SHAW GROUP INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2002
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to
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Commission File Number: 0-22992
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THE SHAW GROUP INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Louisiana 72-1106167
- --------------------------------------- ---------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)

4171 Essen Lane, Baton Rouge, Louisiana 70809
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(Address of principal executive offices) (Zip Code)

(225) 932-2500
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(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
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Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes X No .
----- -----

The number of shares outstanding of each of the issuer's classes of common stock
as of the latest practicable date, is as follows:

Common stock, no par value, 37,732,716 shares outstanding as of
January 10, 2003.

FORM 10-Q

TABLE OF CONTENTS

Part I - Financial Information

Item 1. - Financial Statements

Condensed Consolidated Balance Sheets - November 30, 2002
and August 31, 2002 3 - 4

Condensed Consolidated Statements of Income - For the Three
Months Ended November 30, 2002 and 2001 5

Condensed Consolidated Statements of Cash Flows - For the Three
Months Ended November 30, 2002 and 2001 6

Notes to Condensed Consolidated Financial Statements 7 - 18

Item 2. - Management's Discussion and Analysis of Financial Condition 19 - 28
and Results of Operations

Item 3. - Quantitative and Qualitative Disclosures About Market Risk 29

Item 4. - Controls and Procedures 29 - 30

Part II - Other Information

Item 1. - Legal Proceedings 31

Item 4. - Submission of Matters to a Vote of Security Holders 31

Item 6. - Exhibits and Reports on Form 8-K 31

Signature Page 32

Certifications 33 - 34

Exhibit Index 35

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PART I - FINANCIAL INFORMATION

ITEM 1. - FINANCIAL STATEMENTS

THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)

ASSETS

(Continued)

The accompanying notes are an integral part of these statements.

3

THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)

LIABILITIES AND SHAREHOLDERS' EQUITY

The accompanying notes are an integral part of these statements.

4

THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share amounts)

The accompanying notes are an integral part of these statements.

5

THE SHAW GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

The accompanying notes are an integral part of these statements.

6

THE SHAW GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 - Unaudited Financial Information

The accompanying condensed consolidated financial statements and financial
information included herein have been prepared pursuant to the interim reporting
requirements of Form 10-Q. Consequently, certain information and note
disclosures normally included in financial statements prepared annually in
accordance with generally accepted accounting principles have been condensed or
omitted. Readers of this report should therefore refer to the consolidated
financial statements and the notes thereto included in the Annual Report on Form
10-K for the fiscal year ended August 31, 2002 of The Shaw Group Inc.

The financial information of The Shaw Group Inc. and its wholly-owned
subsidiaries (collectively, "the Company" or "Shaw") for the three-month periods
ended November 30, 2002 and 2001 and as of November 30, 2002 included herein is
unaudited. However, the Company's management believes it has made all
adjustments (consisting of normal recurring adjustments) which are necessary to
fairly present the results of operations for such periods. Results of operations
for the interim period are not necessarily indicative of results of operations
that will be realized for the fiscal year ending August 31, 2003.

The Company's foreign subsidiaries maintain their accounting records in their
local currency (primarily British pounds, Australian and Canadian dollars,
Venezuelan Bolivars, the Euro and the Dutch Guilder prior to January 1, 2002.)
All of the assets and liabilities of these subsidiaries (including long-term
assets, such as goodwill) are converted to U.S. dollars with the effect of the
foreign currency translation reflected in "accumulated other comprehensive
income," a component of shareholders' equity, in accordance with Statement of
Financial Accounting Standards (SFAS) No. 52 and SFAS No. 130 - "Reporting
Comprehensive Income." Foreign currency transaction gains or losses are credited
or charged to income.

Certain reclassifications have been made to the prior year's financial
statements in order to conform to the current year's presentation.

Note 2 - Capital Stock Transactions

In September 2001, the Company's Board of Directors authorized the Company to
repurchase shares of its no par value Common Stock ("Common Stock"), depending
on market conditions, up to a limit of $100,000,000. As of November 30, 2002,
the Company had completed its purchases under this program as it had purchased
5,331,005 shares at a cost of approximately $99,880,000. This includes 3,170,605
shares purchased at a cost of approximately $47,837,000 during the three months
ended November 30, 2002 and 2,160,400 shares purchased at a cost of
approximately $52,043,000 during the year ended August 31, 2002. Also included
in Treasury Stock is 650 shares valued at approximately $33,000 that were
returned in fiscal 2002 in connection with the finalization of an acquisition.

Note 3 - Escrowed Cash

In connection with a performance bond on a foreign project, the Company agreed
to deposit in escrow with the issuer of the bond primarily advance payments
received from the Company's customer. During the year ended August 31, 2002, the
Company deposited approximately $96,500,000 into escrow pursuant to this
agreement. This deposit is recorded as escrowed cash. As a result of the
performance bond, the Company's customer

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agreed not to withhold retentions on the Company's billings. The Company
believes that based on current contract terms and scope, its initial $96,500,000
deposit represents its maximum escrow requirement for the project. The Company
expects that the maximum balance will be retained in escrow until early to mid
calendar 2003, at which time escrow funds will be released incrementally to the
Company as the Company completes certain contract milestones. A final escrow
amount of approximately $18,000,000 will be released to the Company upon initial
contract acceptance as defined in the agreement, which is currently projected to
occur in calendar 2005. The bonding company (or "surety") may draw on the escrow
funds only to secure the surety from a defined loss. The escrowed funds are
invested in short-term, high quality investments and investment income is
remitted to the Company on a quarterly basis. The Company may request the surety
to allow the Company to substitute a letter of credit for all or part of the
cash escrow requirements.

Note 4 - Acquisitions

SFAS No. 141 - "Business Combinations" requires that all acquisitions initiated
after June 30, 2001 be recorded utilizing the purchase method of accounting.
Most of the Company's acquisitions that were completed prior to June 30, 2001
were also accounted for using the purchase method of accounting under Accounting
Principles Board (APB) Opinion No. 16. Under the purchase method, the cost of
each acquired operation is allocated to the assets acquired and liabilities
assumed based on their estimated fair values. These estimates are revised during
the allocation period as necessary when, and if, information becomes available
to further define and quantify the value of the assets acquired and liabilities
assumed. The allocation period does not exceed beyond one year from the date of
the acquisition. To the extent additional information to refine the original
allocation becomes available during the allocation period, the allocation of the
purchase price is adjusted. Likewise, to the extent such information becomes
available after the allocation period, such items are included in the Company's
operating results in the period that the settlement occurs or information is
available to adjust the original allocation to a better estimate. These future
adjustments, if any, that may arise from these acquisitions may materially
favorably or unfavorably impact the Company's future consolidated financial
position or results of operations.

In connection with potential acquisitions, the Company incurs and capitalizes
certain transaction costs, which include legal, accounting, consulting and other
direct costs. When an acquisition is completed, these costs are capitalized as
part of the acquisition price. The Company routinely evaluates capitalized
transaction costs and expenses those costs related to acquisitions that are not
likely to occur. Indirect acquisition costs, such as salaries, corporate
overhead and other corporate services are expensed as incurred.

The operating results of the acquisitions accounted for as a purchase are
included in the Company's consolidated financial statements from the applicable
date of the transaction.

IT Group Acquisition

During fiscal year 2002, the Company acquired substantially all of the operating
assets and assumed certain liabilities of The IT Group, Inc. ("IT Group") and
its subsidiaries. IT Group and one of its wholly-owned subsidiaries, Beneco,
were subject to separate Chapter 11 bankruptcy reorganization proceedings and
the acquisition was completed pursuant to the bankruptcy proceedings. The
acquisition of the IT Group assets was completed on May 3, 2002 and the
acquisition of Beneco's assets was completed on June 15, 2002.

The Company believes, pursuant to the terms of the acquisition agreements, it
has assumed only certain liabilities ("assumed liabilities") of the IT Group and
Beneco as specified in the acquisition agreements. The Company has estimated
that its total of assumed liabilities is approximately $350,000,000. Further,
the

8

acquisition agreements also provide that certain other liabilities of the IT
Group, including but not limited to, outstanding borrowings, leases, contracts
in progress, completed contracts, claims or litigation that relate to acts or
events occurring prior to the acquisition date, and certain employee benefit
obligations, are specifically excluded ("excluded liabilities") from the
Company's transactions. The Company, however, cannot provide assurance that it
does not have any exposure to the excluded liabilities because, among other
matters, the bankruptcy courts have not finalized their validation of the claims
filed with the courts. Additionally, the Company has not completed its review of
liabilities that have been submitted to the Company for payment. Accordingly,
the Company's estimate of the value of the assumed liabilities may change as a
result of the validation of the claims by the bankruptcy courts or other factors
which may be identified during its review of liabilities.

The IT Group acquisition was recorded as a purchase, and accordingly, the
Company's results of operations include those of the acquired IT Group and
Beneco businesses from the respective acquisition dates. The Company has not
completed all necessary appraisals of the property and equipment purchased nor
has the Company completed the process of obtaining information about the fair
value of all of the acquired assets and assumed liabilities. Accordingly, the
Company anticipates that there will be further adjustments to the IT Group
purchase price during the allocation period.

The Company acquired a large number of contracts in progress and contract
backlog for which the work had not commenced at the acquisition date. Under SFAS
141, construction contracts are defined as intangibles that meet the criteria
for recognition apart from goodwill. These intangibles, like the acquired assets
and liabilities, are required to be recorded at their fair value at the date of
acquisition. The Company recorded these contracts at fair value using a market
based discounted cash flow approach. Related assets of approximately $10,607,000
and liabilities of $53,096,000 (reduced by allocation period adjustments
recognized as of November 30, 2002) have been established that are amortized to
contract costs over the estimated lives of the underlying contracts and related
production backlog. The amount of the accrued future cash losses on assumed
contracts with inherent losses (accrued contract loss reserves) was estimated to
be approximately $9,860,000 (including allocation period adjustments recognized
as of November 30, 2002) and a liability of such amount was established.
Commencing with the initial recording of these liabilities and reserves in the
year ended August 31, 2002, the assets and liabilities are amortized as work is
performed on the contracts. The net amortization recognized during the three
months ended November 30, 2002 was approximately $3,024,000 and has been
reflected as a reduction in the cost of revenues, which resulted in a
corresponding increase in gross profit. The activity related to these contract
assets and liabilities is included in the table at the end of Note 11.

Stone & Webster Acquisition

On July 14, 2000, the Company purchased substantially all of the operating
assets of Stone & Webster, Incorporated ("Stone & Webster"), a global provider
of engineering, procurement, construction, consulting and environmental services
to the power, process, environmental and infrastructure markets. The acquisition
was concluded as part of a proceeding under Chapter 11 of the Bankruptcy Code
for Stone & Webster. This transaction was accounted for under the purchase
method of accounting.

The Company believes that, pursuant to the terms of the Stone & Webster
acquisition agreement, it assumed only certain specified liabilities, which the
Company has estimated to be approximately $740,000,000. The Company believes
that liabilities excluded from this acquisition include liabilities associated
with certain contracts in progress, completed contracts, claims or litigation
that relate to acts or events occurring prior to the acquisition date, and
certain employee benefit obligations, including Stone & Webster's U.S. defined
benefit plan (collectively, the "excluded items"). The Company, however, cannot
provide assurance that it has

9

no exposure with respect to the excluded items because, among other things, the
bankruptcy court has not finalized its validation of claims filed with the
court. The final amount of assumed liabilities may change as a result of the
validation of the claims process; however, the Company believes, based on its
review of claims filed, that any such adjustment to the assumed liabilities and
future operating results will not be material.

Note 5 - Inventories

The major components of inventories consist of the following (in thousands) as
of the dates indicated:

Note 6 - Investment in Unconsolidated Entities

During the three months ended November 30, 2002, the Company recognized a
$100,000 loss from Shaw-Nass Middle East, W.L.L., the Company's Bahrain joint
venture ("Shaw-Nass"). No earnings were recognized from Shaw Nass in the period
ended November 30, 2001. As of November 30, 2002 and August 31, 2002, the
Company had outstanding receivables from Shaw-Nass totaling $6,040,000 and
$5,970,000, respectively. These receivables relate primarily to inventory and
equipment sold to Shaw-Nass.

During the three months ended November 30, 2002, the Company recognized a
pre-tax loss of approximately $2,300,000 from the operations of its EntergyShaw
joint venture as compared with earnings of approximately $151,000 for the three
months ended November 30, 2001. The Company had outstanding trade accounts
receivable from EntergyShaw totaling approximately $5,770,000 and $32,000 at
November 30, 2002 and August 31, 2002 respectively.

As is common in the engineering, procurement and construction industries, the
Company executed certain contracts jointly with third parties through joint
ventures, limited partnerships and limited liability companies. The investments
included on the accompanying Condensed Consolidated Balance Sheets as of
November 30, 2002 and August 31, 2002 are approximately $14,330,000 and
$18,255,000 respectively, which generally represents the Company's cash
contributions and earnings from these investments.

Note 7 - Debt

Revolving Lines of Credit

The Company's primary credit facility ("Credit Facility"), dated July 2000, is
for a three-year term, and provides that both revolving credit loans and letters
of credit may be issued within the limits of this facility. The Credit Facility
was amended on February 28, 2002 to, among other matters, increase the total
Credit

10

Facility to $350,000,000 from $300,000,000 and to eliminate the previous
$150,000,000 limit on letters of credit. The amended Credit Facility allows the
Company to borrow either at interest rates (i) in a range of 1.50% to 2.25% over
the London Interbank Offered Rate ("LIBOR") or (ii) from the prime rate to 0.75%
over the prime rate. The Company selects the interest rate index and the spread
over the index is dependent upon certain financial ratios of the Company. The
Credit Facility is secured by, among other things, (i) guarantees by the
Company's domestic subsidiaries; (ii) a pledge of all of the capital stock of
the Company's domestic subsidiaries and 66% of the capital stock in certain of
the Company's foreign subsidiaries; and (iii) a security interest in all
property of the Company and its domestic subsidiaries (except real estate and
equipment). The Credit Facility also contains restrictive covenants and other
restrictions, which include but are not limited to the maintenance of specified
ratios and minimum capital levels and limits on other borrowings, capital
expenditures and investments. Additionally, the Credit Facility established a
$25,000,000 aggregate limit on the amount of the Company's Common Stock
repurchases and/or LYONs repurchases made subsequent to February 28, 2002,
without prior consent. Subsequent consent was provided to allow the Company to
complete in October 2002 the $100,000,000 Common Stock repurchase program which
was authorized by the Company's Board of Directors in September 2001(see Note 2
of Notes to Condensed Consolidated Financial Statements). As of November 30,
2002, the Company was in compliance with these covenants or had obtained the
necessary waivers. At November 30, 2002 letters of credit of approximately
$173,200,000 were outstanding and no revolving credit loans were outstanding
under the Credit Facility. The Company's total availability under the Credit
Facility at November 30, 2002 was approximately $176,800,000. At November 30,
2002, the interest rate on this line of credit was either 4.25% (if the prime
rate index had been chosen) or 2.94% (if the LIBOR rate index had been chosen).

As of November 30, 2002, the Company's foreign subsidiaries had short-term
revolving lines of credit permitting borrowings totaling approximately
$15,500,000. These subsidiaries did not have any outstanding borrowings under
these lines at November 30, 2002.

LYONs Convertible Securities

Effective May 1, 2001, the Company issued and sold $790,000,000 (including
$200,000,000 to cover over-allotments) of 20-year, zero-coupon, unsecured,
convertible debt, Liquid Yield Option(TM) Notes ("LYONs", "debt" or "the
securities"). The debt was issued at an original discount price of $639.23 per
$1,000 maturity value and has a yield to maturity of 2.25%. The debt is senior
unsecured obligations of the Company and is convertible into the Company's
Common Stock at a fixed ratio of 8.2988 shares per $1,000 maturity value or an
effective conversion price of $77.03 at the date of issuance. Under the terms of
the issue, the conversion rate may be adjusted for certain factors as defined in
the agreement including but not limited to dividends or distributions payable on
Common Stock, but will not be adjusted for accrued original issue discount. The
Company realized net proceeds, after expenses, from the issuance of these
securities of approximately $490,000,000. The Company used these proceeds to
retire outstanding indebtedness and for general corporate purposes, including
investment in AAA rated, short-term marketable securities held until maturity
and cash equivalents.

The holders of the debt have the right to require the Company to repurchase the
debt on May 1, 2004, May 1, 2006, May 1, 2011 and May 1, 2016 at the then
accreted value. The Company has the right to fund such repurchases with shares
of its Common Stock, cash, or a combination of Common Stock, at the current
market value, and cash. The debt holders also have the right to require the
Company to repurchase the debt for cash, at the accreted value, if there is a
change in control of the Company, as defined, occurring on or before May 1,
2006. The Company may redeem all or a portion of the debt at the accreted value,
through cash payments, at any time after May 1, 2006.

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Note 8 - Comprehensive Income

Comprehensive income for a period encompasses net income and all other changes
in a company's equity other than from transactions with the company's owners.
Comprehensive income was comprised of the following (in thousands) for the
periods indicated:

The foreign currency translation adjustments relate to the varying strength of
the U.S. dollar in relation to the British pound, Venezuelan Bolivar, Australian
and Canadian dollars and the Euro (prior to January 1, 2002, the Dutch guilder).

The Company's hedging activities (which are generally limited to foreign
exchange transactions) during the quarters ended November 30, 2002 and 2001 were
not material.

Note 9 - Business Segments

The Company has segregated its business activities into three operating
segments: Integrated EPC Services segment, Environmental and Infrastructure
segment, and Manufacturing and Distribution segment. The following table
presents information about segment profits and assets (in thousands) for the
periods indicated. Certain reclassifications, primarily related to the new
Environmental and Infrastructure segment, have been made to conform November 30,
2001 information to the November 30, 2002 presentation basis.

12

Note 10 - Earnings Per Common Share

Computations of basic and diluted earnings per share are presented below.

At November 30, 2002 and 2001 the Company had approximately 2,790,000 and 92,500
weighted-average incremental shares related to stock options that were excluded
from the calculation of diluted income per share because they were antidilutive.

Note 11 - Goodwill and Other Intangibles

Goodwill

The following table reflects the changes (in thousands) in the carrying value of
goodwill from September 1, 2002 to November 30, 2002. Refer to Note 4 of Notes
to Condensed Consolidated Financial Statements for a more detailed discussion of
the recognition of goodwill in connection with these acquisitions.

13

Goodwill associated with the IT Group and PsyCor acquisitions which were
completed in the year ended August 31, 2002 has been preliminarily calculated as
of November 30, 2002. The Company expects to revise these balances during the
one year allocation period as the Company has not obtained all appraisals of the
property and equipment it purchased nor has it completed all of its other review
and valuation procedures of the assets acquired and the liabilities assumed.

Amortizable Intangibles and Accrued Contract Loss Reserves

The Company's intangible assets include construction contract adjustments
established in purchase accounting, (related to the acquisition of the IT Group
and Stone & Webster), accrued contract loss reserves and its proprietary
ethylene technology acquired in the Stone & Webster transaction, which is being
amortized over 15 years on a straight line basis. The Company is still
evaluating a customer relationship intangible and patents acquired in the IT
Group acquisition. The Company has also established accrued contract loss
reserves, primarily related to contracts acquired from IT Group and Stone &
Webster.

The following table presents the additions to and utilization/amortization of
intangible assets and accrued contract loss reserves for the periods indicated
(in thousands):

The Company previously referred to the fair value of the acquired contract
liability adjustments resulting from the Stone & Webster acquisition as gross
margin reserves. The decreases in the contract (asset) and contract liability
adjustments for the three months ended November 30, 2002 represent allocation
period adjustments made with respect to the IT Group acquisition, The contract
(asset) adjustments are included in other current

14

assets in the accompanying condensed consolidated balance sheets. The $3,400,000
increase in the accrued contract loss reserve was comprised of a $2,400,000
allocation period adjustment for the IT Group acquisition and a $1,000,000
reserve established for anticipated losses on current contracts. The annual
amortization related to the ethylene technology is $1,906,000.

Note 12- Contingencies

Contingencies Associated with Domestic Power Market EPC Projects

In fiscal 2002 and 2001 the Company entered into several significant EPC
contracts for new domestic gas-fired combined cycle power plants. During fiscal
2002 and 2001, the Company recognized revenues of approximately $1,500,000,000
and $250,000,000, respectively, related to these contracts. For the three months
ended November 30, 2002 and 2001, the Company recognized revenues of
approximately $394,000,000 and $133,000,000, respectively, related to these
contracts. The Company's customers for these power plants are major utility
companies and independent power producers ("IPPs"), several of which where
wholly or partially owned subsidiaries of major utilities. In fiscal 2002,
demand for new capacity in the domestic power market significantly decreased,
resulting in, among other things, financial distress among many participants in
the domestic power markets, particularly the IPP's. At the time the Company
entered into these contracts, all of these customers had investment grade credit
ratings. During 2002, all of the Company's IPP customers received downgrades to
their credit ratings, reducing their credit ratings below investment grade. The
condition of the national power market, these credit downgrades and other
factors resulted in three projects being canceled or suspended. For one of these
projects, Pike, discussed further below, the Company was notified by the
customer of their intention to not make a scheduled milestone payment on its
required due date. As of November 30, 2002, the Company has approximately
$609,000,000 remaining in backlog related to gas-fired combined cycle power
plant projects; $199,000,000 for IPP's on six projects with the remaining
$410,000,000 for major utility companies on three projects. (Approximately
$147,000,000 of the IPP backlog is with NEG for the Covert and Harquahala
projects - see discussion below.)

In addition, under the terms of one contract with an IPP, the customer, at its
option, can pay a portion of the contract price in subordinated notes or cash.
The Company believes that the amount payable in subordinated notes will not
exceed $27,000,000 under the terms of the contract. The subordinated notes, if
issued, would bear interest at prime plus 4% and mature in October 2009.
However, if any amounts under the notes are unpaid 8 months following final
acceptance of the project, the unpaid notes, plus a cash payment of the amounts,
if any, paid on the notes through the conversion date, is convertible at the
option of the Company into a 49.9% equity interest in the related project. The
payments that could be made with these notes would be due in the first half of
fiscal 2003 and final acceptance of the project is expected in the first half of
calendar 2003.

The Pike Project

During the fourth quarter of 2002, one of the Company's customers, LSP-Pike
Energy, LLC ("Pike") notified the Company of its intention to not pay a
scheduled milestone billing on the required due date of August 4, 2002. Pike is
a subsidiary of NRG Energy, Inc. ("NRG"), which is owned by Xcel Energy, Inc.
("Xcel"). In accordance with the terms of the contract, on September 4, 2002,
the Company notified the customer it was in breach of the terms of the contract
for nonpayment and, therefore, the contract was terminated.

Prior to the contract termination, the Company had executed
commitments/agreements to purchase equipment for the project and had also
entered into agreements with subcontractors to perform work on the project.

15

Certain of these commitments and agreements contain cancellation clauses and
related payment or settlement provisions. The Company has entered into
discussions with its vendors and subcontractors to determine the final amounts
owed based on the termination of the project. While the Company believes that,
pursuant to the terms of the contract with Pike, the Company has retained
ownership of a significant amount of equipment that was to be installed on the
project, the project lenders have advised the Company that they may have an
interest in certain of this equipment. Under the terms of the contract between
the Company and Pike, Pike is obligated to reimburse the Company for all of the
costs incurred by the Company, whether before or after the termination, and a
fee for the work performed prior to the termination. The Company believes that
it is owed approximately $130,000,000 in costs and fees over the amounts already
paid under the contract.

The Company is actively pursuing alternatives to collect all amounts owed under
the Pike contract. On October 17, 2002, the Company filed an involuntary
petition for liquidation of Pike, under Chapter 7 of the U.S. Bankruptcy Code to
protect its rights, claims, and security interests in and to the assets of Pike.
In December 2002, Pike disputed the bankruptcy petition in court and discovery
is currently proceeding. The Company also filed suit against NRG and Xcel, along
with certain of their officers to collect amounts due, damages, and costs. In
addition to the legal proceedings, the Company is continuing discussions with
Pike and their lenders in an effort to resolve collection of the amounts owed.

The Company believes it will ultimately recover the costs it incurred and will
incur under the terms of the contract and the profit it has recognized on the
project. No revenue or profit related to Pike was recognized for the three
months ended November 30, 2002. The Company will not recognize any additional
profit it is owed under this contract until it is probable it will collect that
additional amount.

Although the Company expects to recover amounts owed to it (including final
vendor and subcontractor settlements), it is also reasonably possible that the
Company will not recover all of its costs and profit recognized on the project;
particularly if the customer's financial situation continues to deteriorate and
if (i) any dispute regarding the ownership of the equipment in the possession of
the Company is resolved adversely to the Company; or (ii) such equipment cannot
be used on another similar project or liquidated by the Company to recover all
or a portion of the amount owed. NRG has announced that it is in default on
certain of its debt facilities, has failed to make certain principal and
interest payments, and is currently working on a comprehensive restructuring
plan. The amount, if any, that may not be recoverable is dependent upon the
final amounts to be expended by the Company related to the project, the amount
to be realized upon disposition of the equipment related to the project and the
financial wherewithal of the customer in the future, which is dependent upon its
ability to restructure and/or reach agreement with its creditors or to obtain
additional funding from its parent company.

The Company has, in connection with its evaluation of the Pike project,
estimated that (i) it has or will incur costs of approximately $75,000,000 to
$80,000,000 over the amounts that have been previously collected from Pike and
(ii) equipment that was to be installed on the project could be liquidated for
approximately $40,000,000 to $60,000,000. Although the Company does not believe
a loss has been incurred as of November 30, 2002, based on these estimates, if
the Company is unable to collect additional amounts from its customer (or its
affiliates), the Company's potential future loss on the Pike project could range
from $15,000,000 to $40,000,000.

Any potential loss on the project will be recognized (charged to earnings) in
the period when it becomes evident that a loss has occurred and amount of the
loss can be reasonably estimated.

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The Covert & Harquahala Projects

On October 10, 2002, the parent company, PG&E Corp. ("PG&E") of a customer, PG&E
National Energy Group, Inc. ("NEG") announced it had notified its lenders it did
not intend to make further equity contributions as required under the credit
facility to fund two projects, Covert and Harquahala, currently in progress on
which the Company is the EPC contractor. As of January 14, 2003, the Company
continues working on the projects under the contract terms. As of December 31,
2002, these two projects were each over 75% complete with a total cost at
completion of over $600,000,000 each. Therefore, the Company believes these
projects are unlikely to be canceled. If the projects were ultimately terminated
prior to completion, although no assurances can be made, the Company believes
that it would be able to recover any amounts owed to it under the contracts
through collection from the customer, its parent, and/or the lenders. In
addition, the Company believes that it has first lien rights, superior to the
primary lenders, on the partially completed projects. However, the Company
cannot guarantee that these projects will be completed.

Three related agreements for each project combine to effect the target price
contracts. One agreement with each project entity provides for a fixed price
subject to increase by change orders and claims, while the other agreements
provide for payment from NEG of costs in excess of the fixed price. As of
December 31, 2002, the Company's cost estimates indicate total costs for the two
projects will exceed the combined original target prices by approximately
$55,000,000, of which the Company believes substantial amounts will be recovered
through claims and change orders. Approved change orders and claims are
recoverable under the fixed price agreements from the project entities or the
lenders, in the event of assignment. Any costs in excess of the fixed price, as
revised for approved change orders and claims, are nevertheless recoverable from
NEG. Although these costs will remain due from NEG, the Company may not be able
to collect all of these costs, should NEG be unable to pay. Due to increases in
cost estimates, the Company reversed during the three months ended November 30,
2002, $7,700,000 of profit previously recognized on these projects.

On December 13, 2002, the Company filed suit in the. U.S District Court in
Delaware seeking a declaration that NEG has repudiated the contracts and that
the Company is entitled to adequate assurances of performance under these
contracts, including adequate assurance of payment. The suit further requests
that in the event adequate assurance is not provided, the Company be relieved of
its obligation to complete the EPC services on these projects. In addition, the
Company has provided a notice of default under the agreements to NEG and its
lenders, and of its right to terminate the contracts as early as January 15,
2003, unless adequate assurance of payment under the contracts can be made.

Although no assurances can be made, the Company believes it will recover all
amounts owed to it under these contracts through collection from NEG, the
project entities or their lenders. It is reasonably possible however, that the
Company may not collect all future amounts owed to it under this project which
could have a material adverse effect on operating results in the period when the
uncollectable amounts would be recognized.

Note 13 - Changes in Accounting Principles

On December 31, 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 148 -"Accounting for Stock-Based Compensation-Transition and
Disclosure". This statement amends SFAS No. 123 - "Accounting for Stock Based
Compensation" to allow those companies which decide to adopt the fair value
recognition provision of SFAS No. 123 to choose between alternative methods to
transition to this method of accounting for stock-based compensation. SFAS No.
148 also amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28
- - "Interim Financial Reporting" to require Companies to disclose in

17

the summary of significant accounting policies in annual and interim financial
statements their accounting policy for stock-based employee compensation and the
effect of this policy on reported net income and earnings per share. The Company
does not anticipate adopting the fair value method of accounting for stock-based
compensation as set forth in SFAS No. 123 and, therefore, the Company will not
be affected by the transition provisions of SFAS No.148. The Company anticipates
providing the additional disclosures required by SFAS No. 148 in its Condensed
Consolidated Financial Statements for the quarter ended February 28, 2003.

18

PART I - FINANCIAL INFORMATION

ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Introduction

The following discussion summarizes the financial position of The Shaw Group
Inc. and its subsidiaries (hereinafter referred to collectively, unless the
context otherwise requires, as "the Company" or "Shaw") at November 30, 2002,
and the results of their operations for the three-month period then ended and
should be read in conjunction with (i) the unaudited financial statements and
notes thereto included elsewhere in this Quarterly Report on Form 10-Q and (ii)
the consolidated financial statements and accompanying notes to the Company's
Annual Report on Form 10-K for the fiscal year ended August 31, 2002.

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. The statements contained in this
Quarterly Report on Form 10-Q that are not historical facts (including without
limitation statements to the effect the Company or Shaw or its management
"believes," "expects," "anticipates," "plans," or other similar expressions) are
forward-looking statements. These forward-looking statements are based on the
Company's current expectations and beliefs concerning future developments and
their potential effects on the Company. There can be no assurance that future
developments affecting the Company will be those anticipated by the Company.
These forward-looking statements involve significant risks and uncertainties
(some of which are beyond the control of the Company) and assumptions. They are
subject to change based upon various factors, including but not limited to the
following risks and uncertainties: changes in the demand for and market
acceptance of the Company's products and services; changes in general economic
conditions, and, specifically, changes in the rate of economic growth in the
United States and other major international economies; the presence of
competitors with greater financial resources and the impact of competitive
products, services and pricing; the cyclical nature of the individual markets in
which the Company's customers operate; changes in investment by the energy,
power and environmental and infrastructure industries; the availability of
qualified engineers and other professional staff needed to execute contracts;
the uncertain timing of awards and contracts; cost overruns on fixed, maximum or
unit priced contracts; cost overruns which negatively affect fees to be earned
or cost variances to be shared on cost plus contracts; changes in laws and
regulations and in trade, monetary and fiscal policies worldwide; currency
fluctuations; the effect of the Company's policies, including but not limited to
the amount and rate of growth of Company expenses; the continued availability to
the Company of adequate funding sources; delays or difficulties in the
production, delivery or installation of products and the provision of services,
including the ability to recover for changed conditions; the ability of the
Company to successfully integrate acquisitions; the protection and validity of
patents and other intellectual property; and various legal, regulatory and
litigation risks. Should one or more of these risks or uncertainties
materialize, or should any of the Company's assumptions prove incorrect, actual
results may vary in material respects from those projected in the
forward-looking statements. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. For a more detailed discussion of some
of the foregoing risks and uncertainties, see the Company's filings with the
Securities and Exchange Commission, particularly "Item 7- Management's
Discussion and Analysis of Financial Condition and Results of Operations - Risk
Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended
August 31, 2002.

19

General

The Company is a leading global provider of comprehensive services to the power,
process, and environmental and infrastructure industries. Shaw is a
vertically-integrated provider of comprehensive engineering, procurement, pipe
fabrication, construction and maintenance services to the power and process
industries. Shaw is also a leader in the environmental, infrastructure and
homeland defense markets providing consulting, engineering, construction,
remediation and facilities management services to governmental and commercial
customers.

The Company has three operating segments: Integrated EPC (engineering,
procurement and construction - "EPC") Services, Environmental & Infrastructure
("Shaw E&I"), and Manufacturing and Distribution.

Integrated EPC Services

The Integrated EPC Services segment provides a range of design and construction
related services, including design, engineering, construction, procurement,
maintenance, piping system fabrication, and consulting services primarily to the
power generation and process industries.

Environmental & Infrastructure

The Environmental & Infrastructure segment provides services which include the
identification of contaminants in soil, air and water and the subsequent design
and execution of remedial solutions. The Company also provides project and
facilities management capabilities and other related services to
non-environmental civil construction, watershed restoration and the outsourcing
privatization markets.

Manufacturing and Distribution

The Manufacturing and Distribution segment manufactures and distributes
specialty stainless, alloy and carbon steel pipe fittings. These fittings
include elbows, tees, reducers and stub ends.

Comments Regarding Future Operations

Historically, the Company has used acquisitions to pursue market opportunities
and to augment or increase existing capabilities, and plans to continue to do
so. However, all comments concerning the Company's expectations for future
revenue and operating results are based on the Company's forecasts for its
existing operations and do not include the potential impact of any future
acquisitions.

Critical Accounting Policies

Item 7 included in Part II of the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 2002 presents the accounting policies and related
estimates that the Company believes are the most critical to understanding its
consolidated financial statements, financial condition, and results of
operations and which require complex management judgments, uncertainties and/or
estimates. Information regarding the Company's other accounting policies is
included in the Notes to Consolidated Financial Statements in Item 8 of Part II
of the Company's Annual Report on Form 10-K for the fiscal year ended August 31,
2002.

20

Results of Operations

The following table sets forth, for the periods indicated, the percentages of
the Company's net revenues that certain income and expense items represent:

General

The Company's revenues by industry sectors approximated the following for the
periods presented:

The Company's revenues increased to $996.9 million for the three months ended
November 30, 2002 from $453.6 million for the three months ended November 30,
2001. This increase in revenue included an approximate $241.6 million increase
in revenues from the power generation industry sector. This increase was
attributable to increased revenue from the Integrated EPC Services segment for
contracts for the construction of new gas-fired power plants, most of which were
entered into in fiscal 2001 and early fiscal 2002. Additionally, during the
third quarter of fiscal 2002, the Company acquired most of the assets and
assumed certain liabilities of the IT Group, a leading provider of environmental
and infrastructure services to

21

governmental and commercial customers. As a result of this acquisition, the
Company formed a new Environmental & Infrastructure business segment, by
combining the acquired IT Group operations with the Company's existing
environmental and infrastructure businesses. This acquisition increased the
Company's revenues from environmental and infrastructure services to $317.6
million for the three months ended November 30, 2002 from revenues of $37.1
million for the three months ended November 30, 2001, or an increase of $280.5
million. The Company anticipates that revenues for the remainder of fiscal 2003
will be lower than revenues for the current quarter due to the downturn in the
domestic power market.

The Company's revenues by geographic regions approximated the following for the
periods presented:

Revenues for domestic projects increased $509.8 million to $874.3 million for
the three months ended November 30, 2002 from $364.5 million for the three
months ended November 30, 2001. This increase primarily resulted from an
increase in power generation revenues and the acquisition of the IT Group.

Revenues for international projects increased $33.5 million, or 38%, to $122.6
million for the three months ended November 30, 2002 from $89.1 million for the
same period of the prior year. The revenue increase in the Far East was
primarily a result of the work performed on a 600,000 tons per year ethylene
plant in China that is scheduled for completion in fiscal 2005. Additionally,
the revenue increase in Other North America is attributable to revenues realized
from the Canadian operations of the IT Group.

Total backlog at November 30, 2002 was approximately $5.0 billion as compared
with $5.6 billion at August 31, 2002. The decrease in backlog was attributable
to reduction in demand for power generation services. Approximately 88% of the
backlog relates to domestic projects, and roughly 47% of the backlog relates to
work currently anticipated to be completed during the 12 months following
November 30, 2002. The backlog is largely a reflection of the broader economic
trends being experienced by the Company's customers and is important in
anticipating operational needs.

Backlog at November 30, 2002 by industry sector is as follows (in millions):

Environmental and Infrastructure $ 2,264.3 45%
Power Generation 2,150.7 43
Process Industries 527.3 11
Other Industries 59.5 1
------------ ------------
$ 5,001.8 100%
============ ============

22

Backlog is not a measure defined in generally accepted accounting principles and
the Company's backlog may not be comparable to backlog of other companies. The
Company cannot provide any assurance that revenues projected in its backlog will
be realized, or if realized, will result in profits.

The following presents a comparison of the Company's operating results from the
three months ended November 30, 2002 as compared with the three months ended
November 30, 2001 for the Company's three business segments.

Integrated EPC Services Segment

The Integrated EPC Services revenues from customers in the following industry
sectors approximated the following for the periods indicated:

Revenues increased 67% to $666.7 million for the three months ended November 30,
2002, as compared with $398.9 million for the same period in the prior year. The
increase in revenues is due to increased revenue from contracts for the
construction of new gas fired-power plants, most of which were entered into
fiscal 2001 and early fiscal 2002. However, as discussed in Note 12 of Notes to
Condensed Consolidated Financial Statements demand for the construction of new
gas-fired power plants decreased significantly in fiscal 2002 and certain of the
Company's in-process contracts were cancelled or suspended during the fourth
quarter of fiscal 2002. While the Integrated EPC Services segment will realize
increases in revenue related to the construction and maintenance of nuclear
power plants and from other power activities in fiscal 2003 as compared with
fiscal 2002, it is anticipated that due to the downturn in the market for the
construction of new gas-fired power plants that the segment's revenues will be
substantially less in each of the last three quarters of fiscal 2003 as compared
with the first quarter of fiscal 2003 as large EPC projects booked in 2001 and
early 2002 are completed.

Segment gross profit decreased to $45.6 million in the three months ended
November 30, 2002 from $48.9 million in the three months ended November 30, 2001
and the gross profit margin percentage for the three months ended November 30,
2002 decreased to 6.8% from 12.3% in the prior year. Gross profit in the three
months ended November 30, 2002 was increased (cost of revenues decreased) by
approximately $2.7 million for the amortization of liability adjustments to the
fair value of contracts acquired in the Stone &Webster acquisition. (See Note 11
of Notes to Condensed Consolidated Financial Statements.)

The decrease in gross margin and gross margin percentages in the first quarter
of fiscal 2003 as compared with the first quarter of fiscal 2002 was
attributable primarily to (i) adjustments to certain EPC contract costs
estimates in the first quarter of fiscal 2003 which reduced, on a cumulative
basis , the total estimated earnings on the contracts and (ii) a significantly
higher percentage of segment revenues being derived from lower margin revenue
sources including (a) revenues from large equipment purchases that carry a very
low gross margin due to the "pass through" nature of their underlying costs,
which revenues were approximately $130

23

million (approximately 19% of segment revenues) for the three months ended
November 30, 2002 as compared with approximately $30 million (approximately 8%
of segment revenues) for the three months ended November 30, 2001, and (b)
revenues from pipe fabrication (which carry higher gross profit margins than
stand-alone EPC contracts), which decreased slightly in the first quarter of
fiscal 2003 versus 2002 thereby resulting in pipe fabrication contributing a
much lower percentage of total segment revenues.

Segment backlog at November 30, 2002 was approximately $2.7 billion as compared
with approximately $3.3 billion at August 31, 2002, and was comprised of the
following:

The segment's backlog declined from August 31, 2002 because the amount of work
performed on power generation contracts was not fully replaced with new orders
due to the downturn in demand for power generation services.

The Company anticipates that in the future, the Integrated EPC Services segment
will continue to derive significant revenues from the power industry (including
both fossil fuel and nuclear) as the segment expects to increase its revenues
from other sectors of the domestic power industry through, for example,
contracts to re-power, refurbish or maintain existing power plants, and to
provide and install emission control equipment. Further, although award levels
will be less than in prior years, the Company anticipates it will continue to
design and construct new power plants - primarily for regulated utilities.

Additionally, the Company has seen increases in bid and proposal activity in
various foreign process and power industry sectors.

(Note: See Note 12 of Notes to Condensed Consolidated Financial Statements for a
discussion of the contingencies related to certain cancelled and active
Integrated EPC Services projects.)

Environmental and Infrastructure Segment

Environmental & Infrastructure segment revenues for the three months ended
November 30, 2002 were $317.6 million as compared with revenues in the same
period of the prior fiscal year of $37.1 million, an increase of $280.5 million.
This increase was entirely attributable to the Company's acquisition of the IT
Group assets (see Note 4 of Notes to Condensed Consolidated Financial
Statements).

Gross margin for the three months ended November 30, 2002 was $34.0 million as
compared with $8.8 million for the same period of the prior year. Gross profit
in the three months ended November 30, 2002 was positively impacted (cost of
revenues decreased) by approximately $3.0 million for the net amortization of
asset/liability adjustments to the fair value of contracts acquired in the IT
Group acquisition. (See Note 4 and Note 11 of Notes to Consolidated Financial
Statements.)

24

The gross margin percentage was approximately 10.7% for the three months ended
November 30, 2002 and approximately 23.6% for the three months ended November
30, 2001. The reduction in the gross margin percentage for the three months
ended November 30, 2002 as compared with the three months ended November 30,
2001 was attributable to lower margin contracts associated with the businesses
acquired in the IT Group transaction. The Company anticipates that for the
remainder of fiscal 2003 the gross margin percentage for the Environmental &
Infrastructure segment will approximate the gross margin realized during the
three months ended November 30, 2002. The difference in the gross margin
percentages between the Company's pre-IT Group environmental and infrastructure
operations (primarily infrastructure and hazardous material clean up and
disposal) and those acquired in the IT Group asset acquisition (environmental
clean-up, landfills and facilities management) is primarily attributable to such
factors as different customers, competition and mix of services.

Backlog in this segment at both November 30, 2002 and August 31, 2002 was
approximately $2.3 billion. The Company believes the Environmental &
Infrastructure segment revenues will increase over the next several years, as a
result of a combination of factors, such as, market opportunities in various
environmental clean-up, homeland defense and infrastructure markets and the
Company's belief that it will be able to re-gain market share which the IT Group
lost while it was experiencing financial difficulties, including the period in
which it was in bankruptcy during the first four months of calendar 2002. The
Company anticipates that segment revenue will decline in the second quarter of
fiscal 2003 and recover in the third and fourth quarters of fiscal 2003.

Manufacturing and Distribution Segment

Revenues decreased to $12.6 million for the three months ended November 30, 2002
from $17.5 million for the three months ended November 30, 2001. Additionally,
segment net income decreased in the first quarter of fiscal 2003 to
approximately $.5 million from approximately $1.7 million in the first quarter
of fiscal 2002. These decreases were attributable to market conditions, which
reflected less demand and resultant pricing pressures.

General and Administrative Expenses, Interest Expense and Income, and Income
Taxes

General and administrative expenses increased to approximately $49.9 million for
the quarter ended November 30, 2002 as compared with $30.9 million for the
quarter ended November 30, 2001. As a percentage of revenues, however, general
and administrative expenses decreased to 5.0% for the three months ended
November 30, 2002 compared with 6.8% for the three months ended November 30,
2001. A substantial portion of the approximate $19 million increase in general
and administrative costs is attributable to the operations of Shaw E&I
(comprised largely of the IT Group businesses which the Company acquired in the
third quarter of fiscal 2002). Many of Shaw E&I's contracts are cost-plus and
allow for reimbursement of general and administrative costs. Accordingly, a
large percentage of Shaw E&I's general and administrative costs are directly
reimbursed through its contract provisions. Additionally, the Company is
incurring increased depreciation and facilities costs in fiscal 2003 resulting
from capital projects completed in the latter part of fiscal 2002. The Company
anticipates that it will reduce its total general and administrative expenses in
the remaining quarters of fiscal 2003 from the first quarter 2003 level as a
result of reduced revenues from the construction of gas power generation plants.

25

Interest expense for the quarters ended November 30, 2002 and November 30, 2001
was approximately $5.8 million. Substantially all of the Company's borrowings
are attributable to its LYON's subordinated debentures which were issued in
fiscal 2001 (see Note 7 of Notes to Condensed Consolidated Financial
Statements). Accordingly, the Company's interest expense for the quarter ended
November 30, 2002 remained comparable with interest expense for the same period
in fiscal 2002 because there was no substantive change in the amounts borrowed
or interest rates. The Company's interest costs include the amortization of loan
fees associated with the LYONs and the Credit Facility and, therefore, the
Company's interest expense is higher than would be expected based on its
borrowing levels and the LYONs stated interest rate. The primary components
(accretion of zero coupon discount interest and amortization of loan fees) of
the Company's interest expense are non-cash charges.

Interest income for the quarter ended November 30, 2002 decreased to
approximately $1.5 million from $3.0 million for the quarter ended November 30,
2001 as a result of lower interest rates and lower levels of invested funds.

The Company's effective tax rate was 36% for the quarters ended November 30,
2002 and 2001. The Company's tax rate is primarily impacted by the mix of
foreign (including foreign export sales) versus domestic work.

Liquidity and Capital Resources

Net cash used in operations was $69.1 million for the three months ended
November 30, 2002 compared with $79.2 million of net cash provided by operations
for the three months ended November 30, 2001. For the quarter ended November 30,
2002 cash was increased by (i) net income of $16.5 million, (ii) deferred tax
expense, depreciation and amortization of $14.1 million, and (iii) interest
accretion and loan fee amortization of $5.1 million. These increases were more
than offset as net cash was decreased by changes in certain assets and
liabilities of $102.0 million, comprised primarily of reductions in accounts
payable and advanced billings and billings in excess of cost and estimated
earnings on uncompleted contracts. Partially offsetting these uses of cash was
an increase in accrued expenses. During fiscal 2002 and 2001, the Company billed
and collected substantial advanced billings on its larger EPC contracts, which
positively impacted cash flow in fiscal 2002 and 2001, however, the Company's
cash flow in the first quarter of fiscal 2003 was negatively impacted as the
Company utilized these funds to pay project costs. Further, the Company did not
receive a substantial amount of advanced billings in the first quarter of fiscal
2003. The Company expects that its cash flow will continue to be negatively
impacted by the payment of project costs for which it has received advance
payments during the remainder of fiscal 2003.

Additionally, the Company acquired a large number of contracts in the Stone &
Webster and IT Group acquisitions with lower than market rate margins due to the
effect of the financial difficulties experienced by Stone & Webster and the IT
Group on negotiating and executing contracts prior to acquisition. These
contracts were adjusted to their fair value as an asset or liability and the
related amortization of the liability has the net effect of reducing cost of
revenues for the contracts as they are completed, while the amortization of the
asset increases costs of revenues. Cost of revenues was reduced on a net basis
by approximately by approximately $5.7 million and $8.1 million during the
quarters ended November 30, 2002 and 2001, respectively, through the
amortization of these adjustments, which is a non-cash component of income. The
amortization of these assets and liabilities resulted in a corresponding net
increase in gross profit. The adjustments are amortized over the lives of the
contracts, which for certain IT Group contracts, will continue for five to ten
years. See Note 4 and Note 11 of Notes to Condensed Consolidated Financial
Statements.

26

Net cash used in investing activities was $6.8 million for the first quarter of
fiscal 2003, compared to $2.4 million for the same period of the prior fiscal
year. During the first three months of fiscal 2003, the Company purchased $7.5
million of property and equipment which represents a "normal" level of property
and equipment expenditures for its existing operations.

Net cash used in financing activities totaled $49.3 million for the quarter
ended November 30, 2002, compared to $3.8 million of net cash used in the first
quarter of fiscal 2002. During the three months ended November 30, 2002 the
Company purchased approximately 3,171,000 shares of its Common Stock for a cost
of approximately $47.8 million. These purchases completed the Company's $100
million Common Stock repurchase program that it initiated in September 2001. The
Company also made payments on credit lines, debt and leases of approximately
$1.7 million.

The Company's primary credit facility ("Credit Facility"), dated July 2000, is
for a three-year term, and provides that both revolving credit loans and letters
of credit may be issued within the limits of this facility. The Credit Facility
was amended on February 28, 2002 to, among other matters, increase the total
Credit Facility to $350 million from $300 million and to eliminate the previous
$150 million limit on letters of credit. The amended Credit Facility allows the
Company to borrow either at interest rates (i) in a range of 1.50% to 2.25% over
the London Interbank Offered Rate ("LIBOR") or (ii) from the prime rate to 0.75%
over the prime rate. The Company selects the interest rate index and the spread
over the index is dependent upon certain financial ratios of the Company. The
Credit Facility is secured by, among other things, (i) guarantees by the
Company's domestic subsidiaries; (ii) a pledge of all of the capital stock of
the Company's domestic subsidiaries and 66% of the capital stock in certain of
the Company's foreign subsidiaries; and (iii) a security interest in all
property of the Company of its domestic subsidiaries (except real estate and
equipment). The Credit Facility also contains restrictive covenants and other
restrictions, which include but are not limited to the maintenance of specified
ratios and minimum capital levels and limits on other borrowings, capital
expenditures and investments. Additionally, the Credit Facility established a
$25 million aggregate limit on the amount of the Company's Common Stock
repurchases and/or LYONs repurchases made subsequent to February 28, 2002,
without prior consent. Subsequent consent was provided to allow the Company to
complete in October 2002 the $100 million Common Stock repurchase program which
was authorized by the Company's Board of Directors in September 2001(see Note 2
of Notes to Condensed Consolidated Financial Statements). As of November 30,
2002, the Company was in compliance with these covenants or had obtained the
necessary waivers. At November 30, 2002 letters of credit of approximately
$173.2 million were outstanding and no revolving credit loans were outstanding
under the Credit Facility. The Company's total availability under the Credit
Facility at November 30, 2002 was approximately $176.8 million. At November 30,
2002, the interest rate on this line of credit was either 4.25% (if the prime
rate index had been chosen) or 2.94% (if the LIBOR rate index had been chosen).

Although the Company had no borrowings outstanding under the Credit Facility as
of November 30, 2002, the Credit Facility is still fully available to the
Company. As of November 30, 2002, the Credit Facility was being used primarily
to provide letters of credit to satisfy various project guarantee requirements.
The Company currently anticipates that it will revise and extend the Credit
Facility in the second or third quarter of fiscal 2003. The Company has also
previously used this Credit Facility to provide working capital and to fund
fixed asset purchases and subsidiary acquisitions, including the acquisition of
substantially all of the operating assets of Stone & Webster.

The Company's cash flow and/or working capital for the remainder of fiscal 2003
will be impacted by such factors as (i) the amount of increased working capital
necessary to support the operations and the settlement of assumed liabilities of
the recently acquired IT Group, (ii) payment of costs on projects for which
significant

27

advance payments had been previously received and the timing and negotiated
payment terms of its projects, (iii) developments with respect to the Pike, NEG
and other IPP projects (see Note 12 of Notes to Condensed Consolidated Financial
Statements) and (iv) its capital expenditures program. Further, the Company
anticipates recording in the third quarter of fiscal 2003 an increase in the
current maturity of long term debt (as a reduction to working capital) related
to the Company's LYONs' obligations. This adjustment will not affect actual
liquidity requirements in fiscal 2003. However, an adjustment to classify a
substantial amount of the debt as having a current maturity will be required
because the owners of the LYONs' notes are permitted, if they choose to do so,
to submit these notes to the Company in May 2004 for repurchase by the Company.
The Company may choose to repurchase the LYONs in either cash or shares of the
Company's Common Stock, or a combination of Common Stock and cash. Accordingly,
as a result of these factors, the Company's expects its working capital position
to decrease during the next twelve months.

The Company believes that its $355 million of working capital and unused
borrowing capacity of $176.8 million at November 30, 2002, is in excess of its
identified short-term working capital needs, (based on its existing operations)
and that it will have sufficient working capital and borrowing capacity to fund
its operations for the next twelve months.

Financial Accounting Standards Board Statements

On December 31, 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 148 -"Accounting for Stock-Based Compensation-Transition and
Disclosure". This statement amends SFAS No. 123 - "Accounting for Stock Based
Compensation" to allow those companies which decide to adopt the fair value
recognition provision of SFAS No. 123 to choose between alternative methods to
transition to this method of accounting for stock-based compensation. SFAS No.
148 also amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28
- - "Interim Financial Reporting" to require Companies to disclose in the summary
of significant accounting policies in annual and interim financial statements
their accounting policy for stock-based employee compensation and the effect of
this policy on reported net income and earnings per share. The Company does not
anticipate adopting the fair value method of accounting for stock-based
compensation as set forth in SFAS No. 123 and, therefore, the Company will not
be affected by the transition provisions of SFAS No.148. The Company anticipates
providing the additional disclosures required by SFAS No. 148 in its Condensed
Consolidated Financial Statements for the quarter ended February 28, 2003.

28

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

The Company is exposed to interest rate risk due to changes in interest rates,
primarily in the United States. The Company's policy is to manage interest rates
through the use of a combination of fixed and floating rate debt and fixed rate
short-term investments. The Company currently does not use any derivative
financial instruments to manage its exposure to interest rate risk.

As discussed in Note 7 of Notes to Condensed Consolidated Financial Statements,
on May 1, 2001, the Company issued $790 million (face value) 20-year, 2.25%,
zero-coupon, unsecured, convertible debt for which it received net proceeds of
approximately $490 million. After paying off approximately $67 million of
outstanding debt, the remaining proceeds were invested in short term, AAA debt
instruments and were used for general corporate purposes.

As of November 30, 2002, the Company had a $350 million credit facility ("Credit
Facility") that permits both revolving credit loans and letters of credit. At
November 30, 2002 letters of credit of approximately $173.2 million were
outstanding and no revolving credit loans were outstanding under the Credit
Facility. The Company's total availability under the Credit Facility at November
30, 2002 was approximately $176.8 million. At November 30, 2002, the interest
rate on this line of credit was either 4.25% (if the prime rate index had been
chosen) or 2.94% (if the LIBOR rate index had been chosen). See Note 7 of Notes
to Condensed Consolidated Financial Statements for further discussion of this
line of credit.

Foreign Currency Risks

The majority of the Company's transactions are in U.S. dollars; however, certain
of the Company's subsidiaries conduct their operations in various foreign
currencies. Currently, the Company, when considered appropriate, uses hedging
instruments to manage its risks associated with its operating activities when an
operation enters into a transaction in a currency that is different than its
local currency. In these circumstances, the Company will frequently utilize
forward exchange contracts to hedge the anticipated purchases and/or revenues.
The Company attempts to minimize its exposure to foreign currency fluctuations
by matching its revenues and expenses in the same currency for its contracts. As
of November 30, 2002, the Company had a minimal number of forward exchange
contracts outstanding that were hedges of certain commitments of foreign
subsidiaries. The exposure from the commitments is not material to the Company's
results of operations or financial position.

ITEM 4. CONTROLS AND PROCEDURES

a) Evaluation of disclosure controls and procedures. Within the 90 day
period prior to the filing date of this Quarterly Report on Form 10-Q,
the Company's management, including the Company's Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of
the design and operation of the Company's disclosure controls and
procedures. Based on that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer believe that:

o the Company's disclosure controls and procedures are
designed to ensure that information required to be disclosed
by the Company in the reports it files or submits under the
Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in
the SEC's rules and forms; and

29

o the Company's disclosure controls and procedures operate
such that important information flows to appropriate
collection and disclosure points in a timely manner and are
effective to ensure that such information is accumulated and
communicated to the Company's management, and made known to
the Company's Chief Executive Officer and Chief Financial
Officer, particularly during the period when this Quarterly
Report on Form 10-Q was prepared, as appropriate to allow
timely decision regarding the required disclosure.

b) Changes in internal controls. There have been no significant changes
in the Company's internal controls or in other factors that could
significantly affect the Company's internal controls subsequent to
their evaluation, nor have there been any corrective actions with
regard to significant deficiencies or material weaknesses.

30

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On August 5, 2002, the Company was notified by NRG Energy, Inc. ("NRG")
that due to liquidity issues, neither NRG nor its subsidiary, LSP-Pike
Energy, LLC ("Pike"), could make the next scheduled payment on the project
for which the Company had a contract involving engineering, procurement,
and construction of a combined cycle power plant in Holmesville,
Mississippi. Consequently, on October 17, 2002 the Company filed an
involuntary petition for liquidation of LSP-Pike Energy, LLC, under Chapter
7 of the Bankruptcy Code in the United States Bankruptcy Court for the
Southern District of Mississippi, Jackson Division, to protect its rights,
claims and security interests in and to the assets of Pike. Additionally,
the Company filed suit against NRG and Xcel, and certain of their officers
in the United States District Court for the Southern District of
Mississippi, Jackson Division, to collect amounts due, damages and costs. A
lien has also been filed on the project property. The Company is continuing
discussions with NRG, Xcel, and the lenders in an effort to resolve this
matter. In December 2002, Pike disputed the bankruptcy petition in court
and discovery is currently proceeding. Also see Note 12 to the Notes to
the Condensed Consolidated Financial Statements in Part I of this report,
which is hereby incorporated by reference, for a further discussion of the
Pike project.

ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fiscal quarter ended November 30, 2002, there were no matters
submitted by the Company to a vote of its security holders.

ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K

A. Exhibits

99.1 Certification pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).

99.2 Certification pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).

B. Reports on Form 8-K

During the quarter ended November 30, 2002, the Company did not file a
Form 8-K.

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SIGNATURES AND CERTIFICATIONS

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

THE SHAW GROUP INC.

Dated: January 14, 2003 /s/ Robert L. Belk
----------------------------------
Chief Financial Officer
(Duly Authorized Officer)

32

CERTIFICATIONS

I, J.M. Bernhard, Jr., President and Chief Executive Officer of The Shaw
Group Inc., certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of The Shaw Group Inc.;

2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Quarterly Report;

3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
Quarterly Report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Quarterly
Report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this Quarterly Report (the "Evaluation Date"); and

c. presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
Quarterly Report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: January 14, 2003 /s/ J. M. Bernhard, Jr.
--------------------------------------
J. M. Bernhard, Jr.
President and Chief Executive Officer

33

I, Robert L. Belk, Executive Vice President and Chief Financial Officer of
The Shaw Group Inc., certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of The Shaw Group Inc.;

2. Based on my knowledge, this Quarterly Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Quarterly Report;

3. Based on my knowledge, the financial statements, and other financial
information included in this Quarterly Report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
Quarterly Report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Quarterly
Report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this Quarterly Report (the "Evaluation Date"); and

c. presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
Quarterly Report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: January 14, 2003

/s/ Robert L. Belk
-----------------------------------
Robert L. Belk
Executive Vice President and
Chief Financial Officer

34

THE SHAW GROUP INC.

EXHIBIT INDEX

Form 10-Q Quarterly Report for the Quarterly Period ended November 30,
2002.

A. Exhibits

99.1 Certification pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).

99.2 Certification pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed
herewith).

35