BWX Technologies Inc (BWXT) 2010 Q3 法說會逐字稿

Ladies and gentleman, thank you for standing by, and welcome to the Babcock & Wilcox Company Third Quarter 2010 Earnings Conference Call. At this time, all participants are in listen-only mode. Following the Company's prepared remarks, we will conduct a question and answer session, and instructions will be given at that time. I would now like to turn the call over to your host for today, Mr. Michael Dickerson, B&W's Vice President and Investor Relations Officer. Please go ahead.

Thank you, Alicia, and good morning, everyone. Welcome to the Babcock & Wilcox Company Third Quarter 2010 Earnings conference call. I'm Mike Dickerson, Vice President and Investor Relations Officer at B&W.

Joining me this morning are Brandon Bethards, B&W's President and Chief Executive Officer, Mary Pat Salomone, Chief Operating Officer, Mike Taff, Chief Financial Officer, and James Canafax, our General Counsel. Many of you have already seen a copy of our press release from last night. For those of you who have not, it is available on First Call and on our website at babcock.com.

During this call, certain statements we make will be forward-looking. I want to call your attention to our Safe Harbor provision for forward-looking statements that can be found at the end of our press release. The Safe Harbor provision identifies risk factors that may cause actual results to differ materially from the content of our forward-looking statements. Our registration statement on Form 10 and the most recent quarterly report on Form 10-Q on file with the SEC provide further detail about the risk factors related to our business.

The format for today's call will first be some opening remarks by Brandon about the current business environment and status of our major initiatives. Second, Mike will provide financial details about the quarter. And finally, Brandon will conclude with comments on the Company's outlook, followed by a question and answer period.

Due to the number of participants on today's call, I would ask that you limit yourself to one question and perhaps one follow-up, and of course you are welcomed to get back into the queue.

Finally, I would encourage you to read the basis of presentation footnote in our 10-Q for a detailed description of the presentation of financial information for the third quarter.

With that, I will now turn the call over to Brandon.

Thank you Mike and good morning everyone and thank you for joining us. I would like to start by saying that I am pleased with our results for the third quarter as the Company continues to execute very well with regard to our backlog and daily operations and generate healthy earnings. While I hesitate to call a bottom, economic indicators and power consumption metrics would suggest that at this point in the business cycle that our power markets are perhaps bouncing along at the bottom. While I have been through this before, it certainly feels that way.

Having said that, I would like to point out that earnings per share were up roughly 41% from the prior year third quarter, while revenues were a little lighter than we expected. Remember, however, that a significant portion of our earnings are from entities that are reported in equity income and never run through backlog or revenues. However, these earnings continue to grow and they continue to add meaningfully to our success.

Overall, operating income is up 41.1% in the third quarter of '10, compared to the third quarter of '09. This is the first year-over-year increase in operating income since the third quarter of 2008. However, this quarter's earnings growth is only part of the story. There are a number of other important points that I would like to highlight for you.

First, let me begin with safety, which is one of the key metrics we use to measure our operational performance. Our safety performance remains on track to achieve significant year-over-year improvements. However, as you may know, continuous improvement of our safety performance is not an easy task. Our current total recordable incident rate is about 1.25, which is already a small fraction of the average industrial rate in the United States. For the first nine months of 2010, this represents a 13% improvement compared to the prior year.

Second, consolidated backlog has remained steady at $4.4 billion from the end of the second quarter. More importantly, as the government segment backlog sequentially declined due to its normal seasonal pattern, the power generation systems segment backlog increased sequentially by $205 million.

This increase is primarily due to our success in the US and international nuclear equipment and services market, with contributions from fossil power and environmental aftermarket services and growth in our energy from waste and biomass in our European operations.

Third, power generation from coal in the US is well ahead of 2009 levels and is beginning to approach peak 2007 values. Coal-fired power generation is up approximately 7.5% for the first eight months of 2010 compared to the same period in 2009. This is primarily due to weather conditions and continuing modest economic growth. Our customers' power generation systems are now running harder, while at the same time, they have significantly curtailed routine maintenance of their fleet over the last few years.

If US economic growth continues in 2011, I believe that we will begin to experience a recovery in capital and non-capital maintenance spending, as utilities will seek to minimize outage risk of their low variable cost coal-fired generation assets.

Also, I'd like to point out that our short-term growth initiatives continue to play out as we expect. EPA regulation is at the forefront of our utility customers' planning process. A confluence of regulations is expected to come together next year, and our customers are beginning to take a comprehensive look at their power generation systems to plan for the implementation of environmental equipment and the associated services necessary to comply with the proposed regulations.

We are beginning to field calls from our customers looking for our assistance during this planning process. And as many of you know, with approximately one third of the US market share during the last environmental equipment cycle, as well as our full complement of environmental products and services that we offer, we are well-positioned to help our utility customers comply with these regulations.

The previously mentioned success in the US nuclear power aftermarket is in part responsible for our power generation backlog growth in the third quarter of 2010. This is a significant market with 104 active reactors in the US that all require replacement components from time to time and outage service every 18 to 24 months.

While our commercial nuclear business in the US was sold in the 1980s, we retained our technology and market position in Canada. This has given us an operational platform and the necessary credibility with our US customers and has greatly assisted with our expansion into the US market this year.

As many of you know, the expansion of our government M&O business has contributed to the government operations segment's earnings growth over the last few years. I am pleased to advise that this expansion continued with the recent award of a $2.1 billion D&D contract at the retired gaseous diffusion plant in Ohio. This award is expected to contribute to significant earnings growth in 2011. I'd also like to point out that given that these earnings are recognized as equity income, this booking is not reflected in our quarter-end backlog.

Before I turn the call over to Mike to discuss our financials in more detail, I would like to talk a bit about the status of our major initiatives. First, our expansion in India continues as planned. We are still early in the process, having recently secured land for a new ultra-supercritical boiler manufacturing facility. Licenses and regulatory approvals are nearly all in place, and the Company is beginning to actively pursue sales opportunities in the region. Our plan is to import from either the US or our China operations during the interim period until our facility is completed sometime in 2012 or early 2013. As you know, these are typically long-lead sales cycles, and our goal is to announce to you an initial award sometime in late 2011.

Also during the third quarter we made the first payment related to our $100 million strategic investment in USEC. The remaining two tranches will be made subject to conditions, including conditional loan approval and final loan approval for USEC's $2 billion loan guarantee application with the Department of Energy.

We are also aware that USEC recently received a draft term sheet related to the loan guarantee application, which will serve as a basis for their negotiation of terms for the guarantee. While we cannot predict with certainty the timing of the DOE's approval, we are hopeful that this will be completed sometime around the middle of next year. We anticipate the conclusion of the loan guarantee and our investment to trigger the beginning of a significant increase in activity in the American Centrifuge Project, which represents an important growth driver for our government business.

Through a joint venture established between B&W and USEC, we will manage all aspects of manufacturing of the AC100 series centrifuge machine, including the integration of all suppliers and subcontractors, as well as delivery and assembly of all production centrifuges at the American Centrifuge site in Piketon, Ohio.

Lastly, our B&W mPower small modular reactor, or SMR, initiative continues to accelerate, while interest in the B&W mPower as a scalable, carbon-free, and price competitive power generation solution for our utility customers also continues to grow.

The Integral Systems Test facility, or IST, is under construction, and we expect it to be operational by mid-year by the middle of next year. This is a key milestone in the NRC design certification process.

Additional milestone include the identification of a first-customer lead plant site. The Company remains on track with these initiatives and expects to achieve these milestones within the next 12 to 18 months and submit an application to the NRC for design approval in 2012 as originally planned.

Now, I will turn the call over to Mike Taff, who will provide additional details on our financial performance for the quarter.

Thanks Brandon. Revenues in the third quarter were $632.8 million, a decrease of 2.5% from the third quarter of 2009, which is an improvement from the decline of 6% recorded in the second quarter. Consolidated operating income of $65.1 million increased $19 million, or 41.1% from the third quarter of 2009. This resulted in an operating income margin of 10.3% for the quarter.

Revenues in the government operation segment of $265.1 million increased $5.3 million, or 2.1% in the third quarter of 2010, compared to the third quarter of 2009. This increase is principally the result of an increase in activity for nuclear reactor components, partially offset by a reduction in revenues with a manufacturer of components for a commercial uranium enrichment project.

Backlog in this segment has declined from the end of the second quarter, as expected, due to the normal seasonal patterns of the government's budgetary appropriations cycle. Exiting 2010, assuming that the government's budget appropriations cycle and customer contract negotiations are completed during the fourth quarter, we expect that the government operations segment will end the fourth quarter with the highest backlog in its history.

Operating income in the government operations segment of $48.1 million increased $28.3 million or 143% in the third quarter of 2010 compared to the third quarter of 2009. This increase is principally related to the productivity and project execution improvement on the production of nuclear reactor components, an increase in fees earned due to higher funding levels and productivity at the Company's management and operations sites.

In addition, the Company experienced an improvement in operating results and a favorable contingency resolution at the Company's highly enriched uranium nuclear manufacturing facility, or simply NFS.

Revenues in the power generation systems segment were $369 million, down $20.6 million or approximately 5.3% from the $389.6 million reported in the third quarter of 2009. This decrease was principally related to a decline in demand for coal-fired generation systems and services in the United States, partially offset by increasing volumes in renewable power generation systems.

Operating income in the power generation systems segment, including the equity income of B&W's portion of its global joint ventures, was $20.4 million compared to $34.2 million in the third quarter of 2009. The decrease in operating income is principally related to improvements in contract execution, offset by the decline in market demand for the Company's fossil power generation products and services in the United States and an increase in research and development efforts for the Company's modular nuclear reactor program or mPower.

The power generation segment's selling, general and administrative expenses have been reduced over time with market demand, however, offset by increases related to acquired businesses and the Company's mPower program.

Research and development expenses related to the Company's mPower program were higher in the third quarter of 2010 by approximately $9.9 million, compared to the third quarter of 2009. The Company's net cash and investment position was $256.1 million at the end of the third quarter 2010, a decrease of $67.6 million at the end -- versus the end of the second quarter of 2010.

During the third quarter, we generated $18.1 million in cash flow from operations. This cash flow is net of a pension contribution of $55.9 million made during the quarter. Also during the quarter, the Company made its first tranche investment in USEC of $37.5 million. In addition to net cash, the Company maintained a $700 million revolving credit agreement with approximately $475 million of availability as of the end of the third quarter.

The Company continues to maintain an adequate liquidity to fund operations, which could include increased working capital requirements, internal growth and research and development programs, as well as additional product and geographic expansion opportunities.

Our effective tax rate for the year is expected to be approximately 38%. Keep in mind that our current mix of business is predominantly in the United States and therefore, we will generally have a rate close to the US business statutory rate. Let me now turn the call back over to Brandon for some final remarks.

Thanks, Mike. To summarize, I would like to emphasize that our short-term growth initiatives are focused on expanded nuclear parts and services in the US market and abroad, preparing for an expected increase of maintenance spending by US utilities, development of the India coal-fired power generation market, expansion of our government portfolio as evidenced by the Portsmouth D&D Project, and our participation in the management of the American Centrifuge projects. Additionally, we remain diligent and focused on our core power markets in the US, especially the growing demand for environmental equipment, installation and power generation parts and services.

While we wait for utilities to become more constructive on their maintenance and capital plans, the early signs of expansion are appearing. Given continuing economic expansion as I said earlier, coal-fired generation in the US is growing and is approaching prior peak levels while utilities have continued to hold maintenance spending at very low levels over the past three years. I do not believe that this can last much longer without significant risk to the capacity and availability factors associated with these customers' key assets. I believe that before long we will see increasing demand for renewable parts and maintenance services as an important part of our power generation portfolio.

That concludes our prepared remarks. I will now turn the call back over to the operator who will assist us in taking your questions. Thank you. Operator?

(Operator Instructions). Your first question comes from the line of Tahira Afzal from KeyBanc Capital Market. Please proceed.

Good morning gentlemen.

Good morning, Tahira.

Good morning.

Just wanted to start by asking you a little more in terms of the pension expenses and how you see those playing out in 2011? And number two, if you could talk a bit more about perhaps the international opportunities you have on the nuclear maintenance that is set aside, et cetera, going forward. That's the pipeline that might provide a bridge so would love to get a little more sense of that.

Yes, Tahira, on the pension expense, as you noticed, we had about $31 million worth of expense this quarter, and we'd expect that similar for next quarter as well. And then as we look into 2011 I would expect pension expense really would be similar to what we've experienced in 2010 with one caveat, that being determining the discount rate for the year. And that is generally determined in the fourth quarter and really principally where the rates are in the last 30 days of the year.

So assuming that our discount rate is not materially different than it is today, then I would expect pension expense to kind of be in that same range of what we've seen this year in that probably $27 million to $30 million a quarter range of expense, a decline in the discount rate going into next year, but it'll have an effect in increasing pension expense slightly for 2011.

Tahira, this is Brandon. Let me take the second part of your question. With regard to international components and service in the international market for -- in the international nuclear market, the booking that I was referencing in the third quarter was really an expanded role for B&W Canada at the Embalse project in Argentina. That is a B&W CANDU reactor system. As you know, we are still part of team CANDU and that is just a continuation of some engineering work that we started there a couple years ago and they're moving into a replacement program for their steam generators. International in general, it is an area of interest for us with regard to components and service. As you know, there are CANDU reactors in other parts of the world, and we are still continued to call upon and are pleased to serve those customers.

Additionally, we have an interest in the new -- in the upcoming steam generator replacement cycle at EDF in France. EDF is in the process of qualifying suppliers for replacement steam generators on their PWR systems. We are well qualified to do that, and that is another area of interest for us in the commercial international nuclear market.

Okay great. That is very helpful. Could you over there touch a bit on the competitive dynamics of the [FDG] on a global level? I know we've heard about Doosan, the Korean company, really sort of playing a role over there and [South Coast] that bought some of Westinghouse's fabrication capacity in the 1970s. Could you talk about if there are any other competitors that are viable over there?

And number two, just wanted to get your take on the nuclear policy in the US. There's been a lot of movements over the last couple of months in regards to loan guarantees, et cetera. Would love to get a sense from you, politically, how you see the SMR policies moving ahead and the nuclear policy really moving ahead at this point.

Okay, thank you for that question. We'll spend the next hour and a half answering those, very good questions. With regard to our competitors, we tend not to make public comment relative to their capabilities, but I would draw your attention with regard to the manufacturing capabilities of our Company.

As you know, we have had a continuing program, the most vigorous in the world actually of manufacturing and delivering heavy nuclear components out of our North American facilities, and that includes our facilities in Lynchburg Virginia, Mount Vernon, Indiana, Erwin, Tennessee, Barberton, Ohio, and of course Cambridge, Ontario where we have the largest and only clean room for nuclear component fabrication in North America.

Our quality in manufacturing processes and refinements that we've continued to develop over the last 25 years makes us very competitive with regard to schedule and base component manufacturing costs. So while we can't really comment about what our competitors are doing, we feel very good about our position relative to that marketplace.

With regard to the more broader question on nuclear policy and the loan guarantees, let me say we are focused on the loan guarantee process quite closely as it relates to USEC and the funding necessary to proceed with the American Centrifuge Project. But on the commercial power side of the business, loan guarantees are key relative to what I call the large mega shaft machines for those projects to go forward.

And that's part of what mPower is all about, is to be able to give the customer optionality with regard to the size and the timing of when he brings base-load generation on. And I've said in previous public press conferences for a robust and healthy nuclear industry there has to be a life after guarantee -- loan guarantees, and we think our SMR program actually provides part of the solution for that dilemma with our customers.

The only other comment I would make relative to the recent election, I think that nuclear power is a bipartisan issue for our government. And from all of my contact with the key members that deal in this arena, I think they're very committed to continuing to move forward to facilitate the reemergence of that, both from an economic, jobs and a strategic position relative to the United States.

Okay. Thank you very much.

Your next question comes from the line of Andy Kaplowitz from Barclays Capital. Please proceed.

Good morning, guys.

Good morning, Andy.

Good morning.

Good morning. Brandon, you mentioned that US power generation utilization is going up in the coal-fired fleet, but that maybe you're not seeing it flow through to you guys just yet. Maybe if you give us a little more color on that. Is your parts and service business, has it flattened out now in revenue or is it still declining? Is there any way that you could give us sort of what it looks like year-over-year? And then historically how should we think about a snap back as we go into next year, assuming that it's right that these utilities are going to have to spend more money next year? I would expect a snap back could be pretty significant. There's a lot of questions in there but anything you could give us.

Okay, thank you, Andy. Yes, let me say that we tend to group our service business in a large category of aftermarket or incurring service, but really when you take and dissect that service business there's many pieces and parts that make up that aggregate. Specifically to your question, we're quite pleased with the business that we're doing in small non-engineered replacement components. These have to do with pulverizer replacement components, burner parts, small pressure part sections, that the customer can install in his plant at a minimum expense on his part.

Now, as the generation from the coal fleet continues to return to something near '07 levels, basically if you think about it, the owners are monetizing some of that deferred maintenance to move them through this recessionary period, but you can only defer that for so long. This has been an extra long recession from the previous cycles when we would typically have already moved through this a year ago. So the flywheel effect of building up the need for both non-capital and capital maintenance to assure the availability and capacity factors is simply building up. And that's going to lead to a market that I think you're asking about with regard to your snap back question.

There is a tendency to focus on your low variable cost generating assets. And certainly there are a number of key coal generating facilities out there that fill that category for our customers. And while the capacity factors may be down, they are willing to replace power from those units should one of them go down unexpectedly. But as the whole fleet is required to generate more base-load power, that becomes very costly and it leads to the economic conditions that drive for what I would consider an overspend or a catch-up spend cycle that usually runs about three or four quarters once the industry becomes comfortable that in fact we are out of the woods on the economy.

Okay, and that's helpful, Brandon. I mean if I just sort of aggregate what you're saying, does it mean though that your total parts and service business is relatively flat now, or is it still declining?

It has been relatively flat now for about six quarters. It has a little bit of seasonality to it, so it's kind of difficult to say with great certainty, but it was strong in the last quarter which is a very positive sign.

Got you, no, that's helpful. Okay, shifting gears for a second to power margins. I mean you guys know it's hard to model the power margins each quarter. They bounce around a lot. I wonder how much of this bouncing around is your -- your factors are somewhat underutilized, so we see more of the variability because they're somewhat underutilized. Is that a fair statement, or -- I mean, you mentioned pretty good execution in the quarter but the power margins were definitely different than last quarter, much lower. How do we look at power margins going forward?

Well, Andy, that's always a challenge to predict that because we still have some large projects rolling off and backlogged both in new coal and some of the environmental projects. And with regard to warranty expense, contingency harvesting opportunities, these become very milestone dependent. And these projects run on their own schedules and that's what leads to some of the lumpiness.

With regard to utilization capacity, our management team in that area has done an extremely good job over the last 2-1/2 years of managing down variable cost and dealing as swiftly with a certain amount of the fixed cost. The goal there is to stay out ahead of that. But that is probably not -- it's more of the timing associated with projects than it is that factor with regard to that lumpiness in power margins. And the other factor in there that Mike talked about was factoring in the spend on R&D. And he may want to shed some more light on that.

Yes, and it's Mike. I think two points to bring there. I think you're right on from one standpoint, that we did see a pretty low quantum of revenues this quarter in power generation, probably about $52 million less than what we saw last quarter. So that certainly affected just the utilization and covering some of the fixed cost and all. And then the additional R&D expense continued to ramp up and I think in R&D we spent about $17 million this quarter. You'll see that next quarter and we may even be ramping that up a little bit more in 2011. We'll give you some more guidance on that probably towards the end of the year. And I think those are two big factors related to margins there.

And Mike, do you think the goal of 7% to 10% margins is still realistic in this environment?

I think so. I mean I think we need to be towards probably the lower end of that range, but I still think 7% to 10% is realistic when we're in that $400 million and above range of revenues for that segment. This quarter at 369, that really did hurt us some from a total margin standpoint. So if we can be in that 400 to 425 range on a quarterly basis going forward, I feel comfortable being in that range.

Helpful. Thank you, guys.

Thank you.

Your next question comes from the line of Scott Levine from JP Morgan. Please proceed.

Hi, good morning, guys.

Good morning, Scott.

Good morning.

You mentioned in the press release that you know you're seeing early signs of spending and doing some advisory work with the utilities in preparation for the new emissions regulations. Can you give some more color on the type of work that you're doing and whether your expectation is the pace is expected to pick up here over the next couple of quarters really irrespective of further clarity? And then as a follow-up to that what your expectations are in terms of the timeline to finalization of regulation of SOx and NOx and mercury?

Yes. Scott, this is Brandon. What I was referring to there -- just recently we picked up a request to assist one of our customers with a feasibility study basically looking at all 11 generating assets in his fleet to try and start to develop a matrix of opportunities on how he may approach the strategy generation for complying with the clean air transport rule, the new ash rules and boiler MACT which will cover mercury.

So this is an interesting process. We were pleased that this particular customer came to us because they recognize that we have a broad portfolio of technologies that are -- were really assembled for this type of environment where the customer will be forced to make some pretty significant decisions with a minimum amount of time for compliance.

So we're seeing the stocking phase increase. We've actually recently reviewed a major project that'll be bidding this quarter. Probably won't be awarded until the first quarter of next year, but these are all positive signs that the industry is moving forward and preparing itself to deal with this confluence of environmental regulations that I mentioned earlier.

Got it. Then I have one follow-up on the government business. Could you talk about the process on maybe Portsmouth specifically, and/or in your government clean-up business in general? Are you sensing any change in trend on the part of either competition or contracting terms from the DOE? Any expectations that the contracting business with the DOE is evolving or changing in any way?

Scott, the short answer to that is no. We don't see any major divergence from their past contracting policies from a competitive standpoint. You basically have the same principal competitors. These are people that we team with on some projects and compete with on others.

There's a lot of work to do in the area of D&D with regard to these old DOE sites. And I think cleaning those up is becoming an ever increasing higher priority for society in general. So we're pretty optimistic that that's going to continue at a pretty brisk pace.

Yes, and just a reminder, Scott, on that Portsmouth award, that handoff occurs early next year, first quarter of next year from the current contractor over to the consortium that we're teamed with our partner Fluor.

So you got essentially a full year's contribution from that?

It'll be about nine months.

Nine months. Got it, great. Thank you.

Your next question comes from the line of Graham Mattison from Lazard Capital Markets. Please proceed.

Hi, good morning, guys.

Good morning.

Good morning, Graham.

Just to follow-up on the margin question there. If you look on the power side, if you look at the margins in some of the renewable or biomass projects, how do those compare to the more traditional fossil fuel margins?

They're -- I'd say they're fairly comparable. We're -- I'd say it's kind of in the mid-range of that. I mean typically kind of if you look at margins in general on power generation, parts and service are generally the higher margin work. And then environmental is kind of in that sweet spot, as we like to call it, along with what you mentioned on -- with renewables and biomass. And then a new plant, OEM-type project would be at kind of the lower end of that range.

All right. Great, that's helpful. And then, in terms of newer technologies or potential acquisitions, are there any technologies that you're looking to add in the near term to meet the upcoming regulations, or if you'd just make a comment on your outlook on potential acquisitions.

Well, I think the question may be specific with regard to environmental technologies --

Yes.

-- and let me say that we are well-positioned there with our current portfolio. We are -- but having said that, we are continuously keeping an eye on that through our research and development group by monitoring all technology applications and patents worldwide on that. We don't see any holes in our portfolio to meet the new convergence of all of the regs coming at our utility customers. So that's pretty much positioned and ready to go.

But with regard to technology acquisitions in general, we are continuously diligent with regard to opportunistic acquisitive growth opportunities. And that's about all I can say about that. It wouldn't be appropriate to discuss any activities that we have ongoing in that area.

The other thing that I'd point out, Graham, is as you look at the prior environmental market, we were typically either number one or two market share related to scrubbers, SCRs, mercury control devices, baghouses and things of that nature. So we are very well-positioned with our existing technology and certainly would assume that we would maintain those leadership positions in this next round of spending.

All right, great, very helpful. Thank you very much.

Your next question comes from the line of Vance Edelson from Morgan Stanley. Please proceed.

Hi. Thanks for taking the questions. Brandon, on the timeframe for compliance with the EPA regs, just following up on an earlier question, really beyond the near term, beyond 2011, what's the likely implementation pattern looking out to 2014 and beyond? Do you see extensions and so forth, making this truly a very long-term opportunity for you?

Good question. As I had mentioned, I think, on our last call that there is sort of a -- if you did a plot of these projects when they get released and when they work, it has the appearance of a shotgun pattern on the charts. There are some early movers and then there are some late movers and then usually a larger group in between. And with regard to the timing of the opportunity, I think it's always worthwhile to bear in mind that these projects can run anywhere from 2 to 3-1/2 years in length and they have the typical characteristics of an ENC or EPC project where you go through the engineering phase, you go through the raw material acquisition phase. You go through the fabrication, installation, commissioning, et cetera.

So there are definitely a number of utilities that have pressures on them to comply not only with the federal regs, but they have also have other drivers pushing them forward to early compliance. They may have made commitments relative to some of the new coal-fired generation that are coming on that are above and beyond these regs. So there's always a number of opportunities in that market and we're seeing some of that start to move forward.

We still believe at this point in time, our best estimates are that there are about 35 to 50 gigawatts of units affected by the clean air transport rules and boiler MACT that are going to have to go through rather extensive modifications for SOx, NOx and mercury. And it's simply that. So we think that this market's probably going to pick up bidding activity next year. And I'm still consistent with my comments from last quarter that we think that'll lead to a meaningful backlog build starting in the second half of 2011.

Okay. That's very helpful. And as a follow-up, you already covered the mid-term election impact on nuclear power which sounds fairly benign, maybe even potentially positive. Any changes on the outlook for defense spending or anything on the government side of the business that comes to mind? Or is it pretty much status quo following the elections?

I think the easiest way to think of that is the fact that given the deficit, it would be naive to think that there isn't going to be pressures on government spending given the current deficit that the country is running. But with regard to defense spending, the area where we operate in the nuclear deterrent triad is very high in the defense priority list.

And we feel that that particular activity in that program is very crucial to the defense of this nation and will receive reasonable and fair treatment in the budgeting process. And we don't really see any storm clouds on the horizon in that regard.

Okay, great to hear. I'll leave it there. Thanks.

Thanks.

Your next question comes from the line of Steven Fisher from UBS Securities LLC. Please proceed.

Hi, good morning.

Good morning, Steve.

Good morning, Steve.

You had a very good quarter of booking with mPower. And I'm just wondering about how lumpy you expect that to be over the next few quarters before these EPA awards really pick up later next year. Do you think this quarter is a level to build on or could there still be some variability?

Steve, it's Mike. I mean I think there's always variability but I do think this -- we'll see some, hopefully, see some growth in the fourth quarter from that standpoint. And also, as I mentioned earlier, I think I mentioned once we get kind of north of that $400 million run rate on a quarterly basis, I think we feel pretty good about maintaining our margins at our advertised rate.

Okay. And then can you talk about the timing of that India booking you mentioned in late 2011? Is there a specific bid result scheduled for then or what's driving the timing that you expect there?

See, basically, it's the standing up of our new business operations over there. You know there was a signpost that I think that you can look at with regard to the India market that came forward. A couple of weeks there was an announcement that Reliant in India had received financing from a number of Chinese banks to purchase approximately $10 billion of power generating equipment from China. And that's just sort of the tip of the iceberg.

That market is significantly underserved right now. And the growth rates that the Indian economy is on is going to require substantial build-out for the next 10 to 20 years in that market. So our approach to that is to get our joint venture company functioning with regard to the ability to respond to that market. Our customer or our partner Thermax has a very significant presence and we have a longstanding working relationship with them.

So we're going through the training process with regard to the once-through ultra supercritical boilers that this Company will be delivering to the market. We should be in a position to start bidding opportunities shortly after the first of the year. In India, as in the US, these are always long lead time bid cycles. So that would lead you believe that it would be feasible to look at some type of a booking toward the middle to the end of 2011.

Okay, great. Thanks a lot.

Your next question comes from the line of Martin Malloy from Johnson Rice. Please proceed.

Good morning.

Good morning.

Good morning, Marty.

Could you talk a little bit about the research and development and its relationship to mPower and potential funding assistance from the Department of Energy or through the alliance with Bechtel?

Yes. Research and -- we're actually pursuing a number of funding avenues there, Marty. As you know, the majority of it is self-funded through ourselves and Bechtel. However, we are getting contributions from state entities. For instance, the Virginia Tobacco Fund is providing assistance with regard to the IST facility that I mentioned in the prepared remarks. And we're very pleased to have the state's support and contribution in that area.

We were looking at -- or we're keeping a close eye on the budgeting and appropriations process as it relates to funding within the DOE for the development of small modular reactors. It's well-known that that is a stated priority for the Department of Energy and is, again, is sort of a bipartisan support. We're not sure how that process will play out. We'll be very pleased to be a beneficiary of that if it comes through. If not, our timing of the project will continue to move forward.

Okay. And as far as milestones to watch out for with mPower, what are -- is there anything that you can help us with in terms of looking for next milestones? Is it a customer order? Is it working its way through the approval process with the government for the design?

Yes, all of that. The next identifiable on-target milestone is certainly the production of data from the Integrated Systems Test facility which we expect to start to flow. That's very key with regard to the NRC design certification process and, of course, the announcement of a lead customer or a lead plant site it is in our program for late next year. But if that comes early that will certainly help the process and will tend to put pressures on us to accelerate the program. And that would be a positive thing that we would look very favorable upon.

Thank you.

Your next question comes from the line of Rob Norfleet from BB&T Capital Markets. Please proceed.

Good morning.

Good morning.

Good morning, Rob.

Most of my questions have been asked. I just wondered if you could just provide a little bit of insight in terms of generally what you're seeing as it relates to M&O opportunities for 2011. Just roughly how many projects that you're monitoring or have the ability to bid on?

The market there for M&O opportunities is always in a continuous state of rollover. It -- going forward, we're probably seeing about the same level of opportunity next year as we saw this year. It'll be really a function of how successful we are on those bidding opportunities.

Rob, there's a number of opportunities. I mean there's, as you are aware, we just recently won the Portsmouth award. There's another site that's very similar with a similar mission that we're currently looking at. I think we're in the bid process, Mary Pat, and we may have already bid that.

Yes. Correct.

So that's a very good opportunity, very similar characteristics to the one we just won, as well as several others. So as Brandon said, I think there's -- you'll see us active and probably see some different activity related to that as well.

Okay, great. And when would we expect to see the Y-12 and Pantex bids contracts combined into one and then rebid?

Well, as you know, we just received a one-year extension on that and that was effective October 1st of this year. So that will run through September of next year. In addition to that, the commission's announced that there were two to three month extensions. So you could see it be pushed out an additional six months as well. We're still waiting for the final RFP on that. So we still -- there has -- there's still not a definitive answer as to whether those will be bid individually or combined. But so, we're still waiting on that and working with the agencies on the way those will be bid going forward.

Great, thanks for your time.

Thanks, Rob.

There are no further questions at this time. This does conclude the question and answer portion of the call. I will now turn the call back over to Mike Dickerson for closing remarks. Please proceed, sir.

Well, thank you, everyone, for joining us this morning. That concludes today's conference call, a replay of which will be available on our website later today. Also on the website is a Company overview with some additional information that we plan to share with investors and analysts throughout various meetings throughout this quarter. Everyone have a nice day.

Ladies and gentlemen, thank you for your participation. This does conclude the conference call. Have a great day.