Fitch Rates Fluor's $300MM Convertible Senior Unsecured Notes.

Business Editors

CHICAGO--(BUSINESS WIRE)--Feb. 10, 2004

Fitch Ratings has assigned an 'A' rating to Fluor's new $300 million issue of 20-year convertible senior unsecured notes. The Rating Outlook is Negative.

Proceeds from the new notes will be available to support working capital requirements and other corporate uses, including the possible refinancing of a capitalized lease for Fluor's Aliso Viejo office facilities, maturing in 2004, that has a balance of approximately $100 million. The notes may be redeemed for cash, at the noteholders' option, at their five-year anniversary. Redemptions or conversions at other dates may be paid in cash or stock at Fluor's option.

The new notes represent Fluor's only meaningful long term debt aside from approximately $127 million of capitalized leases and $18 million of municipal bonds, excluding normal operating leases. As the proceeds are expected to meet working capital and other current funding requirements, Fitch views the debt as supporting Fluor's liquidity. Any further increase in working capital requirements beyond current levels, however, could potentially represent a fundamental step-up in project investment by Fluor, with a resultant increase in net debt that could weaken the company's financial profile. Fitch anticipates, however, that such increases, including those related to the Hamaca project, would be funded internally. Conversely, Fluor's capital structure could be enhanced by the convertibility option of the new notes which could lead to future equity issuance and a stronger equity base.

The rating incorporates Fluor's conservative financial policies and financial profile, its capacity to absorb moderate project losses, the company's franchise presence in its engineering and construction activities, and a history of profitability. In addition, as the company gradually builds up its service businesses, it should benefit from a more diverse and stable revenue base. These businesses generated roughly one-third of operating profit in the first three quarters of 2003.

Rating concerns include exposure to economic cycles and potential losses inherent in the engineering and construction industry. The negative outlook reflects concerns about the potential effect of Fluor's Hamaca project on working capital requirements and on profitability, as well as about longer term trends in backlog, margins and net investment in Fluor's project portfolio. It will be important in 2004 for Fluor to demonstrate its continued ability to generate adequate gross margins and cash flow necessary to maintain equity growth, liquidity and net debt levels consistent with recent historical measures.

Working capital requirements for the start up of cost reimbursable work in 2004 initially have resulted in commercial paper usage for the first time since the middle of 2001. The increased usage is considered normal given the wind down of energy projects that were funded by client advances, but such work creates modest incremental risk that the increased investment in working capital by Fluor could become permanent and result in higher losses in the event of project disputes.

Fluor has three separate claims totaling $669 million pertaining to the Hamaca oil project in Venezuela. While considered large, these claims could reasonably be expected to be recovered on a timely basis and without significantly reducing Fluor's anticipated gross margin. Partial resolutions of the claims through arbitration were initially expected to be reached by the end of 2003 but have been postponed to the first quarter of 2004. Although not currently anticipated, arbitration settlements resulting in excessive write-offs would negatively affect the ratings.

Fluor has ample liquidity, including cash advances from clients that typically have represented around half of the company's total cash balances and that are designated for project funding. In addition, committed bank facilities totaling $700 million expire between October, 2004 and 2006 and include letter of credit capacity, a revolving credit facility, and $300 million of commercial paper backup lines. Commercial paper outstanding as of Dec. 31, 2003 was $121 million.