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McDermott Splits Power/Gas to Keep Government Options Open

Offshore oil and gas infrastructure producer and power generation system manufacturer McDermott International Inc. said early last week that it plans to separate its operating subsidiaries, Babcock & Wilcox Co. (B&W) on the power side and J. Ray McDermott S.A. (J. Ray) on the oil and gas side, into two independent, publicly traded companies.

The company noted that the separation will allow B&W to pursue new nuclear contract awards with the U.S. government by eliminating the risk posed by recent modifications of the rules under the Federal Acquisition Regulations that limit the government's ability to contract with inverted companies and their subsidiaries. McDermott is incorporated in Panama as a result of its inversion in the 1980s. McDermott added that the move will better position each company for growth based on corporate strategies, market opportunities, free cash flow and customer relationships.

The separation is anticipated to be effected through a spin-off of B&W, a transaction that is intended to be tax-free to McDermott shareholders. Following completion of the separation, McDermott is expected to be renamed J. Ray McDermott SA, and shareholders will own 100% of two separate companies: B&W and J. Ray. The transaction is expected to be completed in nine to 12 months, the company said.

B&W will be a technology innovator in power generation and a specialty manufacturer of nuclear components with a legacy spanning more than 140 years. B&W designs, engineers, manufactures and constructs power generation systems, primarily for large utility and industrial customers, as well as related aftermarket parts, services and environmental control systems. B&W will be headquartered in Charlotte, NC, and will still be headed by Brandon C. Bethards as president and CEO.

For the U.S. government -- its largest customer -- B&W supplies nuclear components for defense programs and manages and operates nuclear facilities and environmental management sites. B&W, including its joint venture companies, employs more than 15,000 worldwide.

J. Ray, an engineering, construction and installation company focused on the offshore upstream oil and gas market, will provide front-end design and detailed engineering, construction and installation of offshore production facilities, pipelines and subsea systems. J. Ray's principal executive offices will remain in Houston and will be led by Stephen M. Johnson as president and CEO. He will assume this role at year-end in connection with the previously announced retirement of current President and CEO Robert A. Deason.

J. Ray's customers include national and major oil and gas companies worldwide and the company has a significant presence in the Americas, Asia-Pacific, Caspian Sea and Middle East markets. The company employs approximately 16,000 worldwide.

"The separation of B&W and J. Ray will be a transformational event for McDermott, which we expect to deliver important benefits to our shareholders, as well as the employees of each business," said McDermott CEO John A. Fees. "We believe that as separate, independent, publicly traded entities, B&W and J. Ray will benefit from enhanced management focus, more efficient capital allocation and greater operational and strategic flexibility. Given that McDermott has historically operated each business independently under the B&W and J. Ray franchises, including separate external credit facilities, we believe this should be viewed as a seamless transition for our customers and employees."

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