BWX Technologies Inc (BWXT) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Babcock & Wilcox Company's first quarter 2012 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 and instructions will be given at that time. I will 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

Thank you Robin. And good morning everyone, welcome to the Babcock & Wilcox Company first quarter 2012 earnings conference call. I am Mike Dickerson Vice President and Investor Relations Officer at B&W. Joining me this morning are Jim Ferland, B&W's President and Chief Executive Officer, Mary Pat Salomone, Chief Operating Officer, and Tony Colatrella, our Chief Financial Officer. Many of you have already seen a copy of our press release issued last night, for those of you that have not, it is available on First Call, and at 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 detail about the risk factors related to our business.

Additionally I want to remind that you except as required by law, B&W undertakes no obligation to update any forward-looking statement to reflect events or circumstances that may arise after the date of this call. Also on today's call the Company provides 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 as a substitute for the comparable GAAP measures. B&W believes the 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 to assist them in understanding B&W's ongoing operations. A reconciliation of these non-GAAP measures can be found in our first quarter earnings release should last night, and in our Company overview presentation posted on the Investor Relations section of our website at babcock.com. 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 in the queue.

With that, I would now like to turn the call over to Jim.

Thanks, Mike. Good morning everyone. I am pleased to be able to report a solid first quarter for the Company in terms of revenue and earnings. All of our business units performed well and in line with our expectations. Bookings were also very strong, moving our backlog to record levels. As I have only been here for a couple of weeks, it is appropriate for me to have Mary Pat and Tony take you through the performance of the business over the first quarter, and we will get to that in just a minute. I thought I would spend a little time describing to you my initial thoughts on coming into the Company.

At a high level, B&W is as advertised a solid business with industry leading positions. If any of you have not been through the Analyst Day presentation from September, I encourage to you do so as it provides a good overview. As it relates to our government segment, I have known for a long time that B&W held valuable and important positions as it relates to the US Naval Reactor Program, but over the last several years the B&W Technical Services Unit has also set itself apart as industry leader, in the management and operation, as well as the environmental clean-up of government sites, many with a high consequence nuclear mission. In these two business segments, B&W is well-positioned from a competitive standpoint going forward.

In the Nuclear Energy segment reentry into the nuclear services market in the US, while not without some challenges has been a success. Combined with a state-of-the-art manufacturing facility and nuclear clean room in Ontario, Canada, this business has doubled in size over the last few years. With word of our successful outage work beginning to spread around the industry, the emerging opportunities as a result of the aging US nuclear fleet and post-Fukushima modifications, and my background, we should be able to continue to grow the top and bottom line over the next several years.

The opportunity in the Power Gen segment as a result of the drive to minimize the environment impact of coal is providing significant lift. Both the Power Generation group's backlog and financial results. I was pleasantly surprised by the environmental market projection that I have seen. You saw some of the impact of this in the press release issued last night. Today, the Power Generation group has more than $4 billion in bids outstanding or in progress. More importantly, more than $2 billion of these bids are environmental systems and services, where we have historically maintained a strong market position.

B&W's approach allows us to take advantage of our broad product offerings, and to engineer and design cost effective solutions for each unique customer and site situation. Again, here is a situation where in a competitive market, the Company is very well-positioned. However, despite all of these positives, it appears to me that the market is undervaluing B&W as franchise. If I may elaborate on this for a minute, I think there are few reasons.

First are the obvious. Normal market considerations, like trading patterns of our peer groups, the price of natural gas in the US and others. Then there are things frankly which are more within our control, such as the investment responsibility and related risk and upside opportunity at mPower, which today resides largely with B&W. And finding a means to address in a responsible and effective manner the high level of pension funding and expense that is currently running through our financial statements.

Additionally, we will look at other ways to drive shareholder returns, including optimizing B&W's capital structure and allocation of capital within the Company. I don't have any concrete answers to share with you today, but I am committed to looking at these opportunities to unlock value. I believe we need a broad-based approach to value creation. We need to maintain and grow a strong set of diverse business operations, as well as a balanced approach to risk and capital asset management. It is not my intention to analyze things forever. We will study, decide, implement, and move on to the next item. I can assure you that driving growth and shareholder returns are top priorities for me.

The last item I want to talk about is our strategy, a turnover at the CEO level always creates a bit of uncertainty. Broadly, I think we are focused in the right areas. While executing on this strategy, the Company has put together a series of solid quarters, outperforming nearly every step of the way. The Company has been executing a strategic plan that is refreshed each fall. It is too early for me to say whether there is a need for me to make significant changes in B&W's strategy, but the strategic planning process which will begin shortly, will be an area of focus for me, and because of its importance will absorb a fair amount of my time. When the process wraps up later in the year, I look forward to sharing the outcome with you.

With that, I will turn the call over to Mary Pat.

Thanks, Jim. Let me start today by describing our performance this quarter, and update you on a positive recent development. The Company continues to perform very well. Revenues of $765.9 million were up $74.6 million, or 10.8% in the first quarter compared to the year ago quarter. This is the sixth quarter in a row of positive year-over-year consolidated revenue growth. This is principally a result of higher environmental bookings over the last three quarters, as well as new renewable steam generation systems and nuclear power generation parts, service, and construction projects.

Bookings of $1.4 billion in the quarter resulted in ending backlog of $6 billion, which represents an increase of $616 million, or 11.5% from the ending backlog at the fourth quarter of 2011, and a 21.4% improvement from the first quarter of 2011. The increase in backlog on a year-over-year basis was driven principally by a 76.6% increase in the power generation segment, which Tony will cover in more detail later.

Consolidated operating income for the first quarter of 2012 was $65.7 million compared to $21.9 million in the first quarter of 2011. Included in operating earnings in the first quarter of 2011 were charges related to lost contracts totaling $32.7 million. Excluding the impact of these charges in the prior year, operating earnings in the first quarter of 2012 increased $11.1 million, or 20.3% compared to the first quarter of 2011. The increase in operating income, excluding the impact of prior year charges, was primarily due to improvements in productivity in the manufacture of naval nuclear components and commercial nuclear down blending in the nuclear operation segment, as well as an increase in revenues in the power generation segment.

On the safety front, the Company continues to execute to its high standards, and has again started the year on a strong note. For the first quarter of 2012, the Company is reporting total injury frequency rate, lost time case frequency rate, and the cost severity index all below prior year levels and better than first quarter 2012 targets.

Before I turn the call over to Tony to talk about individual segment performance, I want to give you an update on some recent positive developments in the Naval Reactor Program. Last quarter, we discussed a speech given by Defense Secretary Panetta, related to program procurement changes in future budget years. It is still too early to have any clear indication of the impact, if any, these potential program changes will have on B&W. The process will require discussion, evaluation, and negotiation, and will eventually translate into a detailed budget that must be approved by Congress and the President. Part of that process is playing out now.

If you recall, in Panetta's speech the most significant near term item related to the movement of the procurement of one Virginia Class submarine from 2014 to 2018, maintaining the same total number of vessels over that time period. Recently, the House Armed Services Committee announced that it has decided to provide funding for an additional submarine in 2014. This would essentially fill in the procurement schedule back to two submarines per year. While this is potentially a positive development for our business, ultimately we will not know with certainty until the budget for the government's fiscal year 2013 is finalized.

With that, let me now turn the call over to Tony, who will take you through the results of each of our business segments and other financial metrics.

Thanks, Mary Pat. Revenues in the Power Generation segment of $414.3 million for the first quarter of 2012 increased $58.1 million, or 16.3% compared to the $356.2 million reported in the first quarter of 2011. This result was principally due to increased new billed environmental projects, as well as biomass and waste-to-energy new build power generation boilers and auxiliary systems.

Revenues in our aftermarket parts and service business increased 6.6% sequentially compared to the fourth quarter of 2011, but we are down 3.5% compared to the first quarter of last year. This increase in sequential aftermarket parts and services, which was primarily attributable to the US based coal power generation fleet, occurred at the same time that natural gas prices declined by roughly 30%.

While this sector of the business has performed well, it is likely that prolonged gas prices below the cost of production may adversely affect the long term growth profile of this sector of the market, particularly in small consumable parts which represent less than 10% of the power generation segment revenue, revenues from new build environmental systems and services increased 96.5% in the first quarter of 2012 compared to 2011, while new build steam generation systems primarily from the renewable markets increased 43.3%.

Operating income in the Power Generation segment, including the equity income from our global joint ventures was $28.0 million in the first quarter 2012, an increase of $1.4 million, or 5.3% compared to first quarter of 2011. The year-over-yearincrease in operating income was primarily due to stronger new build environmental and steam generation margins resulting from higher volume, partially offset by an expected reduction in equity income contributions from the Company's China joint venture, and start-up costs related to our new India joint venture.

Bookings in the first quarter in Power Generation segment were $1.1 billion, resulting in a backlog of $2.7 billion, an increase of 36.2% from the end of the fourth quarter of 2011, and an increase of 76.6% from Q1 2011. First quarter bookings included $676 million for the design, engineering and construction scope of the West Palm Beach waste-to-energy plant award announced last year, as well as the related long term operations and maintenance contract.

Environmental bookings during the first quarter were $249 million, compared to just $30.6 million in the first quarter of 2011. Continuing a positive year-over-year trend in the environmental equipment and systems market that started in mid-2011. We continue to experience robust bidding activity, and believe that we will continue to realize strong booking levels in subsequent quarters.

The Nuclear Energy segment reported revenues of $86.6 million in the first quarter of 2012, an increase of $21.3 million from the first quarter of 2011. This increase in revenues is primarily due to increased levels of nuclear utility outage services due to the variable nature of nuclear utilities outage schedule, and a reactor service project as well that carried over from the fourth quarter. Nuclear Energy segment operating loss of $16.8 million in the quarter includes R&D and SG&A related mPower costs of $27.9 million, of which $3.6 million is noncash, nondeductible in kind R&D expenses incurred by the minority partner of generation mPower, which are as we mentioned before consolidated on the books of B&W. Excluding these mPower related costs, operating profits for the Nuclear Energy segment, which includes the manufacturing of nuclear components and nuclear services and projects, was $11.1 million for the quarter.

Nuclear Operation segment revenues of $250.2 million were essentially flat, compared to the $250.5 million we reported in the first quarter of 2011. This slight decline this revenues within the segment for the quarter when compared to prior year are the result of improvements in year-over-year manufacturing efficiency and expense management. This results in lower billings to our customer as we share these efficiencies with them. At the operating income line, you will see that these efficiencies are translated into higher earnings and margins over the last several quarters.

Nuclear Operations operating income was $48.0 million in the first quarter 2012, representing an operating margin of 19.2%. This compares to $30.4 million in operating income, and a 12.2% margin in the first quarter of 2011. In the first quarter of 2011, the nuclear operations group earnings were burdened by approximately $11.1 million related to contract adjustments to lost position down blending contracts in our wholly-owned subsidiary, Nuclear Fuel Services that have since been completed.

Excluding the impact of these prior year charges, operating income increased 15.5% in the first quarter of 2012 compared to the first quarter of 2011. Backlog in nuclear operations was as expected, down slightly on a sequential basis. In the quarter, we did book a new $130 million contract for the design and engineering of advanced reactor components for the Virginia Class submarine program. Nuclear operations segment ended the quarter with a backlog of more than $2.9 billion.

Technical Services segment revenues of $25 million decreased $3.4 million in the first quarter of 2012 compared to the corresponding quarter of 2011. Due primarily to the lower level of spending on the American Centrifuge project as compared to the prior year. Operating income of $14.6 million increased $2.5 million, or 20.7% in the first quarter of 2012 compared to the first quarter of 2011. This increase in operating income is due principally to the ramp-up of new environmental remediation, decontamination and decommissioning contracts.

Let me touch on our balance sheet and cash flows. During the first quarter, the Company made pension contributions of $91.6 million, which when combined with the timing of 2011 incentive compensation payments resulted in a cash use from operating activities of $103.2 million during the first quarter of 2012. The Company's cash and investment position net of debt was $418.7 million at the end of the first quarter of 2012, a decrease of $125 million compared to $543.7 million at the end of fourth quarter of 2011. In addition to net cash, the Company maintains a $700 million revolving credit agreement, which had approximately $483.8 million of availability as of the end of the first quarter.

The Company believes it maintains adequate liquidity to fund operations, which include increased working capital requirements, internal growth, and R&D programs, as well as additional product and geographic expansion. Due to favorable market conditions, we are currently in the process of amending and extending our credit agreement and subject to market conditions expect to complete this process during the second quarter of 2012.

Finally, I want to call your attention to an update to our commitments and contingencies as noted in our Form 10-Q which was filed last night with the SEC. As you know, B&W has been engaged in a mediation process with Energy Northwest with respect to the Columbia Nuclear Condenser project from last year. I am pleased to report that we have reached an agreement in principal, and subject to ratification by Energy Northwest's Executive Board at a meeting scheduled to be held today, this would result in a lump sum payment to Babcock & Wilcox Nuclear Energy Incorporated.

Let me now turn the call over to Jim for some final remarks.

Thanks Tony, and thanks Mary Pat. I want to thank the team for a strong first quarter. The transition is much easier with positive news and strong performance to report on this call. It is certainly a pleasure to be taking over a well-run and top performing organization. I look forward to meeting and working with all of our analysts, shareholders, and prospective shareholders.

To reiterate some of my earlier comments, maintaining strong safety and operating performance in all of our markets, maintaining focus on solving the complex issues faced by our customers with innovative solutions is important to unlocking value for B&W. But I also believe there are other actions we as a management team can take, as I described earlier, to unlock value for our shareholders, and we will evaluate and run to ground each of those initiatives.

That concludes our prepared remarks. I will now turn the callback over to Robin, who will assist us in taking your questions.

(Operator Instructions). Your first question comes from the line of Joe Ritchie of Goldman Sachs. Please proceed.

Good morning, everyone.

Good morning.

So I have got one comment and then two questions. Jim, I know it is early, so we definitely appreciate your thoughts on what you have seen so far in B&W, and the potential initial leverage that you can pull to help unlock shareholder value. We are looking forward to hearing a lot more about that in future discussions, but moving onto my question, the first question is on the bids outstanding. You have got $4 billion in bids outstanding today. That seems like a material uplift based on where you guys have been over the last three to six months. If you could maybe provide some color on how that has trended over the last six months, and then in particular on the emissions awards, if you can comment on the pace of emissions awards?They seem to be surprising to the upside at least from our perspective. I would love to hear a little bit about that?

This is Mary Pat. In response to that, Joe, I think that our bids outstanding in the first quarter have definitely uplifted from where they had been. But that is really a positive. What is driving that is there are definitely regulations, we talk a lot about Casper, or we talk a lot about math, but there are other regulations driving utilities to install environmental equipment in addition to that. And so we do have a portfolio there of technologies that provides the customers a range of choices to deal with their particular challenges. And so we are finding those choices to be very beneficial in this whole environmental surge here. It is difficult to predict bookings quarter by quarter. And so I think overall, we expect the 2012 environmental bookings to be higher than the 2011 environmental bookings, and we really think that this represents a significant opportunity.

You guys I mean you are well on your way to surpassing 2011. I guess really on the pace, it was interesting from recent discussion that we have had, it seemed like the second half of the year the awards were going to be more back end weighted for the emission cycle for 2012, and yet you start off the year with $250 million. And so is that still your expectation that the awards on the emissions side are going to be greater in the second half than they are in the first?

We continue to see continued buildup there and continued driving that, I think we had anticipated that there might a slowdown in the first half of the year due to what was going on with Casper and the utilities reevaluating. Again as I said, there are a lot of things driving the environment work beyond just Casper. So we continue to see that move forward

And I guess just one follow-up question on the margins, particularly on the government op segment. Really strong this quarter, well above call it normalized levels. Was there anything one-time that benefited the quarter, and how should we be thinking about the trajectory of those margins going forward? Thank you, I will get back in queue

There was nothing specific that drove the first quarter in the nuclear operations group. I think with regard to our entire government portfolio, we expect, as we told you before, relatively constant earnings as compared to the 2011 record level earnings that we achieved.

Okay. Thank you.

And your next question comes from the line of Tahira Afzal of KeyBanc.

Good morning and congratulations on a good quarter.

Thank you.

Thanks.

Thank you.

My first question is really in regards to the margins on the power side. You have seen strong bookings. It seems incrementally the momentum in generally is better than you thought. Qualitatively, can you just compare about how we should be thinking about power margin trajectory going forward, and then I have just one more follow-up?

Thanks. Mary Pat is going to take the margin question.

Quarter one is seasonally a lower margin quarter than other quarters typically are. Last year we also had some pretty favorable project closeouts in the first quarter as well. Again as we said before, we expect pretty flat margins as compared to 2011 over the year, but clearly the revenue is up, so the contribution is going to be up. So that drives the numbers higher. Our target margin going forward is still in that 7% to 10% range that we have told you before, and so I think that is our expectation then.

Okay. Great. And actually I lied,I have two follow-ups. Jim, first of all, you have had a lot of experience with a very established firm on the nuclear side. As you look at mPower and I know Westinghouse has recently jumped into the fray on the small modular reactor side as well. Can you talk about as you have come into BWC and you have examined mPower, what you think really its key advantages are, in terms of technology to the extent you can that really put it ahead of some of its peers perhaps. And then if you can talk about some of the opportunities that are in the marketplace in the US, and internationally and we have been hearing a little more about Europe and coal retirements there, and the potential market for SMRs, I would love to get your thoughts there?

Sure. Happy to do that. I am going to be a little bit careful on the technology question. Because as you said, given my background. I will say about mPower, B&W is clearly committed to that and we have some very talented resources that are working on both the commercial business side and on the technology side of mPower, and I am impressed with the Company's efforts on that front. But I am probably going to leave it at that as far as direct comparisons.

Market opportunities in my view are many for mPower. Obviously, we tend to think first in the US, where I do think there are some market opportunities in the next few years. I think the concept of SMRs plays well though all around the world, and I see significant opportunities to some extent in Europe, and more so and primarily in the developing countries and Asia. I think there is an awful lot of upside opportunities for SMR, certainly in China, and to some extent in India, and you will see over the next couple of years our focus intensify in those parts of the world as we look to develop those opportunities

Okay. Great. Thank you and a quick last question really on the Virginia Class submarines. The scope increase, to the extent you can comment on what that was driven by, and then the original Panetta plan that came out earlier, talked about potentially increasing the scope of Virginia Class submarines to accommodate more missiles, would that potentially mean larger scope if that proposal goes through?Thank you very much.

With regard to the, Tahira, I think what you are referencing is the contract that we just announced. That is really new technology in some components for future, for Virginia class submarines so that is what that is related to, exciting opportunity for us there. With regard to the other changes in the missile compartments for Virginia Class, that doesn't really affect the base reactor compartment at all. And so therefore, there is no real change to the submarines and to our scope of work for the sub.

Okay. Super. Thank you.

And your next question comes from the line of Chase Jacobson of William Blair. Please proceed.

Hi. Good morning.

Good morning.

Good morning.

I just wanted to follow up on a question about the bid pipeline. In the press release you talked about $4 billion of bids outstanding. I think that is up from about $3 billion the last several quarters. And you mentioned that $2 billion was related to bids around the EPA regulations. Of the other $2 billion, can you just give us some type of sense of what types of projects are included in there, and if any of that is similar to the service contract that you announced this quarter?

Yes. There are some similarities to the contract that we announced this year in that there are other waste-to-energy type contracts that we are looking at in the US and in Europe. So there are some similarities, not anything of the magnitude of the West Palm Beach project, so with regard to that. The other large portions of the bid, the outstanding bids relate to new steam generation-type systems, primarily outside of the US.

Okay. But is it coal related, or is it other waste energy projects, any color on that?

It would be both. Again it is the waste energy in the US as well as outside, coal outside the US.

Okay. And then when you look kind of beyond that, you did mention that cheap natural gas could change the longer term growth profile of the business. Are you pretty confident when you look beyond the $4 billion of bids outstanding that you could replace that with new bids in the coming quarters?

Yes. This is Jim. When we look long term, let me just talk through a couple things that we think about. Number one, low gas prices certainly does have an impact on our business. We mentioned earlier the fact that when gas price is low, the gas plants run and the coal plants run a little bit less, and that has a relatively small impact on us, but it does reduce our aftermarket services and parts business a little bit. In the short to medium term in the PGG business though, that is more than offset by a relatively large magnitude of environmental upgrade projects that we see coming. So the low gas price has an impact on our business, relatively small, but the upside opportunity on the environmental is very large.

When we look to the future and we, along with everybody else, do our best to project what gas prices will look like, certainly they will have an impact on the coal business in the US, but not that large. We project a relatively small number of coal units coming offline, a little bit more than we had projected last year, obviously. But the great bulk of the coal units today, including the larger units remain online in our projections for 15 to 20 years, and we don't expect that to change. We are also seeing in the US some units begin to switch from coal to co-generation where it is a combined coal gas or just gas firing opportunity. That actually means more business to us, as those units potentially switch over. If you look worldwide, obviously natural gas prices in the US are not reflected in the rest of the world, in Europe or in Asia that way, and we continue to see a robust business for PGG on the coal side, particularly in Asia.

Okay. That is very helpful. And just one other question on the ACP. I know it is a pretty small part of the business now. It is a larger opportunity. It looks like that is going to be slowing down a bit. Are there any actions that B&W is taking in terms of cost cutting to offset the slowdown in revenue from that project?

We are already at very low levels of spending,that has all been accomplished. That slowdown really started last year, and so we are at a very low level of spending on the ACP project. So I think longer term, we remain committed to that program and we remain hopeful that USEC is going to be able to obtain the funding to complete this research and development, and research design and development program that they have been pursuing, and that we can continue to support them there.

Alright.

And just to note, if USEC is successful on that project, I know they are working very hard to make that true. Obviously, we would ramp efforts back up on the ACP manufacturing side.

Okay. That is helpful. Thanks.

And your next question comes from the line of Will Gabrielski of Lazard Capital Markets. Thanks. Proceed.

Thanks. Good morning. Within the government equity income line the number was up year-on-year, maybe you just can go back and talk about what drove that, and then going forward through the rest of the year what type of run rate you are thinking about now?

In terms of the, it was up over last year because of the first quarter of last year, because of the new decontamination and decommissioning contracts that were awarded in the latter part of 2010, early part of 2011. We had been going through a transition process, and we have taken those over. Those are ramping up. So that is what you start to see over, that is what is driving the numbers on the technical services group. Again, I think our projection is that for the government services group, the government group combined, constant levels with last year.

Okay. That is helpful. Can you talk about the power margin and how much duration is left on some of the early wins you had in environmental that you called out in the Q as maybe impacting the margin to the downside?

On track durations are typically 24 to 36 months would be a typical duration.

Okay. So is there a crossover point in that business, maybe on revenues, where you see a little bit of an inflection, whether it is just on better utilization of your assets, maybe in dollars that margin could begin to rebound a little bit?

Yes. Next year we expect that again, we are expecting higher margins as we get further into that cycle by all means.

Okay. And as you are bidding projects now are you starting to see better margins come through on what you are winning versus a year ago?

In some cases.

Okay. And then lastly, on the capital location and the balance sheet, I am wondering if there are any updates, maybe a little more granular thoughts around what you guys are considering at this point, or when we might hear something around that?

Not today. The point, the real message I was trying to get across was we think there are some opportunities, and we are going to look hard at them. And once we make some decisions, we'll get out and we will communicate it to you folks.

Alright. Looking forward to it. Thanks again.

And your next question comes from the line of Jamie Cook of Credit Suisse. Please proceed.

Hi. Good morning. Two questions. One just back, I appreciate the color on your color on the potential switching from coal to gas, and what the implications are for your revenue. Just the 10% is that as of today? Can you talk about how that fluctuates throughout the cycle, and also what the profit contribution is? Because I would assume it is higher than, much higher than the sales contribution.

And then my second question sort of back to the margin question on the emissions side, can you just talk about your win rate right now? Is it better, worse, or in line with historic levels? Because it did sound like previously you guys thought you wouldn't win as much in the beginning because you tend to be more disciplined. So I am just trying to get a sense from that point of view as well. How quickly capacity can tighten in the industry?

Yes. Jamie, Tony is going to take part one and then Mary Pat part two.

I think you are referring to the aftermarket business and PGG?

Yes.

I want to make sure we are on the same page. With regards to that there is some variability in the aftermarket business depending obviously on how heavily utilized the coal fleet is. The variability though, again because it's only 10% of PGG's revenues, round numbers is not that substantial. That said, it is of course one of the contributors to our profit stream, and it did have an impact in the quarter, more than offset by the upsides we saw elsewhere, but not a substantial impact

But how much larger is the profit contribution relative to the top line? I mean I understand the 10% on the revenue, but again the contribution on the margin on the profit I would assume would be much higher?

It is a little bit higher, but we are not going to get into the specifics of that on the call.

With regard to the hit rate on the environmental projects, we are tracking to the historic hit rate, and our historic market share there. I think one of the things we have done very well in this cycle is we are targeting customers and projects that really fit our sweet spot. And so that has proven to be pretty successful for us starting out.

Okay. And just because the award pace has moved much quicker than I think I thought and some other people thought, are there any concerns out there, when do you expect there to be concerns from utilities, that capacity in the overall industry starts to tighten, or are we just too far away from even worrying about that yet ?

I would say it is early yet to be worrying about that.

Okay. Thanks I will get back in queue, nice quarter.

Thank you.

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

Good morning, guys.

Good morning, Scott.

On the nuclear energy side, it looked like you guys benefited from a strong quarter on outage work. I am wondering whether there was any trends designed from that, and what your expectations are for that level of work going forward, and thoughts with regard to seasonality, and helping us model your quarters correctly for that particular business?

Fair enough, Scott. This is Jim. Yes. We did have a good first quarter. What you will find in the commercial nuclear segment is with, the outages obviously run on either mostly 18 month cycles, occasionally 24 month cycles, so it is going to vary up and down for us, as we break into this outage services market in the states. So, number one, it is going to be variable. Number two, we have a relatively small market share today, although we have performed very well on the jobs that we have done on the outage service side. So that also will make it variable. But it also provides some mid to long term upside opportunity for us.

Right. That makes perfect sense. And then maybe as my follow-up here, with regard to the environmental pace of bookings you see proceeding the next few quarters and years, how much of a factor is the outcome of the Casper dispute, and also the election cycle and who, and the outcome of that election cycle? In your view, are those really material factors potentially in terms of utility spending behavior, or really more nonevents in your opinion?

We are clearly watching both of those going forward. As Mary Pat said before, we look at Casper and Mass, but there are a lot of drivers that utilities consider when they get ready to make big investments like this. Casper and the east side of the US drives SCR and FTD work for us. So the faster Casper progresses, the faster that type of work will come out for us.

As far as the election cycle goes, it could have an impact. If you step back and look at it, there is a general trend in the UStowards stricter environmental regulations. It is happening slowly, and it does, the speed at which we move in that direction does vary a little bit depending upon election cycle and the administration that is in power. But regardless of who is in power, it is our belief that environmental push continues to the right, and that will be more and more of a factor going forward. So we see upside market opportunity regardless of who wins, and what the outcome looks like in November

Understood. Thanks.

And your next question comes from the line of Steven Fisher of UBS. Please proceed.

Hi. Good morning.

Good morning.

Just to follow up on that last question on nuclear energy. I am wondering what the pipeline of potential nuclear energy services projects look like at this point?Do you have a bid slate in that market or do you have to wait for the multi-year contracts to come up, and then you get access to those outages every 18 months or so?

Yes. A, just off the bat, those are relatively small contracts in the big scheme of things. And the utilities do tend to bid them out in groups over time. So they will come out going forward. Obviously, we are happy with the technology we have. We think it has performed well relative to the competition in the marketplace. But that does not mean immediate work for us. Nuclear by its nature is relatively cautious, and they want to see us perform and they also want to make sure that they, as we continue to increase our workload, that we have time to staff up on the technology and people side. So I think we are well-positioned. We have a small market share, which is good because we can improve it. but you are not going to see a dramatic increase in the near term on that front. But we do see a lot of upside opportunity in the long run.

Okay. Great. And then NFS seemed to be a year-over-year swing factor in profitability in the nuclear operations, so I guess I am just wondering how that business is performing, and how much profit it is generating relative to its potential, and then how you see it maybe being able to achieve whatever the potential is over the next couple of years?

NFS has had four solid quarters of really good performance, in particular on the commercial down blending operations, which had initially created some of the losses. I think the good news going forward is that as we are working off those loss contracts that we inherited and knew we were getting when we bought NFS. And so we are moving into more profitable work there as we move forward.

Okay. Maybe just quickly, can you quantify or give any color on how material the cash payment related to Energy Northwest is going to be?

No.

Less than the charge?

As we said, we are under some confidentiality restraints in the agreement that we have in place. We are expecting an Energy Northwest Board meeting today. And once we have information, we will go ahead and put it out.

Okay. Thank you.

And your next question comes from the line of Andy Kaplowitz, please proceed.

Good morning, guys. Nice quarter.

Good morning.

If I could just follow up on Jamie's question, maybe in a slightly different way. You mentioned that small consumable parts are less than 10% of the business. But parts and service overall is quite a bit larger than that, right? Maybe 30%, 40% of the business. You guys tell me. But I am just trying to think about overall sensitivity to your business. If US coal production let's say is down 10%, is it fair to say that your business could be down commensurate with that, or am I not thinking about it right?

I think that what you have to think about is that a lot of the units that are retiring are referred to as the small dirties, that the utilities have not invested lots of money into in the past. And so that they are not units that we were getting lots of revenue or earnings from. So when you look at the fact that there will still, we project that there will still be more than 200 gigawatts, 250 gigawatts of coal in the base, there is still an awful lot of service work and parts that are going to need to be provided.

Okay. That is fair, Mary Pat. So basically, the way you are answering my question is that if we were down 10%, you would be down a lot less than that?Fair?

That is right. Fair.

That is correct. And in the long run, we will look obviously, to expand that business overseas, and make that back up.

Okay. That is good. So the Chinese joint venture you talked about it being down this year. So it was well telegraphed. Can you talk about what your guys are telling you about that business right now, is it stabilized at a low level, it is still getting a little weaker?How do we think about that business?

Yes. I think it has definitely stabilized, and we see it actually, we did see some improvement in the bookings in the first quarter. We still do expect it to be lower than it was last year. But we have seen some improvement there. So by all means. I mean again, the other driver, just to be clear, the driver to the equity income drop year-over-year is not just from China. It is also from the contributions that we are making to the start-up of the Indian joint venture, which is construction of that factory in Pune is progressing very well, and we expect to finish that construction in the third quarter of this year.

Thanks, Mary Pat. Jim, you are going to tell me it is too early but I will ask it anyway, any easy wins on mPower pension that you see to cut costs a little bit?Anything maybe that is low-hanging fruit, or I know you are telling me it is too early?

It is a little bit early. What I will tell you on mPower is obviously I like the opportunity. One of the things we are looking hard at over the next few months and we will communicate out to you guys when the time is right, is we are looking at the business model inside mPower. There are many different ways for companies to play in a new power plant like that. You have EPC. You have manufacturing. You have fuel, and you have long term services. Each of those represent a potential value stream for us, and we are looking hard at where do our core competencies best match with those potential value streams, and then over time we are going to focus on those areas. So I do think you will see some small changes in our approach going forward. And as we get that ironed out and it becomes crystal clear to us, we will make it crystal clear to you.

Okay. Thanks, guys

And your next question comes from the line of Martin Malloy of Johnson Rice.

Good morning.

Good morning.

Could you talk about the DoE SMR program, and the timing of that and when you might hear something on an award there?And one of your peers suggested September, as early as September they might hear?

Yes. The application is actually due to the submitted by the 21st of May. So it is pretty relatively, we are in the final preparation process right now of that application. And a decision, we would expect a decision in the third quarter.

Okay, and with regards to USEC and the $43 million that you got invested there, at what point do you try to get your money back and how do you go about doing that?

This is Tony Colatrella, Marty. Let me just say, I will reiterate really what was said early by Mary Pat. We made this as a strategic investment in USEC, and focused on the long term viability and importance of the American Centrifuge program. You would expect we regularly review the carrying value of all of our investments, including the $43 million you just referred to, which is our preferred investment, equity investment in USEC, and we have done so again this quarter, and we are comfortable at this time that USEC is a going concern, and accordingly, we believe we will recover the full value of our investment. And so we are not going to speculate on the possibility of a bankruptcy, or any other changes with respect to USEC. We are comfortable with where our investment is today. We continue to monitor the situation, and we will continue to do so as we move out into time. And I think there is really not much more we should or can say on that right now.

Okay. Thank you.

And your next question comes from the line of John Rogers of DA Davidson. Please proceed.

Hi. Good morning, and congratulations on the quarter as well. Jim, in terms of your earlier comments just about strategy, and I am not sure what you can say on this at this point, but B&W has got a pretty diverse portfolio, but it still concentrated along the coal side. As you look at it, nuclear versus the renewables versus possibly gas fired, what are you thinking about the portfolio on the power side of it? Are their places you would like to add to that, and also the balance between government work and private sector?

Well, let me just say a couple of things. Right now I very much like the portfolio that we have today. It is obviously performing very well for us. I think it is nicely balanced between a couple pretty stable businesses on the government side that we have a lot of expertise in, and we perform pretty well on, and I think we will continue to do that going forward. So I like the government businesses. On the commercial side, clearly, we play relatively, I have a very strong play in coal. And a relatively strong play in nuclear. I like both of those. And part of our job there is to diversify internationally, just because coal may have a small decrease in the States doesn't mean that can't be a solid and growing business for us in the years going forward.

As far as overall diversification, renewables are an option as well. We do want to leverage our core competencies in the power sector. And gas I think is also an opportunity for us in the long run. So we will look at all of those in the coming months, and we will also look for ways to leverage our other core competencies on technology and people, and see if there are perhaps some markets tangential to the ones that we are in today that might provide some upside for us

Okay. And just as a follow-up, maybe for Tony or Mary Pat, in terms of the power generation business, and if this is in the Q I will get there, you mentioned environmental business up 96%, steam generating up 43% but could you walk us through the other segments or components of that get you to the 16% revenue growth?

I think we were talking, I have to go back and look. But those might have been bookings numbers.

Okay. Okay. That was all bookings?

Yes.

Okay. Thank you.

Your next question comes from the line of Randy Bhatia of Capital One Southcoast. Please proceed.

Good morning. Thanks, guys.

Good morning Randy.

If I could just follow-up a little bit on one of questions that was asked earlier. On power gen margin expansion, I think as your Analyst Day last fall, you had specifically said when revenues get to around $1.9 billionto $2 billion in that segment, that is when cost absorption would take place, and we could see some ramp in margins. Are those numbers still fair? Should we still be thinking about that $1.9 billion to $2 billion, or is it a little higher than that now?

I think relatively in that $2 billion or higher range is where we would expect to see that occur.

Okay. And you are saying that is more of a 2013 event, not 2012?

Right.

Okay. Fair enough. And then if I could just one more along the same lines, in your Q you mentioned that you are seeing some higher than expected competition in new build environmental. Could you just comment a little bit on that, in terms of what sort of impact that is having on the margin in the first quarter, and then whether or not you are seeing any new faces in the competitive environment, given the staggering market opportunity that this is?Thanks a lot?

From the standpoint of new faces, the faces that we have seen primarily it is in the, out there in the environmental, it is pretty stable. So I don't think we have necessarily seen any real new faces in a large way anyway. In terms of the margin impact on the first quarter, again as we said, some of the margins early on were lower. You are seeing some of that in the first quarter. But, yes,it is really just all part of the cycle.

Okay. Thank you.

And absolutely, by the way, in line with our internal projections.

Yes. With projections. Absolutely.

Okay. Great. Thanks, guys.

And let me step back just for one moment to John Rogers' earlier question. Those are revenue numbers. If you break down power gen revenues on a quarter-over-quarter basis compared to 2011, new build environmental and new build steam generation systems were up significantly year-over-year. But the biggest part of that business today, aftermarket services collectively was down on a year-over-year basis, although it was up sequentially as Tony mentioned earlier. That is how we get to a net 16%. That entirety after market services, which was strong, very strong in the first quarter of 2011 was down about 80% year-over-year. Operator, we will take your next question.

There are no further questions. I would like to turn the call back over to Michael Dickerson.

Thank you everybody for joining us this morning. That concludes our conference call. A replay of which will be made available for a limited time on our website later today. I will be around my office the rest of the day if anyone has any follow-up. Thanks everybody, and have a good day.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect, and have a great day.