Stone & Webster, Inc. Business Information, Profile, and History

Company Perspectives:

Stone & Webster, A Shaw Group Company, is one of the world's foremost engineering-construction companies. Founded in Boston in 1889 as an electrical testing laboratory and consulting firm, Stone & Webster has evolved into a global organization employing more than 5,000 people worldwide. Stone & Webster meets the needs of clients, public and private, in virtually every sphere of activity. Today, Stone & Webster is a full service engineering and construction organization, offering the managerial and technical resources that are vital to solving complex energy, environmental, infrastructure and industrial challenges worldwide.

History of Stone & Webster, Inc.

Stone & Webster, Inc., one of the nation's engineering giants, has since 1889 offered its customers in the United States and the world engineering, design, construction, consulting, and environmental services to build electric power plants, petrochemical plants and refineries, factories, infrastructure, and civil works projects. Stone & Webster helped build substantial portions of the nation's power production infrastructure, including coal, oil, natural gas, nuclear, and hydroelectric plants constituting around 20 percent of U.S. generating capacity. The company played a significant role in the nation's defense efforts during World War I and II and afterwards, helping develop the A-Bomb, constructing large shipyards, and creating alternate means of production of strategic materials such as synthetic rubber. Much of the world's capacity in petrochemical and plastics development was also developed as a result of Stone & Webster efforts. After a sudden decline in fortunes in the late 1990s, the company declared bankruptcy in 2000 and was bought by the Baton Rouge, Louisiana-based engineering firm the Shaw Group. Stone & Webster continues to be a leader in power plant construction, engineering, and plant management, as well as in hazardous waste management and environmental services.

Origins in the 19th Century

The company's founders were two electrical engineering graduates from the Massachusetts Institute of Technology (MIT), Charles A. Stone and Edwin S. Webster, who started their own firm, the Massachusetts Electrical Engineering Company, a year after their graduation. Electrical engineering was a new field in the 1880s--Thomas Edison had patented the incandescent lamp only a decade earlier--and Stone and Webster opened their doors in spite of discouraging advice from respected mentors such as Professor Charles Cross, who told them that "there might be enough electrical consulting work to support one of you, but not both."

From the company's start in Boston in 1889, however, there was work for both, work which initially involved small jobs such as testing equipment and performing feasibility studies. Stone and Webster soon developed original testing systems and expanded their test activities to encompass the complete range of electrical equipment.

A year after the company that became known as Stone & Webster opened for business, it obtained its first significant contract, with the S.D. Warren Company in Maine, to design and install a direct current generating plant associated with a dam, along with a transmission line to the Warren paper mill a mile distant. In this task and those that followed, the new engineering company hired part-time university students, beginning a relationship with the Boston academic community which would continue into the 1990s.

By the early 1900s, Stone & Webster had diversified rapidly, involving itself in engineering, building, constructing, and managing power plants, and developing a name for its ability to build and operate integrated systems fueled either by coal or hydroelectric generation. Initial start-up operations were handled by the company's plant betterment division, which created and used an early form of quality control. In addition to its plant operations, the company also installed and managed lighting systems and electric-powered street railway systems.

By 1906, a number of major engineering projects were in process in six states, with several others being planned. To handle the load, Stone & Webster formed its first subsidiary, Stone & Webster Engineering Corporation, which managed all engineering, construction, and purchasing activities. Corporation activities underwent rapid growth, and by 1910 some 14 percent of the nation's total electrical generating capacity had been designed, engineered, and built by Stone & Webster.

Military and Power Projects in the 1920s-30s

After the onset of World War I, Stone & Webster took on a variety of military assignments, including designing and building new arsenals, military bases, airfields, and camp facilities, as well as the massive Hog Island Shipyard at Philadelphia, which employed 35,000 workers and had more launching ways than the three largest British shipyards combined. Once open, Hog Island completed 82 ships in two and one-half years.

In the post-armistice years and into the next decade, the company continued to grow and expand in the United States as well as abroad, constructing increasingly larger power plants and stations and transmission lines, as well as laboratories, factories, sugar refineries, warehouses, and a variety of other facilities. By 1920, the company also began building what at that time was the world's longest continuous tunnel, an 18.2 mile water tunnel which doubled the supply of Catskill water to Manhattan.

That year, Stone & Webster also managed 59 utility companies in 18 states and held a financial interest in many of them. As the decade moved on, growing national energy needs resulted in a need for increased availability of financing, and Stone & Webster responded in 1927 by merging with a 41-year-old investment banking organization to create a new investment subsidiary. During the next three years, the subsidiary participated as a principal in originating and underwriting more than a billion dollars in security issues and participating in the sale of nearly one-quarter of all new offerings syndicated in the United States.

In 1929, Stone & Webster decided for the first time to offer its stock to the public at $100 a share. However, in the words of former company President William F. Allen, Jr., in an address to the Newcomen Society, "That was not, perhaps, the greatest piece of timing." Only a few months later, the stock market crashed, eventually bringing the value of Stone & Webster stock to the low teens during the worst years of the Depression.

The 1930s were particularly challenging years for Stone & Webster. While the momentum in construction built by long-term contracts signed in the boom years of the late 1920s carried the company through 1931, new business became increasingly difficult to secure. During the early part of the decade, the company built, among other projects, the Rock Island Dam (the first to cross Washington's Columbia River), the 50-story RCA building in New York City, and a natural gas pipeline in Texas and New Mexico; however, by 1934 the company had far fewer contracts and was forced to reduce its staff.

Moreover, with the 1930 acquisition of Engineers Public Service, a utility holding company, Stone & Webster had itself become a utility holding company. When the Public Utilities Holding Company Act was passed just five years later, Stone & Webster was forced to choose between remaining a holding company or focusing on the engineering and construction business. The company opted to divest itself of its utility holdings. Through the mid-1930s, Stone & Webster continued to be active in appraisals and studies for major clients and in designing and constructing plants. As the decade drew to a close, the chemical industry began to undergo a rapid expansion, and Stone & Webster established a petroleum division.

War Efforts

America's entry into World War II brought a dramatic increase in demand for all types of engineering and construction, and Stone & Webster became intensely involved in the war effort. According to former Stone & Webster president Allen, "Few elements of war production were not impacted in a significant way by Stone & Webster." Typical Stone & Webster wartime assignments included the design and construction of cartridge case plants, a complete steel foundry, a plant to produce bombsights and other equipment, a plant furnishing fire-control instruments, a facility producing aircraft superchargers, and three TNT-production plants, in addition to meeting demands for infrastructure and power facilities. The company was also called upon to engage in more creative projects. For example, since the Japanese invasion of Southeast Asia had eliminated virtually all of the world's access to natural rubber, Stone & Webster was asked to develop a production process for synthetic rubber technology, and the company subsequently designed or built all U.S. plants for the production of butyl rubber.

Perhaps the most creative Stone & Webster wartime effort was its involvement in the Manhattan Project, which devised the atomic bomb. Beginning in early 1942, company efforts resulted in the establishment of a completely separate engineering organization employing 800 engineers and draftsmen in order to examine ways to obtain large quantities of fissionable uranium-235. Stone & Webster also built an electromagnetic separation plant and constructed a city in Oak Ridge, Tennessee, that ultimately housed 75,000 workers. These extensive efforts were undertaken despite the complexities that often follow a change in organizational leadership, for in 1941, after 52 years, founder Charles Stone passed away; five years later, partner Edwin Webster retired from his position as chairman of the board.

Postwar Growth and the Nuclear Power Industry

Immediately after the end of the war, demand for Stone & Webster services rose rapidly among U.S. public utilities. Under the leadership of Texan George Clifford, the company began to build interstate gas pipelines and compressor stations and also became the largest single stockholder in the Tennessee Gas Transmission Company (Tenneco). Unique solutions were found to problems related to the need to store natural gas under extreme pressure in stainless steel containers underground. The company built the world's largest turbine manufacturing plant and also continued to concentrate heavily on power generation. In 1949, Stone & Webster accounted for some 16 percent of the steam electric generating capacity in the United States.

The company was also retained on tasks that helped shift the nation's economy from a defense to a civilian basis, such as estimating the costs of deactivation and stand-by maintenance of defense plants and shipyards, providing technical advice and services on Japanese reparations, evaluating the mobile equipment that remained in overseas theaters, and continuing work at Oak Ridge.

During the 1950s and 1960s, Stone & Webster was perhaps the most significant engineering company to be involved in the nation's developing nuclear power industry. Chosen after a competition with 90 other companies to build the nation's first nuclear power plant in Shippingport, Pennsylvania, Stone & Webster was subsequently selected to design and supervise the construction of a large accelerator at the Brookhaven National Laboratory, design the neutron shield tank for the nuclear-powered merchant ship N.S. Savannah, and engineer and construct a prototype atomic energy power plant for the U.S. Army.

The steady demand for electric power generation also meant an increase in construction contracts for more conventional power plants. By the early 1950s, Stone & Webster had built 27 separate hydroelectric plants constituting 5 percent of U.S. capacity, steam power plants aggregating six million kilowatts in capacity, and some 6,000 miles of power transmission lines.

During this time, the company also obtained a variety of chemical process contracts in the United States, Canada, Japan, and other countries to meet the worldwide demand for plastics. Under the "process" category, the company designed ethylene plants, oil refineries, artificial gas producing plants, paper mills, specialized processing and purification facilities, extraction plants, and breweries. From 1950 through 1970, for example, the company designed 22 petrochemical plants in Japan alone.

As the 1960s drew on, however, Stone & Webster's petrochemical and plastics activity began to slow as U.S. refinery capacity caught up with customer demand and declined accordingly. To smooth the impact of these fluctuations, the company diversified its process interests, developing, for example, a more extensive relationship with the paper industry. During the decade, the company designed the first commercial mill to make pulp from hardwood trees.

Slowing business activity also resulted in some conceptual restructuring within the company, including an effort to standardize designs in areas of proven success and placing a greater emphasis on the use of project work teams that combined staff with differing specialized skills. The increased emphasis on teaming fit well with Stone & Webster's need to address problems that developed in the energy supply sector in the mid- to late 1960s and was used in the design of synthetic natural gas plants, a liquified natural gas distribution center, and demonstration projects in coal and oil gasification.

During the 1970s, major world events--including the two OPEC (Organization of Petroleum Exporting Countries) oil embargoes, uncertainty in the chemical process industry with respect to feedstock supplies, increasing opposition to the use of nuclear power, and a growing public awareness of environmental issues--brought difficulties as well as new business opportunities for Stone & Webster.

The high prices that followed the embargoes, for example, constrained energy demand and thus reduced the need for new electric generating capacity. Utilities looked into every possible alternative to meet demand, short of constructing major new baseload stations, resulting in "one of the severest drop-offs in building in the history of the engineering-construction industry," according to former Stone & Webster president William Allen in Public Utilities Fortnightly (July 20, 1989). An equally severe, simultaneous downturn in international construction compounded the problem.

Challenges in the 1970s-80s

Stone & Webster's difficulties with constructing conventional power plants were matched by its problems in nuclear construction. By the late 1970s, the company had attained a central role in the nuclear power industry--a significant portion of all nuclear energy in the United States was being generated at plants designed and generated by Stone & Webster. In 1975, the company had been selected to construct the Clinch River Breeder Reactor. However, increasing public opposition to the construction of nuclear plants, lengthy delays brought by challenges before Public Utility Commissions, and corresponding increases in plant construction costs, capped by the incident at Three Mile Island in 1979, brought about a moratorium on the construction of large nuclear plants and the cancellation of many existing orders.

The company began to respond to these challenges during the remainder of the 1970s and into the early 1980s. Stone & Webster met its clients' reluctance to build by improving engineering and construction efficiencies through the use of computer-assisted design and innovative working agreements with contractors and the building trades unions, as well as by providing services that kept plants operating safely, efficiently, and for a longer time than originally intended.

To further survive in this complex business environment, Stone & Webster began to more intensely solicit government and international business, increase its activity in the area of environmental protection and alternative energy production, continue its activity in extending the lives of existing power plants, and develop other areas of diversification as long as they did not distract from the company's core business--engineering. Stone & Webster also began to phase out those parts of the company that were unrelated to its core activities and no longer considered financially viable, such as its securities subsidiary.

In the 1990s, Stone & Webster faced a business environment in which its core activities of power plant and petrochemical plant construction were lagging, and new areas targeted for growth had not yet fulfilled their potential. As a result, company stock performance was sluggish, and in 1992 a stockholder group headed by corporate gadfly Bob Monks attacked Stone & Webster management, asserting that the company had not exploited its assets to keep its stock price high and inquiring as to growth plans the company intended to institute in order to raise stock value. Over the two years that followed, Monks brought suit in federal court and also took action before the Securities and Exchange Commission (SEC) on issues related to Stone & Webster's performance, but both the court and the SEC rejected his assertions.

In 1994, the company registered a net loss of $7.8 million despite revenues of over $818 million. Recognizing that a need existed to improve its financial picture, Stone & Webster opted for a further change in its traditional marketing strategy. The company centered its hopes for future growth on a broader expansion of its core businesses into global markets, a cutback in its dependence on power generation, and the expansion of its environmental and transportation efforts.

According to then president and CEO Bruce Coles, Stone & Webster's engineering and construction efforts were projected to move from 80 percent in the power market to between 30 and 50 percent by the year 2000. Government contracts in transportation and the environment were expected to constitute another 17 to 25 percent of revenues, with 16 to 25 percent from process activities, and 8 to 15 percent from the industrial sector. Coles estimated that some 40 percent of Stone & Webster's business would take place overseas by 2000.

In the mid-1990s, new Stone & Webster environmental services contracts included an exclusive licensing arrangement with Texaco entered into in 1994 to help develop and market the High Rate Bioreactor (HRB), which used bacteria to detoxify industrial and municipal wastes. Stone & Webster was also involved in the U.S. Department of Energy's nuclear cleanup efforts at Hanford, Washington, and Rocky Flats, Colorado; water and sewer cleanup programs that included the cleanup of New York and Boston harbors; the development of a land-based sludge disposal system for New York City; and the expansion of the wastewater treatment system at Disney World in Florida.

Stone & Webster's infrastructure and transportation activities during this time included the engineering and design of railway and other large transit systems, including part of the Washington, D.C. metro; major airport improvements in Denver and Miami; bridge construction, such as the eight mile-long bridge linking Prince Edward Island to the Canadian mainland; and roadway upgrading, including work on the New Jersey Turnpike. Moreover, the company's advanced computer applications efforts included the use of three-dimensional models; expert systems which monitored, diagnosed, and recommended solutions in areas from equipment vibration to chemical plant processing; and advanced controls that continuously monitored all plant operations.

Changes in Leadership in the Late 1990s

Despite its challenges, Stone & Webster appeared to retain considerable strengths on which to draw. Once the impact of strategies responsive to the business environment of the 1990s had been put in place, company officials and outside observers seemed reasonably optimistic about the company's prospects as it moved on into its second century. However, righting the company was difficult, and after a quick turnover of leadership in the mid-1990s, Stone & Webster found itself floundering. CEO Coles had spent his entire career moving up the ladder at Stone & Webster. Three months after being named chairman in 1995, Coles resigned, citing only personal reasons for his abrupt departure. Coles was succeeded by H. Kerner Smith, who became president and CEO in 1996 and chairman in 1997. Smith had been the chief executive of several global engineering firms. He had been president and CEO of Riley Consolidated, Inc., a manufacturer of power plants, and had served as managing director of the German engineering giant Deutsche Babcock AG. Smith was also well known as an advocate of the so-called independent power movement, which sought to restructure the electric utility industry. Well aware of the problems at Stone & Webster, Smith vowed to turn the company around. Smith's hiring was taken as a positive sign by dissident shareholders, who included not only Bob Monks but Frank Cilluffo, a company director who owned 11.5 percent of the company's shares. Early in 1996, Cilluffo dropped a proxy resolution which had demanded that the company sell off some non-essential assets, apparently because he was cheered by the hiring of Smith. Shareholders seemed mollified by mid-1997, when the company projected a 15 percent increase in earnings per share. The company's stock price rose to over $40 in May 1997, financial performance was on the upswing, and H. Kerner Smith was credited with having changed the direction of Stone & Webster.

There was little sign that anything was wrong at the company in the late 1990s. Stone & Webster announced it was selling some buildings in Boston in 1997 but claimed that this was only because the company had an excess of real estate. The chief financial officer, who was retiring as the sale took place, assured a Boston Globe reporter (June 10, 1997) that despite rumors that the company was struggling, it was, in fact, "very strong financially." Stone & Webster also moved its corporate headquarters out of New York City and back to Boston, and sold or subleased office space in New York and New Jersey. Whatever was actually the case in 1997, by 1999 Stone & Webster had serious cash flow problems. Company executives later charged that chairman Smith had consistently underbid on projects in order to win business, putting Stone & Webster on shaky ground. A lawsuit filed in 2001 revealed that by late 1999 Stone & Webster was desperate for cash and had been forced to cancel some everyday expenses, such as newspaper delivery to corporate headquarters. While problems had evidently been building up for some time, in was only in May 2000 that the company revealed that a cost overrun at a domestic project it would not name had led to what it called "liquidity problems." The company's stock price plummeted by more than 50 percent in one day, as Stone & Webster declared it would have to restate its 1999 financial results. Chairman Smith soon resigned, as did the president and chief operating officer. The company declared bankruptcy and was up for sale. The Jacobs Engineering Group seemed the likely buyer, with a bid for $150 million. However, Jacobs was swept aside by the Shaw Group, a Baton Rouge supplier of fabricated piping and other equipment for both the power and the oil and gas industries. Shaw took on Stone & Webster for $163 million, assuming about $450 million in liabilities as well as assets valued at roughly $600 million.

The sudden bankruptcy of the venerable company elicited ire and consternation. The Shaw Group filed suit against former chairman Smith, who was due a severance package estimated at more than $10 million. Allegations swirled that Smith had tried to hide the weakening condition of the company in order to provoke a sale. Shaw shepherded its new subsidiary through bankruptcy proceedings that lasted for three years. The acquisition of Stone & Webster had doubled Shaw's size, and the subsidiary seemed to do well under its new owner. Stone & Webster picked up contracts for work around the globe. In 2002, it won a contract for managing a construction project for gas works for the Abu Dhabi Marine Operating Company in the United Arab Emirates. It secured work on a power project in the United States and began other projects in the Middle East, Turkey, and China in the early 2000s. The company finally emerged from bankruptcy in late 2003. Under the Shaw Group, Stone & Webster was part of a global leader with revenue of over $3.3 billion. The Stone & Webster subsidiary retained 5,000 employees, working on construction and engineering projects, hazardous waste management, and environmental services across the world.

Principal Subsidiaries: Stone & Webster Engineering, Ltd. (United Kingdom); Stone & Webster Engineering Corporation; Stone & Webster Management Consultants, Inc.; Stone & Webster Abu Dhabi UAE, Inc.; Stone & Webster Asia Corporation.

Principal Competitors: Jacobs Engineering Group, Inc.; Tetra Tech, Inc.; URS Corporation.

Chronology

• Key Dates:
• 1889: Stone and Webster found company in Boston.
• 1906: The company opens its first subsidiary.
• 1929: Stone & Webster goes public.
• 1942: The company begins involvement in the Manhattan Project.
• 1975: Stone & Webster is selected to build the Clinch River nuclear plant.
• 1995: The company's chairman resigns after three months on the job.
• 2000: Liquidity problems force the company into bankruptcy; Stone & Webster is acquired by Shaw Group.
• 2003: The company emerges from bankruptcy.