BWX Technologies Inc (BWXT) 2012 Q2 法說會逐字稿

Welcome to the Babcock & Wilcox Company Second 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 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.

Thank you, Jeanette, and good morning, everyone. Welcome to the Babcock & Wilcox Second Quarter 2012 Earnings Conference Call. I'm 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, Tony Colatrella, our Chief Financial Officer, and Mary Pat Salomone, our Chief Operating Officer, who is joining us remotely this morning. 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 our website at Babcock.com. During this call, certain statements we make will to 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 with our business. Additionally, I want to remind you that, 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 may 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 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 second quarter earnings release issued last night and in our company overview presentation, which will be posted on the investor relations section of our website at Babcock.com later today. With that, I would now like to turn the call over to Jim.

Thanks, Mike. Good morning, everyone. I'm pleased to be able to report another strong quarter for the Company. Our business units continue to perform well and in line with our overall expectations. Consolidated revenues of $852 million increased by 13% compared to the prior-year second quarter. As expected this growth is being driven by our Power Generation segment and more specifically, by the acceleration of environmental control equipment and new build steam generation systems. Aftermarket services are also higher compared to the prior second quarter, driven by environmental services.

It's worth pointing out that this is the seventh quarter in a row of consolidated revenue growth for the Company. Bookings in the second quarter were strong as well; up 28% from the prior-year period. In the second quarter, the nuclear operations groups reported bookings of close to $200 million related to a number of separate contracts for the design and manufacture of naval nuclear reactor components, as well as certain material recovery activities. Power Generation segment bookings were also up on a quarter-over-quarter basis and include another quarter of environmental bookings at $176 million; an increase of 72% compared to prior-year second quarter. The Company was able to generate $0.54 in consolidated earnings per share, including the successful settlement and recovery of some costs incurred last year on the nuclear energy segment condenser replacement project. Safety continues to be an area of emphasis and success. Worldwide, the Company continues to achieve its targeted safety metrics and to exceed industry standards.

In particular, I want to call out B&W Pantex, which surpassed 5 million safe hours in June. This is extraordinary performance at a key government site. Now, let me address a few specific items I called out last quarter. First, capital structure and the potential return of capital to our shareholders in the form of a dividend or share repurchase. I indicated that we would review and analyze these options and we are doing so in connection with our annual strategic planning process. We remain on schedule and will culminate with a review with the Board of Directors this fall. We'll be prepared to share our plans with you, as we stated before, at the end of the year.

We're also making meaningful progress as it relates to various options in regard to our pension plan and I'll let Tony cover that in a few minutes. Lastly, the Company has embarked on a global competitiveness initiative. The goal is to enhance profitability and shareholder returns through lower cost of execution and structural and efficiency improvements. This program will involve a review of all functions and business units within the Company, including corporate functions. With the Company performing so well, you may ask why the Company is taking on such an initiative. I believe that now, while the Company is enjoying strong cash flows and earnings and is not under financial stress is exactly the right time to be looking at optimizing our cost structure. I've reassigned two company executives to lead this effort, reporting directly rally to me.

Mike Dickerson, most recently our Investment Relations Officer and Eileen Competti, most recently President of Diamond Power International, a subsidiary in our power generation group, will co-lead this effort. As a team, Eileen has a long history with the Company and Mike brings an external set of experiences. Mike comes with a strong financial background and Eileen with an operational bent. Mike and Eileen have my full support and confidence to drive performance improvements to make B&W an even stronger and more competitive global business. Over the next few months, they will be analyzing, benchmarking, and developing recommendations, which we expect to implement throughout 2013.

Some of these actions could have an up front, nonrecurring cost associated with them. Our plan is to identify the costs, where relevant for future periods, to give you good visibility into our plan. Jenny Apker, B&W's Treasurer, will assume the additional responsibility for investor relations going forward. With that, I'll turn the call over to Tony, who will take you through the segment results and other financial items.

Thanks, Jim. Jim mentioned the consolidated performance for the quarter, so let me start by walking you through the segment results. Revenues in the Power Generation segment of $497 million for the second quarter of 2012 increased $108.4 million, or 27.9%, compared to $388.6 million we reported in the second quarter of 2011. This result was principally due to increased new build environmental projects, as well as biomass and waste energy new build power generation boilers and auxiliary systems. Revenues in our Aftermarket Parts and Service business increased 4% compared to the second quarter of 2011 and increased 12.8% sequentially compared to the first quarter of 2012. Revenues from new build environmental systems increased 111.4% in the second quarter of 2012 compared to 2011, while new build steam generation systems, primarily from the renewables markets, increased 45%. Operating income in the Power Generation segment, including the equity income of our global joint ventures, was $46.5 million in the second quarter of 2012; an increase of $18.4 million or 65.5% compared to second quarter of 2011.

The year-over-year increase in operating income was primarily due to stronger new build, environmental and steam generation revenues, partially offset by an expected reduction in equity income contributions from the Company's joint ventures in China and start up costs related to our new Indian joint venture. Bookings in the second quarter in the Power Generation segment were $374.8 million, an increase of 11.4% compared to the second quarter of 2011. Environmental bookings during the second quarter were $176.8 million, an increase of 72.3% compared to the second quarter of 2011; continuing a positive year-over-year trend in the environmental equipment and systems market that started in mid-2011. Our Nuclear Operations segment reported revenues of $265.4 million in the quarter; a sequential increase of 6.1% from the first quarter of 2012, but a decrease of 2.6% compared to the second quarter of 2011. Nuclear Operations operating income was $48.5 million in the second quarter of 2012, a slight increase from the first quarter of this year, but down $10.8 million compared to the second quarter of 2011. Recall that the second quarter of 2011, Nuclear Operations segment operating income included a one-time gain of $10.9 million related to the NFS acquisition settlement. Backlog in Nuclear Operations, as expected, decreased slightly from the first quarter of the year.

During the second quarter, we did book nearly $200 million in new contract awards related to the design and engineering and manufacturing of naval nuclear reactor components, as well as nuclear material recovery. The Nuclear Operations segment ended the quarter with backlog of roughly $2.9 billion. The Nuclear Energy segment reported revenues of $67.4 million in the second quarter of 2012; a decrease of $26.5 million from the second quarter of 2011. This decline in revenues was principally due to the absence of material receipts for a large replacement steam generator project, which accounted for $31.8 million of revenue in the second quarter of 2011. Nuclear Energy segment operating loss of $12.9 million for the quarter included R&D and SG&A-related mPower costs of $32.7 million, of which $5.1 million was comprised of non-cash, non-deductible, in-kind R&D expenses incurred by the minority partner of Generation mPower, which we are required, under US GAAP, to consolidate on the books of B&W.

Nuclear Energy's operating profit for the core business, which includes the manufacturing of nuclear components, as well as services and projects, was $19.8 million in the quarter and included an $18.1 million gain from the recovery of costs incurred in the prior year from the Columbia condenser replacement project. Technical Services segment revenues of $28.3 million decreased $2.4 million in the second quarter of 2012 compared to the second quarter of 2011; due primarily to lower customer spending on the American centrifuge project as compared to the prior year. Operating income of $18.4 million increased $3.9 million, or 26.9%, in the second quarter of 2012 compared to the second quarter of 2011. This increase in operating income was due principally to the ramp up of new environmental remediation, decontamination, and decommissioning contracts, as well as a $1.2 million gain on the sale of our interest in an unconsolidated non-core joint venture. Now, let me touch on our balance sheet and cash flow. During the second quarter, the Company made pension contributions of $94 million, which significantly impacted the second quarter cash flow from operating activities. We do not anticipate making any additional pension contributions for the remainder of the year.

Accordingly, we expect to generation significant cash flow from operations in the second half of 2012, resulting in positive cash flow for the year. As it relates to our pension funding requirements, in July 2012, the President signed legislation which, among other things, included changes to the provisions for determining minimum funding levels for US pension plans. The Company has essentially funded its pre-legislation requirement for 2012. We anticipate that the funding relief that results from this legislation would significantly reduce the Company's pension funding going forward and favorably impact free cash flows beginning in 2013. The Company is currently evaluating the implementation of its legislation and its impact on 2013 funding requirements. The Company is also in the process of evaluating its accounting for pensions, specifically the use of mark-to-market accounting.

The application of mark-to-market accounting for our pension plans would result in a significant reduction in quarterly pension expense, but would in turn, subject the Company to potential fourth quarter gains or losses in 2012 and beyond, as a result of fluctuations in pension asset performance and changes in discount rates, among other items, relative to the beginning of your actuarial assumptions embedded within our pension valuation. We expect to complete our evaluation in the coming months and will make a decision on any potential change in accounting for pensions in connection with the Company's year-end pension valuation. Now let me turn the call back over to Jim for some final remarks.

Thanks, Tony. The Company continues to await the outcome of the Department of Energy's small modular reactor cost share program, while at the same time evaluating potential outcomes and the impact it will have on our spending profile in the coming periods. We're hopeful that we'll hear positive news in the very near term. We're also awaiting the outcome of the re-bid of the Pantex Y-12 contracts. The NNSA has stated that an award will be made no earlier than September and could be well after the November elections. The company is the lead contractor in both of these sites and is operating under contract extensions today.

Lastly, I want to assure you that we're making meaningful progress on the initiatives I described earlier; namely, a review of our capital structure and the potential return of capital to shareholders, changes to our pension plans, as well as our global competitiveness initiative. As we move through the balance of this year, we'll integrate these important initiatives into our strategic planning process and I expect that we'll have more definition around all these items in the coming months. That concludes our prepared remarks. I will now turn the call back over to the operator, who will assist us in taking your questions.

(Operator Instructions) Martin Malloy, Johnson Rice.

Congratulations on a strong quarter.

Thanks, Marty.

Could you maybe give us an update in terms of recent conversations and interactions you have been having with the utility customers on the environmental control side and what you're hearing in terms of their pace of rolling out these projects?

Yes, Marty, will do. A couple of comments on PGG and overall bookings - as we indicated in the past, it does continue to be a little bit lumpy, but we feel very good about that overall business and where it's going. Timing of the bookings have been impacted a little bit, for example, by CSAPR. We can see it both in utility decision making on existing proposals and in the number of new proposals that are coming out. That said, outstanding bids are at $3.4 billion, which is very much at the high-end of the average for the last couple of years. Net-net, this environmental upgrade cycle remains intact. It will continue to be a strong upside for the Company in the next two, three, four years, but the timing is going to vary a little bit as the utilities take into account their unique circumstances and pace their decision making.

Okay. Then could you also maybe give us an update on your new joint venture plant in India and progress there in bookings?

Yes, the progress on the building the factory itself, we remain on track. Recent reports actually are that the facility is essentially complete, very high-end equipment, and we have a work force with our joint venture partner in India that is prepared to get to work. That said, we continue to chase bookings in India and don't have anything to report today on that front. Obviously, it's a priority for the Company.

There are a number of bids.

Yes, there are a number of bids outstanding right now that we're actively working on.

Okay. Thank you.

Rob Norfleet, BB&T Capital Markets.

Congratulations on a nice quarter.

Thank you.

Just real quick, in terms of the Power [Gen] business, the margins in the quarter were strong, a little north of 9%. That said, you did cite that close-outs aided margins in the quarter. Can you discuss how much of that margin enhancement was due to close-outs? In addition to that, can you actually discuss what you're seeing in terms of the competitive nature of the market? Obviously, pricing looks like it's still competitive as customers are trying to fill backlog and how has that impacted your win rate?

I'll take a stab at that. This is Tony Colatrella. First of all, the margins in the quarter were not necessarily any more impacted by close-outs than in any other quarter, just to be clear. Every quarter, we go to a process of evaluating and re-estimating, where appropriate, the contracts based on where we are in terms of centers of completion, how costs are tracking. I wouldn't read too much into that. I would say that in terms of the competitive market, the market is very competitive.

I think we've indicated that in past quarters. But we also think we have a very competitive offering and a compelling value proposition because we can offer the customer a wide variety of technologies that suit virtually any environmental requirement. I think we're well-positioned. The market is competitive. We continue to try to be very prudent in our bidding and to provide a good value proposition, but not necessarily trying to be the low cost provider in all cases.

Okay, that's helpful. Last question to Jim, in terms of mPower, Jim, I know this quarter you all decided the accelerated spend in R&D this year first quarter was up $11 million. Outside of the DOE grant, can you discuss other options that you've looked at to potentially reduce this R&D spend; whether it's bringing in additional partners like Bechtel to do various aspects of the actual production phase or any associated alliance that you have with the MOU you've signed with the existing utilities that you have?

Sure thing. On mPower, primary focus for us today, of course, is and it relates to funding, is to go ahead and win the DOE award that's outstanding. We continue to feel we're in a good position for that and would hope to see a decision coming out of the federal government in the next couple of months. As I stated before, we are taking a look at what's the overall business model look like for mPower, with not only trying to look one or two years into the future, which is primarily about licensing and design, but looking many years into the future, all the way through the ultimate delivery of the end product into the marketplace. When we do that, we're trying to balance how much of that company do we want to own ourselves versus the upfront funding requirements to get the design and licensing done on mPower.

There are multiple different ways for us to go about that. You mentioned a couple of them already. We could potentially look to some outside partners that bring either technology or some expertise that we don't have. On the mPower side, we can also look to various customer arrangements to help with that and I would say that we're in discussions on all those fronts today, in conjunction with our strategic thinking as to exactly what we do want this business model to look like for the Company one to two years in the future. Those discussions continue. As something gets concrete, we'll let everybody know what the plans are, but it certainly has the focus of both the leadership at the Company and the Board.

That is helpful. Thank you.

Jamie Cook, Credit Suisse.

Congratulations on a good quarter. With regard to the R&D spend or the spend related to the mPower, given the run rate we have in the first half of the year, in the back half of the year, I think you were targeting $80 million to $100 million, should we now assume the higher end is more likely, just given the run rate? I know you guys didn't give official guidance, but you did give some context with how to think about 2013. Jim or Tony, in your mind, has anything changed that would suggest that you wouldn't be able to hit the target you guys put out there with emission stuff being a little, well, it's always lumpy right, and you had a good past two quarters, but with that or with spend in other areas and Pantex potentially getting pushed out? Thanks.

I'll take the mPower and then I'll let Tony address your second question. On mPower, I think your assumption's correct. If you take a look at the run rate and you take a look at the projected spending through the end of the year, we'll probably be on the high-end of that range. When we take a look at mPower, what we're trying to balance is the spend rate on R&D versus the schedule risk with the next big milestone being submitting the license application to the NRC. Obviously, the more we spend, the better we feel about schedule and vice versa, so that's what we're trying to balance on that front.

We'll have essentially the same discussion when and if we win the DOE FOA funding. Once we win that funding and we work with the DOE and we get a better understanding of how large or small that might be in the timing, we'll also be looking to make decisions about balancing spending versus risk, incorporating that DOE, money. That's something that we'll be actively working on for the next few months.

Okay. Great. Tony on the 2012 not guidance, outlook, whatever you want to call it, but your thoughts?

For 2012, I would say there's no significant change, really. The limited guidance we've provided for 2013 or at least the inference of what that guidance might be, I would also say there's really no reason to change, there's no change in our thinking right now. That said, we are really in the early stages of beginning our planning process. Just to give you some perspective, we first go through and try to look at our long range plan, our strategic plan. Obviously, there's a lot of puts and takes that we discuss there with respect to how and when we invest and where. Once we finish that, we then roll immediately into our annual planning process. At this point, Jamie, there is really no change. We feel good about directionally where we're heading this year and obviously, when it's appropriate, we'll give you more guidance on 2013.

Okay, thanks.

Andy Kaplowitz, Barclays.

Nice quarter.

Thanks, Andy.

Jim, if I could ask you about the nuclear energy business. I think you've talked about making sure that, that business is de-risked as we go forward, given what happened last year. The revenue run rate's down a little bit and the margins are down in that business because the revenue's down. Is this what it's going to look like going forward? This level of revenue and this level of profitability?

Commercial nuclear business, when we look at that, when I look at that and I think about it, today, that commercial nuclear business is primarily a business centered in Canada, doing work for Canadian customers. That really provides the foundation for the revenue and the margins in that business today and we remain in a strong, competitive position in Canada and should be able to hold our own up there. The growth opportunity is obviously expansion into the US and potentially into Europe, but initial focus will be here in the US. When we do that, we're trying to balance increasing revenue and margin against risk, exactly as you stated; probably with a little bit different risk profile than we took on the Columbia condenser project. I think there is growth opportunity in commercial nuclear as we look to expand and leverage the technical capabilities and the manufacturing expertise we have in Canada, into the states. It's probably not going to be very large in the next couple of years. It's going to take us a little bit of time to grow into that business. As we grow into it though, I can assure you that we'll be very focused on managing risk and not getting in front of ourselves.

Okay, that's helpful, Jim. Maybe you can talk about the health of your coal aftermarket business. In the quarter it looks good and the margins obviously look good in the quarter. Obviously, there's been concern with power generation being weak and natural gas prices being low. Maybe you can talk about what you've seen. I know you've said that it's not that sensitive, what's going on, but maybe just give us an update?

Right. As we said, aftermarket services are up quarter-over-quarter. You mentioned a couple of things that could be trying to slow that business down a little bit. On the other hand, the weather has been awfully warm across the US for the last three or four months and that's driven increased usage in coal units, which should manifest itself in some potential service opportunities downstream from a [wear] parts and aftermarket service perspective. To give you a little bit of a comparison, if you take a look quarter-over-quarter at the small replacement parts business inside PGG, it was down quarter-over-quarter, but a little bit less than $1 million. It reinforces the idea that, certainly, we're impacted as these coal units run a little bit less or some percentage of them come offline and it impacts us, but not in a large way.

Okay. We saw in the Q something about a security issue at Y-12. It doesn't seem like that much of an issue, but any interruption there in your business or in fees or anything like that?

Right. There was a security incident a little over a week ago at Y-12. Just to put a little bit of context around that, we have the M&O contract at the Y-12 site. A third party was in charge of security forces under a separate contract. Obviously, we're working closely with the government to understand the incident. One of the first actions we took as a company to reassign General Rod Johnson, who's a B&W employee overseeing security at our Pantex site and we brought him into Y-12 to oversee the investigation and the corrective actions that are going to have to take place on that site. Still, up front, it obviously has our focus, as any of our government contracts, especially when they involve safety and security of facilities, but we have the right people working on it. If anything else emerges going forward, we'll let you know.

Thanks Jim. Nice quarter.

Scott Levine, JPMorgan.

Your power business continues to be the growth driver and the growth again in this quarter very impressive. The environmental bookings down a little bit from the last couple of quarters, but as you indicated, the business is inherently lumpy there. What should we expect for the balance of the year there and/or, you mentioned CSAPR as a potential modest factor? When we get resolution there, would you expect that to alleviate uncertainty on the part of utilities or is that a much lesser factor than, say, the MATS rule or other factors influencing the utility spending behaviors? A little bit more color there.

Let's see what we can do on that front. CSAPR has an impact on the utility decision making and I don't know if we're going to get clarity on that when the court ruling comes out in the next few weeks or couple of months. I think that's just one of many factors that the utilities weigh when they're trying to make environmental investment decisions. Clearly, there's a push toward increased regulation and the utilities recognize that, whether it's MATS or CSAPR or any of the other various rules that are being propagated out there. As we've said before, utilities, we can make some broad statements, but each utility has a unique set of criteria that they use to make decisions about how they're going to invest and when they are going to invest in their coal plants.

We do expect to see it move up and down. Feel good about bookings second half of the year, but it's going to continue to be lumpy. I'm not sure if I provided a whole bunch of clarity on that for you but you should walk away with we feel very good about the business, we feel good about the technology we provide, and the number of bids that are outstanding overall. But it's going to be up and down as this business grows and takes bookings.

That's helpful. Thanks, Jim. As a follow-up, a broader policy question, you mentioned the news with regard to the sub program, the addition of the Virginia-Class potentially for fiscal '13, what ramifications do you see of the upcoming election on your business? Do you see much difference depending on the outcome in general and where might we see some sensitivities as we roll into 2013?

Obviously, two big government businesses for us; one with NOG and one on the technical services side. I don't see a big impact on the businesses one way or the other as a result of the November elections. If you take a look at where we're placed in the market, particularly on the NOG side, where we provide these long lead, high-tech components to submarines and carriers, we feel pretty good about our position on that front. Although you can never say there's no risk, I think there's minimal risk to the funding on the NOG side going forward, same on the TSG side. Perhaps as the federal government makes some decisions about taxation and spending levels going forward, it could have a small impact on the various sites we run. But if you look at all the sites we're on, they have critical missions and they need to remain operational. We're going to continue to do good work for the government on that front and that continues to be a good business for us going forward.

Got it, thanks. Nice quarter.

Steven Fisher, UBS.

Good morning, nice quarter.

Thank you.

A question about the cost review that you mentioned, is it your sense you have some underperforming entities that need restructuring? What, generally, do you expect that you're going to find from this review?

I'm not sure if we have underperforming entities, as much as I can see some opportunity inside the business to either take out overhead costs or perhaps to improve margin across the board. We wouldn't undertake it and take two executives out of their current jobs and put it on if we didn't think we had some significant material opportunity there. That said, the first step in the process is for the internal team, with a little bit of help from some consultants, to take a look at what are the opportunities and how large are they? Then we'll get into which of those do we think we might be able to capture and which not. As we get our arms around the size of this and exactly what this effort looks like, we'll be sure to communicate that going forward. We wouldn't undertake it if we didn't think something was there.

Okay, and then just a follow-up on the Virginia-Class. What and when are the next big decision points for the government as it relates to that program and what expectations do you have?

On the Virginia-Class, essentially what we're talking about here, it's really a time issue of the procurement on a single sub and whether it's going to take place in fiscal year '14 or out toward fiscal year '18. We're moving one set of components back and forth. On that front, on both the House and the Senate side, all four sub-committees, both the authorizers and the appropriators have reviewed it and have added the money back in to move that Virginia-Class back into '14. The next steps on that front is it needs to be incorporated or we need a defense budget and then the President needs to sign that budget. Those are the next milestones that we're watching, but we feel pretty good about it having bipartisan support, both on the House and Senate side.

Okay. Great, thank you.

Will Gabrielski, Lazard.

Can you talk about the FirstEnergy agreement with respect to mPower and what that entails from both sides and what we should be looking for as milestones out of that relationship?

Sure. The FirstEnergy agreement on mPower, important step for us, we had a previous relationship in place with TVA on mPower. TVA stepped forward up front. We have been in multiple discussions with various utility entities, both inside the US and outside over the last few months. Essentially, the agreement with FirstEnergy is they've taken a look at the mPower technology, they like it, they think there could be a potential use for that technology when they look at their long-term planning profile for generations going forward.

That's basically what the agreement's built around is going ahead, doing the studies and the background research that need to take place over the next couple of years to see if an mPower type small modular reactor makes sense for FirstEnergy. That doesn't represent a contract, but it's a step in the right direction. We feel pretty good now about having two very large, well-regarded US utilities backing mPower.

Okay. That's helpful. In your core coal business, it looks like there was an update to your slideshow back in June and clearly, it sounds like you're targeting maybe the international market a little more aggressively. Can you talk about any progress there? What that entails and what our expectation should be?

Sure. We certainly have a very strong business in the US and it's actually going to be the growth platform for PGG in the next couple of years. We've talked quite a bit about environmental services. We're pretty strong in Asia with the joint venture in China. We just announced about a $300 million contract for that China JV in Vietnam. That's a nice step for us providing building components in China that we're going to (technical difficulty) in place outside China. We mentioned already today the India manufacturing facility being just about ready to come online and the fact that we're chasing multiple contract opportunities over there.

We do continue to look for opportunities in Europe. We do have a presence in some markets in Europe and actually a strong presence with some of our technologies in Europe and we'll continue to look to build that going forward. If you just think about Europe and the US markets, those are primarily, we're looking for opportunities to do service work on existing plants and to do environmental upgrade work. When you look at the Asian markets and the Indian markets, we're primarily looking at opportunities there to do new build coal, at least in the short run. That could change going forward and we could be doing environmental upgrades there as well, at some point. That's our approach. We feel pretty good about the PGG business, both growth opportunities in the US and overseas.

Okay. That's really helpful. But Latin America, also, I assume, is on that list?

Yes. Absolutely. We think there's opportunities in Latin America, as well, and we're chasing a handful of opportunities on the bidding side there.

Okay. Can you just help me understand if you are successful and are awarded one of the two DOE grants for mPower, how would you account for that on the P&L? How would that flow through? Would it hit in one quarter? Would it not hit the P&L?

I'll let Tony step in as needed on this one. It would come in over time, quarterly by quarterly basis. It's a matching funds program, so we have to spend money in order to pick up the matching funds from the DOE. To a large extent, it simply offsets what we would otherwise spend. That said, before you immediately take all that money to the bottom line, as I mentioned before, we are balancing internally the amount of spend that we need in order to meet the milestone schedules that we have out there and the DOE program will factor into that spending profile.

Okay. That's helpful. One of your environmental competitors was recently acquired or announced to be acquired by another company in the industry. Any thoughts around how that might impact the competitive landscape, particularly on the construction side of some of these larger environmental awards?

Yes. I'm not sure it has an impact, necessarily, for us on that front. As Tony said before, we think we're at a pretty strong position, both from a technology and a construction standpoint on the PGG coal business. I don't think that acquisition really changes the playing field at all.

Okay. That's very helpful. Thank you.

Tahira Afzal, KeyBanc.

Congratulations on the good quarter.

Thank you.

First question is in regards to your environmental outlook. We've seen several utilities announce their plans and really update their plans on the environmental side this quarter. Several, including large ones like Southern and FirstEnergy, have brought their spending levels down. My first question is, as we look at the addressable market you've always talked about in terms of opportunity set for BWC, has there been any incremental change to that or were your assumptions fairly conservative versus some of the utilities out there to begin with?

I think our assumptions hold. What's taking place in the market is pretty much what we have laid out from a strategic perspective. We continue to follow the utility by utility decisions, but it's essentially in line with what we've been expecting.

Okay, great. A follow-up to that, clearly, it makes sense that CSAPR and some of the fluidity around the rules has probably created a bit of a timing issue. But as you look into the second half of this year, do you still expect environmental spending in general to ramp up for you folks on the bookings front?

Yes. As we said, overall, outstanding bids are at $3.4 billion, which is not quite as high as it was last quarter, but is very much a high mark if you take a look at the average over the last couple of years. We continue to see the number of bookings increasing going forward. It's just projecting the timing on that's difficult for us.

Okay great. On the maintenance spending of coal power plants, we've had a couple of large power plants, a couple of large utilities such as AEP, really indicate that environmental plans on some of the larger plants out there like [Sandy Hook], et cetera are being put on hold and they're reviewing whether they want to really continue with scrubbing or retiring. I know in your earlier assumptions and commentary, you'd indicated that you were assuming that the smaller plants would be really targeted for retirement. Any thought at this point on maybe some of the larger plants being considered for retirement?

No, I don't think so. I think overall, the market's acting as we would expect it to. Again, plant-by-plant decisions are pretty unique to each utility and it's a little bit hard to predict on a plant-by-plant basis. In general, we expect to see the smaller plants under more financial pressure and the larger plants being in a better position. But again, it depends on a plant-by-plant basis for each utility. But net-net, we think the market's in about the same place today as we expected it to be.

Super. Last question is, of course, on my favorite mPower, as well. First of all, congratulations on FirstEnergy. I know it's just an MOU, but clearly a pretty big signaling event in a sense. As you look at some of the traditional nukes that have now started to ramp up in construction in the US, it seems like they're facing some issues, example, (inaudible) facing some cost issues on the rebar side and might have to eventually go and redesign it. Essentially, means that there are cost increases coming on some of these first plants to be built and essentially in the US. Could you talk about what the implications for some of the modular designs are? Does this, in general, create a sentiment of cautiousness on costs around nuclear in general or does this propel the case for mPower even more?

I think everybody is always going to be cautious on schedule and budget on the commercial nuclear side and there are obviously some eyes on how the initial construction goes in the states. That said, the modular technology that we have with mPower, I think, provides us some advantages; especially, if you take a look at the percentage of the components that are going to be manufactured offsite as opposed to on site. I think it puts us in a little bit better position to control the costs and schedule. Again, we wish nothing but success to all the new build opportunities that are going on today, but I think mPower is well-positioned, from a conceptual standpoint, to be able to make a story to the marketplace about holding budget and schedule in the future.

Thank you very much.

Brian Konigsberg, Vertical Research.

Following up on Tahira's question in regards to utilities, we did see Exelon basically go bankrupt on Homer City, their plant, because it was actually just too expensive to retrofit. There was some concern there was going to be sale of coal plants in the future that could result in a markdown of coal plants in the US as well, which could impair some utility's abilities to gain credit for retrofit activities. I'm just curious, have you seen any of that? Is that a concern of yours going forward that could impair the market that you're addressing as far as environmental equipment?

We continue to watch it on a plant-by-plant basis. Net-net, we don't think that the impacts on that front are going to materially change our assumptions about the size of the of addressable market for us in the future, but we'll obviously continue to watch.

Okay. With mPower, that's moving along, I'm just curious as far as international opportunities, do you anticipate there could be a market that you could sell into prior to it being implemented in the United States?

A couple comments on that front, on mPower internationally. One is, when we take a look at the size of the addressable markets over the next 10 to 20 years, the real opportunity is overseas, primarily in Asia, simply because they're going to be doing the majority of the new power plant building, just because of the rate at which their economies are growing. Obviously, we're paying a lot of attention to making sure we have a market presence and the ability to deliver our product into those markets. I could see the initial opportunities being overseas, as opposed to in the US. That's what happened, for example, on the units that are being built in China today. I could easily see that repeating on the mPower front and we'd be prepared if that's where the market emerges, we'll be prepared to go there.

Thank you very much.

Randy Bhatia, Capital One Southcoast.

If I could, we're getting close to this $500 million a quarter, $2 billion a year clip in PGG that has been referred to in the past is the point at which margins begin to accelerate. The question here is are you seeing anything out there that could prevent or delay that from being achieved here over the next couple of quarters? How quickly can the margins ramp based on what you currently have in backlog and what your near term prospects are?

I would say clearly as volume grows we do expect to get more leverage from the underlying cost structure of the business. I think it's also fair to say, though, we have said this, I think, on more than one occasion, some of what we have benefited from in the last two years has been strong, closeout performance on contracts that were booked at the height of the last cycle, Randy. What I think you have to say is we do believe there's leverage to be had. We do think that we're well-positioned to take advantage of the market as it grows. We also think that, frankly, in this business, a 9% operating margin, which is where we are right now, is pretty healthy and is certainly well above the mean of the range that we've consistently said, which is 7% to 10%.

The long answer to your question is we do see opportunities. We're not forecasting an immediate ramp up in operating margins. Quite frankly, our current run rate in sales of $2 billion is at the low end of what we experienced in the last environmental cycle. As we start to see revenues jump from $2 billion to $2.3 billion to $2.5 billion and given the things I just indicated, we should be able to hold or improve upon the margins.

Okay. Great, thanks. If I could just circle back on mPower, in your analyst day in New York in, I think it was, November, you guys had given a forecast of here's what we're thinking about in terms of time frame on first revenue, first cash flow, et cetera from mPower. Is there any update to that from last year and how would the DOE funding potentially alter that timeline?

As far as timeline and DOE, funding, I'm not sure the DOE funding materially alters the timeline. We have a schedule laid out and amount of work to do. The DOE funding might help offset a little bit of our cost over the next few years to get there. Off the top of my head, I don't know exactly what we said in November as far as the timeline goes, but again, we're targeting 2021, 2022 for a first unit online and we'd expect the revenue to ramp up a few years in advance of that. I think we'll have a much better idea of exactly what that revenue profile could and should look like over the next couple of years. It's relatively difficult to predict with any accuracy today.

Okay. One housekeeping question, you mentioned $3.4 billion in bids out. Did you give the environmental piece of that? In previous quarters, you guys have given, I think, last quarter it was $4 billion in total bids out, but $2 billion was environmental.

Last quarter, it was around $4 billion in total, it was $2 billion in environmental. I think we said it was $3.4 billion in total today. A couple of big projects coming out of there that hit the market, one in environmental. I think that puts it somewhere around the $1.5 billion mark, which is at the high-end of where it's been the last four to six quarters, Q1 aside.

Okay. All right, guys. Congratulations on the quarter. Thanks a lot.

This concludes the Q&A session for today's call. I would now like to turn the call back over to Mr. Michael Dickerson for any closing remarks.

Thanks, Jeanette. I will be available over the next couple of weeks to continue to help through your analysis and understanding of the Company, while at the same time, transitioning responsibility for IR to our Treasurer, Jenny Apker. Thank you for joining us this morning. That concludes our conference call. A replay of this call should be available later on today. Thanks everybody.

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