

 

•                  We adopted fresh-start reporting asof February 1, 2002 as discussed below.

 

•                  We filed an amended and restatedcertificate of incorporation and adopted amended and restated bylaws andestablished a new board of directors.

 

***Reorganization items***

 

Reorganization itemsconsisted of the following:

 
| ** **                                                              | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  January 2,  2004** | ** ** | **Eleven months  ended  January 3,  2003** | ** ** | **(Predecessor Company)  One month  ended  February 1,  2002** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------|------------|
| Professional  fees and other expenses related to bankruptcy proceedings |       | $                                  | —     |                             | $          | 4,900                                      |       | $                                                              | 3,174      |   | $ | 36,072 |   |
| Adjustment to  accrued reorganization costs due to a settlement         |       | (1,245                             | )          | —                           |       | —                                     |       | —                                                         |       |
| Impairment of  assets of rejected contracts                             |       | —                             |       | —                           |       | —                                     |       | 907                                                            |       |
| Adjustments to  fair values in fresh-start                              |       | —                             |       | —                           |       | —                                     |       | 35,078                                                         |       |
| Total  reorganization items                                             |       | $                                  | (1,245     | )                                | $          | 4,900                                      |       | $                                                              | 3,174      |   | $ | 72,057 |   |

 

***Contractualinterest expense***

 

During the pendency ofour bankruptcy proceedings, we ceased accruing interest on our long-term debt.Contractual interest expense not recorded during the one month ended February1, 2002 was $7,090.

 

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***Fresh-startreporting***

 

As of February 1, 2002,we adopted fresh-start reporting pursuant to the guidance provided by SOP 90-7,*Financial Reporting by Entities in Reorganizationunder the Bankruptcy Code.* In connection with the adoption offresh-start reporting, a new entity was created for financial reportingpurposes. The effective date of our emergence from bankruptcy is considered tobe the close of business on February 1, 2002 for financial reporting purposes.

 

Pursuant to SOP 90-7, weused the purchase method of accounting to allocate our reorganization value toour net assets with the excess recorded as goodwill on the basis of estimatesof fair values. The reorganization value was determined to be $550,000 as ofFebruary 1, 2002. On the Effective Date, we borrowed $40,000 under the SeniorSecured Revolving Credit Facility; however, because the borrowings under theSenior Secured Revolving Credit Facility are revolving working capital loans,they were not included as part of the reorganization value. Therefore, thereorganization value of $550,000 represents the value of our stockholders’equity as of the Effective Date. Based on estimated fair value, we allocated$28,647 of the equity value to the stock purchase warrants and the remainder toCommon Stock.

 

As part of our emergencefrom bankruptcy, the following transactions were recorded:

 

(a)          We made payments of$24,500 to creditors under the Plan of Reorganization and $34,749 in deferredfinancing costs related to the Senior Secured Revolving Credit Facility anddeferred bonding fees. These emergence costs necessitated the $40,000 drawunder the Senior Secured Revolving Credit Facility.

(b)         We wrote-off $22,123 infees on the RE&C Financing Facilities and the Senior Unsecured Notes.

(c)          Upon emergence,$1,880,900 of liabilities subject to compromise were treated as follows:

•                  $373,545of unsecured liabilities were retained by us and $4,500 were paid at emergence.

•                  $926,288in unsecured obligations were exchanged for 5,000 shares of Common Stock and8,520 warrants. The unsecured obligations included $300,000 of Senior UnsecuredNotes and approximately $415,000 related to specified Power business unitprojects that were subject to guarantees by the Sellers.

•                  $576,567in secured obligations, including accrued interest, were exchanged for 20,000shares of Common Stock, and $20,000 in cash paid on the Effective Date.

(d)         We recorded a gain ondebt discharge of $1,460,732, less the value of Common Stock and warrantsissued of $550,000, net of income taxes of $343,539.

 

**4.****              RESTRUCTURINGCHARGES**

 

During 2001, we initiatedrestructuring actions to improve operational effectiveness and efficiency andreduce expenses globally relative to employment levels and excess facilitiesconsistent with the Plan of Reorganization. A liability was recorded as otheraccrued liabilities for employee termination benefits, impairment charges andenhanced pension benefits. The severance costs represented expected reductionsin work force for management, professional, administrative and operationaloverhead. The facility closure costs consist primarily of future leasepayments, net of estimated sub-tenant rental income, for vacated excessfacilities. As part of the Plan of Reorganization in January 2002, restructuringliabilities of $14,155 representing the remaining balance recorded as part ofthe acquisition of RE&C and consisting of non-cancelable lease obligationswere discharged. The remaining liability at December 31, 2004 primarilyrepresents facility closure costs.

 

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The following presentsrestructuring charges accrued and costs incurred for the periods presented:

 
| ** **                                              | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  January 2,  2004** | ** ** | **Eleven months  ended  January 3,  2003** | ** ** | **(Predecessor Company)  One month  ended  February 1,  2002** | ** ** |
|---------------------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------|------------|
| Accrued  restructuring liability at beginning of period |       | $                                  | 9,454      |                             | $          | 11,987                                     |       | $                                                              | 24,718     |   | $ | 44,072 |   |
| Charges and  liabilities accrued:                       |       |                               |       |                             |       |                                       |       |                                                           |       |
| Severance and  other employee related costs             |       | —                             |       | —                           |       | —                                     |       | 625                                                            |       |
| Payments, net of  sub-tenant rental income and other    |       | (2,777                             | )          | (2,533                           | )          | (12,731                                    | )          | (5,824                                                         | )          |
| Liabilities  discharged in bankruptcy                   |       | —                             |       | —                           |       | —                                     |       | (14,155                                                        | )          |
| Accrued  restructuring liability at end of period       |       | $                                  | 6,677      |                             | $          | 9,454                                      |       | $                                                              | 11,987     |   | $ | 24,718 |   |

 

**5.             VENTURES**

 

***Constructionjoint ventures***

 

We participate inunconsolidated construction joint ventures that are formed to bid, negotiateand complete specific projects. The unconsolidated construction joint venturesare reflected in our consolidated balance sheets as investments in and advancesto construction joint ventures accounted for under the equity method, and ourproportionate share of revenue, cost of revenue and gross profit is included inour consolidated statements of operations. The size, scope and duration ofjoint-venture projects vary among periods. The tables below present thefinancial information of our unconsolidated construction joint ventures inwhich we do not hold a controlling interest but do exercise significantinfluence. At December 31, 2004, $27,708 was included in our consolidatedbalance sheet under the caption “Billings in excess of cost and estimatedearnings or uncompleted contracts,” representing our share of unconsolidatedconstruction joint ventures that had an excess of liabilities over assetsprimarily due to accrued contract losses.

 
| **Combined financial position of unconsolidated  construction joint ventures** | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| Current assets                                                                 |       | $                     | 182,127    |                | $          | 217,893 |   |
| Property and  equipment, net                                                   |       | 3,707                 |       | 3,785               |       |
| Current  liabilities                                                           |       | (171,476              | )          | (165,284            | )          |
| Net assets                                                                     |       | $                     | 14,358     |                | $          | 56,394 |   |

 
| **Combined  results of operations of unconsolidated construction**

**joint  ventures** | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  January 2,  2004** | ** ** | **Eleven months  ended  January 3,  2003** | ** ** | **(Predecessor Company)  One month  ended  February 1,  2002** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                                                              |       |                               |       |                             |       |                                       |       |                                                           |       |
| Revenue                                                                                 |       | $                                  | 656,307    |                             | $          | 702,648                                    |       | $                                                              | 596,965    |   | $ | 43,751 |   |
| Cost of revenue                                                                         |       | (668,496                           | )          | (624,535                         | )          | (574,175                                   | )          | (42,436                                                        | )          |
| Gross profit  (loss)                                                                    |       | $                                  | (12,189    | )                                | $          | 78,113                                     |       | $                                                              | 22,790     |   | $ | 1,315 |   |

 
| **Washington Group International’s share of  results of operations**

**of unconsolidated construction joint ventures** |   |     |    |     |   |     |   |    |    |
|------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|---------|---------|
| Revenue                                                                                                                      |   | $        | 257,679 |     | $      | 271,218  |   | $       | 236,701 |   | $ | 17,790 |   |
| Cost of revenue                                                                                                              |   | (270,237 | )       | (239,881 | )      | (229,383 | )      | (17,387 | )       |
| Gross profit  (loss)                                                                                                         |   | $        | (12,558 | )        | $      | 31,337   |   | $       | 7,318   |   | $ | 403 |   |

 

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During 2004, aconstruction joint venture in which we participate recorded a contract loss ona $362,000 fixed-price roadway interchange and bridge project in which we havea 50% interest. Our share of the loss amounted to $27,500. The contract loss isprimarily a result of cost growth due to design changes, quantity growth, priceescalation, and project delays. As of December 31, 2004, the project isapproximately 30 percent complete and scheduled to be completed in the fourthquarter of 2006. A portion of the joint venture losses may be recovered throughchange orders or claims; however, since realization can not be assured at thistime, no potential change orders or claims have been considered in calculatingthe estimated loss. The change orders and claims will be recognized when it isprobable that they will result in additional contract revenue and can bereliably estimated. While the entire amount of the current estimated loss hasbeen recognized, actual results may differ from our estimates.

 

***Unconsolidatedaffiliates***

 

At December 31, 2004 andJanuary 2, 2004, we held ownership interests in several unconsolidatedaffiliates that are accounted for under the equity method, the most significantof which are two incorporated mining ventures: MIBRAG (50%) and WestmorelandResources, Inc. (“Westmoreland Resources”) (20%). We provide consultingservices to MIBRAG and contract mining services to Westmoreland Resources. Thetables below present the financial information of our unconsolidated affiliatesin which we do not hold a controlling interest but do exercise significantinfluence.

 
| **Combined  financial position of unconsolidated affiliates** | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
|---------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| Current assets                                                |       | $                     | 184,801    |                | $          | 187,983 |   |
| Property and  equipment, net                                  |       | 615,475               |       | 553,219             |       |
| Other  non-current assets                                     |       | 686,849               |       | 665,705             |       |
| Current  liabilities                                          |       | (98,424               | )          | (87,306             | )          |
| Long-term debt,  non-recourse to parents                      |       | (257,950              | )          | (274,697            | )          |
| Other  non-current liabilities                                |       | (769,739              | )          | (739,741            | )          |
| Net assets                                                    |       | $                     | 361,012    |                | $          | 305,163 |   |

 
| **Combined  results of operations of unconsolidated affiliates** | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  January 2,  2004** | ** ** | **Eleven months  ended  January 3,  2003** | ** ** | **(Predecessor Company)  One month  ended  February 1,  2002** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------|------------|
| Revenue                                                          |       | $                                  | 457,219    |                             | $          | 447,386                                    |       | $                                                              | 296,335    |   | $ | 28,403 |   |
| Costs and  expenses                                              |       | (401,182                           | )          | (394,847                         | )          | (240,358                                   | )          | (21,508                                                        | )          |
| Net income                                                       |       | $                                  | 56,037     |                             | $          | 52,539                                     |       | $                                                              | 55,977     |   | $ | 6,895 |   |

 

In the fourth quarter of2002, MIBRAG mbH successfully negotiated amendments to the original agreementon transportation credit matters it had entered into with the German governmentin 1993. As a result of those negotiations, MIBRAG mbH recognized $13,000 in operatingincome, of which our portion was $6,500. In addition, MIBRAG mbH recognized a$12,000 one-time award of power cogeneration credits, of which our portion was$6,000. The negotiations also included a settlement agreement replacing annualpayments to be received by MIBRAG mbH over approximately 19 years from theGerman government with a one-time, up-front payment totaling approximately$383,000, which was recorded as deferred income in other non-currentliabilities. MIBRAG mbH also capitalized approximately $392,000 as anon-current asset for coal transportation and mining rights acquired throughthe settlement agreement. Both the deferred revenue and the rights will beamortized over approximately 19 years.

 

**6.     SALE OF BUSINESSES**

 

In November 2001, we andBNFL agreed to pursue the sale of the Electro-Mechanical Division (“EMD”) ofthe Westinghouse Businesses. EMD designed and manufactured components for theU.S. Navy, nuclear power 

 

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utilities and other industries. On October 28, 2002, we sold EMD to asubsidiary of Curtiss-Wright Corporation. Curtiss-Wright Corporation agreed topay $80,000 in cash, subject to certain adjustments, and assumed certainliabilities, including pension and other post-retirement obligations. Cashproceeds, net of a required contribution to the pension plan assumed byCurtiss-Wright Corporation were $77,133 and were distributed 60:40 between usand BNFL. We received $46,280 in net cash proceeds resulting in a $3,420 gain($1,145 net of tax and minority interest) on the sale of EMD, which wasreflected as other operating income in 2002. Operating results for EMD areincluded as part of the Energy & Environment business unit in Note 12, “OperatingSegment, Geographic and Customer Information” through the date of the sale.

 

On April 18, 2003, wesold the process technology development portion of our petroleum and chemicalbusiness (the “Technology Center”) for $17,700, subject to certain adjustments,and recognized a gain of $4,946 on the sale reflected as other operating incomein 2003. Operating results for the Technology Center are included as part ofthe “Intersegment and other unallocated operating costs” in Note 12, “OperatingSegment, Geographic and Customer Information” through the date of the sale.

 

Operating results of theTechnology Center and EMD included in our consolidated results of operationsfor periods prior to the sales are as follows:

 
| ** **         | ** ** | **Year ended  January 2,  2004** | ** ** | **Eleven months  ended  January 3,  2003** | ** ** | **(Predecessor Company)  One month  ended  February 1,  2002** | ** ** |
|--------------------|------------|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------|------------|
| Revenue            |       | $                                | 9,989      |                                       | $          | 150,086                                                        |       | $ | 17,088 |   |
| Net income  (loss) |       | (590                             | )          | 7,333                                      |       | 960                                                            |       |
|                    |            |                                  |            |                                            |            |                                                                |            |  |  |  |

 

**7.     GOODWILL**

 

The following tablereflects the changes in the carrying value of goodwill from January 3, 2003 toDecember 31, 2004. We reduce goodwill as a result of amortization of the excessof tax deductible goodwill over financial reporting goodwill and from actualand forecast usage of pre-reorganization NOL carryovers. Goodwill of asubsidiary is assigned each year to the reporting segments to which thesubsidiary was providing service in accordance with SFAS No. 142, *Goodwill and Other Intangible Assets*. In addition, asdisclosed in Note 12, “Operating Segment Geographic and Customer Information,”certain operations were transferred among business units during 2004.

 
| **Goodwill  activity by**

**reporting  segment**                          | ** ** | **Power** | ** ** | **Industrial/  Process** | ** ** | **Infrastructure** | ** ** | **Mining** | ** ** | **Defense** | ** ** | **Energy &  Environment** | ** ** | **Corporate  and other** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------------|------------|-----------|------------|--------------------------|------------|--------------------|------------|------------|------------|-------------|------------|-------------------------------|------------|--------------------------|------------|-----------|------------|
| Balance at  January 3, 2003                                                |       | $         | 6,386      |                     | $          | 112,077            |       | $          | 49,008     |        | —     |                          | $          | 42,320                   |       | $         | 177,463    |   | — |   | $ | 387,254 |   |
| Reorganization  of reporting structure                                     |       | 1,695     |       | (9,658                   | )          | 7,963              |       | —     |       | —      |       | —                        |       | —                   |       | —    |       |
| Adjustment for  amortization of tax goodwill and utilization of NOL’s |       | (834      | )          | (12,338                  | )          | (6,397             | )          | —     |       | (3,847      | )          | (3,935                        | )          | —                   |       | (27,351   | )          |
| Balance at  January 2, 2004                                                |       | 7,247     |       | 90,081                   |       | 50,574             |       | —     |       | 38,473      |       | 173,528                       |       | —                   |       | 359,903   |       |
| Reorganization  of reporting structure                                     |       | 7,000     |       | (10,656                  | )          | (1,536             | )          | —     |       | 720         |       | 4,472                         |       | —                   |       | —    |       |
| Adjustment for  amortization of tax goodwill and utilization of NOL’s |       | (1,588    | )          | (21,493                  | )          | (12,907            | )          | —     |       | (7,327      | )          | (8,771                        | )          | —                   |       | (52,086   | )          |
| Balance at  December 31, 2004                                              |       | $         | 12,659     |                     | $          | 57,932             |       | $          | 36,131     |        | —     |                          | $          | 31,866                   |       | $         | 169,229    |   | — |   | $ | 307,817 |   |

 

We perform our annualgoodwill impairment test for all of our reporting segments as of October 31, inconjunction with our annual budgeting and forecasting process. There was nogoodwill identified for impairment during our annual review of goodwill for theyears ended December 31, 2004 and January 2, 2004.

 

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**8.     CREDIT FACILITY**

 

In connection with ouremergence from bankruptcy protection on January 25, 2002, we entered into theEmergence Credit Facility that provided for an aggregate of $350,000 ofrevolving borrowing and letter of credit capacity. Borrowings and otherfinancial accommodations under the Emergence Credit Facility were allocated prorata between a Tranche A facility in the amount of $208,350 and a Tranche Bfacility in the amount of $141,650. The borrowing rate under the EmergenceCredit Facility was, for Tranche A, the applicable LIBOR, which had a statedfloor of 3%, plus an additional margin of 5.5%, and for Tranche B, LIBOR plusan additional margin of 5.5%. The Emergence Credit Facility carried other fees,including commitment fees and letter of credit fees, normal and customary forsuch credit agreements. On October 9, 2003, we replaced the Emergence Credit Facility with aNew Senior Secured Revolving Credit Facility (the “Credit Facility”). As aresult of the refinancing, a pre-tax charge to income of $9,831 was recorded inthe fourth quarter of 2003 associated with the unamortized balance of thefinancing fees of the Emergence Credit Facility.

 

The Credit Facilityprovides for up to $350,000 in the aggregate of loans and other financialaccommodations allocated pro rata between a Tranche A facility in the amount of$115,000 and a Tranche B facility in the amount of $235,000. We amended theCredit Facility on March 19, 2004 and again on August 5, 2004, to include morefavorable terms on the Tranche B facility. As amended, the scheduledtermination dates for Tranche A and Tranche B are October 9, 2007 and August 5,2008, respectively. The borrowing rate for Tranche A is the greater of LIBOR or2%, plus an additional margin of 3.50%. The borrowing rate for Tranche B isLIBOR, plus an additional margin of 2.50%. As of December 31, 2004, theeffective borrowing rate was 5.90% for Tranche A and 4.90% for Tranche B. TheCredit Facility also provides for other fees, including commitment and letterof credit fees, normal and customary for such credit agreements. Under thecurrent terms of the agreement, letters of credit are allocated pro ratabetween the facilities on the same basis as loans. Letter of credit fees are calculatedusing the applicable LIBOR margins of 3.50% for Tranche A and 2.50% for TrancheB plus an issuance fee. The average issuance fee for both tranches was 0.25%.Commitment fees are calculated on the remaining borrowing capacity of eachtranche after subtracting all loans and letters of credit. The commitment feeis 1.50% for Tranche A and 2.50% for Tranche B. At December 31, 2004, $123,881in face amount of letters of credit were issued and outstanding and noborrowings were outstanding leaving a borrowing capacity of $226,119 under theCredit Facility. The Credit Facility contains financial covenants requiring themaintenance of specified financial and operating ratios, and specified eventsof default that are typical for a credit facility of this size, type and tenor.The Credit Facility also contains affirmative and negative covenants that limitour ability and the ability of some of our subsidiaries to incur debt or liens,provide guarantees, make investments, merge with or acquire other companies, andpay dividends. At December 31, 2004, we were in compliance with all of thefinancial covenants under the Credit Facility. The Credit Facility is securedby substantially all of the assets of Washington Group and our wholly owneddomestic subsidiaries.

 

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**9.     TAXES ON INCOME**

 

The components of theU.S. federal, state and foreign income tax expense (benefit) were as follows:

 
| ** **                        | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  January 2,  2004** | ** ** | **Eleven months  ended  January 3,  2003** | ** ** | **(Predecessor Company)  One month  ended  February 1,  2002** | ** ** |
|-----------------------------------|------------|------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------|------------|
| Currently  payable                |       |                               |       |                             |       |                                       |       |                                                           |       |
| U.S. federal                      |       | $                                  | 611        |                             | $          | 684                                        |       | $                                                              | —     |   | $ | — |   |
| State                             |       | 548                                |       | 1,247                            |       | 1,660                                      |       | (129                                                           | )          |
| Foreign                           |       | 3,629                              |       | 4,927                            |       | 4,158                                      |       | 361                                                            |       |
| Total current  expense            |       | 4,788                              |       | 6,858                            |       | 5,818                                      |       | 232                                                            |       |
| Deferred                          |       |                               |       |                             |       |                                       |       |                                                           |       |
| U.S. federal                      |       | 37,526                             |       | 34,605                           |       | 36,107                                     |       | (19,178                                                        | )          |
| State                             |       | 4,517                              |       | 4,175                            |       | 3,900                                      |       | (1,246                                                         | )          |
| Foreign                           |       | (7,306                             | )          | 1,250                            |       | 392                                        |       | 114                                                            |       |
| Total deferred  expense (benefit) |       | 34,737                             |       | 40,030                           |       | 40,399                                     |       | (20,310                                                        | )          |
| Income tax  expense (benefit)     |       | $                                  | 39,525     |                             | $          | 46,888                                     |       | $                                                              | 46,217     |   | $ | (20,078 | ) |

 

The components of thedeferred tax assets and liabilities and the related valuation allowances wereas follows:

 
| **Deferred tax assets and liabilities** | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
|-----------------------------------------|------------|-----------------------|------------|---------------------|------------|
| Deferred tax  assets                    |       |                  |       |                |       |
| Goodwill                                |       | $                     | 18,051     |                | $          | 4,557 |   |
| Compensation and  benefits              |       | 51,946                |       | 45,915              |       |
| Depreciation                            |       | 1,322                 |       | —              |       |
| Provision for  losses                   |       | 35,131                |       | 42,279              |       |
| Joint ventures                          |       | 13,101                |       | 9,065               |       |
| Revenue  recognition                    |       | 6,514                 |       | 3,343               |       |
| Self-insurance  reserves                |       | 33,702                |       | 28,790              |       |
| Alternative  minimum tax                |       | 17,098                |       | 16,796              |       |
| Foreign tax  credit                     |       | 17,461                |       | 16,462              |       |
| Net operating  loss carryovers          |       | 142,212               |       | 150,393             |       |
| Valuation  allowance                    |       | (126,969              | )          | (144,582            | )          |
| Other, net                              |       | 6,831                 |       | —              |       |
| Total deferred  tax assets              |       | 216,400               |       | 173,018             |       |
| Deferred tax  liabilities               |       |                  |       |                |       |
| Investment in  affiliates               |       | (57,578               | )          | (38,670             | )          |
| Depreciation                            |       | —                |       | (1,493              | )          |
| Other, net                              |       | —                |       | (16,891             | )          |
| Total deferred  tax liabilities         |       | (57,578               | )          | (57,054             | )          |
| Total deferred  tax assets, net         |       | $                     | 158,822    |                | $          | 115,964 |   |

 

During the thirdquarter of 2003, we completed an analysis of the tax laws applicable to thecancellation of debt under our bankruptcy proceedings resulting in adjustmentsto deferred income taxes for the year ended January 2, 2004. The followingadjustments to deferred taxes were recorded:

 

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•                  Net operating loss (“NOL”) carryoverswere increased by $278,704, resulting in a deferred tax asset of $108,778. Avaluation allowance of $91,834 was established against this deferred tax asset.

•                  Alternative minimum tax (“AMT”)credit carryovers increased by $16,112, resulting in a deferred tax asset of$16,112.

•                  The tax basis in depreciable assetswas reduced by $37,187, resulting in a deferred tax liability of $13,016.

 

As of December 31,2004, we have remaining tax goodwill of $59,031 resulting from the acquisitionof the Westinghouse Businesses and $579,320 resulting from the acquisition ofRE&C. The amortization of this tax goodwill is deductible over remainingperiods of 9.2 and 10.5 years, respectively, resulting in annual tax deductionsof $61,613, net of minority interest. At December 31, 2004, we had federal NOLcarryovers of $211,551, most of which is subject to an annual limitation of$26,510. The federal NOL carryovers expire in years 2020 through 2022.  We also have foreign NOL carryovers of$181,524, most of which are not subject to expiration. The foreign NOLcarryovers primarily consist of losses incurred on two construction projects inthe United Kingdom which were acquired as part of the RE&C acquisition. Wealso had $17,461 of foreign tax credits which currently have no expirationdate.

 

The $126,969valuation allowance reduces the deferred tax assets associated with the NOLcarryovers to a level which we believe will, more likely than not, be realizedbased on estimated future taxable income. As the NOL is used against taxableincome or the valuation allowance is no longer considered necessary, thevaluation allowance will be reduced, substantially all of which will result ina corresponding reduction to financial statement goodwill. During 2004, basedon actual and forecasted utilization of NOL carryovers the valuation allowancewas decreased by $17,365. The tax effect of the change resulted in anadditional $11,116 deferred tax asset. The combined amount of $28,481 wasrecorded as a reduction to goodwill. The valuation allowance also had minoradjustments due to foreign currency translation.

 

Years prior to 1994 areclosed to examination for federal tax purposes. We have evaluated the availableevidence about both asserted and unasserted income tax contingencies in ourincome tax returns filed with the Internal Revenue Service, state, local andforeign tax authorities.  We haverecorded $18,232 for income tax contingencies which represents our estimate ofthe amount that is probable and estimable of being payable, if successfullychallenged by such tax authorities, under the provisions of SFAS No. 5, *Accounting for Contingencies*.  Any reversal of this contingency resultingfrom favorable settlements with a tax authority will result in a reduction togoodwill because the contingency relates to issues that existed prior tofresh-start reporting. We have not received either written or oral tax opinionsthat are contrary to our assessment of the recorded income tax provision andincome tax contingency accrual.

 

Income tax expense(benefit) differed from income taxes at the U.S. federal statutory tax rate of35.0% as follows:

 
| ** **                         | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  January 2,  2004** | ** ** | **Eleven months  ended  January 3,  2003** | ** ** | **(Predecessor Company)  One month  ended  February 1,  2002** | ** ** |
|------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------|------------|
| Federal tax rate                   |       | 35.0                               | %          | 35.0                             | %          | 35.0                                       | %          | 35.0                                                           | %          |
| State tax, net  of federal benefit |       | 3.1                                |       | 3.2                              |       | 3.5                                        |       | 2.8                                                            |       |
| Nondeductible  items               |       | 2.1                                |       | 2.8                              |       | 3.0                                        |       | .4                                                             |       |
| Foreign tax                        |       | (2.9                               | )          | 1.3                              |       | 2.7                                        |       | —                                                         |       |
| Effective tax  rate                |       | 37.3                               | %          | 42.3                             | %          | 44.2                                       | %          | 38.2                                                           | %          |

 

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Foreign taxes include abenefit for current year losses in certain foreign jurisdictions. A fullvaluation allowance has been provided against the resulting foreign NOL’s.Non-deductible items were principally comprised of non-deductiblereorganization expenses, lobbying expenses, and the non-deductible portion ofmeals and entertainment expenses.

 

The US Governmentratified the protocol modifying the income tax treaty between the US and theNetherlands in December 2004. The protocol eliminates the 5% Netherlandswithholding tax on dividends from Netherlands subsidiaries received afterFebruary 1, 2005. The net impact of the elimination of the Netherlandswithholding tax on future dividends was a reduction in our deferred taxliability of $3,623, which decreased income tax expense in 2004.

 

Income beforereorganization items, income taxes, minority interests and extraordinary itemis comprised of the following:

 
| ** **                                                                                          | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  January 2,  2004** | ** ** | **Eleven months  ended  January 3,  2003** | ** ** | **(Predecessor Company)  One month  ended  February 1,  2002** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------|------------|
| U.S. source                                                                                         |       | $                                  | 13,950     |                             | $          | 46,018                                     |       | $                                                              | 60,059     |   | $ | 4,648 |   |
| Foreign source                                                                                      |       | 90,681                             |       | 69,741                           |       | 47,617                                     |       | 3,420                                                          |       |
| Income (loss)  before reorganization items, income taxes, minority interests and extraordinary item |       | $                                  | 104,631    |                             | $          | 115,759                                    |       | $                                                              | 107,676    |   | $ | 8,068 |   |

 

**10.  BENEFIT PLANS**

 

***Pensionplans and supplemental retirement plans***

 

We sponsor definedbenefit pension plans and unfunded supplemental retirement plans, whichprimarily cover certain groups of current and former employees of theWestinghouse Businesses. We make actuarially computed liability calculationsfor financial reporting purposes and make contributions as necessary toadequately fund benefits for these plans. Qualified plan assets are invested inmaster pension trusts for the Westinghouse Businesses that invest primarily inpublicly traded common stocks, bonds, government securities and cashequivalents.

 

We use an October 31measurement date for our pension plans.

 

Reconciliation ofbeginning and ending balances of benefit obligations and fair value of planassets and the funded status of the pension plans are as follows:

 
| **Change in benefit obligations**           | ** ** | **Year Ended  December 31, 2004** | ** ** | **Year Ended  January 2, 2004** | ** ** |
|---------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| Benefit  obligations at beginning of period |       | $                                 | 72,207     |                            | $          | 62,619 |   |
| Service cost                                |       | 4,768                             |       | 3,367                           |       |
| Interest cost                               |       | 4,453                             |       | 4,091                           |       |
| Participant  contributions                  |       | 510                               |       | 447                             |       |
| Benefit payments                            |       | (3,538                            | )          | (3,627                          | )          |
| Actuarial loss                              |       | 4,728                             |       | 5,310                           |       |
| Benefit  obligations at end of period       |       | $                                 | 83,128     |                            | $          | 72,207 |   |

 

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| **Change  in plan assets**                                  |   | **Year Ended  December 31,  2004** | ** ** | **Year Ended  January 2,  2004** |   |
|-------------------------------------------------------------|--------|------------------------------------|------------|----------------------------------|--------|
| Fair value of  plan assets at beginning of period           |   | $                                  | 14,605     |                             | $      | 9,620 |   |
| Actual return on  plan assets                               |   | 1,233                              |       | 2,480                            |   |
| Company  contributions                                      |   | 8,263                              |       | 6,130                            |   |
| Participant  contributions                                  |   | 510                                |       | 447                              |   |
| Benefit payments                                            |   | (3,538                             | )          | (3,627                           | )      |
| Divestiture -  sale of EMD                                  |   | —                             |       | (445                             | )      |
| Fair value of  plan assets at end of period                 |   | $                                  | 21,073     |                             | $      | 14,605 |   |
| Funded status  (obligations less fair value of plan assets) |   | $                                  | (62,055    | )                                | $      | (57,602 | ) |
| Unrecognized net  actuarial loss                            |   | 12,559                             |       | 7,915                            |   |
| Unrecognized  prior service cost                            |   | 12                                 |       | —                           |   |
| Accrued benefit  cost                                       |   | (49,484                            | )          | (49,687                          | )      |
| Contributions  made after the measurement date              |   | 545                                |       | 507                              |   |
| Accrued benefit  cost at end of period                      |   | $                                  | (48,939    | )                                | $      | (49,180 | ) |

 

Amounts recognized in thebalance sheet for the pension plans are as follows:

 
| ** **                                     | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| Accrued benefit  liability                     |       | $                     | (55,986    | )                   | $          | (53,227 | ) |
| Intangible asset                               |       | 1                     |       | —              |       |
| Accumulated  other comprehensive loss          |       | 4,846                 |       | 2,881               |       |
| Minority  interest in other comprehensive loss |       | 2,200                 |       | 1,166               |       |
| Net amount  recognized                         |       | $                     | (48,939    | )                   | $          | (49,180 | ) |

 

We expect to contribute$8,400 to our pension plans in 2005. At December 31, 2004, the benefitobligation for each pension benefit plan disclosed above exceeded the fairvalue of plan assets.  Pension benefitsexpected to be paid in each of the next five years and in the aggregate for thenext succeeding five years are $3,618, $3,827, $4,027, $4,294, $4,600 and$30,960, respectively, at December 31, 2004.

 

The accumulated benefitobligation for all defined benefit pension plans was $77,099 and $67,365 atDecember 31, 2004 and January 2, 2004, respectively.

 

The components of netpension costs for the plans are as follows:

 
| **Components  of net pension costs** | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  January 2,  2004** | ** ** | **Eleven months  ended  January 3,  2003** | ** ** | **(Predecessor Company)  One month  ended  February 1,  2002** | ** ** |
|--------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------|------------|
| Service cost                         |       | $                                  | 4,769      |                             | $          | 3,367                                      |       | $                                                              | 4,503      |   | $ | 369 |   |
| Interest cost                        |       | 4,453                              |       | 4,091                            |       | 9,111                                      |       | 854                                                            |       |
| Expected return  on assets           |       | (1,336                             | )          | (923                             | )          | (6,214                                     | )          | (600                                                           | )          |
| Recognized net  actuarial loss       |       | 175                                |       | 125                              |       | 11                                         |       | 13                                                             |       |
| Net periodic  pension costs          |       | $                                  | 8,061      |                             | $          | 6,660                                      |       | $                                                              | 7,411      |   | $ | 636 |   |

 

The actuarial assumptionsused to determine pension benefit obligations for the plans are as follows:

 
| ** **                 | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
|----------------------------|------------|-----------------------|------------|---------------------|------------|
| Discount rate              |       | 5.50% to 6.0%         |       | 6.3                 | %          |
| Compensation  increases    |       | 4.0                   |       | 4.0                 |       |
| Expected return  on assets |       | 8.0                   |       | 8.0                 |       |

 

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Experience gains andlosses, as well as the effects of changes in actuarial assumptions and planprovisions, are amortized over the average future service period of employees.

 

To determine the overallexpected long-term rate of return on assets, we evaluate the following: (i)expectations of investment performance based on the specific investmentpolicies and strategy for each class of plan assets, (ii) historical rates ofreturn for each significant category of plan assets and (iii) other relevantmarket and company specific factors we believe have historically impactedlong-term rates of return.

 

Separate investmentcommittees manage the assets of the two master trusts, which hold the planassets. In accordance with the investment guidelines, the assets of the fundsare invested in a manner consistent with the fiduciary standards of theEmployee Retirement Income Security Act of 1974 (ERISA). The investments aremade solely in the interest of the participants and beneficiaries and for theexclusive purpose of providing benefits to the participants and theirbeneficiaries. The asset allocation targets for these two master trusts areapproximately 60 percent in equities and 40 percent in fixed income securities.Actual allocation percentages will vary from the target percentages based onshort-term fluctuations in cash flows and market fluctuations.

 

The pension plan’sweighted-average asset allocations by asset category are:

 
| **Asset category**            | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
|-------------------------------|------------|-----------------------|------------|---------------------|------------|
| U.S. equity  securities       |       | 58                    | %          | 55                  | %          |
| Fixed income debt  securities |       | 34                    |       | 36                  |       |
| Non-U.S. equity  securities   |       | 6                     |       | 6                   |       |
| Cash and cash  equivalents    |       | 2                     |       | 3                   |       |

 

***Post-retirementbenefit plans***

 

Weprovide benefits under company-sponsored retiree health care and life insuranceplans for certain groups of employees of the Westinghouse Businesses. Theretiree health care plans require retiree contributions and contain other costsharing features. The retiree life insurance plan provides basic coverage on anoncontributory basis.  We also sponsorfrozen benefit plans for certain groups of employees and retirees other thanthe Westinghouse Businesses.  Dependingon the plan, the retirees are entitled to health care and/or life insurancebenefits.  Some plans require retireecontributions.  We reserve the right toamend or terminate the post-retirement benefits currently provided under theplans and may increase retirees’ cash contributions at any time.

 

Weuse an October 31 measurement date for our post-retirement benefit plans.

 

Reconciliationof beginning and ending balances of post-retirement benefit obligations andfair value of plan assets and the funded status are as follows:

 
| **Change in post-retirement benefit obligations** | ** ** | **Year Ended  December 31, 2004** | ** ** | **Year Ended  January 2, 2004** | ** ** |
|---------------------------------------------------|------------|-----------------------------------|------------|---------------------------------|------------|
| Benefit  obligations at beginning of period       |       | $                                 | 54,890     |                            | $          | 48,179 |   |
| Service cost                                      |       | 1,911                             |       | 889                             |       |
| Interest cost                                     |       | 3,397                             |       | 3,119                           |       |
| Participant  contributions                        |       | 1,201                             |       | 1,244                           |       |
| Benefit payments                                  |       | (4,926                            | )          | (5,688                          | )          |
| Actuarial loss                                    |       | 2,748                             |       | 7,147                           |       |
| Benefit  obligations at end of period             |       | $                                 | 59,221     |                            | $          | 54,890 |   |

 

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| **Change in plan assets**                                   | ** ** | **Year Ended  December 31,  2004** | ** ** | **Year Ended  January 2,  2004** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|
| Fair value of  plan assets at beginning of period           |       | $                                  | —     |                             | $          | — |   |
| Company  contributions                                      |       | 3,725                              |       | 4,444                            |       |
| Participant  contributions                                  |       | 1,201                              |       | 1,244                            |       |
| Benefit payments                                            |       | (4,926                             | )          | (5,688                           | )          |
| Fair value of  plan assets at end of period                 |       | $                                  | —     |                             | $          | — |   |
| Funded status  (obligations less fair value of plan assets) |       | $                                  | (59,221    | )                                | $          | (54,890 | ) |
| Unrecognized net  actuarial loss                            |       | 11,073                             |       | 8,464                            |       |
| Accrued benefit  cost                                       |       | (48,148                            | )          | (46,426                          | )          |
| Contributions  made after the measurement date              |       | 736                                |       | 577                              |       |
| Accrued benefit  cost at end of period                      |       | $                                  | (47,412    | )                                | $          | (45,849 | ) |

 

As of December 31, 2004and January 2, 2004, the accrued benefit liabilities recognized in the balancesheet for the postretirement benefit plans are $(47,412) and $(45,849),respectively.

 

We expect to contribute$4,100 to our post-retirement plans in 2005. Post-retirement benefits expected to be paid in each of the next five yearsand in the aggregate for the next succeeding five years are $4,062, $4,201,$3,968, $4,034, $4,111, and $22,117, respectively, at December 31, 2004.

 

The components of netpost-retirement costs are as follows:

 
| **Components of net post-retirement costs** | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  January 2,  2004** | ** ** | **Eleven months  ended  January 3,  2004** | ** ** | **(Predecessor Company)  One month  ended  February 1,  2003** | ** ** |
|---------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------|------------|
| Service cost                                |       | $                                  | 1,456      |                             | $          | 889                                        |       | $                                                              | 1,216      |   | $ | 25 |   |
| Interest cost                               |       | 3,397                              |       | 3,119                            |       | 4,623                                      |       | 292                                                            |       |
| Recognized net  actuarial gain (loss)       |       | 306                                |       | —                           |       | —                                     |       | (31                                                            | )          |
| Amortization of  prior service credit       |       | —                             |       | —                           |       | —                                     |       | (32                                                            | )          |
| Partial  recognition of initial obligation  |       | 287                                |       | —                           |       | —                                     |       | —                                                         |       |
| Net  post-retirement costs                  |       | $                                  | 5,446      |                             | $          | 4,008                                      |       | $                                                              | 5,839      |   | $ | 254 |   |

 

Theactuarial assumptions used to determine post-retirement benefit obligations areas follows:

 
| ** **                                                                         | ** ** | **December  31, 2004** | ** ** | **January 2, 2004** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|---------------------|------------|
| Discount rate                                                                      |       | 5.25 to 6.25%          |       | 6.3%                |       |
| Health care cost  trend rate assumed for next year                                 |       | 10.0%                  |       | 9.6%                |       |
| Rate to which  the cost trend rate is assumed to decline (the ultimate trend rate) |       | 5.0%                   |       | 5.5%                |       |
| Year that the  rate reaches the ultimate trend rate                                |       | 2010                   |       | 2006                |       |

 

Experience gains andlosses, as well as the effects of changes in actuarial assumptions and planprovisions, are amortized over the average future service period of employees.

 

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The health care costtrend rate assumption has a significant effect on the amounts reported forhealth care plans. The effect of a 1% change in this assumption would be asfollows:

 
| **Post-retirement  benefits**                       | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| Effect on total  of service and interest cost       |       |                  |       |                |       |
| 1% point  increase                                  |       | $                     | 647        |                | $          | 433 |   |
| 1% point  decrease                                  |       | (501                  | )          | (338                | )          |
| Effect on  accumulated projected benefit obligation |       |                  |       |                |       |
| 1% point  increase                                  |       | 4,565                 |       | 4,367               |       |
| 1% point  decrease                                  |       | (3,882                | )          | (3,618              | )          |
|                                                     |            |                       |            |                     |            |  |  |

*** ***

***Deferredcompensation plans***

 

We provide nonqualifiedplans for executives. We have a deferred compensation plan which allows fordeferral of salary and incentive compensation beyond amounts allowed under our401(k) plan and a restoration plan that provides matching contributions oncompensation not eligible for matching contributions under our 401(k) plan. Asof December 31, 2004 and January 2, 2004, the accrued benefit amounts are$9,262 and $5,014, respectively, and are included in other non-currentliabilities in the accompanying consolidated balance sheets.

 

***Otherretirement plans***

 

We sponsor a number ofdefined contribution retirement plans. Participation in these plans isavailable to substantially all salaried employees and to certain groups ofhourly employees. Our cash contributions to these plans are based on either apercentage of employee contributions or on a specified amount per hourdepending on the provisions of each plan. The net cost of these plans was$26,600 for the year ended December 31, 2004, $28,915 for the year endedJanuary 2, 2004, $29,643 in the eleven months ended January 3, 2003 and $2,557for the month ended February 1, 2002.

 

***Multiemployerpension plans***

 

We participate in andmake contributions to numerous construction-industry multiemployer pensionplans. Generally, the plans provide defined benefits to substantially allemployees covered by collective bargaining agreements. Under the EmployeeRetirement Income Security Act, a contributor to a multiemployer plan isliable, upon termination or withdrawal from a plan, for its proportionate shareof a plan’s unfunded vested liability. We currently have no intention ofwithdrawing from any of the multiemployer pension plans in which weparticipate. The net cost of these plans was $31,290 in the year ended December31, 2004, $51,566 in the year ended January 2, 2004, $89,242 in the elevenmonths ended January 3, 2003 and $6,479 for the month ended February 1, 2002.During the eleven months ended January 3, 2003, the net cost of themultiemployer pension plans included cost incurred by us on several largeprojects performed under the Raytheon Settlement which were funded on acost-type basis. Such costs decreased during the years ended December 31, 2004and January 2, 2004, as the projects were being completed.

 

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**11.  TRANSACTIONS WITH AFFILIATES**

 

We purchased goods andservices from companies owned by the chairman of our board of directors asfollows:

 
| ** **                                                       | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  January 2,  2004** | ** ** | **Eleven months  ended  January 3,  2003** | ** ** | **(Predecessor Company)  One month  ended  February 1,  2002** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------|------------|
| Capital  expenditures                                            |       | $                                  | 160        |                             | $          | 25                                         |       | $                                                              | 258        |   | $ | 17 |   |
| Lease and  maintenance of corporate aircraft                     |       | 1,904                              |       | 1,875                            |       | 1,934                                      |       | 149                                                            |       |
| Parts, rentals,  overhauls and repairs of construction equipment |       | 1,055                              |       | 1,242                            |       | 731                                        |       | 111                                                            |       |
| Other                                                            |       | 272                                |       | 3                                |       | 21                                         |       | —                                                         |       |
|                                                                  |            |                                    |            |                                  |            |                                            |            |                                                                |            |  |  |  |  |

 

We mined and sold ballastused in railroad beds to affiliates of the chairman of our board of directorsas follows:

 
| ** **    | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  January 2,  2004** | ** ** | **Eleven months  ended  January 3,  2003** | ** ** | **(Predecessor Company)  One month  ended  February 1,  2002** | ** ** |
|---------------|------------|------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------|------------|
| Ballast sales |       | $                                  | 681        |                             | $          | 667                                        |       | $                                                              | 2,383      |   | $ | 8 |   |
|               |            |                                    |            |                                  |            |                                            |            |                                                                |            |  |  |  |  |

 

Financial advisoryservices and construction materials were purchased by us from firms owned by oraffiliated with persons who were members of our board of directors at the timeof purchase as follows:

 
| ** **                           | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  January 2,  2004** | ** ** | **Eleven months  ended  January 3,  2003** | ** ** | **(Predecessor Company)  One month  ended  February 1,  2002** | ** ** |
|--------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------|------------|
| Financial  advisory services         |       | —                             |       | —                           |       | —                                     |       | $                                                              | 700        |   |
| Construction  materials and services |       | $                                  | 1,362      |                             | $          | 203                                        |       | $                                                              | 1,879      |   | — |   |
|                                      |            |                                    |            |                                  |            |                                            |            |                                                                |            |  |  |  |  |

 

**12.  OPERATING SEGMENT, GEOGRAPHIC AND CUSTOMERINFORMATION**

 

We operate through sixbusiness units, each of which comprises a separate reportable business segment:Power, Infrastructure, Mining, Industrial/Process, Defense and Energy &Environment. The reportable segments are separately managed, serve differentmarkets and customers and differ in their expertise, technology and resourcesnecessary to perform their services.

 

Power providesengineering, construction and operations and maintenance services in bothnuclear and fossil power markets for turnkey new power plant construction,plant expansion, retrofit and modification, decontamination anddecommissioning, general planning, siting and licensing and environmentalpermitting.

 

Infrastructure providesdiverse engineering and construction and construction management services forhighways and bridges, airports and seaports, tunnels and tube tunnels, railroadand transit lines, water storage and transport, water treatment, sitedevelopment and hydroelectric facilities. The business unit generally performsas a general contractor or as a joint venture partner with other contractors ondomestic and international projects.

 

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Mining providescontract-mining, engineering, resource evaluation, geologic modeling, mineplanning, simulation modeling, equipment selection, production scheduling andoperations management to coal, industrial minerals and metals markets.

 

Industrial/Processprovides engineering, design, procurement, construction services and totalfacilities management for general manufacturing, pharmaceutical andbiotechnology, metals processing, institutional buildings, food and consumerproducts, automotive, aerospace, telecommunications and pulp and paperindustries.

 

Defense provides acomplete range of technical services to the U.S. Department of Defense,including operations and management services, environmental and chemicaldemilitarization services, waste handling and storage, architecturalengineering services and engineering, procurement and construction services forthe armed forces.

 

Energy & Environmentprovides services to the U.S. Department of Energy, which is responsible formaintaining the nation’s nuclear weapons stockpile and performing environmentalcleanup and remediation. The business unit also provides the U.S. governmentwith construction, contract management, supply chain management, qualityassurance, administration and environmental cleanup and restoration services.Energy & Environment also provides safety management consulting and wasteand environmental technology and engineered products, including radioactivewaste containers and technical support services.

 

The accounting policiesof the segments are the same as those described in the summary of significantaccounting policies. We evaluate performance and allocate resources based onsegment assets, gross profit and equity in income of unconsolidated affiliates.Segment operating income is total segment revenue reduced by segment cost of revenue,goodwill amortization, integration and merger costs, restructuring costs andother operating income.  Effective January 3, 2004, certain divisionsof the Industrial/Process business unit were transferred to the Infrastructureand Energy business units to more closely align the divisions to the markets ofthe respective business unit.  Priorperiods operating results for the transferred divisions have been reclassifiedbetween business units to conform to the current period organization.

 

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| ** **                                                     | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  January 2,  2004** | ** ** | **Eleven months  ended  January 3,  2003** | ** ** | **(Predecessor Company)  One month  ended  February 1,  2002** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------|------------|
| **Revenue**                                                    |       |                               |       |                             |       |                                       |       |                                                           |       |
| Power                                                          |       | $                                  | 633,981    |                             | $          | 511,788                                    |       | $                                                              | 920,068    |   | $ | 85,551 |   |
| Infrastructure                                                 |       | 891,081                            |       | 585,847                          |       | 707,249                                    |       | 82,130                                                         |       |
| Mining                                                         |       | 109,780                            |       | 84,150                           |       | 63,227                                     |       | 5,326                                                          |       |
| Industrial/Process                                             |       | 394,739                            |       | 430,341                          |       | 534,936                                    |       | 59,952                                                         |       |
| Defense                                                        |       | 495,295                            |       | 506,092                          |       | 494,981                                    |       | 62,107                                                         |       |
| Energy &  Environment                                      |       | 396,570                            |       | 385,497                          |       | 584,744                                    |       | 52,471                                                         |       |
| Intersegment,  eliminations and other                          |       | (6,064                             | )          | (2,564                           | )          | 6,409                                      |       | 2,375                                                          |       |
| Total revenues                                                 |       | $                                  | 2,915,382  |                             | $          | 2,501,151                                  |       | $                                                              | 3,311,614  |   | $ | 349,912 |   |
| **Gross  profit (loss)**                                       |       |                               |       |                             |       |                                       |       |                                                           |       |
| Power                                                          |       | $                                  | 34,493     |                             | $          | 38,595                                     |       | $                                                              | 23,886     |   | $ | 199 |   |
| Infrastructure                                                 |       | (17,117                            | )          | 31,600                           |       | 18,110                                     |       | 3,212                                                          |       |
| Mining                                                         |       | 7,848                              |       | 4,581                            |       | 1,805                                      |       | 100                                                            |       |
| Industrial/Process                                             |       | 17,151                             |       | 1,965                            |       | (6,033                                     | )          | 298                                                            |       |
| Defense                                                        |       | 40,156                             |       | 49,836                           |       | 42,140                                     |       | 1,956                                                          |       |
| Energy &  Environment                                      |       | 73,567                             |       | 70,232                           |       | 80,628                                     |       | 5,717                                                          |       |
| Intersegment and  other unallocated operating costs            |       | (6,067                             | )          | (20,460                          | )          | (11,500                                    | )          | (362                                                           | )          |
| Total gross  profit                                            |       | $                                  | 150,031    |                             | $          | 176,349                                    |       | $                                                              | 149,036    |   | $ | 11,120 |   |
| **Equity  in income of unconsolidated affiliates**             |       |                               |       |                             |       |                                       |       |                                                           |       |
| Power                                                          |       | $                                  | 260        |                             | $          | 417                                        |       | $                                                              | —     |   | $ | — |   |
| Infrastructure                                                 |       | 892                                |       | 730                              |       | —                                     |       | —                                                         |       |
| Mining                                                         |       | 25,551                             |       | 25,740                           |       | 27,342                                     |       | 3,109                                                          |       |
| Industrial/Process                                             |       | 696                                |       | 512                              |       | —                                     |       | —                                                         |       |
| Defense                                                        |       | —                             |       | —                           |       | —                                     |       | —                                                         |       |
| Energy &  Environment                                      |       | (482                               | )          | (1,880                           | )          | —                                     |       | —                                                         |       |
| Intersegment and  other                                        |       | —                             |       | —                           |       | —                                     |       | —                                                         |       |
| Total equity in  income of unconsolidated affiliates           |       | $                                  | 26,917     |                             | $          | 25,519                                     |       | $                                                              | 27,342     |   | $ | 3,109 |   |
| **Operating  income (loss)**                                   |       |                               |       |                             |       |                                       |       |                                                           |       |
| Power                                                          |       | $                                  | 34,753     |                             | $          | 39,012                                     |       | $                                                              | 23,886     |   | $ | 199 |   |
| Infrastructure                                                 |       | (16,225                            | )          | 32,330                           |       | 18,110                                     |       | 3,212                                                          |       |
| Mining                                                         |       | 33,399                             |       | 33,521                           |       | 29,147                                     |       | 3,209                                                          |       |
| Industrial/Process                                             |       | 17,847                             |       | 2,477                            |       | (6,033                                     | )          | 298                                                            |       |
| Defense                                                        |       | 40,156                             |       | 49,836                           |       | 42,140                                     |       | 1,956                                                          |       |
| Energy &  Environment                                      |       | 73,085                             |       | 69,867                           |       | 84,048                                     |       | 5,717                                                          |       |
| Intersegment and  other unallocated operating income and costs |       | (4,624                             | )          | (18,993                          | )          | (11,500                                    | )          | (987                                                           | )          |
| General and  administrative expenses, corporate                |       | (60,404                            | )          | (57,520                          | )          | (48,138                                    | )          | (4,180                                                         | )          |
| Total operating  income (loss)                                 |       | $                                  | 117,987    |                             | $          | 150,530                                    |       | $                                                              | 131,660    |   | $ | 9,424 |   |

 

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| **Assets as of**          | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
|---------------------------|------------|-----------------------|------------|---------------------|------------|
| Power                     |       | $                     | 88,672     |                | $          | 48,463 |   |
| Infrastructure            |       | 255,704               |       | 256,398             |       |
| Mining                    |       | 216,911               |       | 178,690             |       |
| Industrial/Process        |       | 141,674               |       | 168,138             |       |
| Defense                   |       | 112,990               |       | 125,042             |       |
| Energy &  Environment |       | 280,381               |       | 267,077             |       |
| Corporate and  other (a)  |       | 491,874               |       | 366,715             |       |
| Total assets              |       | $                     | 1,588,206  |                | $          | 1,410,523 |   |

 

----

(a)           Corporate and other assetsprincipally consist of cash and cash equivalents and deferred tax assets.

 
| **Capital expenditures**    | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  January 2,  2004** | ** ** | **Eleven months  ended  January 3,  2003** | ** ** | **(Predecessor Company)  One month  ended  February 1,  2002** | ** ** |
|-----------------------------|------------|------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------|------------|
| Power                       |       | $                                  | —     |                             | $          | 34                                         |       | $                                                              | 269        |   | $ | 15 |   |
| Infrastructure              |       | 20,022                             |       | 3,651                            |       | 3,424                                      |       | 296                                                            |       |
| Mining                      |       | 9,947                              |       | 3,715                            |       | 2,972                                      |       | 58                                                             |       |
| Industrial/Process          |       | 206                                |       | 303                              |       | 2,539                                      |       | 657                                                            |       |
| Defense                     |       | 8                                  |       | —                           |       | 113                                        |       | —                                                         |       |
| Energy &  Environment   |       | 1,507                              |       | 671                              |       | 6,068                                      |       | 1,474                                                          |       |
| Corporate and  other        |       | 3,527                              |       | 3,839                            |       | 7,572                                      |       | 1,403                                                          |       |
| Total capital  expenditures |       | $                                  | 35,217     |                             | $          | 12,213                                     |       | $                                                              | 22,957     |   | $ | 3,903 |   |

 
| **Depreciation**          | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  January 2,  2004** | ** ** | **Eleven months  ended  January 3,  2003** | ** ** | **(Predecessor Company)  One month  ended  February 1,  2002** | ** ** |
|---------------------------|------------|------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------|------------|
| Power                     |       | $                                  | 108        |                             | $          | 149                                        |       | $                                                              | 137        |   | $ | 12 |   |
| Infrastructure            |       | 5,906                              |       | 15,461                           |       | 34,505                                     |       | 2,971                                                          |       |
| Mining                    |       | 5,913                              |       | 6,314                            |       | 6,269                                      |       | 586                                                            |       |
| Industrial/Process        |       | 743                                |       | 1,168                            |       | 1,382                                      |       | 270                                                            |       |
| Defense                   |       | 59                                 |       | 103                              |       | 137                                        |       | 14                                                             |       |
| Energy &  Environment |       | 1,258                              |       | 1,667                            |       | 2,612                                      |       | 172                                                            |       |
| Corporate and  other      |       | 4,727                              |       | 6,507                            |       | 5,700                                      |       | 1,587                                                          |       |
| Total  depreciation       |       | $                                  | 18,714     |                             | $          | 31,369                                     |       | $                                                              | 50,742     |   | $ | 5,612 |   |

 

***Investmentsin unconsolidated affiliates***

 

At December 31, 2004 andJanuary 2, 2004, we had $179,347 and $145,144, respectively, in investmentsaccounted for by the equity method, primarily consisting of MIBRAG. Theseinvestments were held and reported primarily as part of the Mining businessunit.

 

***Geographicareas***

 

Geographic data regardingour revenue is shown below. Revenues are attributed to geographic locationsbased upon the primary location of work performed. Geographical disclosures oflong-lived assets are impracticable to prepare.

 

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| **Geographic data**  | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  January 2,  2004** | ** ** | **Eleven months  ended  January 3,  2003** | ** ** | **(Predecessor Company)  One month  ended  February 1,  2002** | ** ** |
|----------------------|------------|------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------|------------|
| Revenue              |       |                               |       |                             |       |                                       |       |                                                           |       |
| United States        |       | $                                  | 2,145,175  |                             | $          | 2,259,826                                  |       | $                                                              | 3,044,201  |   | $ | 321,885 |   |
| Iraq                 |       | 492,430                            |       | 39,129                           |       | —                                     |       | —                                                         |       |
| Other  international |       | 277,777                            |       | 202,196                          |       | 267,413                                    |       | 28,027                                                         |       |
| Total revenue        |       | $                                  | 2,915,382  |                             | $          | 2,501,151                                  |       | $                                                              | 3,311,614  |   | $ | 349,912 |   |

 

Revenue from otherinternational operations in all periods presented was in numerous geographicareas without significant concentration.

 

***Majorcustomers***

 

Ten percent or more ofour total revenues were derived from contracts and subcontracts performed bythe Power, Infrastructure, Industrial/Process, Defense, and Energy &Environment business units to the following customers for the periodspresented:

 
| ** **                  | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  January 2,  2004** | ** ** | **Eleven months  ended  January 3,  2003** | ** ** | **(Predecessor Company)  One month  ended  February 1,  2002** | ** ** |
|-----------------------------|------------|------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------|------------|
| U.S. Department  of Energy  |       | $                                  | 409,700    |                             | $          | 340,027                                    |       | $                                                              | 315,687    |   | $ | 26,938 |   |
| U.S. Department  of Defense |       | 1,086,034                          |       | 605,942                          |       | 748,656                                    |       | 84,745                                                         |       |
| Raytheon Company            |       | —                             |       | 129,296                          |       | 513,247                                    |       | 44,058                                                         |       |
|                             |            |                                    |            |                                  |            |                                            |            |                                                                |            |  |  |  |  |

** **

**13.  CONTINGENCIES AND COMMITMENTS**

 

***Contractrelated matters***

 

We have cost-typecontracts with the U.S. government that require the use of estimated annualrates for indirect costs. The estimated rates are analyzed periodically and adjustedbased on changes in the level of indirect costs we expect to incur and thevolume of work we expect to perform. The cumulative effect of changes toestimated rates is recorded in the period of the change. Additionally, theallowable indirect costs for U.S. government cost-type contracts are subject toadjustment upon audit by the U.S. government. To the extent that these auditsresult in determinations that costs claimed as reimbursable are not allowablecosts, or were not allocated in accordance with federal regulations, we couldbe required to reimburse the government for amounts previously received. Auditsby the U.S. government of indirect costs are substantially complete through2000. Audits of 2001 and 2002 indirect costs are in process.

 

U.S. Government CostAccounting Standards and other regulations also require that accountingchanges, as defined, be evaluated for potential impact to the amount ofindirect costs allocated to government contracts and that cost impactstatements be submitted to the U.S. government for audit. We have prepared andsubmitted cost impact statements for 1989 through 1998 that have been auditedby the U.S. government. We are currently negotiating the resolution of certainproposed audit adjustments to the cost impact statements. We are also in theprocess of preparing cost impact statements for 1999 through 2004.

 

While we have recordedreserves for amounts we believe are owed to the U.S. government under cost-typecontracts, actual results may differ from our estimates. We believe that theresults of the indirect cost audits, the resolution of the proposed auditadjustments related to the 1989 through 1998 cost impact statements, and the 

 

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final submission and audit of cost impact statements for 1999 through2004 will not have a material adverse effect on our financial position, resultsof operations or cash flows.

 

***Lettersof credit***

 

Inthe normal course of business, we cause letters of credit to be issued inconnection with contract performance obligations that are not required to bereflected in the accompanying consolidated balance sheets. We are obligated toreimburse the issuer of such letters of credit for any payments madethereunder. At December 31, 2004 and January 2, 2004, $157,881 and $175,417,respectively, in face amount of letters of credit were outstanding. We havepledged cash and cash equivalents as collateral for our reimbursementobligations with respect to $34,000 in face amount of letters of credit thatwere outstanding at December 31, 2004 not related to the New Credit Facility.At December 31, 2004, $123,881 of the outstanding letters of credit were issuedand outstanding under the New Credit Facility.

 

***Long-termleases***

 

Total rental and long-termlease payments for real estate and equipment charged to operations were $55,053for the year ended December 31, 2004, $51,724 for the year ended January 2,2004, $53,488 in the eleven months ended January 3, 2003 and $5,235 for themonth ended February 1, 2002. Future minimum rental payments under operatingleases, some of which contain renewal or escalation clauses, with remainingnoncancelable terms in excess of one year at December 31, 2004 were as follows:

 
| **Year ending**    | ** ** | **Real estate** | ** ** | **Equipment** | ** ** | **Total** | ** ** |
|--------------------|------------|-----------------|------------|---------------|------------|-----------|------------|
| December 30,  2005 |       | $               | 31,568     |          | $          | 4,535     |       | $ | 36,103 |   |
| December 29,  2006 |       | 29,068          |       | 3,485         |       | 32,553    |       |
| December 28,  2007 |       | 22,497          |       | 2,714         |       | 25,211    |       |
| January 2, 2009    |       | 12,258          |       | 1,264         |       | 13,522    |       |
| January 1, 2010    |       | 7,505           |       | 1,059         |       | 8,564     |       |
| Thereafter         |       | 17,594          |       | 2,053         |       | 19,647    |       |
| Totals             |       | $               | 120,490    |          | $          | 15,110    |       | $ | 135,600 |   |

 

Future minimum leasepayments as of December 31, 2004 have not been reduced by minimumnon-cancelable sublease rentals aggregating $5,934.

 

The above table does notinclude a seven year extension, signed in January 2005, for the Boise, Idahocorporate and business unit headquarters. The annual minimum lease cost will bean additional $3,145 for 2009 and 2010 and will be $15,723 thereafter.

 

***Guarantees***

 

We have guaranteed theindemnity obligations of the Westinghouse Businesses relating to the sale ofEMD to Curtiss-Wright Corporation for the potential occurrence of specifiedevents, including breaches of representations and warranties and/or failure toperform certain covenants or agreements. Generally, the indemnificationprovisions expire by October 2005 and are capped at $20,000. In addition, theindemnity provisions relating to environmental conditions obligate theWestinghouse Businesses to pay Curtiss-Wright Corporation up to a maximum$3,500 for environmental losses they incur over $5,000 until October 2007. TheWestinghouse Businesses are also responsible for environmental losses thatexceed $1,300 related to a specified parcel of the sold property throughOctober 2012. BNFL has agreed to indemnify us for 40% of losses we incur as aresult of our guarantee. We believe that the indemnification provisions willnot have a material adverse effect on our financial position, results ofoperations or cash flows.

 

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***LegalMatters***

 

***ERISA Litigation***.  Somecurrent and former officers, employees and directors of Washington Group werenamed defendants in an action filed in 1997 in the U.S. District Court for theDistrict of Idaho by two former participants in the Old MK 401(k) Plan and theOld MK Employee Stock Ownership Plan. The complaint alleged, among otherthings, that the defendants breached certain fiduciary duties under theEmployee Retirement Income Security Act of 1974 (“ERISA”). In October 2003, anagreement in principle was reached to settle the matter. The settlementincludes contributions from insurance carriers, the two plan trustees andWashington Group. In addition, the plaintiffs’ claim in our reorganization casehas been allowed and plaintiffs are entitled to participate in the distributionof shares of common stock and warrants to unsecured creditors. The two plantrustees and Washington Group guaranteed that the value of shares of commonstock and warrants, as defined, would be at least $1,425. To the extent thevalue of the shares and warrants exceed the specified amount, excess shares andwarrants are distributed to the trustees and us. In August 2004, the settlementwas approved by the trial court in which the class action was pending. Noappeal has been taken and therefore the trial court’s decision has become finaland non-appealable as of October 1, 2004. The settlement has also been approvedby the bankruptcy court that presides over our reorganization case resulting infinal settlement of this matter. A charge of $3,480 for settlement costs andlegal expenses related to this matter was included in other operating income inthe year ended January 2, 2004. During the fourth quarter of 2004,distributions of shares and warrants exceeded the minimum amount. Accordingly,we are entitled to receive common stock and warrants with a value of $1,443.The value of the common stock and warrants has been recorded as a reduction tothe previously recorded settlement charge.

 

***Tar Creek Litigation***. From the spring of 1996 through the springof 2001, we were the environmental remediation contractor for the U.S. ArmyCorps of Engineers (the “USACOE”) with respect to remediation at the Tar CreekSuperfund site at a former mining area in northeast Oklahoma. The USACOE hadcontracted with the U.S. Environmental Protection Agency (the “EPA”) to removelead contaminated soil in residential areas from more than 2,000 sites andreplace it with clean fill material. In February 2000, various federalinvestigators working with the U.S. Attorney’s Office for the Northern Districtof Oklahoma executed search warrants and seized records at the Tar Creekproject site. Allegations made at the time included claims that the project hadfalsified truck load tickets and had claimed compensation for more loads thanactually were hauled, or had indicated that full loads had been hauled whenpartial loads actually were carried, as well as claims that the project hadsought compensation for truckers and injured workers who were directed toremain at the job site, but not to work. Through claims filed in our bankruptcyproceedings and conversations with lawyers from the Civil Division of the U.S.Department of Justice, we learned that a *qui tam* lawsuitwas filed against us under the federal False Claims Act by private citizens(the relators), alleging fraudulent or false claims by us for payments wereceived in connection with the Tar Creek remediation project. In March 2004,the Department of Justice declined to intervene in this civil lawsuit, with theexception of four claims, which are stayed and remain under seal. The relatorsfiled an amended complaint in March 2004, which eliminated the four claims thathad been reserved to the government. We have moved to dismiss the relators’claims, and the Court has yet to rule on our motion to dismiss. Also, in April2004, we received a letter from the EPA’s Suspension and Debarment Divisionseeking information from us regarding the *qui tam*allegations, in order for the EPA to determine whether we were a responsiblecontractor. In October 2004, we were advised by the government that thecriminal investigation was concluded in September 2004 without any criminalprosecution. We believe that there was no wrongdoing by us or our employees atthis project. Based on the status of this matter, we cannot make an estimate ofpotential additional loss, if any.

 

***Litigation andInvestigation related to USAID Egyptian Projects***. In 2002, the Inspector General for the U.S.Agency for International Development (“USAID”) requested documentation aboutand made inquiries into the contractual relationships between one of our U.S.joint ventures and a local construction company in Egypt. The focus of theinquiry, which is ongoing, is whether the structure of our businessrelationship with the Egyptian company violated USAID contract regulations withrespect to source, origin and nationality requirements. In January 2004, weentered into an agreement with USAID whereby we agreed to undertake certaincompliance and training measures and USAID agreed that we are presentlyeligible for USAID contracts, including for host-country projects, and are notunder threat of suspension or debarment arising out of matters covered by the 

 

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USAID inquiry. We satisfactorily completedthat training effective November 22, 2004, and we are currently in goodstanding to bid all USAID projects.

 

We were notified by theDepartment of Justice in March 2003 that the U.S. government was consideringcivil litigation against us for potential violations of the USAID source,origin and nationality regulations in connection with five of ourUSAID-financed host-country projects located in Egypt beginning in 1996.Following that notification we responded to inquiries from the Department ofJustice and otherwise cooperated with the government’s investigation.  In November 2004, the government filed anaction in the U.S. District Court for the District of Idaho against us and thecompanies referred to above with respect to the Egyptian projects. The actionwas brought under the Federal False Claims Act, the Federal Foreign AssistanceAct of 1961, and common law theories of payment by mistake and unjustenrichment. The complaint seeks damages and civil penalties for violations ofthe statutes and asserts that the government is entitled to a refund of allamounts paid to us and the other defendants under the specified contracts. Thegovernment alleges that approximately $373,000 was paid under those contracts.We have been in discussions and mediation with the government concerning thesematters for an extended period of time, although no resolution of the matterhas been reached.  During this period,the litigation has been stayed by agreement of the parties until early April2005.  We continue to dispute thegovernment’s damages allegations and its entitlement to any recovery. We intendto vigorously defend against the allegations and claims in the litigation andto pursue continued discussions with the government.

 

Our joint venture for one ofthe five projects referred to above has brought arbitration proceedings beforean arbitral tribunal in Egypt in which it has asserted a claim for additionalcompensation for the construction of water and wastewater treatment facilitiesin Egypt. The project owner, an Egyptian government agency, has asserted in acounterclaim that, by reason of alleged violations of the USAID source, originand nationality regulations and alleged violations of Egyptian law, our jointventure should forfeit its claim, and pay damages of approximately $6,000 andthe owner’s costs of defending against the joint venture’s claims.

 

Based on our assessment ofthese matters, we recorded a charge of $8,200 in the fourth quarter of 2004. Wecannot make an estimate of potential additional loss, if any.

 

***General Litigation***.  Inaddition to the foregoing, there are other claims, lawsuits, disputes withthird parties, investigations and administrative proceedings against usrelating to matters in the ordinary course of our business activities that wedo not expect to have a material adverse effect on our financial position,results of operations or cash flows. Government contracts are subject tospecific procurement regulations, contract provisions and a variety of otherrequirements relating to the formation, administration, performance andaccounting for these contracts. As a result of our government contracting,claims for civil or criminal fraud may be brought by the government for violationsof those regulations, requirements and statutes.

 

**14.  SUPPLEMENTAL CASH FLOW INFORMATION**

 
| ** **                                                                                                     | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  January 2,  2004** | ** ** | **Eleven months  ended  January 3,  2003** | ** ** | **(Predecessor Company)  One month  ended  February 1,  2002** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------|------------|
| Supplemental  cash flow information                                                                            |       |                               |       |                             |       |                                       |       |                                                           |       |
| Interest paid                                                                                                  |       | $                                  | 12,121     |                             | $          | 14,285                                     |       | $                                                              | 15,874     |   | $ | 451 |   |
| Income taxes  paid, net                                                                                        |       | 7,411                              |       | 5,725                            |       | 2,646                                      |       | 975                                                            |       |
| Supplemental  non-cash investing activities                                                                    |       |                               |       |                             |       |                                       |       |                                                           |       |   |   |   |   |
| Adjustment to  investment in foreign subsidiaries for cumulative translation adjustments,  net of income taxes |       | $                                  | 9,348      |                             | $          | 15,844                                     |       | $                                                              | 9,652      |   | $ | 80 |   |

 

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**15.  COMPREHENSIVE INCOME (LOSS)**

 

Comprehensive income(loss) for the periods ended December 31, 2004, January 2, 2004, January 3,2003 and February 1, 2002 (Predecessor Company) was as follows:

 
| ** **                                                       | ** ** | **Before-tax  amount** | ** ** | **Tax (expense)  or benefit** | ** ** | **Net-of-tax  amount** | ** ** |
|------------------------------------------------------------------|------------|------------------------|------------|-------------------------------|------------|------------------------|------------|
| **Year  ended December 31, 2004**                                |       |                   |       |                          |       |                   |       |
| Foreign currency  translation adjustments                        |       | $                      | 14,381     |                          | $          | (5,033                 | )          | $ | 9,348 |   |
| Minimum pension  liability adjustment, and other                 |       | (1,645                 | )          | 654                           |       | (991                   | )          |
| Other  comprehensive income                                      |       | $                      | 12,736     |                          | $          | (4,379                 | )          | $ | 8,357 |   |
| **Year  ended January 2, 2004**                                  |       |                   |       |                          |       |                   |       |
| Foreign currency  translation adjustments                        |       | $                      | 24,376     |                          | $          | (8,532                 | )          | $ | 15,844 |   |
| Minimum pension  liability adjustment, net of minority interests |       | (1,890                 | )          | 736                           |       | (1,154                 | )          |
| Other  comprehensive income                                      |       | $                      | 22,486     |                          | $          | (7,796                 | )          | $ | 14,690 |   |
| **Eleven  months ended January 3, 2003**                         |       |                   |       |                          |       |                   |       |
| Foreign currency  translation adjustments                        |       | $                      | 14,849     |                          | $          | (5,197                 | )          | $ | 9,652 |   |
| Minimum pension  liability adjustment, net of minority interests |       | (992                   | )          | 389                           |       | (603                   | )          |
| Other  comprehensive income                                      |       | $                      | 13,857     |                          | $          | (4,808                 | )          | $ | 9,049 |   |
| **One  month ended February 1, 2002**                            |       |                   |       |                          |       |                   |       |
| Foreign currency  translation adjustments                        |       | $                      | 123        |                          | $          | (43                    | )          | $ | 80 |   |
| Amounts  reclassified to net income in fresh-start reporting     |       | 31,038                 |       | (10,770                       | )          | 20,268                 |       |
| Other  comprehensive income                                      |       | $                      | 31,161     |                          | $          | (10,813                | )          | $ | 20,348 |   |

 

The accumulated balancesrelated to each component of other comprehensive income (loss) were as follows:

 
| ** **                         | ** ** | **Foreign  currency  items** | ** ** | **Unrealized  gains (losses)  on securities** | ** ** | **Minimum  pension  liability  adjustment** | ** ** | **Accumulated  other  comprehensive  income (loss)** | ** ** |
|------------------------------------|------------|------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|------------------------------------------------------|------------|
| Balance at  December 28, 2001      |       | $                            | (15,718    | )                                             | $          | —                                      |       | $                                                    | (4,630     | ) | $ | (20,348 | ) |
| Other  comprehensive income        |       | 15,718                       |       | —                                        |       | 4,630                                       |       | 20,348                                               |       |
| Balance at  February 1, 2002       |       | —                       |       | —                                        |       | —                                      |       | —                                               |       |
| Other  comprehensive income (loss) |       | 9,652                        |       | —                                        |       | (603                                        | )          | 9,049                                                |       |
| Balance at  January 3, 2003        |       | 9,652                        |       | —                                        |       | (603                                        | )          | 9,049                                                |       |
| Other  comprehensive income (loss) |       | 15,844                       |       | —                                        |       | (1,154                                      | )          | 14,690                                               |       |
| Balance at  January 2, 2004        |       | 25,496                       |       | —                                        |       | (1,757                                      | )          | 23,739                                               |       |
| Other  comprehensive income (loss) |       | 9,348                        |       | 207                                           |       | (1,198                                      | )          | 8,357                                                |       |
| Balance at  December 31, 2004      |       | $                            | 34,844     |                                          | $          | 207                                         |       | $                                                    | (2,955     | ) | $ | 32,096 |   |

 

**16.  CAPITAL STOCK, STOCK PURCHASE WARRANTS ANDSTOCK COMPENSATION PLANS**

 

As discussed in Note 3, “Acquisition,Reorganization Case and Fresh-start Reporting,” our Plan of Reorganizationcanceled all of the then outstanding shares of capital stock, stock purchasewarrants and stock options as of January 25, 2002, and new capital stock, stockpurchase warrants and stock options were issued.

 

***Capitalstock***

 

Pursuant to ourcertificate of incorporation, we have the authority to issue 100,000 shares ofcommon stock and 10,000 shares of preferred stock. Preferred stock can beissued at any time or from time to time in one or 

 

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more series with suchdesignations, powers, preferences and rights, qualifications, limitations andrestrictions thereon as determined by our board of directors.

 

***Stockpurchase warrants***

 

At December 31, 2004, wehad outstanding warrants giving rights to acquire 8,378 shares of our commonstock. The warrants were issued in connection with our Plan of Reorganizationto unsecured creditors in three tranches as follows:

 

Tranche A -3,035 shares at an exercise price of $28.50 per share

Tranche B -3,468 shares at an exercise price of $31.74 per share

Tranche C -1,875 shares at an exercise price of $33.51 per share

 

All of the above warrantswill expire in January 2006.

 

***Stockcompensation plans***

 

Washington GroupInternational, Inc.’s Equity and Performance Incentive Plan (the “2002 Plan”)became effective January 25, 2002 upon our emergence from bankruptcy. Anamended and restated version of the 2002 Plan was approved at our annualmeeting of stockholders on May 9, 2003. Under the 2002 Plan, our board ofdirectors may approve the award of option rights, appreciation rights,performance units, performance shares, restricted shares, deferred shares orother awards to directors, officers and key employees and option rights andrestricted shares to directors for us and our subsidiaries. Our common sharesavailable under the 2002 Plan shall not exceed 6,002 shares. Awards are subjectto terms and conditions determined by our board of directors. All stock optionsissued under the 2002 Plan must have an exercise price equal to or greater thanthe fair value of our common stock on the date the stock option is granted.Re-pricing of stock options is prohibited without stockholder approval. As ofDecember 31, 2004, only option rights and performance units have been awardedunder the 2002 Plan.

 

On May 7, 2004, ourstockholders approved the Washington Group International Inc. 2004 EquityIncentive Plan (the “2004 Plan”), which provides for additional shares underthe long-term incentive program (“LTIP”). The 2004 Plan allows our board ofdirectors to award various types of rights related to our stock, includingoptions to purchase stock, appreciation rights, restricted stock, and deferredstock. Persons eligible to receive awards under the 2004 Plan include officers,key employees and directors of the company. The 2004 Plan provides a fixedlimit of 2,400 shares of which no more than 400 may be issued in connectionwith awards other than stock options and appreciation rights. All stock optionsissued under the 2004 Plan must have an exercise price equal to or greater thanthe fair value of our common stock on the date the stock option is granted.Repricing of stock options is prohibited without stockholder approval. As ofDecember 31, 2004, only option rights and deferred stock have been awardedunder the 2004 Plan.

 

***Long-termincentive program***

 

We have an LTIP designedto provide long-term incentives to executives to increase stockholder value.The LTIP consists of nonqualified fixed-price stock options and performanceunit awards granted under the 2002 Plan and the 2004 Plan, annually. The LTIPlinks a portion of compensation to stockholder value and utilizes vestingperiods to encourage participating executives to continue in our employ. Thesize and timing of awards are determined by the compensation committee of theboard of directors.

 

From January 25, 2002through December 31, 2004, specified members of management, designatedemployees and our board of directors (other than the chairman) were grantednonqualified stock options to purchase an aggregate total of 3,308 shares ofthe common stock, subject to dilution, with terms of ten years and exerciseprices determined at the market prices on the dates of grant, ranging from$13.40 to $38.72 per share. Options granted in 2002 vested one-third on thedate of grant, one-third on the first anniversary of the date of 

 

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grant and the final third on the second anniversary of the date ofgrant. Options granted after 2002 vest one-third on the first anniversary ofthe date of grant, one-third on the second anniversary of the date of grant andthe final third on the third anniversary of the date of grant. The vestingperiod for future grants will be determined by the compensation committee ofour board of directors.

 

On January 25, 2002, thechairman of our board of directors, Mr. Dennis R. Washington, was granted stockoptions to purchase shares of common stock in three tranches. The first tranchewas to expire five years after the Effective Date of our Plan ofReorganization. The remaining tranches were to expire four years after theEffective Date. One-third of each tranche vested on the Effective Date, anadditional one-third of each tranche vested on the first anniversary of theEffective Date and the final third of each tranche vested on the secondanniversary of the Effective Date, January 25, 2004. As consideration for anadditional three years of service as chairman of our board of directors, Mr.Washington’s stock options were amended in November 2003 extending theexpiration dates on all three tranches to ten years from the original date ofgrant, or January 25, 2012. As a result of this extension, we recordedcompensation expense of $784 and $6,174 during the years ended December 31,2004 and January 2, 2004, respectively, as general administrative expenses andas an increase to additional paid-in capital. The number of shares andrespective exercise prices for each tranche are as follows:

 
| ** ** | ** ** | **Number of shares** | ** ** | **Exercise price per share** | ** ** |
|------------|------------|----------------------|------------|------------------------------|------------|
| Tranche A  |       | 1,389                |       | $                            | 24.00      |   |
| Tranche B  |       | 882                  |       | $                            | 31.74      |   |
| Tranche C  |       | 953                  |       | $                            | 33.51      |   |

 

Option and award activityunder our stock plans is summarized as follows:

 
| **Number of options**                          | ** ** | **Outstanding at  beginning of period** | ** ** | **Granted** | ** ** | **Canceled** | ** ** | **Exercised** | ** ** | **Outstanding at  end of period** | ** ** |
|------------------------------------------------|------------|-----------------------------------------|------------|-------------|------------|--------------|------------|---------------|------------|-----------------------------------|------------|
| Year ended  December 31, 2004                  |       | 5,563                                   |       | 837         |       | (66          | )          | (329          | )          | 6,005                             |       |
| Year ended  January 2, 2004                    |       | 5,033                                   |       | 652         |       | (76          | )          | (46           | )          | 5,563                             |       |
| Eleven months  ended January 3, 2003           |       | 4,417                                   |       | 626         |       | (10          | )          | —        |       | 5,033                             |       |
| Options issued  upon emergence from bankruptcy |       | —                                  |       | 4,417       |       | —       |       | —        |       | 4,417                             |       |
| **Predecessor  Company**                       |       |                                    |       |        |       |         |       |          |       |                              |       |
| One month ended  February 1, 2002              |       | 7,390                                   |       | —      |       | (7,390       | )          | —        |       | —                            |       |
|                                           |       |                                    |       |        |       |         |       |          |       |                              |       |
| **Weighted-average  exercise prices**          |       |                                    |       |        |       |         |       |          |       |                              |       |
| Year ended  December 31, 2004                  |       | $                                       | 25.52      |        | $          | 34.82        |       | $             | 21.30      |                              | $          | 21.62 |   | $ | 27.17 |   |
| Year ended  January 2, 2004                    |       | 26.62                                   |       | 16.18       |       | 19.47        |       | 23.13         |       | 25.52                             |       |
| Eleven months  ended January 3, 2003           |       | 27.60                                   |       | 19.65       |       | 24.00        |       | —        |       | 26.62                             |       |
| Options issued  upon emergence from bankruptcy |       | —                                  |       | 27.60       |       | —       |       | —        |       | 27.60                             |       |
| **Predecessor  Company**                       |       |                                    |       |        |       |         |       |          |       |                              |       |
| One month ended  February 1, 2002              |       | 8.72                                    |       | —      |       | 8.72         |       | —        |       | —                            |       |
|                                                |            |                                         |            |             |            |              |            |               |            |                                   |            |  |  |  |  |  |

 
| **Number of options and awards**               | ** ** | **Options Exercisable  at end of period** | ** ** | **Stock  Awards** | ** ** | **Shares available  for grant** | ** ** |
|------------------------------------------------|------------|-------------------------------------------|------------|-------------------|------------|---------------------------------|------------|
| Year ended  December 31, 2004                  |       | 4,777                                     |       | 16                |       | 2,006                           |       |
| Year ended  January 2, 2004                    |       | 3,323                                     |       | —            |       | 393                             |       |
| Eleven months  ended January 3, 2003           |       | 1,688                                     |       | —            |       | 969                             |       |
| Options issued  upon emergence from bankruptcy |       | 1,486                                     |       | —            |       | 1,585                           |       |
| **Predecessor  Company**                       |       |                                      |       |              |       |                            |       |
| One month ended  February 1, 2002              |       | —                                    |       | —            |       | —                          |       |

 

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| **Weighted-average exercise price  of vested options** | ** ** | **Exercisable at  end of period** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------|------------|
| Year ended  December 31, 2004                          |       | $                                 | 26.62      |   |
| Year ended  January 2, 2004                            |       | 26.67                             |       |
| Year ended  January 3, 2003                            |       | 26.60                             |       |
| Options issued  upon emergence from bankruptcy         |       | 27.56                             |       |
| **Predecessor  Company**                               |       |                              |       |
| One month ended  February 1, 2002                      |       | —                            |       |
|                                                        |            |                                   |            |  |

 

On February 9, 2005, anadditional 382 options to purchase common shares were granted at an exerciseprice of $42.25 per share.  In addition,124 shares of restricted shares were awarded to key employees under the 2004Plan.

 

Beginning in 2003,performance units are awarded annually and mature at the end of theirthree-year performance period. The value of each performance unit will becalculated at the end of the three-year performance period to which it relates,based on performance results relative to predetermined corporate financialgoals. At the end of each three-year period, the value of mature performanceunits generally will be paid in cash provided the threshold performance metricshave been achieved. Certain executives who are subject to stock ownershipguidelines may elect to have the value of mature performance units paid instock to the extent necessary to satisfy those guidelines. During 2004 and2003, $6,316 and $2,563 was recorded as compensation related to the performanceunits based on financial performance.

 

***Stock-basedcompensation***

 

We adopted thedisclosure-only provisions of SFAS No. 123. Accordingly, compensation cost hasbeen recorded based only on the intrinsic value of the options granted. Nosignificant compensation cost was recognized for the eleven months endedJanuary 3, 2003 or the one month ended February 1, 2002. We recognized $1,164and $6,174 of compensation cost during the years ended December 31, 2004 andJanuary 2, 2004, respectively, for stock-based compensation awards. If we hadelected to recognize compensation cost based on the fair value of the optionsgranted at grant date as prescribed by SFAS No. 123, net income (loss) wouldhave been adjusted to the pro forma amounts as disclosed in Note 1, “SignificantAccounting Policies.”

 

The Black-Scholes optionvaluation model was used to estimate the fair value of the options for purposesof the pro forma presentation set forth in Note 1, “Significant AccountingPolicies.”

 

The following assumptionswere used in the valuation and no dividends were assumed:

 
| ** **                                         | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  January 2,  2004** | ** ** | **Eleven months ended  January 3,  2003** | ** ** |
|----------------------------------------------------|------------|------------------------------------|------------|----------------------------------|------------|-------------------------------------------|------------|
| Average expected  life (years)                     |       | 6                                  |       | 6                                |       | 5                                         |       |
| Expected  volatility                               |       | 39.9                               | %          | 40.2                             | %          | 42.3                                      | %          |
| Risk-free interest  rate                           |       | 4.0                                | %          | 4.6                              | %          | 5.0                                       | %          |
| Weighted-average  fair value:                      |       |                               |       |                             |       |                                      |       |
| Exercise price  greater than market price at grant |       | $                                  | —     |                             | $          | —                                    |       | $ | 8.00 |   |
| Exercise price  equal to market price at grant     |       | 15.93                              |       | 7.48                             |       | 8.65                                      |       |
| Exercise price  less than market price at grant    |       | —                             |       | —                           |       | —                                    |       |
|                                                    |            |                                    |            |                                  |            |                                           |            |  |  |  |

 

The assumptions used inthe Black-Scholes option valuation model are highly subjective, particularly asto stock price volatility of the underlying stock, and can materially affectthe resulting valuation.

 

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The following tablesummarizes information regarding options that were outstanding at December 31,2004:

 
| ** **      | ** ** | **Options outstanding** | ** ** | **Options exercisable**              | ** ** |
|-----------------|------------|-------------------------|------------|--------------------------------------|------------|
| ** **      | ** ** | **Number**              | ** ** | **Weighted-average  exercise price** | ** ** | **Weighted-average  remaining  contractual life (years)** | ** ** | ** ** |
| ** **      | ** ** | ** **              | ** ** | ** **                           | **Number** | ** ** | **Weighted-average  exercise price** | ** ** |
| **Price range** | ** ** | ** **              | ** ** | ** **                           | ** ** | ** ** |
| Below $24.00    |       | 890                     |       | $                                    | 16.70      |   | 7.91 |   | 507 |   | $ | 17.31 |   |
| $24.00 - $29.01 |       | 2,448                   |       | 24.03                                |       | 7.03 |   | 2,435 |   | 24.01 |   |
| $29.02 - $33.51 |       | 1,838                   |       | 32.66                                |       | 7.07 |   | 1,835 |   | 32.66 |   |
| Above $33.51    |       | 829                     |       | 35.52                                |       | 9.13 |   | — |   | — |   |
|                 |            |                         |            |                                      |            |  |  |  |  |  |  |  |  |

 

***Stockholderrights plan***

 

On June 21, 2002, ourboard of directors adopted a stockholder rights plan under which we issue oneright for each outstanding share of our common stock. The rights expire in 2012unless they are earlier redeemed, exchanged or amended by the board ofdirectors. The board also adopted a Three-Year Independent Director Evaluation(“TIDE”) policy with respect to the plan. Under the TIDE policy, a committeecomprised solely of independent directors will review the plan at least onceevery three years to determine whether to modify the plan in light of allrelevant factors.

 

The rights initiallytrade together with our common stock and are not exercisable until 10 daysafter the earlier of a public announcement that a person or group has acquiredbeneficial ownership of 15% or more, with certain exceptions, of our commonstock or the commencement of, or public announcement of an intent to commence,a tender or exchange offer which, if successful, would result in the offeroracquiring 15% or more of our common stock. Once exercisable, each right wouldseparate from the common stock and be separately tradeable.

 

If a person or groupacquires beneficial ownership of 15% or more, with certain exceptions, of ourcommon stock, or if we are acquired in a merger or other business combination,each right then exercisable would entitle its holder to purchase, at theexercise price of $125 per right, shares of our common stock, or the survivingcompany’s stock if we are not the surviving company, with a market value equalto twice the right’s exercise price.

 

We may redeem the rightsfor $.01 per right until the rights become exercisable. We also may exchangeeach right for one share of common stock or an equivalent security until anacquiring person or group owns 50% or more of the outstanding common stock.

 

The rights are notconsidered to be common stock equivalents because there is no indication thatany event will occur that would cause them to become exercisable.

 

**17.  AGREEMENT TO ACQUIRE BNFL’S INTEREST INWESTINGHOUSE BUSINESSES**

 

On August 25, 2004, weentered into an agreement to acquire BNFL’s 40% economic interest in theWestinghouse Businesses, effective July 31, 2004. The Westinghouse Businessesmanage highly complex facilities and programs for the U.S. Department of Energy(“DoE”) and Department of Defense (“DoD”) and provide engineering,construction, management, and risk-analysis services for a variety ofgovernmental markets.  Under the terms ofthe agreement, we will control the Westinghouse Businesses and will generallypay BNFL 40% of net future profits from certain existing contracts and onfuture Washington Group contracts, if any, at certain DoE sites and one DoDsite (the “40% Legacy Contracts”), and 10% of the profits from all otherexisting operations and future contracts with the DoE through September 30,2012 (the “10% Contracts”).  BNFL willnot share in any losses related to 10% Contracts if they occur in the future,but will retain its portion of liabilities incurred prior to July 31, 2004. Theacquisition is currently subject to compliance with the Hart-Scott-RodinoAntitrust Act (the “HSR Act”). The acquisition will be exempt from the HSR Actunder rules recently adopted by the Federal Trade Commission that will becomeeffective on April 7, 2005.

 

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Foraccounting purposes, the agreement will be bifurcated between the 40% LegacyContracts and the 10% Contracts. Since BNFL currently has a 40% economicinterest in the 40% Legacy Contracts and will continue to receive 40% of thenet profits from such contracts, in substance there will be no change in theeconomic relationship of the parties and therefore payments to BNFL for theirshare of the cash flows from the 40% Legacy Contracts will not be recorded asconsideration for the acquisition of a minority interest. Currently, BNFL’sportion of the earnings related to the 40% Legacy Contracts is classified onthe statement of income as minority interest in income of consolidatedsubsidiaries. BNFL’s portion of the cash flows related to the 40% LegacyContracts is classified on the statement of cash flows as a financing activityas distributions to minority interests. After the transaction becomeseffective, BNFL’s share of the earnings related to the 40% Legacy Contractswill be classified as cost of revenue and BNFL’s share of the cash flowsrelated to the 40% Legacy Contracts will be classified as an operatingactivity.

 

Paymentsto BNFL for the 10% Contracts will be treated as consideration for theacquisition of a minority interest and will be recorded using the purchasemethod of accounting. The acquired interest in assets and assumed liabilitieswill be recorded at estimated fair value. We do not expect that the fair valuesof assets and liabilities will differ significantly from currently recordedbalances, except for goodwill. To the extent the fair value of assets acquiredexceeds liabilities assumed, contingent consideration will be recorded at thedate of acquisition. If future payments for the 10% Contracts exceed the amountof initial contingent consideration recorded, the excess payments will berecorded as goodwill.

 

Ona pro forma basis, assuming the acquisition was effective as of December 31,2004, significant impacts on the balance sheet would include: (i) eliminationof minority interest of approximately $41,600 related to BNFL’s currentinterest in the Westinghouse Businesses, (ii) elimination of approximately $64,100of goodwill currently recorded, and (iii) recording a receivable from BNFL forits portion of liabilities retained consisting primarily of pensionliabilities. We do not anticipate that the acquisition will have a significantimpact on our results of operations and cash flows except for theclassification of BNFL’s portion of the earnings and payments for the 40%Legacy Contracts as explained above.

 

**18.  FINANCIAL INSTRUMENTS**

 

The estimated fair valuesof financial instruments at December 31, 2004 and January 2, 2004 weredetermined, using available market information and valuation methodologiesbelieved to be appropriate. However, judgment is necessary in interpretingmarket data to develop the estimates of fair values. Accordingly, the estimatespresented herein are not necessarily indicative of the amounts that we couldrealize in a current market exchange. The use of different market assumptionsand/or estimation methodologies could have a material effect on the estimatedfair value amounts.

 

The carrying amounts andestimated fair values of certain financial instruments at December 31, 2004 andJanuary 2, 2004 were as follows:

 
| ** **                 | ** ** | **December 31, 2004** | ** ** | **January 2, 2004** | ** ** |
|----------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                 | ** ** | **Carrying  Amount**  | ** ** | **Fair  value**     | ** ** | **Carrying  amount** | ** ** | **Fair  value** | ** ** |
| **Financial  assets**      |       |                  |       |                |       |   |   |   |   |
| Customer  retentions       |       | $                     | 14,973     |                | $          | 14,587 |   | $ | 13,663 |   | $ | 13,277 |   |
| **Financial  liabilities** |       |                  |       |                |       |   |   |   |   |
| Subcontract  retentions    |       | 30,154                |       | 29,377              |       | 21,184 |   | 20,585 |   |
|                            |            |                       |            |                     |            |  |  |  |  |  |  |  |  |

 

The fair value ofcustomer retentions and subcontract retentions was estimated by discountingexpected cash flows at rates currently available to us for instruments withsimilar risks and maturities. The fair value of other financial instrumentsincluding cash and cash equivalents, short-term investments, accountsreceivable excluding customer retentions, unbilled receivables and accounts andsubcontracts payable excluding retentions approximate cost because of theimmediate or short-term maturity.

 

II-83

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**QUARTERLY FINANCIAL DATA**

*(In millions except per sharedata)*

**UNAUDITED**

 

Selected quarterlyfinancial data for the years ended December 31, 2004 and January 2, 2004 ispresented below.

 
| **2004 Quarters ended** | ** ** | **April 2,  2004** | ** ** | **July 2,  2004** | ** ** | **October 1,  2004** | ** ** | **December 31,  2004** | ** ** |
|-------------------------|------------|--------------------|------------|-------------------|------------|----------------------|------------|------------------------|------------|
| Revenue                 |       | $                  | 754.2      |              | $          | 684.5                |       | $                      | 715.3      |   | $ | 761.4 |   |
| Gross profit            |       | 37.4               |       | 37.7              |       | 39.0                 |       | 35.9                   |       |
| Reorganization  items   |       | —             |       | 1.2               |       | —               |       | —                 |       |
| Net income              |       | 13.1               |       | 13.3              |       | 12.2                 |       | 12.5                   |       |
| Income per  share:      |       |               |       |              |       |                 |       |                   |       |
| Basic                   |       | .52                |       | .53               |       | .48                  |       | .49                    |       |
| Diluted                 |       | .47                |       | .49               |       | .45                  |       | .45                    |       |
| Market price            |       |               |       |              |       |                 |       |                   |       |
| High                    |       |               | 40.20      |              |       | 38.40                |       |                   | 36.50      |   |   | 41.34 |   |
| Low                     |       | 32.57              |       | 31.47             |       | 30.75                |       | 31.40                  |       |

 

 
| **2003 Quarters ended** | ** ** | **April 4,  2003** | ** ** | **July 4,  2003** | ** ** | **October 3,  2003** | ** ** | **January 2,  2004** | ** ** |
|-------------------------|------------|--------------------|------------|-------------------|------------|----------------------|------------|----------------------|------------|
| Revenue                 |       | $                  | 657.5      |              | $          | 634.7                |       | $                    | 588.1      |   | $ | 620.9 |   |
| Gross profit            |       | 37.5               |       | 47.7              |       | 53.8                 |       | 37.3                 |       |
| Reorganization  items   |       | —             |       | (3.7              | )          | —               |       | (1.2                 | )          |
| Net income              |       | 12.8               |       | 14.3              |       | 12.8                 |       | 2.2                  |       |
| Income per  share:      |       |               |       |              |       |                 |       |                 |       |
| Basic                   |       | .51                |       | .57               |       | .51                  |       | .09                  |       |
| Diluted                 |       | .51                |       | .57               |       | .51                  |       | .09                  |       |
| Market price            |       |               |       |              |       |                 |       |                 |       |
| High                    |       | 17.75              |       |              | 23.15      |                 |       | 27.95                |       |   | 34.33 |   |
| Low                     |       | 14.35              |       | 17.38             |       | 21.59                |       | 26.85                |       |
|                         |            |                    |            |                   |            |                      |            |                      |            |  |  |  |  |

 

 

**ITEM 9.****                             CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING****AND FINANCIAL DISCLOSURE**

## ** **

During the fiscal yearsended December 31, 2004 and January 2, 2004, there were no changes in, or disagreementswith, accountants on accounting and financial disclosure matters.

 

**ITEM 9A.****                    CONTROLSAND PROCEDURES**

 

***Evaluationof our Disclosure Controls and disclosure of changes to Internal Control overFinancial Reporting.***

 

We maintain a set ofdisclosure controls and procedures designed to ensure that information requiredto be disclosed by us in reports that we file or submit under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in Securities and Exchange Commission (“SEC”) rules andforms. As of the date of the financial statements, an evaluation was carriedout under the supervision and with the participation of our management,including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”),of the effectiveness of our disclosure controls and procedures. Based on thatevaluation, the CEO and CFO have concluded that our disclosure controls andprocedures are effective.

 

II-84

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•                  ***CEO and CFO certificates***

 

Attachedas Exhibits 31.1 and 31.2 to this report on Form 10-K are two certifications,one each by the CEO and the CFO. They are required in accordance with Rule13a-14 of the Exchange Act. This Item 9A, *Controls and Procedures,*includes the information concerning the controls evaluation referred to in thecertifications and should be read in conjunction with the certifications.

 

•                  ***Disclosure controls***

 

“DisclosureControls” are controls and procedures that are designed to reasonably ensurethat information required to be disclosed in our reports filed under theSecurities Exchange Act of 1934, such as this report on Form 10-K, is recorded,processed, summarized and reported within the time periods specified in the SECrules and forms. Disclosure Controls are also designed to ensure thatinformation required to be disclosed is accumulated and communicated to ourmanagement, including our CEO and CFO.

 

•                  ***Internal controls over financial reporting***

 

OurDisclosure Controls include components of our “Internal Control over FinancialReporting.” Internal Control over Financial Reporting is a process designed by,or under the supervision of our principal executive and principal financialofficers, and effected by our board of directors, management and otherpersonnel, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles andincludes those policies and procedures that:

 

•                  Pertainto the maintenance of records that in reasonable detail accurately and fairlyreflect the transactions and dispositions of our assets;

•                  Providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that our receipts and expenditures are being madeonly in accordance with authorizations of our management and directors; and

•                  Providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of our assets that could have a material effecton the financial statements.

 

•                  ***Limitations on the effectiveness of controls***

 

Ourmanagement, including the CEO and CFO, does not expect that our DisclosureControls and/or our Internal Control over Financial Reporting will prevent ordetect all error or fraud. A system of controls is able to provide onlyreasonable, not complete, assurance that the control objectives are being met,no matter how extensive those control systems may be. Also, control systemsmust be established considering the benefits of a control system relative toits costs. Because of these inherent limitations that exist in all control systems,no evaluation of controls can provide absolute assurance that all errors orfraud, if any, have been detected. The inherent limitations in control systemsinclude various human and system factors that may include errors in judgment orinterpretation regarding events or circumstances or inadvertent error.Additionally, controls can be circumvented by the acts of a single person, bycollusion on the part of two or more people or by management override of thecontrol. Over time, controls can also become ineffective as conditions,circumstances, policies, technologies, level of compliance and people change.Because of such inherent limitations, in any cost-effective control system overfinancial information, misstatements may occur due to error or fraud and maynot be detected.

 

II-85

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•                  ***Scope of evaluation of Disclosure Controls***

 

Theevaluation of our Disclosure Controls performed by our CEO and CFO includedobtaining an understanding of the design and objective of the controls, theimplementation of those controls and the results of the controls on this reporton Form 10-K. We have established a Disclosure Committee whose duty is toperform procedures to evaluate the Disclosure Controls and provide the CEO and CFOwith the results of their evaluation as part of the information considered bythe CEO and CFO in their evaluation of Disclosure Controls. In the course ofthe evaluation of Disclosure Controls, we reviewed the controls that are inplace to record, process, summarize and report, on a timely basis, matters thatrequire disclosure in our reports filed under the Securities Exchange Act of1934. We also considered the adequacy of the items disclosed in this report onForm 10-K.

 

•                  ***Conclusions***

 

Basedupon the evaluation of Disclosure Controls described above, our CEO and CFOhave concluded that, subject to the limitations described above, our DisclosureControls are effective to provide reasonable assurance that materialinformation relating to Washington Group International, Inc. and itsconsolidated subsidiaries is made known to management, including the CEO andCFO, so that required disclosures have been included in this report on Form10-K.

 

Wehave also reviewed our internal control over financial reporting during themost recent fiscal quarter, and our CEO and CFO have concluded that there havebeen no changes that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

***Management’sAnnual Report on Internal Control Over Financial Reporting***

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting.  Under thesupervision and with the participation of our management, including our CEO andour CFO, we conducted an evaluation of the effectiveness of our internalcontrol over financial reporting based on the framework in *InternalControl — Integrated Framework*, issued by the Committee ofSponsoring Organizations of the Treadway Commission.  Based on our evaluation under the frameworkin *Internal Control — Integrated Framework*,our management concluded that our internal control over financial reporting waseffective as of December 31, 2004.

 

Our independentregistered public accountants, Deloitte & Touche, LLP, have audited ourmanagement’s assessment of internal control over financial reporting as ofDecember 31, 2004, as stated in their attestation report which is includedherein.

 

II-86

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors and Stockholders ofWashington Group International, Inc.

 

Wehave audited management’s assessment, included in the accompanying Management’sAnnual Report on Internal Control Over Financial Reporting, that WashingtonGroup International, Inc. and subsidiaries (the “Company”) maintained effectiveinternal control over financial reporting as of December 31, 2004, based oncriteria established in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission.  The Company’s management isresponsible for maintaining effective internal control over financial reportingand for its assessment of the effectiveness of internal control over financialreporting.  Our responsibility is to express an opinion on management’sassessment and an opinion on the effectiveness of the Company’s internalcontrol over financial reporting based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States).  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internalcontrol over financial reporting, evaluating management’s assessment, testingand evaluating the design and operating effectiveness of internal control, andperforming such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis forour opinions.

 

Acompany’s internal control over financial reporting is a process designed by,or under the supervision of, the company’s principal executive and principalfinancial officers, or persons performing similar functions, and effected bythe company’s board of directors, management, and other personnel to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles.  A company’s internal controlover financial reporting includes those policies and procedures that (1)pertain to the maintenance of records that, in reasonable detail, accuratelyand fairly reflect the transactions and dispositions of the assets of thecompany; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (3) provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use, or dispositionof the company’s assets that could have a material effect on the financialstatements.

 

Becauseof the inherent limitations of internal control over financial reporting, includingthe possibility of collusion or improper management override of controls,material misstatements due to error or fraud may not be prevented or detectedon a timely basis.  Also, projections of any evaluation of theeffectiveness of the internal control over financial reporting to futureperiods are subject to the risk that the controls may become inadequate becauseof changes in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

 

Inour opinion, management’s assessment that the Company maintained effectiveinternal control over financial reporting as of December 31, 2004, is fairlystated, in all material respects, based on the criteria established in *Internal Control—Integrated Framework*issuedby the Committee of Sponsoring Organizations of the TreadwayCommission. Also in our opinion, the Company maintained, in all materialrespects, effective internal control over financial reporting as of December31, 2004, based on the criteria established in *InternalControl—Integrated Framework*issued by the Committee of SponsoringOrganizations of the Treadway Commission.

 

II-87

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Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated financialstatements and financial statement schedule as of and for the year endedDecember 31, 2004 of the Company and our report dated March 11, 2005 expressedan unqualified opinion on those financial statements and financial statement schedule.

 

 
| /s/ DELOITTE &  TOUCHE, LLP |   |   |
|---------------------------------|--------|--------|
| Deloitte & Touche, LLP      |   |
| Boise, Idaho                    |   |
| March 11, 2005                  |   |

 

**ITEM 9B. OTHER INFORMATION**

 

None.

 

II-88

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**PART III**

 

**ITEM 10.               DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

The information calledfor by this Item will be set forth under the captions “Directors” and****“Executive Officers” in our definitive proxy statement forour annual meeting of stockholders, to be filed not later than April 19, 2005,and is incorporated herein by this reference.

 

**ITEM 11.               EXECUTIVECOMPENSATION**

 

The information calledfor by this Item will be set forth under the caption “Report of theCompensation Committee on Executive Compensation for 2004” in our definitive proxystatement for our annual meeting of stockholders, to be filed not later thanApril 19, 2005, and is incorporated herein by this reference.

 

**ITEM 12.               SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT**

 

***Securities authorized for issuance under equity compensation plans***

 
| ** **                                                  | ** ** | **(a)**                                                                                            | ** ** | **(b)**                                                                            | ** ** | **(c)**                                                                                                                    | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|
| **Plan category**                                           | ** ** | **Number of securities to  be issued upon exercise  of outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities remaining  available for future issuance  under equity compensation  plans (excluding securities)** | ** ** |
| Equity  compensation plans approved by security holders     |       | 6,021,000                                                                                          |       | $                                                                                  | 27.17      |                                                                                                                       | 2,006,000  |   |
| Equity  compensation plans not approved by security holders |       | 871                                                                                                |       | —                                                                             |       | —                                                                                                                     |       |
| Total                                                       |       | 6,021,871                                                                                          |       | $                                                                                  | 27.17      |                                                                                                                       | 2,006,000  |   |

 

As previously disclosedin the definitive proxy statement we filed with the SEC on March 30, 2004, ournon-employee directors (other than the Chairman of the Board) may elect to taketheir annual retainer in deferred stock. One of our directors elected toreceive deferred stock, and in May 2004 we issued rights to receive 871 sharesof deferred stock in lieu of the director’s $30,000 retainer for attendingmeetings in 2004.

 

Additional information called for by this item will beset forth under the caption “Security Ownership of Certain Beneficial ownersand Management” in our definitive proxy statement for our annual meeting ofstockholders, to be filed not later than April 19, 2005, and is incorporatedherein by this reference.

 

**ITEM 13.               CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

The information calledfor by this Item will be set forth under the caption “Certain Relationships andRelated Transactions” in our definitive proxy statement for our annual meetingof stockholders, to be filed not later than April 19, 2005, and is incorporatedherein by this reference.

 

**ITEM 14.               PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

The information calledfor by this Item will be set forth under the caption “Principal Accountant Feesand Services” in our definitive proxy statement for our annual meeting ofstockholders, to be filed not later than April 19, 2005, and is incorporatedherein by this reference.

 

III-1

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**PART IV**

 

**ITEM 15.               EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ONFORM 8-K**

 
| (a)    | *Documents filed as a part of  this Form 10-K.* |                                                                                                                                                                                                                                                                                       |
|--------|-------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                            |
|   | 1.                                              | The Consolidated  Financial Statements, together with the report thereon of Deloitte &  Touche LLP, are included in Part II, Item 8 of this report                                                                                                                                     |   |
|   |                                            |                                                                                                                                                                                                                                                                                       |   |
|   |                                            | Report  of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                   |   |
|   |                                            |                                                                                                                                                                                                                                                                                       |   |
|   |                                            | Consolidated  Statements of Income for the years ended December 31, 2004 and January 2,  2004, the eleven months ended January 3, 2003 (Successor Company), and the  one month ended February 1, 2002 (Predecessor Company)                                                                |   |
|   |                                            |                                                                                                                                                                                                                                                                                       |   |
|   |                                            | Consolidated  Statements of Comprehensive Income for the years ended December 31, 2004 and  January 2, 2004, the eleven months ended January 3, 2003 (Successor Company),  and the one month ended February 1, 2002 (Predecessor Company)                                             |   |
|   |                                            |                                                                                                                                                                                                                                                                                       |   |
|   |                                            | Consolidated Balance Sheets  as of December 31, 2004 and January 2, 2004 (Successor Company)                                                                                                                                                                                               |   |
|   |                                            |                                                                                                                                                                                                                                                                                       |   |
|   |                                            | Consolidated  Statements of Cash Flows for the years ended December 31, 2004 and January 2,  2004, the eleven months ended January 3, 2003 (Successor Company), and the  one month ended February 1, 2002 (Predecessor Company)                                                            |   |
|   |                                            |                                                                                                                                                                                                                                                                                       |   |
|   |                                            | Consolidated  Statements of Stockholders’ Equity (Deficit) for the years ended December 31,  2004 and January 2, 2004, the eleven months ended January 3, 2003 (Successor  Company), and the one month ended February 1, 2002 (Predecessor Company)                                   |   |
|   |                                            |                                                                                                                                                                                                                                                                                       |   |
|   |                                            | Notes to  Consolidated Financial Statements                                                                                                                                                                                                                                                |   |
|   |                                            |                                                                                                                                                                                                                                                                                       |   |
|   | 2.                                              | Valuation,  Qualifying and Reserve Accounts                                                                                                                                                                                                                                                |   |
|   |                                            |                                                                                                                                                                                                                                                                                       |   |
|   |                                            | Financial statement  schedules not listed above are omitted because they are not required or are  not applicable, or the required information is presented in the financial  statements including the notes thereto. Captions and column headings have  been omitted where not applicable. |   |
|   |                                            |                                                                                                                                                                                                                                                                                       |   |
|   | 3.                                              | Exhibits                                                                                                                                                                                                                                                                                   |   |
|   |                                            |                                                                                                                                                                                                                                                                                       |   |
|   |                                            | The exhibits to this  report are listed in the Exhibit Index set forth below.                                                                                                                                                                                                              |   |

 

IV-1

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** **

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, wehave duly caused this Form 10-K to be signed on our behalf by the undersigned,thereunto duly authorized on March 11, 2005.

 

Washington GroupInternational, Inc.

 
| By   /s/  George H. Juetten |                                                                     |
|--------------------------------------------|--------------------------------------------------------------------------|
|                                       | George H. Juetten,  Executive Vice President and Chief Financial Officer |   |
|                                            |                                                                          |  |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this Form 10-K has beensigned below on March 11, 2005 by the following persons on our behalf in thecapacities indicated.

 
|                                           | Chief Executive  Officer and President and Director   |
|------------------------------------------------|-------------------------------------------------------|
|   /s/ Stephen  G. Hanks              |                                                  | (Principal  Executive Officer) |
|                                           |                                                  |
|                                           | Executive Vice  President and Chief Financial Officer |
|   /s/  George H. Juetten             |                                                  | (Principal  Financial Officer) |
|                                           |                                                  |
|                                           | Vice President  and Controller                        |
|   /s/  Jerry K. Lemon                |                                                  | (Principal  Accounting Officer) |
|                                           |                                                  |
|   /s/ Dennis  R. Washington*         |                                                  | Chairman and  Director |
|                                           |                                                  |
|   /s/ David  H. Batchelder*          |                                                  | Director |
|                                           |                                                  |
|   /s/ Michael  R. D’Appolonia * |                                                  | Director |
|                                           |                                                  |
|   /s/ William  J. Flanagan*          |                                                  | Director |
|                                           |                                                  |
|   /s/ C.  Scott Greer*               |                                                  | Director |
|                                           |                                                  |
|   /s/ William  H. Mallender*         |                                                  | Director |
|                                           |                                                  |
|   /s/ Michael  P. Monaco*            |                                                  | Director |
|                                           |                                                  |
|   /s/ Cordell  Reed*                 |                                                  | Director |
|                                           |                                                  |
|   /s/ Bettina  M. Whyte*             |                                                  | Director |
|                                           |                                                  |
|   /s/ Dennis  K. Williams*           |                                                  | Director |

 

----

*Craig G. Taylor, bysigning his name hereto, does hereby sign this Form 10-K on behalf of each ofthe above-named directors of Washington Group International, Inc., pursuant topowers of attorney executed on behalf of each such officer and director.

 

 
| By     /s/  Craig G. Taylor |                               |   |
|------------------------------------------------------|------------------------------------|--------|
|                                                 | Craig G. Taylor,  Attorney-in-fact |   |
|                                                      |                                    |        |  |

 

----

 

**WASHINGTONGROUP INTERNATIONAL, INC.**

**SCHEDULEII.  VALUATION, QUALIFYING AND RESERVEACCOUNTS**

***(Inthousands)***

 

**Allowancefor Doubtful Accounts Receivables Deducted in the Balance Sheet from AccountsReceivable**

 
| **Period Ended**                     | ** ** | **Balance at  Beginning  of Period** | ** ** | **Provisions  Charged to  Operations** | ** ** | **Other** | ** ** | **Deductions** | ** ** | **Balance at  End of  Period** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|----------------------------------------|------------|-----------|------------|----------------|------------|--------------------------------|------------|
| **Predecessor  Company**             |       |                                 |       |                                   |       |      |       |           |       |                           |       |
| One month ended  February 1, 2002    |       | $                                    | (25,941    | )                                      | $          | (160      | )          | —         |       | $                              | 1,311      |   | $ | (24,790 | ) |
| **Successor  Company**               |       |                                 |       |                                   |       |      |       |           |       |                           |       |
| Eleven months  ended January 3, 2003 |       | (24,790                              | )          | (13,444                                | )          | —    |       | 18,820         |       | (19,414                        | )          |
| Year ended  January 2, 2004          |       | (19,414                              | )          | (5,321                                 | )          | —    |       | 11,216         |       | (13,519                        | )          |
| Year ended  December 31, 2004        |       | (13,519                              | )          | (3,707                                 | )          | —    |       | 7,807          |       | (9,419                         | )          |
|                                      |            |                                      |            |                                        |            |           |            |                |            |                                |            |  |  |  |  |

** **

**DeferredIncome Tax Asset Valuation Allowance Deducted in the Balance Sheet**

**fromDeferred Income Tax Assets**

 
| **Period Ended**                     | ** ** | **Balance at  Beginning  of Period** | ** ** | **Provisions  Charged to  Operations** | ** ** | **Other** | ** ** | **Deductions** | ** ** | **Balance at  End of  Period** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|----------------------------------------|------------|-----------|------------|----------------|------------|--------------------------------|------------|
| **Predecessor  Company**             |       |                                 |       |                                   |       |      |       |           |       |                           |       |
| One month ended  February 1, 2002    |       | $                                    | (44,675    | )                                      | $          | (577      | )          | $              | —     |                           | $          | — |   | $ | (45,252 | ) |
| **Successor  Company**               |       |                                 |       |                                   |       |      |       |           |       |                           |       |
| Eleven months  ended January 3, 2003 |       | (45,252                              | )          | (3,260                                 | )          | —    |       | —         |       | (48,512                        | )          |
| Year ended  January 2, 2004          |       | (48,512                              | )          | —                                 |       | (97,194   | )(a)       | 1,124          |       | (144,582                       | )          |
| Year ended  December 31, 2004        |       | (144,582                             | )          | —                                 |       | 17,613    | (b)        | —         |       | (126,969                       | )          |
|                                      |            |                                      |            |                                        |            |           |            |                |            |                                |            |  |  |  |  |  |

 

 

----

(a)           Other adjustments to the deferredincome tax valuation allowance during the year ended January 2, 2004 include a$91,834 increase related to NOL retained after the cancellation of debt andincrease of $5,360 primarily related to foreign exchange gains on foreign NOLcarryovers.

 

(b)           Other adjustments to the deferredincome tax valuation allowance during the year ended December 31, 2004primarily relate to actual and forecasted utilization of NOL carryovers.

 

S-1

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**WASHINGTON GROUP INTERNATIONAL, INC.**

**EXHIBIT INDEX**

** **

**Copiesof exhibits will be supplied upon request. Exhibits will be provided at a feeof $.25 per page requested.**

** **
| **Exhibit  Number** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                                                                                                               |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.1                 |       | Stock Purchase Agreement dated as of  April 14, 2000, among Raytheon Company, Raytheon Engineers & Constructors  International, Inc. and Washington Group International, Inc. (“Washington  Group International”) (filed as Exhibit 2 to Washington Group International’s  Form 10-Q Quarterly Report for the quarter ended March 3, 2000, and  incorporated herein by reference). |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.2.1               |       | Second  Amended Joint Plan of Reorganization of Washington Group International, et.  al. (filed as Exhibit 99.1 to Washington Group International’s Form 8-K Current  Report filed on August 2, 2001, and incorporated herein by reference).                                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.2.2               |       | Modification  to Second Amended Joint Plan of Reorganization of Washington Group  International, et. al. (filed as Exhibit 99.1 to Washington Group  International’s Form 8-K Current Report filed on August 31, 2001, and  incorporated herein by reference).                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.2.3               |       | Second  Modification to Second Amended Joint Plan of Reorganization of Washington  Group International, et. al. (filed as Exhibit 2.3 to Washington Group  International’s Form 8-K Current Report filed on January 4, 2002, and  incorporated herein by reference).                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.2.4               |       | Third  Modification to Second Amended Joint Plan of Reorganization of Washington  Group International, et. al. (filed as Exhibit 2.4 to Washington Group  International’s Form 8-K Current Report filed on January 4, 2002 and  incorporated herein by reference).                                                                                                                               |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.1                 |       | Amended  and Restated Certificate of Incorporation of Washington Group International  (filed as Appendix B to Washington Group International’s Form 14A Definitive  Proxy Statement filed on March 20, 2004, and incorporated herein by  reference).                                                                                                                                             |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.2*                |       | Amended  and Restated Bylaws of Washington Group International as of May 7, 2004.                                                                                                                                                                                                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.1                 |       | Specimen  certificate of Washington Group International’s common stock (filed as  Exhibit 4.1 to Washington Group International’s Form 10-Q Quarterly Report  for quarter ended June 28, 2002, and incorporated herein by reference).                                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.2                 |       | Specimen  certificate of Washington Group International’s Tranche A Warrants (filed as  Exhibit 4.2 to Washington Group International’s Form 10-Q Quarterly Report  for quarter ended June 28, 2002, and incorporated herein by reference).                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.3                 |       | Specimen  certificate of Washington Group International’s Tranche B Warrants (filed as  Exhibit 4.3 to Washington Group International’s Form 10-Q Quarterly Report  for quarter ended June 28, 2002, and incorporated herein by reference).                                                                                                                                                 |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.4                 |       | Specimen  certificate of Washington Group International’s Tranche C Warrants (filed as  Exhibit 4.4 to Washington Group International’s Form 10-Q Quarterly Report  for quarter ended June 28, 2002, and incorporated herein by reference).                                                                                                                                                 |

 

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| 4.5    |   | Warrant  Agreement dated as of January 25, 2002, between Washington Group  International and Wells Fargo Bank Minnesota, National Association, as  warrant agent (filed as Exhibit 4.3 to Washington Group International’s Form  8-K Current Report filed on February 8, 2002, and incorporated herein by  reference).                                                                                                                                                                                                                                                      |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.6    |   | Registration  Rights Agreement dated January 25, 2002, among Washington Group International  and certain parties identified therein (filed as Exhibit 4.2 to Washington  Group International’s Form 8-K Current Report filed on February 8, 2002, and  incorporated herein by reference).                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.11   |   | Rights  Agreement dated as of June 21, 2002, by and between Washington Group  International and Wells Fargo Bank Minnesota, National Association, as rights  agent (filed as Exhibit 4.1 to Washington Group International’s Registration  Statement on Form 8-A filed on June 24, 2002, and incorporated herein by  reference).                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.1.1 |   | Credit  Agreement dated as of January 24, 2002, among Washington Group International,  Credit Suisse First Boston, as administrative agent, collateral monitoring  agent, lead arranger and book manager, ABLECO Finance LLC, as documentation  agent, and certain lenders and issuers identified therein (filed as Exhibit  10.1 to Washington Group International’s Form 8-K Current Report filed on  February 8, 2002, and incorporated herein by reference).                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.1.2 |   | Amendment  No. 1 and Consent dated as of June 28, 2002, to Washington Group  International’s Credit Agreement dated as of January 24, 2002, among  Washington Group International, Credit Suisse First Boston, as administrative  agent, collateral monitoring agent, lead arranger and book manager, ABLECO  Finance LLC, as documentation agent, and certain lenders and issuers  identified therein (filed as Exhibit 10.1 to Washington Group International’s  Form 10-Q Quarterly Report for quarter ended June 28, 2002, and incorporated  herein by reference). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.2   |   | Pledge  and Security Agreement dated as of January 24, 2002, among Washington Group  International, certain subsidiaries of Washington Group International  identified therein and Credit Suisse First Boston, as administrative agent  (filed as Exhibit 10.2 to Washington Group International’s Form 8-K Current  Report filed on February 8, 2002, and incorporated herein by reference).                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.3   |   | Shareholders Agreement dated December  18, 1993, among Morrison Knudsen BV, a wholly-owned subsidiary of Washington  Group International, Lambique Beheer BV and Ergon Overseas Holdings Limited  (filed as Exhibit 10.6 to Washington Group International’s Form 10-K Annual  Report for fiscal year ended November 30, 1997, and incorporated herein by  reference).                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.4   |   | Asset  Purchase Agreement dated as of June 25, 1998, between CBS Corporation and  WGNH Acquisition, LLC related to the acquisition of the Westinghouse Energy  Systems Business Unit from CBS Corporation (filed as Exhibit 10.10 to  Washington Group International’s Form 10-K Annual Report for fiscal year  ended November 30, 1998, and incorporated herein by reference).                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.5   |   | Asset  Purchase Agreement dated as of June 25, 1998, between CBS Corporation and  WGNH Acquisition, LLC related to the acquisition of the Westinghouse  Government and Environmental Services Company business from CBS Corporation  (filed as Exhibit 10.11 to Washington Group International’s Form 10-K Annual  Report for fiscal year ended November 30, 1998, and incorporated herein by  reference).                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.6.1 |   | Amended  and Restated Consortium Agreement between Washington Group International’s  wholly-owned subsidiary, Washington Group International, Inc., an Ohio  corporation, and BNFL USA Group, Inc. (filed as Exhibit 10.3 to Washington  Group International’s Form 10-Q Quarterly Report for quarter ended February  26, 1999, and incorporated herein by reference.)                                                                                                                                                                                                 |

 

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| 10.6.2  |   | Second  Amended and Restated Consortium Agreement between Washington Group  International’s wholly-owned subsidiary, Washington Group International,  Inc., an Ohio corporation, and BNFL-USA Group, Inc., effective as of July 31,  2004 (filed as Exhibit 10.1 to Washington Group International’s Form 10-Q  Quarterly Report for quarter ended October 1, 2004, and incorporated herein  by reference).                                                                                                                           |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.7    |   | Asset Purchase Agreement dated as of  October 25, 2002, between Westinghouse Government Services Company LLC and  Curtiss-Wright Electro-Mechanical Corporation (filed as Exhibit 99.2 to  Washington Group International’s Form 8-K/A Amended Current Report filed on  November 1, 2002, and incorporated herein by reference).                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.8    |   | Trust  and Disbursing Agreement dated as of January 25, 2002, among Washington Group  International, the Official Unsecured Creditors’ Committee and Wells Fargo  Bank Minnesota, National Association, as disbursing agent (filed as Exhibit  10.4 to Washington Group International’s Form 8-K Current Report filed on  February 8, 2002, and incorporated herein by reference).                                                                                                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.9    |   | Settlement  Agreement dated as of January 23, 2002, among Washington Group International,  Raytheon Company and Raytheon Engineers & Constructors International,  Inc. (filed as Exhibit 10.5 to Washington Group International’s Form 8-K  Current Report filed on February 8, 2002, and incorporated herein by  reference).                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.10   |   | Asset  Purchase Agreement dated as of April 17, 2003, between The Shaw Group Inc.  and Washington Group International related to the sale of Washington Group  International’s Petrochemical Technology Center in Cambridge, Massachusetts,  to Stone & Webster, Inc., a subsidiary of The Shaw Group Inc. of Baton  Rouge, Louisiana (filed as Exhibit 10.1 to Washington Group International’s  Form 10-Q Quarterly Report for quarter ended July 4, 2003, and incorporated  herein by reference).                              |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.11.1 |   | Amended  and Restated Credit Agreement dated as of October 9, 2003, among Washington  Group International, Inc., the lenders and issuers party thereto, Credit  Suisse First Boston, as administrative agent, sole lead arranger and book  manager, LaSalle Bank National Association, as documentation agent, and  ABLECO Finance LLC, as syndication agent (filed as Exhibit 10.1 to Washington  Group International’s Form 8-K Current Report filed on October 13, 2003, and  incorporated herein by reference).                        |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.11.2 |   | Amendment  No. 1, dated as of March 19, 2004, to the Amended and Restated Credit  Agreement dated as of October 9, 2003, among Washington Group International,  Inc., the lenders and issuers party thereto, Credit Suisse First Boston, as  administrative agent, sole lead arranger and book manager, and LaSalle Bank  National Association, as documentation agent (filed as Exhibit 10.3 to  Washington Group International’s Form 10-Q Quarterly Report for the quarter  ended April 2, 2004, and incorporated herein by reference). |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.11.3 |   | Amendment  No. 2, dated as of July 22, 2004, to the Amended and Restated Credit  Agreement of October 9, 2003, as amended by Amendment No. 1 dated as of March  19, 2004, among Washington Group international, Inc., the lenders and issuers  party thereto, and Credit Suisse First Boston, as administrative agent for  the Lenders and Issuers thereunder (filed as Exhibit 10.2 to Washington Group  International’s Form 10-Q Quarterly Report for the quarter ended July 2,  2004, and incorporated herein by reference).           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.12   |   | Joinder  Agreement dated as of October 9, 2003, delivered by subsidiaries of  Washington Group International, Inc. and acknowledged and agreed by Credit  Suisse First Boston (filed as Exhibit 10.2 to Washington Group  International’s Form 8-K Current report filed on October 13, 2003, and  incorporated herein by reference).                                                                                                                                                                                                       |

 

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| 10.13.1 |   | Washington  Group International, Inc. Equity and Performance Incentive Plan, Amended and  Restated as of November 9, 2002 (filed as Appendix E to Washington Group  International’s Form Def 14A Definitive Proxy Statement filed on April 8,  2003, and incorporated herein by reference).#                                                                                         |
|---------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.13.2 |   | Washington  Group International, Inc. Equity and Performance Incentive Plan, Amended and  Restated as of August 14, 2003 (filed as Exhibit 10.13.2 to Washington Group  International’s Form 10-K Annual Report for the year ended January 2, 2004,  and incorporated herein by reference). #                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.13.3 |   | Amendment  No. 1, effective as of February 13, 2004, to the Washington Group  International, Inc. Equity and Performance Incentive Plan as Amended and  Restated as of August 14, 2003 (filed as Exhibit 10.2 to Washington Group  International’s Form 10-Q Quarterly Report for the quarter ended April 2,  2004, and incorporated herein by reference).#                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.14   |   | Washington  Group International, Inc. Equity and Performance Incentive Plan - California (filed as Exhibit 10.8 to  Washington Group International’s Form 8-K Current Report filed on February 8,  2002, and incorporated herein by reference). #                                                                                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.15   |   | Description  of Washington Group International’s additional retention and incentive  arrangements (filed as Exhibit 10.9 to Washington Group International’s Form  10-Q Quarterly Report for quarter ended March 29, 2002, and incorporated  herein by reference). #                                                                                                            |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.16   |   | Letter  Agreement dated as of November 15, 2001, between Washington Group  International and Dennis R. Washington (filed as Exhibit 10.9 to Washington  Group International’s Form 8-K Current Report filed on February 8, 2002, and  incorporated herein by reference). #                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.17   |   | Letter  Agreement of January 21, 2004, effective as of November 14, 2003, between  Washington Group International and Dennis R. Washington (filed as Exhibit  10.17 to Form 10-K Annual Report for the year ended January 2, 2004, and  incorporated herein by reference).                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.18   |   | Form  of Indemnification Agreement (filed as Exhibit 10.10 to Washington Group  International’s Form 8-K Current Report filed on February 8, 2002, and  incorporated herein by reference). # A schedule listing the directors and  officers with whom Washington Group International has entered into such  agreements is filed herewith. # *                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.19   |   | Washington  Group International Key Executive Disability Insurance Plan (filed as Exhibit  10.12 to Old MK’s Form 10-K Annual Report for year ended December 31, 1992,  and incorporated herein by reference). #                                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.20   |   | Washington  Group International Executive Life Insurance Plan (filed as Exhibit 10.13 to  Old MK’s Form 10-K Annual Report for year ended December 31, 1992, and  incorporated herein by reference). #                                                                                                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.21.1 |   | Washington  Group International’s Retention Agreement with Stephen G. Hanks dated as of  March 20, 2001 (filed as Exhibit 10.20 to Washington Group International’s  Form 10-K Annual Report for fiscal year ended November 30, 2001, and  incorporated herein by reference). #                                                                                                 |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.21.2 |   | Amendment  dated August 20, 2002, to Washington Group International’s Retention  Agreement of March 20, 2001, with Stephen G. Hanks (filed as Exhibit 10.17.2  to Washington Group International’s Form 10-K Annual Report for fiscal year  ended January 3, 2003, and incorporated herein by reference). #                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                      |
| 10.22.1 |   | Form  of Washington Group International’s Retention Agreement (filed as Exhibit  10.21 to Washington Group International’s Form 10-K Annual Report for fiscal  year ended November 30, 2001, and incorporated herein by reference). # A  schedule listing the Executive Officers with whom Washington Group  International has entered into such agreements is filed herewith.* |

 

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| 10.22.2 |   | Form  of Amendment to Washington Group International’s Retention Agreement (filed  as Exhibit 10.18.2 to Washington Group International’s Form 10-K Annual  Report for fiscal year ended January 3, 2003, and incorporated herein by  reference). # A schedule listing Executive Officers with whom Washington  Group International has entered into such amendments is filed herewith.*                          |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.23   |   | Washington  Group International, Inc. Short-Term Incentive Plan (filed as Appendix D to  Washington Group International’s Form Def 14A Proxy Statement filed on April  8, 2003, and incorporated herein by reference). #                                                                                                                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.23.1 |   | Amendment  1 to Washington Group International, Inc. Short-Term Incentive Plan (filed as  Exhibit 10.3 to Washington Group International’s Form 8-K Current Report  filed on February 15, 2005, and incorporated herein by reference).#                                                                                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.24   |   | Washington  Group International, Inc. Restoration Plan effective as of January 1, 2003,  amended and restated as of August 14, 2003 (filed as Exhibit 10.3 to  Washington Group International’s Form 10-Q Quarterly Report for quarter ended  October 3, 2003, and incorporated herein by reference). #                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.25   |   | Washington Group International, Inc.  Voluntary Deferred Compensation Plan effective as of January 1, 2003, amended  and restated as of August 14, 2003 (filed as Exhibit 10.4 to Washington Group  International’s Form 10-Q Quarterly Report for quarter ended October 3, 2003,  and incorporated herein by reference). #                                                                                            |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.26   |   | Description  of Washington Group International Executive Financial Counseling Program  adopted on February 14, 2003 (filed as Exhibit 10.23 to Washington Group  International’s Form 10-K Annual Report for fiscal year ended January 3,  2003, and incorporated herein by reference). #                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.27   |   | Washington  Group International, Inc. 2004 Equity Incentive Plan effective as of May 7,  2004 (filed as Exhibit 10.1 to Washington Group International’s Form 10-Q  Quarterly Report for quarter ended July 2, 2004, and incorporated herein by  reference).#                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.28   |   | Intercreditor Agreement as of July 31,  2004, among Credit Suisse First Boston, BNFL USA Group, Inc., Washington  Group International, Inc. (an Ohio corporation) (“Washington Group (Ohio)”)  and various affiliates of Washington (Ohio) (filed as Exhibit 10.2 to  Washington Group International’s Form 10-Q Quarterly Report for quarter ended  October 1, 2004, and incorporated herein by reference). |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.29   |   | Security Agreement as of July 31, 2004,  among Washington Group (Ohio), various affiliates of Washington Group (Ohio)  listed therein as Debtors, and BNFL USA Group, Inc. (filed as Exhibit 10.3 to  Washington Group International’s Form 10-Q Quarterly Report for quarter ended  October 1, 2004, and incorporated herein by reference).                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.30   |   | Washington  Group International, Inc. 2004 Equity  Incentive Plan Option Rights Agreement (filed as Exhibit 10.1 to Washington  Group International’s Form 8-K Current Report filed on February 15, 2005, and  incorporated herein by reference).#                                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 10.31   |   | Washington  Group International, Inc. 2004 Equity  Incentive Plan Restricted Share Agreement (filed as Exhibit 10.2 to  Washington Group International’s Form 8-K Current Report filed on February  15, 2005, and incorporated herein by reference).#                                                                                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 21.*    |   | Subsidiaries of Washington Group  International.                                                                                                                                                                                                                                                                                                                                                                            |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 23.1*   |   | Consent of Deloitte & Touche LLP.                                                                                                                                                                                                                                                                                                                                                                                       |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 23.2*   |   | Consent of Deloitte & Touche GmbH.                                                                                                                                                                                                                                                                                                                                                                                      |

 

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| 24.*       |   | Powers  of Attorney.                                                                                                                             |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                             |
| 31.1*      |   | Certification  of the Principal Executive Officer of Washington Group International pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.  |
|       |   |                                                                                                                                             |
| 31.2*      |   | Certification  of the Principal Financial Officer of Washington Group International,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|       |   |                                                                                                                                             |
| 32.1† |   | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                        |
|       |   |                                                                                                                                             |
| 99.1*      |   | Financial Statement of Mitteldeutsche  Braunkohlengesellschaft mbH (MIBRAG) for the year ended December 31, 2004.                                |

 

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#                    Management contract or compensatory plan

*                    Filed herewith

†  Furnished herewith

 

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