Good day and welcome to the KBR 2008 Fourth Quarter Earnings Call hosted by KBR. This call is being recorded. As a reminder, your lines will be in a listen-only mode for the duration of the call. There will be a question-and-answer session immediately following prepared remarks. You will receive instructions at that time. For opening remarks and introductions, I would like to turn the call over to Mr. Rob Kukla, Director of Investor Relations. Please go ahead, sir.

Thank you, Margaret. Good morning and welcome to KBR's fourth quarter 2008 earnings conference call. Today's call is also being webcast and a replay will be available on KBR's Web site for seven days. The press release announcing the fourth quarter results is also available on KBR's Web site. Joining me today are Bill Utt, Chairman, President and Chief Executive Officer, and Kevin DeNicola, Senior Vice President and Chief Financial Officer. In today's call, Bill will provide opening remarks and business outlook. Kevin will address KBR's operating performance, financial position, backlog and other financial items. We will welcome questions after we complete our prepared remarks. Before turning the call over to Bill, I would like to remind our audience that today's comments may include forward-looking statements reflecting KBR's views about future events and their potential impact on performance. These matters involve risks and uncertainties that could impact operations and financial results and cause our actual results to differ from our forward-looking statements. These risks are discussed in KBR's Form 10-K for the year-ended December 31, 2008, KBR's quarterly reports on Form 10-Q and KBR's current reports on Form 8-K. Now I will turn the call over to Bill Utt. Bill?

Thanks, Rob, and good morning, everyone. I'm very pleased with KBR's fourth quarter and full year 2008 results. KBR achieved record profitability in 2008, outpacing last year's income from continuing operations by 69%. In 2008, KBR grew revenue by 32% and business unit income by 43%. In regards to the fourth quarter of 2008, consolidated KBR revenue totaled $3.4 billion, up almost 42% from the $2.4 billion in the fourth quarter of 2007. The services business unit led the revenue increase with a 522% year-over-year improvement, due largely to the BE&K acquisition, followed by a 71% increase for downstream, a 36% increase for upstream, a 28% increase for technology and a 13% increase for G&I. Income from continuing operations for the fourth quarter of 2008 was $88 million or $0.54 per diluted share compared to $48 million or $0.28 per diluted share for the prior year fourth quarter, representing a 93% increase per share. Let me take a moment to discuss backlog. Total backlog was $14.1 billion at the end of December 2008, up 8% from the end of 2007 and down 8% sequentially from the September 2008 quarter. From the sequential comparison perspective, while backlog was down $1.2 billion, approximately $630 million of this decrease was due to foreign exchange adjustments. The remainder of the backlog decline was from normal project work off. During the fourth quarter, KBR did not experience any project cancellations. Further, I was pleased with the sequential backlog growth in the downstream and technology business units driven by several new feed awards and technology licenses and engineering packages. I will go into more detail on these matters later as I discuss the individual business units. Now let me discuss some operational highlights for our KBR business units. With respect to our upstream business unit, during…

Thanks, Bill. I will begin by reviewing KBR's consolidated fourth quarter 2008 results, which primarily focus on year-over-year comparisons. Consolidated KBR revenue for the fourth quarter of 2008 totaled $3.4 billion compared to $2.4 billion in the fourth quarter of 2007. Consolidated operating income was $153 million for the fourth quarter of 2008 compared to operating income of $82 million for the fourth quarter of 2007. Operating income in the fourth quarter of 2008 included a positive contribution of a $24 million change order related to the previously disclosed charge on an LNG project and $20 million charge related to the FCPA judgments and a $6 million charge related to the U.S. Embassy project in Macedonia. Operating income in the fourth quarter of 2007 included $22 million charge related to potentially disallowable costs incurred under U.S. government contracts in the Middle East for activities dating from 2003. Now upstream revenues was $822 million for the fourth quarter of 2008. That's up $219 million or 36% from the fourth quarter of 2007. Business income was $65 million in the fourth quarter of 2008 compared to $64 million reported in the fourth quarter of 2007. Business unit income in the fourth quarter of 2008 included a positive contribution of a $24 million change order related to a previously disclosed charge on an LNG project and the $20 million charge related to the FCPA judgments. The increase in business unit income was driven by the North Rankin 2 offshore project in Australia and by gas monetization, including increases in the Skikda LNG project, Gorgon LNG project and the Pearl GTL project, and partially offsetting this increase was lower activity in several offshore projects near completion. Government infrastructure revenue in the fourth quarter of 2008 was $1.8 billion compared to $1.6 billion in the…

Thanks, Kevin. I would like to offer my thoughts on KBR's outlook on the present state of KBR's markets. As you know, KBR has established significant positions across three distinct market segments, U.S. and Canadian E&C, military services, and global hydrocarbons. First in the U.S. and Canadian E&C market, KBR has seen a general slowing of activity across this market. We see our customer community increasingly focused on awarding their projects to those E&C firms who have demonstrated a track record of delivering on their commitments with high quality and outstanding safety performance. Further, we see projects now clearly being driven on a cost basis rather than a scheduled basis. While the Canadian oil sands market is readjusting to the lower oil price environment, we believe it will take another three months to six months for the E&C supply chain to reduce its costs to allow owners to move forward on the next round of projects in the present commodity environment. In the U.S. we have seen a slowing in our general industrial and commercial building activities. But our power and construction management activities in the education and healthcare arenas remain fairly strong. Second, in our military services market, KBR envisions a stable level of activity under our LOGCAP activities through the remainder of 2009. Our level of activities beyond 2009 however could be influenced by decisions taken over the coming months by the Obama administration. Within our G&I group, we have seen a slowing of infrastructure activity in the Middle East, but we continue to remain optimistic at our prospects in the Australian and U.S. infrastructure markets. Finally, in our global hydrocarbon businesses, we see many of the long lead LNG and offshore projects continuing to move forward. There has been a slow down in the downstream market as…

(Operator instructions) And our first question today comes from the line of John Rogers, D.A. Davidson. John Rogers – D.A. Davidson: Hi, good morning. Bill, you talked about some of your end markets and I was just wondering for a little more clarity on what you're seeing in terms of pricing, especially in the private sector. Where these markets are slowing, are you seeing real price compression?

John, when you say price compression, you're referring to the costs that we offer our customers? John Rogers – D.A. Davidson: Yes, the margins that you're building into your project.

Yes, we are seeing a response particularly on the hydrocarbon side where they are looking to depress the supply chain and it's engineering, it's the procurement, it's the commodities, it's the construction costs and we are seeing that – I would say universally with our hydrocarbon customers and also the other customers we have in our services businesses. And as you know, when you look at an EPC project, the scope of supply for engineering is maybe 8% to 10% at tops, and our margins are of again a much smaller component. We have seen in the supply chain the cost of our commodities for steel, copper, aluminum, nickel. They have all fallen very similarly to what we have seen in the oil price and so those are already achieved. John Rogers – D.A. Davidson: But those just pass through for the most part –

Those pass through. The equipment costs that we have, they have not come down to the degree that the other costs have come down as well. We think their backlogs are still pretty good through '09. But over time we think they will start moving their costs down and perhaps get to levels maybe more quickly than not that will allow projects to move forward. We certainly were able to execute projects in the '04, '05 period when oil was $35 a barrel and believe that over time if oil sustains itself at that level, the cost structure would also fall. But on the equipment side, we are seeing delivery times come in, become shorter delivery times. We see big validities go out longer. And so we're beginning to see the signs that lead us to believe that their costs will come down as well. Certainly on the construction side, the reduction in activity has brought the labor situation into a better supply and demand balance. As we look up in Canada, the union hauls just are posting for workers and so we expect construction labor costs to also moderate and are seeing some evidence of that in the per diems, the overtimes and other ancillary costs that are being – that we're seeing our projects undertake going forward. So, yes, we are seeing a lot of cost pressure, we are trying to help our customers in achieving the lowest delivered cost of their projects. John Rogers – D.A. Davidson: Okay. Thank you.

And our next question comes from Joe Gibney, Capital One Southcoast. Joe Gibney – Capital One Southcoast: Hi, good morning, everybody. Just one quick question on the tax true-up on a minority interest side. Ex that item, where are we on the quarter for 4Q?

Say that again? Joe Gibney – Capital One Southcoast: You indicated the fair amount of noise in the minority interest relative to a tax true-up. Where are we ex that on the two unconsolidated entities that you mentioned?

That's why I gave you the full year. I think if you take the full year and look at it ratably, I think you got a good indication of what should be going on a quarterly basis. Joe Gibney – Capital One Southcoast: Thanks.

Sure.

And next is Barry Bannister with Stifel Nicolaus. Barry Bannister – Stifel Nicolaus: Hi. The Escravos burn in the quarter, apparently there was very little. What was it?

Escravos burn during the year, Barry, was up from '07. We were successful in achieving some incentives during the year from our customer. I don't know the specific number, but it was – we are in the field. We have fundamentally got the home office stuff down and so the focus is getting all the project activities onsite and we are staffing up and making good construction progress. Quarter-over-quarter, from a revenue side, we were approximately 250% of what we had in the third quarter of '08. We had a pretty good pickup third quarter – in fourth quarter of '08 from third quarter of '08. Barry Bannister – Stifel Nicolaus: Yes, can you just give me a number?

Well, we really haven't broken out the Escravos numbers yet and we prefer not to. Barry Bannister – Stifel Nicolaus: Alright. One of the other competitors has achieved some inroads in Afghanistan on LOGCAP IV and I think I heard you say that you had some RFPs but not a lot of success in Afghanistan. Could you just clarify what you said there?

Yes, we – there have been – to my recollection four task orders that have been awarded. I think there was even one in the press today that was awarded. They have been relatively small. We have not been successful in any of these four. The task orders that – now the task orders that we have seen, some have been in Kuwait, some have been in Afghanistan but we are expecting that we will see larger Afghanistan task orders come out during the first half of '09. And we think that this initial work has been in part a – and again, I'm offering you only my opinion, maybe a part by the customer to help stand up some of the new players in the arena to on smaller projects to give them the ability to more credibly bid the larger projects that will be coming out in the balance of '09. Barry Bannister – Stifel Nicolaus: But you really haven't moved off of your original expectations of the percentage of LOGCAP IV that you had retained relative to what you retained of LOGCAP III?

Yes, we are still expecting that by the end of '09, all of LOGCAP III will have been converted into LOGCAP IV, and that of the remaining work in theater, we would certainly have our 40% plus of that and we believe in LOGCAP IV it would be at a higher margin. Okay. Thank you.

And next we will go to Andrew Kaplowitz with Barclays Capital. Andrew Kaplowitz – Barclays Capital: Good morning, guys.

Good morning, Andy. Andrew Kaplowitz – Barclays Capital: So you gave some outlook on the end markets and on new award. I know you sometimes done this in the past and you did this in early January, talked about consensus and being comfortable with it. Are you still comfortable with consensus (inaudible) or can you give us any sort of EPS guidance for 2009?

This is Kevin. I think that the reason why we gave the guidance what we did is that I think guys have had pretty good handles on things and that was about as good as we could get it. I think we try to make sure you understand just where we see the business going forward based on what Bill's remarks were today. But in general, we're still comfortable with what people are looking at right now in the earnings estimates.

I think our policy, Andy, has been just to make the one comment at the end of December period and we will keep everybody updated on events but we don't want to get into a continuing commentary on guidance. Andrew Kaplowitz – Barclays Capital: Okay. That’s okay. If you could talk about the government work, like we see sort of the activity out of Washington in terms of worries around legacy projects that you have worked on in Iraq. And so maybe, Bill, if you could comment a little bit on what you see out there. Has that hindered your business at all? Do you worry about that when it comes to LOGCAP IV? Because there is a lot of noise out there in Congress, particularly.

Yes, first of all, you can't ignore that what's written in the paper, but – then again the Congress is not our customer on the LOGCAP activity. So our customer is the Army, that's under the Pentagon. We continue to get very good and in many cases, excellent award fee evaluations of our performance in conducting that work. And so, our customers very happy with what we're doing and how we're doing it and recognizing that in our award fee scoring. So – and we're continuing to get new work. We have those two orders in the Corps of Engineers and we had the series of work that we talked about I guess in the third – or the fourth – the call for the third quarter we had, as I recall, $190 million or so of awards under the CENTCOM contract. So we're still very active. We're still getting good awards of work. And yes, we still suffer from, I guess, former Chairman of our former parent who was a former executive officer of the United States, but we think that's going to come down. In fact, there was even a correction at the Associated Press issue today correcting some of the statements that were made around the possible involvement of KBR in electrocution matters in theater so. The truth is certainly there with respect to the Army in terms of our performance and it's slowly getting out to Congress and some will choose to read it and accept it and others may have other agendas to publicize things. At the end of the day, we are very comfortable that the facts on all these matters are on KBR side and we will be vindicated as these matters go through their third party determinations. Andrew Kaplowitz – Barclays Capital: Okay. Thank you.

Okay.

And we will now take the question from Jamie Cook of Credit Suisse. Jamie Cook – Credit Suisse: Hi, good morning.

Hi, Jamie. Jamie Cook – Credit Suisse: Congratulations. Two quick questions, one on BE&K, you did say that I think for the year it was about $0.12 accretive, which was better than you thought. I know you gave some color on what you thought about the U.S. and Canadian construction markets, which is BE&K, but anything on an EPS level or will it be more accretive than 2008 even with the slowing in the market? And then my second question, Bill, if you could just speak about on the hydrocarbon side whether you are seeing your burn rates slow as projects get sort of pushed out? And as we look at backlog, is there anything that you sort of thought was going to move forward that's now on hold and if you could quantify that?

Jamie, this is Kevin. Let me take the first part of your question. I think that we felt with the acquisition and what we announced on it we should report on that kind of thing and we did report that we did better than we had originally predicted as far as that was concerned. We folded this thing into at least three business units now. And so we're really not breaking it out for our own purposes as much as what we would do with you. So it's really kind of hard to sort of continue to answer that kind of question going forward. We're very pleased with what it is doing. It added backlog. We've got work in there that we have talked about and you will continue to hear about it. It’s primarily in the services area. So I think you will be able to discern that but we're not breaking it out ourselves anymore. Jamie Cook – Credit Suisse: Okay. That's fair.

Jamie, on the hydrocarbon side, it certainly was announced and I think we have commented on the delay at Yanbu for six months waiting for the reduction in the EPC packages they're looking for. We've commented throughout the year about the delays of Train 7 and our comments have been so extensive we no longer comment on Train 7. But things are moving forward. I think they are taking a little more systematic approach as they evaluate things, but these large hydrocarbon projects are certainly from our participation 48 month to 55 month projects. Our customers, which are typically the national oil companies and increasingly the IOCs have access to cash. They do not need the credit markets to execute these projects and certainly the global demand for hydrocarbons for new hydrocarbon resources is significant even under a no growth economic scenario for the next 15 years. So while things may be moving a little slower than we like, we haven't seen anything that’s been materially delayed from our standpoint beyond what we've commented on Yanbu and Train 7. Jamie Cook – Credit Suisse: Okay. And then just my last question, Bill. We heard a lot of the competition talk about the market moving more towards fixed-price going forward. KBR has made a concerted effort to be a cost plus contractor, and I am just wondering how that holds up in a more challenging environment?

Jamie, let me correct your assessment. We haven't made an affirmative decision to become a reimbursable contractor. We have been very steadfast in driving our organization towards best in class risk awareness. And I personally and our management team and our board certainly welcome the opportunity to look at lump sum fixed price projects. Certainly, the home office services on the Skikda project are lump sum and we continue to look at other projects. Now I will tell you we are much more disciplined than we ever have been in looking at risks and the context of risk and we are having very open discussions with our customers. And certainly as the volatilities in the marketplace have calmed down, we believe we will see more fixed price work as you point out. But I also will tell you that we are willing to play in the fixed price arena and believe we can do so certainly very competitively and certainly much more profitably than we have in the prior four years or five years. Jamie Cook – Credit Suisse: Alright. I will get back in the queue.

And next is Steven Fisher, UBS. Steven Fisher – UBS: It sounded like from a call a couple of weeks ago the resolution of Nigeria was a pretty important thing to get resolved. Now that it is out of the way, wondering, Bill, if you can comment on what's the next most pressing legacy issue or issues that you're most concerned with resolving now?

Well, I would like to – well certainly the issues become smaller. We have the inventory of the arbitrations and we're waiting to understand better the awards we expect to get clarity on in the first quarter, Enomanus [ph] and EPC 1, which would really with the two EPC resolutions last year have really cleared our decks of these major arbitrations. So we ought to have that business behind us. Certainly, as we move towards embracing our new monitor, there is some bit of unknown there. But as I commented in our call, the other week, I think we've already got best in class controls and we'll certainly welcome the monitors view on that but we do things very much according to law. We've been doing those at KBR since before I got here three years ago. These are Halliburton initiated policies and we think they have held the company in good stead since then. So – the deck in terms of projects that need to be converted, arbitrations that need to be finalized, settlements that need to be made is vastly reduced from what it was and I think by the end of the first quarter if our schedules hold a form we will have largely put those behind us. Steven Fisher – UBS: Okay. And then just a follow-up on Jamie's question. To the extent that you do elect to do fixed price work under new contracts in the down cycle over the next year or two. How can you protect yourself from cost overrun as the cycle heats up again?

Well, we are going to spend a lot of time on with our supply community going back to back, necessarily allocating risk that we're taking from our customer down to creditworthy suppliers, and we have very extensive and recurring discussions with our customers regarding this. We are also looking at how do we estimate the risks and perform our internal stress testing of projects to make sure we have appropriate levels of contingencies, funded liabilities, et cetera. We are looking to share risk – as you have seen on many of the big LNG projects, we have done these in partnerships with other firms that provide us an additional double regard, but also additional resources to look at the risk that we take. And we have a fairly good idea of how much risk we want to take in our portfolio and are willing to talk to our customers about that. And there may be evolutions where certain elements could still be reimbursable. That remains to be seen from our discussions with the customer. But it's certainly an area that we're comfortable moving forward in because I think we do a much better job of understanding the risk and are certainly our tolerance for how much risk we can take in any one project. Steven Fisher – UBS: Okay. Thanks a lot.

We will go to Dan Pickering, Tudor Pickering Holt. Dan Pickering – Tudor Pickering Holt: Morning, guys.

Hi, Dan. Dan Pickering – Tudor Pickering Holt: Services, the margins there nicely up from Q4 to Q3 – sorry Q3 to Q4. BE&K obviously a player in that segment. I guess the question is, is that margin level in services sustainable? Were there any one time issues in the fourth quarter we need to be aware of?

I think we had a – Dan, we generally have seen historically the return of some workmen compensation premiums to us in the fourth quarter that provides us kind of mid to high single digit bumps and some of that gets allocated out but it's primarily within services. But that was the big mover that we saw in the fourth quarter, but it was good performance. The MMM vessels that we have are under new contracts and because that's an asset-based business, those margins have moved up and we had the full quarter of operations. In the third quarter, we had one of the units in dry dock and one of the units under an old contract. So we saw the MMM business pick up and that should be sustainable for – those are five-year contracts and so those were the drivers. Dan Pickering – Tudor Pickering Holt: Okay. Alright. So sounds like maybe a little bit of help from workers' comp, so we maybe scale back a bit, but not dramatically as we step through the – ?

Yes, I think on an annual basis, the workman's comp nets out. We probably are a little conservative in our accruals in the first three quarters and get a little bit of a bump in the fourth quarter. Dan Pickering – Tudor Pickering Holt: Okay. And my other question then would be, just as we look at a new administration trying to pump a lot of dollars, infrastructure gets talked about a lot. Can you talk about what if any impact that might have on KBR opportunities? Is the government going to spend money in different places or is that right down your alley?

Well, they are going to spend money in a lot of places. Our positions and infrastructure are really – Texas, Alabama, little bit in California, little bit in Florida, in terms of our civil engineering business that does water plants, roadways, transportation, we do the construction management at Panama City Airport. We've also got some benefit we'll expect to see in the Department of Defense spending as monies come back and they are doing some refurbishments of bases. We also think a lot of the infrastructure is – when it trickles down, we will go to some smaller contractors and maybe not the national players. And so when I think of the Obama stimulus package, I'm not seeing material impact at the KBR level because our U.S. based infrastructure business is a relatively small piece of our overall business, but I think it will bump up a little bit, but it's a positive impact on small part of our business. Dan Pickering – Tudor Pickering Holt: Okay. So not a game changer but nice on the margin?

Nice on a small margin, yes. Dan Pickering – Tudor Pickering Holt: Okay. Thank you.

And next is Will Gabrielski of Broadpoint AmTech. Will Gabrielski – Broadpoint AmTech: Good morning, guys.

Good morning. Will Gabrielski – Broadpoint AmTech: Any thoughts on mix between LOGCAP III and LOGCAP IV? Do you guys have an internal expectation on that this year – what your mix will be?

Well, I think the work that we are aware of that's going to go initially in the first half will be packages in Afghanistan where we're providing services. I think we do – when Iraq goes, it will be late in '09. But I don't sense you're going to see a change in – a material change in what we're looking at in terms of volumes at KBR for 2009. I think it's going to be primarily, even if they do make changes, you will still see the bulk of – the vast majority of the revenues being LOGCAP III revenues. Will Gabrielski – Broadpoint AmTech: Okay. And then one last question because the majority of my questions have been asked and answered but in terms of your guidance range and being comfortable with consensus numbers and obviously that's a very wide range and implies a pretty big revenue delta. Is that dependent on certain programs moving forward? Is that dependent on Gorgon kicking in a certain percentage? What are the main drivers that you guys are looking at to make you comfortable with either the high end or low end of that range or where you fall in between?

Well, again, I want to stay away from the guidance issue. We have a backlog under contract. We think most of its going to – most of the impact for '09 comes from what's in our backlog today and that's – that has been a pretty solid backlog to-date. Alright. Thanks.

We will now go to Vance Edelson, Morgan Stanley. Vance Edelson – Morgan Stanley: Hi, thanks a lot. Just back on the G&I discussion for a moment, but maybe with a different angle, could you elaborate on how the administrations latest views on getting troops out of Iraq in perhaps 19 months, what's the overall impact that any changes in timing could have on the business? How are you thinking about the reset opportunities that you might be involved in regarding the pullout and how that might drive revenues? Thanks.

Our views on what the administration will do are formed by what we read in the paper. We really don't have any unusual insights or any private insights from that. We have commented before that with the amount of troops they got in Iraq, it will take a long time to move the troops out and then to move the equipment and facilities out there. There are – within Iraq and Afghanistan, I believe we have over 88,000 facilities, we say. I think that's just the Iraq component, the 88,000. So when you are thinking about that magnitude of facilities and then the amount of people that are – that go into occupying those facilities, a decision today to have everybody leave in our minds is going to take two years of hard work just to get it all taken out, condition reset and having the sites returned to the conditions that we found them. Vance Edelson – Morgan Stanley: Okay. And one quick follow-up on the share buyback. Could you elaborate a little more on what the pattern might be in terms of when you think you can be in the market during the quarter? Will there be blackout periods or are you saying that – are you saying that you might be able to establish…

What we are going to do is basically put it into like a 10b5-1 or something that basically says, we put it in the hands of the people so we don't – they don't have any material information (inaudible) have material information, we just want it on autopilot. That's the way we're working it. Vance Edelson – Morgan Stanley: So it's kind of on auto pilot hopefully as long as the share count is above 160 –

The initial impact will be we will try to bring the shares in and then after that, it's going to be very minimal. We're periodically only issuing some restricted stock that might vest or something like that. So you're not going to really notice it. I think that's our whole point is that we're going to just try to hold it on an anti-dilutive basis like that to 160. Vance Edelson – Morgan Stanley: Okay. Makes sense. Thanks a lot.

And we will go to Martin Malloy of Johnson Rice. Martin Malloy – Johnson Rice: My questions have been answered. Thank you.

(Operator instructions)

Hi, Margaret, this is Rob. If we've got nobody else in the queue, then we will go ahead and complete the call.

Thank you, sir. There are no additional questions at this time.

Okay. Thank you. Thanks for joining the call today. We look forward to the next earnings call. Thanks.

Ladies and gentlemen, that does conclude today's conference. We thank you for your participation. You may now disconnect.