BWX Technologies Inc (BWXT) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Babcock & Wilcox Company Second Quarter 2011 Earnings conference call. At this time, all participants are in a 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 our host, Mr. Michael Dickerson, B&W's Vice President and Investor Relations Officer. Please go ahead, sir.

Thank you, Kim, and good morning everyone. Welcome to the Babcock & Wilcox Company's Second Quarter 2011 Earnings conference call. I'm Mike Dickerson, Vice President and Investor Relations Officer of 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 issued 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 annual report on Form 10-K and quarterly reports on Form 10-Q on file with the SEC, provide further details about the risk factors related to our business.

Additionally I want to remind you that, except where as required by law, B&W undertakes no obligation to update our forward-looking statements to reflect events or circumstances that may arise after the date of this call.

Also on today's call the Company will provide non-GAAP information regarding certain of its historical results to supplement the results provided in accordance with GAAP, and it should not be considered superior to or a substitute for the comparable GAAP measures. B&W believes that non-GAAP measures provide meaningful insight into the Company's operational performance and provides these measures to investors to help facilitate comparisons of operating results with prior periods and assist them in understanding B&W's ongoing operations. A reconciliation of these non-GAAP measures can be found in our second quarter earnings release issued last night and in our Company overview presentation posted on the Investor Relation section of our website at babcock.com.

The format for today's call will begin with some remarks by Brandon about the status of charges reported, safety and current business conditions. Second, Mary Pat will take you through the performance of each of our business segments, followed by Mike who will provide some additional financial details about the quarter. Finally, Brandon will conclude with some comments about the status of our major initiatives, 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. You are of course welcome to get back into the queue. With that I will now turn the call over to Brandon.

Thank you, Mike, and good morning everyone. Let me begin by highlighting the strong results on a few of our business lines, which allowed us to report better than expected results, while simultaneously absorbing an additional charge related to the nuclear energy project we highlighted in the first quarter.

Operating income in both our Nuclear Operations and Technical Services segments are near record levels for the second quarter as a result of improving productivity and manufacturing and the addition of several new M&O contracts over the last few quarters.

On another positive note, I am pleased to report to you that the processing of the material that resulted in the majority of the first quarter charge at NFS, or Nuclear Field Services, has been completed without any material change to the revised cost estimate.

Also, I'm pleased to report that the Company successfully negotiated a settlement related to the acquisition of NFS resulting in an increase in operating income and cash during the second quarter of 2011 of approximately $10.9 million. I should point out that even without the favorable adjustment, NFS was accretive to the Company's operating income based on its strong operating performance in the quarter.

On a less positive note, you may recall from the first quarter the Company recorded a loss on a certain nuclear energy project. In our last conference call, we indicated confidence that we had a handle on the cost to complete and the issue was contained to the first quarter. That obviously did not happen. It is unfortunate that certain unknown and undisclosed conditions at this site required the Company to take extensive measures beyond the original scope of work to complete the project.

Additionally, as this project shifted from the demolition phase to the reconstruction phase late in the second quarter, the Company encountered a series of unexpected conditions resulting in a schedule extension leading to incremental estimated costs to complete. As of today, the remaining scope of work to be completed on this project is the final structural welding, which is proceeding according to plan.

From an accounting perspective, second quarter operating results included an additional charge of $26 million representing the gross estimated incremental cost to complete. There have been no offsetting claims or equitable adjustments included in the results for the second quarter. However, let me assure you that claims and equitable adjustments that are currently in process are significant in value and may be realized over time. The Company intends to recover all of the costs to which we are contractually entitled. Finally, the Company has thoroughly reviewed its backlog and determined that there are no other nuclear projects of this nature on a fixed price basis.

Moving on from these items, I am pleased to again report a positive year-over-year increase in consolidated revenues for the third quarter in a row. That growth was again evident in all four of our reported business segments in the second quarter of 2011.

On a consolidated basis, revenues were $752.4 million, an increase of $63.9 million or 9.3%. Consolidated operating income was $63.3 million. Before the impact of the $15.1 million of net charges in the second quarter, operating income was $78.4 million, a decrease of $7.3 million from the second quarter of 2010.

The decrease in operating income before items was primarily due to the reduction of the volume of new-build power generation and environmental projects, as well as the closeout of certain Power Generation segment projects in the second quarter of 2010, which had the effect of improving operating results in that prior quarter. The decrease was partially offset by the improvement and performance in production at NFS, the increase in production of nuclear components for the submarine and aircraft carriers program, and fees earned from new M&O contracts.

Also with the recent ramp up and the spending for our mPower initiative, the Company spent $4.8 million more for research, development and associated SG&A related to mPower in the second quarter of 2011 compared to the second quarter of 2010.

Normally I would begin my comments with an update of our safety performance. However, I wanted to address the second quarter charge upfront in our dialogue. Now, turning our attention back to safety, safety as you may know is one of the key metrics we use to measure our performance. Coming off of a strong 2010 year-over-year improvement in safety metrics, we continued that trend in the first half of 2011. Continuous improvement of our safety performance is an important part of the culture at B&W.

For the first half of 2011, the Company is reporting safety metrics better than prior year levels and better than the 2011 total year targets. The result of such favorable performance is a Workers Comp rate that is approximately 40% below the average industrial Workers Comp rates, generating real returns to the bottom line.

On the marketing front, one of the most significant recent events affecting our industry relates to the Environmental Protection Agency release of new regulations. On July 7, 2011, the EPA released its final rules for cross-state air pollution, previously known as the Clean Air Transport Rules, with a compliance period beginning January 1, 2012.

Additionally, the comment period for the draft mercury and air toxics rules, or the Utility Maximum Achievable Control Technology Standards, recently ended on August 4, 2011. Finally, under court order, the EPA has a deadline of November 16th of this year to finalize the Utility MACT rules. EPA rules and regulations continue to move forward and are expected to result in a significant market for environmental compliance through engineering procurement and construction of equipment over the next several years.

With the drafting and passage of these regulations, we have seen the pace of customer inquiries and bidding activity intensify as utilities plan for their capital requirements that will drive their compliance. We have recently announced two contracts for design and supply of emissions control systems, and we have been awarded several small environmental engineering and design contracts.

We expect to continue to see projects awarded through the balance of this year and into and throughout 2012. The Company is actively bidding on a number of environmental projects with a total value of more than $1.6 billion, and we expect to become active in the bidding process on an additional $1 billion of environmental projects through the balance of this year.

Now, let me introduce Mary Pat Salomone, our Senior Vice President and Chief Operating Officer. Some of you had the opportunity to meet with her this summer. And for those who will be joining us for our upcoming Analyst Day in New York on September 15th, you will get a chance to meet her as well as other members of our management team. With that, let me now turn the call over to Ms. Salomone, who will take you through the results of each of our business segments. Mary Pat?

Thanks, Brandon. I would like to walk you through the results for each of our reported business segments. Nuclear Operations segment revenues of $272.6 million increased $25.7 million or 10.4% in the second quarter of 2011 compared to the second quarter of 2010. This increase is principally the result of an increase in activity for naval nuclear reactor components and nuclear fuel.

Operating income of $59.3 million increased $18.6 million or 45.7% in the second quarter of 2011 compared to the second quarter of 2010. The operating income results were driven by strong productivity and project execution improvement on the production of nuclear reactor components, improvements in productivity and production of nuclear fuel, as well as $10.9 million related to the favorable settlement of miscellaneous open acquisition- related issues at NFS.

Backlog in Nuclear Operations declined slightly from the first quarter as expected. However, it still represents close to three years of revenues. Recall that this segment typically books the majority of its annual awards in the fourth quarter of the year as it is highly correlated to the annual budget cycle of the US government.

Revenues in the Power Generation segment of $388.6 million for the second quarter of 2011 increased $19.3 million or 5.2% compared to the $369.3 million reported in the second quarter of 2010. This result was principally due to increased North American construction activity more than offsetting a continuing decline in new-build environmental and power generation systems.

Operating income in the Power Generation segment, including the equity income of B&W's portion of its global joint ventures, was $28.1 million in the second quarter of 2011, an increase of $1.5 million or 5.6% compared to the first quarter of 2011 and a decrease of $14 million from the second quarter of 2010. The year-over-year decrease in operating income was primarily due to the reduction in the volume of new-build power generation and environmental projects, as well as the closeout of certain Power Generation segment projects in the second quarter of 2010 which had the effect of improving the operating results in that prior quarter.

Backlog in the Power Generation segment is down modestly from the first quarter of this year. I would point out, however, that in the second quarter we were awarded a $900 million contract for the engineering, construction and operation of a new West Palm Beach waste-to-energy plant. Because of our conservative method of reporting backlog, most of the roughly $450 million of B&W project scope is not yet reflected in our published backlog. We expect to include this project in backlog in the first half of 2012 when we receive our final notice to proceed.

We have recently announced two contracts for the design and supply of emissions control systems and we have been awarded several small environmental engineering and design contracts. We expect to continue to see additional environmental projects awarded through the balance of the year and into 2012, marking the beginning of what we believe will be a several year growth cycle for environmental projects. As Brandon mentioned earlier, environmental projects that we are actively bidding now and expect to initiate the bidding process during the balance of this year, total approximately $2.6 billion.

Nuclear Energy segment revenues of $93.9 million increased $36.2 million or 62.6% in the second quarter of 2011 compared to the second quarter of 2010. The increase in revenues is due principally to the success achieved supplying nuclear components and volume associated with the nuclear project contract.

Operating loss of $33.3 million in the second quarter includes both the $26 million increase in the cost to complete estimate for our nuclear energy project, as well as $16.9 million of research and development and selling, general and administrative expenses related to the B&W mPower modular nuclear reactor program.

The underlying historical businesses are gaining profitable momentum as the Company continues to be an important supplier of large nuclear components and is increasingly competitive in the US nuclear services industry. As an example, the Company recently completed an outage service at a major nuclear provider in the US, completing the service in less time and with significantly less radiation dosage than had ever been experienced at this site. The industry is aware of this performance, and it has resulted in additional interest in B&W's nuclear service and technology.

Backlog is roughly flat compared to the first quarter of 2011. However, it is up more than 42% from the second quarter of 2010 principally due to success in the US nuclear services industry over the last two quarters in particular.

Technical Services segment revenues of $30.7 million increased $9.8 million or 46.9% in the second quarter of 2011 compared to the second quarter of 2010. Operating income of $14.5 million increased $1.9 million or 15.1% in the second quarter of 2011, compared to the second quarter of 2010. This increase in operating income is due principally to new environmental remediation, decontamination and decommissioning contracts received in the second half of 2010 and the first half of 2011, principally for the Department of Energy.

The Technical Services segment generally does not report a backlog because most of its contracts are through unconsolidated joint ventures. It is important to recognize that this business has continued to grow over the last few years and its growth has accelerated meaningfully over the last year.

In the last 12 months, the Technical Services segment has partnered on approximately $3.6 billion in new awards for work to be completed over the next five to ten years. The largest of these new contract awards was the $2.1 billion Department of Energy decontamination and decommissioning contract for the Portsmouth Gaseous Diffusion Plant in Ohio, which began operation early in the second quarter of 2011 and is expected to ramp up to full-scale operations over the next several quarters. Let me now turn the call over to Mike, who will provide some additional financial details.

Thanks, Mary Pat, for that update. During the second quarter, the Company generated cash flow from operating activities of $29.9 million including the impact of pension funding of $30.7 million. For the full year, the Company expects to contribute approximately $125 million to the pension.

The Company's cash and investment provision net of debt was $368.7 million at the end of the second quarter of 2011 compared to $375.3 million at the end of the first quarter of this year. In addition to net cash, the Company maintains a $700 million revolving credit agreement, with approximately $506 million of availability as of the end of this second quarter. The Company continues to maintain adequate liquidity to fund operations which could include increased working capital requirements, internal growth in R&D programs, as well as additional product and geographic expansion options.

Consolidated research and development expenses was $22.6 million in the second quarter, an increase of $6.4 million compared to the $16.2 million in the second quarter of 2010. This increase was principally a result of an increase in spending related to the Company's mPower initiative. For the full year, the Company expects R&D expenses will continue to increase related to the acceleration in the mPower program, resulting in consolidated R&D expense of approximately $90 million to $100 million for all of 2011.

Looking at selling, general and administrative expenses, year-to-date consolidated SG&A expenses of $199.7 million are over $5.1 million above the first six-month period of 2010. The Company has been focused on managing SG&A expenses across the board, particularly in those areas of the business hit hardest by the recession. On the other hand, we have not been afraid to make the investments that we believe are necessary to position the Company for growth in other areas.

I would point out that included in year-to-date SG&A expenses are approximately $13.9 million of incremental standalone public company costs related to the spinoff of B&W from McDermott International, and $4 million related to our re-entry into the US nuclear services industry and our mPower initiative, as well as some incremental spending related to bidding and proposal efforts.

Capital expenditures in the second quarter of 2011 were $11.4 million, lower than our depreciation and amortization rate, due in part to the timing of expenditures. For the full year, we expect total capital expenditures to be line with depreciation and amortization, in the range of approximately $65 million to $75 million. Let me now turn the call back over to Brandon for some final remarks.

Thank you, Mike. We talked earlier about the recent developments in the environmental regulation, so let me update you on the status of some of the other significant programs at B&W. As it relates to our M&O contracts at Y-12 and Pantex, the National Nuclear Security Administration recently issued a draft request for proposal, with final RFP expected in November 2011. The draft RFP calls for a five-year base term beginning January 2013, with up to five additional years of extension and includes the management and operations of both Y-12 and Pantex. The RFP is focused on achieving cost savings for the NNSA as a result of combining the two operations, and contemplates increasing the scope of operations to include the management of the new proposed UPF facility at Y-12, as well as the Savannah River tritium operations.

We are currently evaluating the RFP with our partners. We believe that given our outstanding performance at these operations, as well as the significant savings that we have been able to generate for NNSA over the last several years, that we are well-positioned to competitively respond to this combined RFP.

Also, as many of you know, the proposed fiscal 2012 budget put forth by the administration includes ongoing and incremental funding for various energy initiatives. Specifically within the DOE, budget proposal is $97 million for a new, small modular nuclear reactor program to assist the industry with design, certification, licensing, and research cost. The new program is comprised of $30 million for reactor concepts R&D and $67 million for cost sharing, technology development and licensing of two near-term deployable SMRs.

Our understanding is that these funds are intended to be awarded to two SMR vendors on a cost share program. Most importantly, this program is intended to continue for five years, with the stated commitment of government participation through the first commercial deployment, rather than a one-time funding event. Recently, the President of B&W Nuclear Energy testified before Congress along with other industry participants with respect to this program. We believe that B&W is well-positioned to being a leading partner for this DOE program.

While we are talking about nuclear power, let me give you a brief update on what we know about the Nuclear Regulatory Commission investigation of the events at Fukushima. As you may know, the NRC task force concluded that the 104 operating nuclear reactors in the US are safe for continued operation. At the same time, it recommended changes in the NRC's regulatory framework.

The Commission's disposition of the task force recommendations is expected in the next several months, will determine the extent of new requirements and the commensurate cost burden to the industry. Although we will continue to monitor post-Fukushima regulatory and industrial developments, based on current information, we expect to continue with our current licensing schedule for the B&W mPower reactor.

Our expansion in India continues as planned. We recently broke ground on our new ultra-supercritical manufacturing facility. Licenses and approvals are in place, and the Company is beginning to actively pursue sales opportunities in the region. Our plan is to support our Indian venture with B&W's resources during the period until our facility is completed sometime in late 2012.

We have also recently signed a memorandum of understanding with Toshiba to cooperatively explore strategic manufacturing, research and other opportunities in advanced supercritical power generation and advanced solar energy technologies around the world, including India. We will explore collaboration on project opportunities in India, making use of Toshiba's steam turbine and generation manufacturing facilities, along with B&W's boiler factory, which both are under construction at this time.

As it relates to our USEC investment, you know that at the end of June, we and Toshiba effectively extended the firm date for a conditional loan approval until August 15th in order to allow more time for USEC to complete their negotiations for a $2 billion loan guarantee with the Department of Energy, in order to fund the American Centrifuge Project. As of today, we are aware that the conditional loan approval has not been received. According to USEC's releases from last week, DOE indicated that USEC needs additional financial and project execution depth to achieve a manageable credit subsidy rate and to proceed with the loan guarantee.

We are continuing to work with USEC, to help them satisfy the DOE concerns. USEC indicated that they expected this process to be measured in weeks, not months. More importantly, I would be much more concerned with the project if the DOE's concerns were technical in nature, rather than financial or structural. Ultimately, we believe that solutions will be found to address these concerns, and the project will move forward.

Lastly, our mPower modular reactor initiative continues to accelerate, while interests in B&W mPower as a scalable, carbon-free, price competitive power generation solution for utility customers also continues to grow. During the quarter, Generation mPower LLC and TVA executed a letter of intent for the deployment of the B&W mPower technology at the TVA Clinch River site.

Recently, the Company has been assisting TVA through a small services contract, in the planning phase for a potential construction permit application. TVA is expected to submit the application in the third quarter of 2012, which we expect will be the first ever construction permit application for a small modular reactor program submitted to the NRC. We are in active discussions with TVA at this time to finalize the contract to complete the preparation of this construction permit application, and hope to be able to report the small but important award shortly.

As planned, we have accelerated our mPower R&D and market development program. Spending on R&D for mPower was $15.5 million in the second quarter, up from $13.8 million in the first quarter of 2011. The acceleration will continue through the balance of the year and could reach $20 million to $25 million in each of the next two quarters.

So to summarize things in a compact nature, let me say that our underlying businesses are performing well, particularly our two government-related segments, while re-entry into the nuclear service market in the US is gaining traction with our nuclear customers. Environmental regulation continues to move ahead with the normal political wrangling that always surrounds environmental regulation. But most importantly, the amounts of projects that are hitting the streets confirms our previous view that backlog from this market should begin to build late in the year.

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

(Operator Instructions)

Your first question comes from the line of Joe Ritchie with Goldman Sachs. Please proceed.

Hi. Good morning, everyone.

Good morning, Joe.

Good morning.

I guess first, on the nuclear energy project, could you tell us a little about where you are from a percentage completion standpoint? I know that you're expecting to get that project done next quarter, but help us understand how confident you are that you've adequately reserved for that project.

Yes, I'd be glad to. When we did our call at the end of the first quarter, we were approximately 29% complete based on the current EAC. With the re-baselining of the project that we did last month, and where we were through the end of the business day yesterday, we are roughly 81% to 82% complete. What that means to me is that we have a very good visibility to the final goal line on this project. We've transitioned all the way through the demolition and decontamination phase of the project. We're into -- well into the structural welding that has to be completed. The [fit-up disk] difficulties that we were experiencing last month are behind us with regard to the customer-supplied materials, and most of the unknown risk that existed three months ago have been identified and provisioned for, and our cost to complete, based over the final spend [has] about 10% contingency in it as of this date.

And Joe, this is Mike. Just to clarify, when we say we're going to finish that project next quarter, we really mean the quarter we're currently in, and we really mean this month. So we expect to have substantially completed this project by the end of this month, which is August.

That's correct.

Okay, great, that's very helpful. And I guess my one follow-up question is really relating to the intensifying bidding activity that you're seeing on the enviro work. Can you help us understand -- it seems like you're bidding on a lot of work, even before the MACT rules are finalized later this year. Can you help us understand a little bit on the timing on when you could potentially see some of these awards put into backlog?

Sure. I think the way to look at that is look at the CSAPR rule. Basically, when that was released in its final state, it affected more or less 23 states in the eastern and central part of the US. That rule basically requires SO2 to be reduced from 4 million tons per year to about 2.1 million by 2014. The states primarily affected are Ohio, Pennsylvania, Indiana, and Texas, and these are all areas where we have strong customer relations and strong execution performance track record.

So that part of it, in itself, kicked off a significant amount of activity. And the court order to continue the utility MACT final publication is all driving the compliance activities that we see today. But with regard to the actual closing of the specific projects, that is often a volatile process in the sense that the timing on these items can move back and forth and usually back in two or three-month increments at a time. But nonetheless, it's significant, and this is a big progression from where we were just 90 days ago.

Okay, thanks for the color, Brandon. I'll get back in queue.

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

Good morning, everyone.

Good morning.

Good morning, Andy.

Morning, Andy.

Brandon, your nuclear operations business has shown good growth for awhile now, including in the quarter, and I think you've ramped up now on the two Virginia class subs fully a year. So the question is, can you still show growth from here, and where is it coming from?

Good question, Andy. I would think that basically the answer is in the past quarter. If we can sustain -- if we sustain the levels that we showed in the last quarter, we will actually show growth for the year. And also, as we've continued to put some of the operational challenges behind us at NFS, that should start to play a more solid foundation, particularly in the Navy fuels portion of that business.

Okay. And Brandon, you're -- maybe you alluded to it with the NFS, but your margins kind of spiked in the quarter in nuclear ops almost 18% ex the [gain]. I know it's a very variable business. Is this just variability? Is there more productivity now that you see in this business so maybe the overall margin run rate is a little better going forward? Can you help address that?

I think we'd be better served to kind of think of it in the nominal range that we've seen in a historical basis going forward. There is some variability due to the work mix flow within a given quarter, depending on what we're working on at any one time. And some of that comes from the just improved operations that I mentioned at NFS. Would you add anything to that, Mary Pat?

No, I would agree with that, Brandon.

Yes, and Andy, it's my gut -- I'd say 18% is kind of the high end of that range. I've always thought of that business in that 16% to 18% range. And again, it ebbs and flows and all, but that's certainly not out of the ballpark, I'd say, of 18%. But I'm kind of thinking that 16% to 18%, 15% to 18% range for that business.

Okay, that's helpful. I'll get back in queue.

Thanks.

Your next question comes from the line of Tahira Afzal with KeyBanc. Please proceed.

Congratulations on a much better quarter, gentlemen.

Thank you, Tahira.

Thank you, Tahira.

My first question is in regards to the environmental work. If I look at what you've booked at the end of June, which is the R.M. Schahfer power plant in Indiana, that seems to be replacement work. So it seems that there were 1980 scrubbers that were installed in 1983 and 1986, 90% sulfur removal capacity. So are you seeing a [budge] from obviously the power plants that will need new equipment? Are you also seeing in your bidding activity a lot of replacement activity coming up, and is that is catching you by surprise in terms of extent?

It's both new-build and replacement, and it's also -- there's a third component that we've seen quite a bit of activity in and that is just the refurbishment and performance upgrade within the existing scrubber structures. While it's not that high in volume, it's a very important part of the opportunity because it's often the highest margin business. So that's been moving along quite well.

But with regard to the timing on this, Tahira, we've been consistent from a year ago saying this is a second-half 2011 event with regard to the crossover, where we would start to hope to see some bookings that would exceed the backlog roll off of the last booking -- or the last cycle of this particular market.

Yes, but it seems like all the utilities that report in the second quarter seem to be sort of agreeing with you on that.

My second question also is sort of a follow-up on that, and then I'll hop back into the queue. If you're looking at some of the congressional noise that's being made around EPA, and I think Exelon came out and said they expect that noise to really not carry much weight, and if you really look at the regulations, EPA on a mandatory level is only allowed a one -- can only give a one-year extension. Do you get a sense from all the large utilities as you talk to them, that even though they might be making a lot of noise, and even if EPA has the ability to look at things on a case-by-case basis, that at this point the potential delays are not going to be really enough to really push out the bidding cycle here to a great extent?

Well, the short answer to that observation is, I think, a -- is yes. I don't think it will push it out significantly. Remember that this is sort of the normal posturing that goes on around the deployment of new EPA regulations. And, in fact, with regard to some of our regulated utilities, this capital investment actually is a business opportunity with regard to return on their invested equity.

We maintain and update on a regular basis a bottoms-up point of service estimate from our capture group in the environmental group, along with a top-down estimate. And we just completed the update last month and we're still -- it's still in that area of around $25 million down to a low of around -- or $25 billion down to a low of $13 billion from the top-down analysis. And the high end from the top-down lines up with our bottom-up estimate. So our analysis or our view of this market is pretty much the same today as it was a year ago when we first started talking about it.

Many thanks.

Your next question comes from the line of Will Gabrielski with Gleacher. Please proceed.

Thanks, good morning.

Good morning, Will.

Good Morning.

The caller you gave on the bids outstanding, and the bids that you expect to come in for the rest of the year, I guess on the environmental side, was helpful. What's the breakdown of that, would you say, by product type versus your initial expectations?

Well, if we get -- well, if we get very granular in that our basic consensus is, is that we think that from a megawatt perspective that there's going to be a midpoint of probably around 40,000 -- 45,000 megawatts of either wet or dry FGD. The near term SCR market looks like it's going to -- it has a much wider volatility, where we would believe that to be somewhere in the higher end of the top-down. Our bottom-up forecast pushes that almost 2X times what you see in the general publications.

Dry sorbent injection is lower from our analysis than the external reports that you see. And the reason being is the utilities have released a lot of information publicly about the fact that meet margin in their systems for the day-to-day operation fluctuations they encounter. And that's challenging to achieve under the current regs with dry sorbent injection only. So that plus fabric filter -- and we operate in all of these environmental product areas as well as provide integrated solutions -- I think positions us well to be a preferred supplier to this particular industry.

Okay. So I think in your press release, two environmental awards over the past few months, and if you do the dollars per kilowatt is lower than the estimates you have in your slide show for what the total average cost would be on a kW basis, and I know part of that's because it doesn't include the construction piece. So is there something unique about what's happening bidding-wise right now? Are people bidding the equipment sooner than the construction versus past cycles where they may have bid it all together? Or is anything to read into that type of activity?

I think it's too early to read anything into that. I mean, we saw that same type of behavior early in the last cycle. The other thing that those numbers exclude beyond construction is also the balance of plant work. That's just the core equipment supply, which is often the lead time, the long lead time [pole] in the project. Once that's set, then the balance of plant design work can proceed, and that's often followed by a construction award. But I still believe that we'll see a measurable amount of this market go on a more integrated solutions basis.

Will, and the other thing, I wouldn't read too much into that when you think about margins. And I think that's really the important thing about us is that A, one, we will maintain our discipline. And the margin we're getting in these new awards, it's consistent with the margins that we saw when we were bidding back in kind of, I'd say, the last phase of the last round of environmental projects. So we're still getting good margins and we still have adequate contingency in these bids as well. So from that standpoint I feel good about the backlog we're running, and I still consider -- I would consider that to be quality backlog. And that's really what's important for us.

Okay and then just lastly, I'm curious. I don't know if this is a fair question yet, but on pension expense there's a lot of moving parts in the market right now that go into your assumptions for next year, but I know Mike's busy trying to get out of there as quickly as possible. But I think he has to do this one more time. So what do you -- what do you expect or anticipate pension may be looking like next year versus this year, given that it's such a significant component of what you generate each quarter?

Great question, Will. If you would have asked me that question three days ago, I would have said it was -- we would expect it to be about in line with our expense this year. After the craziness in the market the last few days, I'm going to leave that to you really smart guys in New York to figure out what the market's going to do for the rest of the year and then I'll be able to answer that question for you.

All right. Well, I'm sure you won't be around to answer it. Thank you.

I may be.

Talk to you later.

Thanks.

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

Good morning.

Morning.

Good morning, Steve.

Assuming we get a loan guarantee over the next few weeks, can you just discuss how the USEC opportunity might ramp up over the next year? I'm just kind of wondering what activities are going to happen and when? I think you're doing project management, but if there's specific tasks you're going [to do] that would be helpful, and how would the revenues ramp up?

Sure, Steve. Actually, it'll be a two-step process. The phase that we are at now is the conditional loan guarantee and following the conditional loan guarantee, there will be a period of time where you'll actually get the final loan guarantee and the project will actually proceed to ramp up at that point and time. It's difficult to say what the timing will be from conditional to final. We've often looked at it internally, and I think USEC looks at it as something in the three to six-month period.

But what we are doing right now is the American Centrifuge project is being maintained at a spin rate from USEC to continue to supply machines into the Lead Cascades. They are also pursuing an R&D sharing development program with DOE that they use to feed that along from spending from their own cash flows. We would expect that to continue, most likely through the period leading up to the conditional loan guarantee and probably through that into the final loan guarantee.

That didn't answer your question, but I would say the earliest ramp up that we would expect to see start would be in the first quarter of '12. It could slide into the second half of '12, depending on the amount of time it takes to get the conditional and the final.

Yes.

Yes, Mike, you want to add to that?

Yes, and Steve, what we've always kind of said to the investment community is that if you look back at kind of the run rate we had at kind of the height of that business when we working with them on the Lead Cascade, I think we were generating somewhere around $20 million of revenue a quarter, [80] to $1 million or so on an annual basis. That could easily double once we are in the full ramp up phase.

It'll be -- there'll be a long ramp up process as they get final loan guarantee and are able to fund the manufacturing of the centrifuge in the plants there. And then we'll start ramping up with hiring employees and all that. But I agree with Brandon. I think it's more of a second half of '12 versus first half. But once we start the process, it'll be a pretty rapid expansion to get up to that near $200 million of annual revenue.

Okay, great. That's helpful. And then, if you could just give us what your latest thoughts are on the timing of recovery and power maintenance spending?

With regard to the capital and non-capital maintenance spending, just watching the order flow on major pressure part work has been trending up. We've had -- this is I think third consecutive quarter of above average replacement parts bookings. So it is that undeniable market that comes from that delayed maintenance aspect. We feel that that's pretty well on track to what we would expect at this point and time.

Okay. So it sounds like it's a pretty steady ramp from here, not any big jump up over the next few quarters?

That's correct. It builds slowly, and it usually stays there for four to six quarters and then comes back into the more normal spend rate for that type of activity.

Okay, great. Thank you.

Thanks, Steve.

Your next question comes from the line of Bryce Humphrey with BB&T Capital Markets. Please proceed.

Hi. Good morning, everyone. This is Bryce on for Rob.

Good morning, Bryce.

Good morning, Bryce.

To drill down further on Power-Gen margins, could you quantify at what level you're booking these new environmental equipment contracts? And then maybe to what extent you also see operating leverage in that business as your volumes ramp back up?

Let me start with the last part of that first. The way we have our operations organized relative to that particular market segment, is through a -- through what I call a campus design approach. It's primarily located in Barberton, Ohio. And we have the ability to move our engineering project management and procurement resources around quite readily in response to the leveraging opportunity. We demonstrated that in the last cycle, that we were able to leverage the business considerably without taking on a significant amount of additional overhead and expense. It's also a good area to subcontract technical services and secund suppliers of that type of talent into our facility.

So we have purposely developed that business model around the concept of being able to lever up and then quickly ramp down as these cycles ebb and flow. With regard to the margins on the bookings, I don't think that would be appropriate. Matter of fact, a lot of our conditions around our contracts have confidentiality clauses in them.

Sure.

But I could say in general that the core equipment typically carries -- because it's a process and performance-orientated system -- carries a higher margin than BOP work. That's why we tend not to focus on the balance of plant work, which is your normal civil piping and electrical work. And then the construction component usually carries a lower margin than the process equipment, but that's sort of the order of magnitude.

The other thing I'd say, Bryce, is you ask about the leverage capability there, and really what I've -- the way I've always thought of that business is once we start getting near that $2 billion annual run rate in that business, that's where we really start to see good leverage. So $1.9 billion, $2 billion and above, you start to see some incremental margin growth there.

Great. That's very helpful, guys, thanks a bunch.

Your next question comes from the line of Scott Levine with JPMorgan. Please proceed.

Good morning.

Good morning, Scott.

Good morning, Scott

I'm trying to get at the underlying profitability of the nuclear energy business. How should we think about that? And also I was wondering if I had heard -- had you guys increased your projected spend for mPower for this year, and if true, if you could give some preliminary thoughts on 2012 there as well would be helpful?

Okay, with regard to the profitability of the nuclear energy segment, the best way to -- the best way to think of that is to think of the business sets that are within that segment. And we have the equipment business, which is the replacement steam generators, reactor vessel heads. That has been a historic business for NE that has a long proven track record. And the margins in that business are good and the projects are large in dollar volume and span a number of years in the execution.

The other part of that business is what I call the nuclear services business and that's the outage inspection services, the high tech, high value added data collection, data analysis and consulting part of the business that Mary Pat talked about earlier. That too because of the unique nature of it, carries a good margin, but it's smaller contracts. It usually falls in the category of what we call a book and bill type of business and occurs during the outage period.

And then there's the nuclear projects business, which has been a historic business for us in Canada. It tends to carry lower margins because most of the -- if not all of the fuel labor component is usually on a time and material basis and consequently it carries lower risk, lower margins. That's the new business that has opened for us in the US. We think there's significant growth in that area but it, too, going forward, will be carrying a lower risk, lower margin-type profile because the fuel labor will be mostly a time and materials type basis.

Overall -- Mike, I don't know if you want to comment on the margins, the margin range for that business? It is masked right now because of the fact that we have these period expenses associated with mPower. We talked about ramping that up to the $20 million to $25 million over the third and fourth quarter, and we would expect the run rate on that to be about the same for 2010, at that level.

Yes and Scott, I wouldn't say we were taking that up. Actually, that's pretty consistent with what I've said all year. As it specifically relates to mPower spend, I think what we've said, starting back at the beginning of this year, was that we thought it would be about double last year. Last year we spent about $40 million. This year, I think we'll still be in that $75 million to $80 million range for mPower. And that gets us on a consolidated level, consolidated spend when you include the traditional R&D spend we do in PGG, up to that $90 million to $100 million range. So that's really what I was saying on the call earlier.

As it relates to margin NE, I think we'll -- that's a good margin business and certainly would be in that kind of advertised range of what we historically had in PGG, and that 7% to 10% range should not be unreasonable.

Got it, thank you. And one follow-up real quick, any change observed -- we've heard it from some [E&Cs] here and there during earning season about changes in the government in terms of contractual terms. Could you talk about whether you've seen any change, or is there any change in behavior or preference on the part of the government in either of your government segments, with regard to either movement towards fixed price versus cost plus or any other change in contracting behavior on their part?

I think the simple way to answer that is that the jobs that we talked about earlier that we -- that we just booked over the last quarter and the last four quarters have basically been to the historical terms and conditions and fee earning potential that we've seen. Not to say that things can't change in the future, but there is no meaningful change that we see right now.

Okay, similar margin, similar risk profile. Got it. Thank you.

Your next question comes from the line of Chase Jacobson with William Blair. Please proceed.

Yes, good morning.

Good morning, Chase.

Good morning.

One more question here on the environmental equipment. You commented about your bidding discipline and the fact that margins are likely to stay strong in that business. Can you just comment on whether or not you think, through your conversations with customers, that you'll be able to sustain your historic 25% to 30% market share? And then if you could just remind us once these projects are awarded, how long do they take to ramp? How long do they take to complete? And are most of them on a cost reimbursable or a fixed price basis?

Okay, that's an interesting question with an S in parenthesis there. First of all, with regard to bidding discipline, let me say it's also, not only just bidding discipline, but strategy. We've come through a period of fairly lean times from an E&C perspective. It's -- you have to be disciplined to resist that temptation to take early projects just for the sake of building backlog with low margins. We followed that strategy in the last cycle, and it worked very well. So it's a combination of basically being able to stay calm and stay disciplined as you progress through that business cycle.

With regard to the margin in the markets, our goal and our underlying business plan basically has us targeting that same 25% to 30% target range that you had talked about. The time to ramp on these projects, if you look at the ones that are going to go early with regards to the 2014 deadline, the states that enforce these environmental regulations often have the ability to provide a one year extension to that compliance. And I think that will be applied almost across the board because of the short, short lead time on this.

But these projects typically run from award to final acceptance or mechanical completion, if you want to, they'll range anywhere from 18 months to 36 months. Some of the bigger, more complex jobs that we did in the last cycle can actually run out for 60 months. But they ramp like a traditional EPC project.

First you have the engineering, then you have the procurement of raw materials, then you have the fabrication. So you'll have, like, six months -- three to six months of this is low volume, low -- at the top line because you're just doing engineering, and then it starts to ramp pretty substantially over the following 12 to 24 months.

Okay and then most of those are done on a reimbursable basis, is that correct?

They're usually done in some type of a hybrid-type fashion. The early projects are more likely to go a lot more on a firm price basis because that's the nature of the market in the first stage. That's why some people prefer to go -- some customers prefer to go early.

But a more logical way to do that that provides value to the end customer and to the contractors that supply that is a hybrid-based approach where you take the engineering and your controllable costs on a firm price basis. You get the scope and the performance exactly the way the customer wants it. You engineer that into it, then you generate the estimates and lock it down and then take the execution risk after that point. That's a business model that really balances the risk and provides the best outcome. Whether the market continues with that process as it did in the last time remains to be seen, but it's certainly the best value proposition for all parties considered.

Okay. And then if I could just ask one question on the M&O side of your business? We haven't really talked about that. Not saying it will be, but obviously there's a lot of concern regarding the government budget cuts. If any of those sites that they do, that you provide M &O service for were to lose funding and were to be shut down, can you just comment on what the process is to shut those down and kind of what the addressable market is for B&W if there did have to be a decommissioning or shut down services at any of those sites?

The nature of the jobs, of the sites that we're operating and are inside the DOE space and the NNSA, are nuclear high consequence operations. So there are two components, those that are operating and are vital and key to the Department of Defense and our armed services.

Some of the other projects that are basically in the D&D phase, like the Portsmouth, some of the old NR sites and the Idaho Mixed Waste facility we talked about, they are in a state of shut down. But those are years in the making. They are nuclear in nature. They contain nuclear materials, so it's not really feasible to just not fund them.

The bigger question is do they receive funding at the current levels or not? And that is really an opportunity for the government here because providing value -- that's how we ran our bread and butter every day in that market is by providing value and doing more with less. So that's more of the nature than a complete shutdown.

Okay, that's helpful, thank you.

Your next question comes from the line of John Rogers with D.A. Davidson. Please proceed.

Hi, good morning. Just one follow-up question, in terms of your power generation backlog as it stands now, can you break it out between replacement components, emissions work and new capacity or roughly some color on that?

Yes, John, and generally kind of the way I think about it on the power side is it's about 30% plus or so power -- 30% plus what I just call parts and service, I guess 35%, about 20% environmental, 20% of what I'd call kind of boiler-type work, and then 15% or so waste energy biomass.

Okay, and you're saying that's what it is normally or that's where it is now?

Well that's what it is now.

Okay.

But I mean historically kind of the way I've always thought of that is it's kind of about a third environmental, about a third parts and service. Historically, back when we were doing more OEM, it was in that 15% to 20% OEM. Today, it's less than 10% OEM.

Right.

Because as you know, we haven't had any new bookings on the OEM side. And then you throw in kind of other which is the bio end -- biomass waste energy.

Okay. And as we look out over, I don't know, the next 12, 18 months, could that environmental piece end up as, I don't know, 50%, 70% of that business or the backlog?

It certainly is intended to increase in proportion what the split is that Mike just read to you, but whether it'll -- it's going to be somewhere in that 40% to 60% range. It -- once you stabilize it at that -- and it'll be a fluctuating ratio depending on where you are in the booking and the execution cycle.

The other thing that I'd add to what Mike said, in the last cycle where we had about 15% approximately and new boiler business, if you would, during that same period we basically had no biomass and no waste energy. So that is sort of -- we sort of see that as a gap filler for that part of the business going forward because we do not forecast any new coal projects in the United States for the foreseeable future.

Okay, great. Thank you, appreciate the help.

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

Good morning.

Morning.

Good morning, Marty.

In terms of the Department of Energy small modular reactor program, if mPower was selected could you talk a little bit about the mechanics for how you'd be reimbursed for the R&D expenditures? Would it be -- would it happen in the quarter or would there be some sort of timing lag?

There's two components to that and -- Marty, and it would certainly be a time lag. It would be over time. We're looking at that situation right now. It's a classical DOE cost share type program where we will have to prepare a proposal. There will be on RFQ. You'll bid into it. They'll select the two -- they'll select the two suppliers that they want to work with on that, and it's broken out into the two components that I mentioned earlier on the call. And those occur over time as those activities are actually executed, if you will. So it won't be a lump sum. It won't be like a grant. It comes with a program run.

Okay, and then --

Is that -- does that make sense? Did I answer your question?

Yes, yes. And then the bidding opportunities that you talked about, the $1.6 billion in bids outstanding for pushing through equipment projects and $1 billion expected to be bid through the end of this year, could you -- what would be -- what would those numbers have been, say, six months ago at the end of 2010?

Six months ago the bids outstanding were almost nil. For the [Qatar] replacement there were other -- there's always a certain amount of environmental business that's out there that's in the background for regional and special compliance reasons other than the EPA rules. But with regard to the new regs, six months ago there was not a lot. We're looking for it now to see if we can find it.

Well, six months ago the bids outstanding were just shy of $3 billion but they were more related to some large international projects and things like that versus today our true bids outstanding today are about $3.2 billion or so. And those have less OEM projects and more of these environmental-type projects we're talking about.

Okay, thank you.

Our next question is a follow-up and it comes from the line of Andrew Kaplowitz with Barclays Capital. Please proceed.

Well, a lot of questions today so I'll just keep it quick, a couple of clean ups. Mike, on [technical] services, Portsmouth is ramping up. You kind of mentioned it in the prepared remarks. Does it keep ramping up from here as we go into 3Q and 4Q from the 2Q number?

I'm sorry, what?

Portsmouth? With the (inaudible)?

Portsmouth? Yes, I mean it does. And as we -- as you know, Andy, we really took over control of that site April 1st, so as things continue to ramp up there will be a slight ramp up quarter by quarter. And I think we kind of hit our peak at Portsmouth as of, as I recall, either Q2 or Q3 of 2012.

Okay, that's helpful. And then the seasonality of your Power Generation business, 3Q is usually a little lighter than 2Q. Is that fair?

Not necessarily. I mean I think what we've seen in the past is Q1 is clearly -- is usually a quieter month. But kind of the shoulder months are, or shoulder quarters, are typically Q2 and Q3 and the first half of Q4.

Okay and then Mike just tax rate. Tax rate was a little lower in 2Q. What should we be using over the next six months?

I think if we stay in that 34%, 35% range I think that's pretty good.

Okay, thank you.

All right. Operator, we'll take one more call if there's anybody out there.

There is no further questions, and I would like to turn the call back over to Mr. Michael Dickerson.

Perfect, thank you, Kim and thank you everyone for joining us this morning that concludes our conference call. A replay of the call will be available for a limited time on our website later today.

Also on our website is a Company overview with some additional information that we'll be sharing with investors and analysts during various meetings throughout the quarter. If anybody has any follow-up questions, please feel free to catch me at my desk today. Thanks everybody.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.