KBR Inc (KBR) 2010 Q3 法說會逐字稿

Good day, and welcome to the KBR third quarter 2010 earnings call hosted by KBR. This call is being recorded. Asa reminder, your lines will be in a listen-only mode for the duration of the call. There will be a question-and-answer session immediately following the prepared remarks. You'll receive instructions at that time.

For opening remarks and introductions, I would like to turn the call over to Mr. Rob Kukla, Director of Investor Relations.

Please go ahead, sir.

Good morning, and welcome to KBR's third quarter 2010 earnings conference call. Today's call is also being webcast, and a replay will be available on KBR's website for seven days. The press release announcing the third quarter results is also available on KBR's website.

Joining me today are Bill Utt, Chairman, President and Chief Executive Officer; and Sue Carter, our Senior Vice President and Chief Financial Officer. In today's call, Bill will provide opening remarks and business outlook. Sue will address KBR's operating performance,financial position, backlog , and other financial items.

We will welcome questions after we complete our prepared remarks. Before turning the call over to Bill, I would like to remind our audience that today's comments may include forward-looking statements reflecting KBR's views about future events and their potential impact on performance. These matters involve risks and uncertainties that could impact operations and financial results, and cause our actual results to differ from our forward-looking statements. These risks are discussed in KBR's Form 10-K for the year ended December 31st, 2009; KBR's quarterly reports on Forms 10-Q; and KBR's current reports on Forms 8-K.

Now I'll turn the call over to Mr. Bill Utt.

Thanks, Rob.

And good morning, everyone.

Overall, I am pleased with KBR's performance this quarter. As we have been discussing over the past year, we are seeing KBR's consolidated revenue decline, primarily associated with the lowering volumes on the LogCAP project. However, KBR's consolidated business unit income is up 13%, and operating income up 24%, both figures compare to the third quarter of last year. The earnings per diluted share of $0.62 for the third quarter is up 38% compared to the prior-year third quarter.

Before making comments on KBR's discreet business units, I would like to discuss KBR's backlog. As we have discussed over the past several quarters and as highlighted during our Analyst and Investor Day at the beginning of June, we have been focused on creating a more profitable backlog. Compared to third quarter of 2009, job income backlog was up 1% relative to a 9% decrease in revenue backlog. Sequentially, KBR's job income backlog was up 1%, despite a less than 1% decline in revenue backlog.

During the third quarter, a final settlement agreement was negotiated with one of our commercial agents, who provided services to various Gas Monetization and oil and gas projects. The agent had confirmed their understanding of and compliance with KBR's monitor-approved policies on business conduct and represented that they had complied with anti-corruption laws as they relate to prior services provided to KBR. We executed a final settlement agreement with the agent in September of 2010, which resulted in a non-cash gain in the third quarter.

Separately, due to actions and inactions on the part of a customer, we identified increases in the forecasted cost-to-complete of an LNG project. The estimated cost increases include additional labor, equipment, subcontractor, bonding, and other project costs. We are in a dialogue with our customer to resolve these issues. As a result of the increases in the forecasted project costs, we recognize a non-cash charge to job income in the third quarter of 2010. The net impact of these two items to hydrocarbon's job income in the third quarter was negligible.

For our Gas Monetization business unit for the Tangguh LNG project, we continue to maintain an ongoing dialogue with the customer to close out the project and conclude final project change orders. The Gorgon LNG project, which is 28% complete, and Pearl GTL project, now in the commissioning phase, were also positive contributors to this quarter's results.

The INPEX Ichthys FEED and the Pluto FEED as well as the Browse LNG basis of design projects are proceeding as planned and also contributed nominally to the quarter's results.

For our oil and gas business unit, we announced earlier this month that we were awarded a contract to execute the Topsides Detailed Design for TOTAL's CLOV FPSO project, which will be used to exploit approximately 500 million barrels of oil from offshore reserves in Angola. The facility will be designed to process approximately 160,000 barrels per day of oil, 230 million standard cubic feet per day of natural gas, and have a 1.8 million barrel oil storage capacity.

During the third quarter, we were also selected by BP to undertake the second stage of concept selection and definition for the onshore terminal and export pipelines for the West Nile Delta development in Egypt. This scope of work will be to develop a technical definition package that will process 1,000 million standard cubic feet per day of gas and condensate. Our portfolio of FEED projects are progressing well; and we believe that we will make several more announcements over the next couple of quarters as these FEED projects move into Detailed Designs , specifically in the Caspian, North Sea, West Africa, and Gulf of Mexico regions.

For our downstream business unit, our work on the Shaybah Gas Plant FEED is progressing well and was a nice contributor the quarter's results. Our responsibilities on the projects have been expanded for additional engineering services, so we look forward to the -- to possibly providing strong execution on this project. In regards to the Lobito refinery in Angola, the FEED is now complete; and negotiations continue for the next phase of the EPCM packages. We hope to conclude the negotiations in the near future.

For the Yanbu Export Refinery Project, our work on the detailed engineering and design and procurement services for the interconnections and utilities packages continues to progress well. We are still in discussions with the client to better define our anticipated construction management role as the project moves to the field.

For the Ras Tanura project, KBR still is providing the PMC as well as a number of Detailed Design FEED packages for the project; and we look forward into moving into the next phase of the project, when the project successfully achieves FID at the end of 2011 or the first part of 2012.

In the North American renewables market, downstream has been awarded the engineering and are in negotiations for the EPC for the commercialization of a new technology to produce biocrude from biomass from process technologies, which will incorporate features from KBR's proprietary FCC technology. The project is in Mississippi and is targeted for completion in late 2011.

The technology business unit was awarded two contracts by the Republic of Iraq Ministry of Oil through the South Refineries Company to provide licensing and basic engineering services for the construction of fluid catalytic cracking and solvent deasphalting units at the planned grassroots Maissan Refinery in Iraq.

Also during the quarter, KBR sold our first VCC technology license in China through the collaboration agreement with BP that I discussed during the first quarter.

During the third quarter, we continue to add primarily hydrocarbons-based technical personnel with a total add of approximately 1,100 or 19% in the first nine months of 2010. We are now slightly below our peak levels from the end of 2008/beginning of 2009 time frame.

For our North American Government and Defense Business Unit, troop levels are now at the expected 50,000 mark. We continue to appropriately staff KBR personnel per the direction of our customer.

During the third quarter, KBR received a $34 million award fee, related to its LogCAP III work for the periods of performance from September 2009 through April 2010 on task orders in Iraq, and from September 2009 through May 2010 on task orders in Afghanistan. For these periods, the award fee determining official rated KBR's performance as very good and excellent on multiple award fee pools. Compared to the prior-year third quarter, the $34 million award fee represents approximately $19 million of incremental income when compared to our prior practice of accruing LogCAP award fees at 72%.

Also during the quarter, legal and allowable costs were down about $9 million from the first two quarters of 2010. The International Government and Defense Business Unit continued to experience increasing services for the UK and NATO troops in Afghanistan. Building on the three-year contract with NATO to provide operations and maintenance services in Kabul we received earlier this year, we have recently been selected as the preferred bidder for a similar NATO contract in Kandahar. We are currently pursuing several opportunities for new work with NATO.

Last quarter, I mentioned the UK government was in the process of preparing its strategic defense review. Last week, this review was complete, indicating a reduction of approximately 25,000 civil servants and approximately 15,000 soldiers, sailors, and airmen. We believe this represents an opportunity for KBR to provide additional outsourced logistical and training support to the UK Ministry of Defense.

For the Infrastructure and Minerals Business Unit, we commented last quarter that we are seeing a surge in mining activity. In September, KBR announced it had been awarded a contract by Rio Tinto and Hancock Prospecting for the $1.3 billion Hope Downs 4 Iron Ore project to provide engineering, procurement management, and construction management services. Construction is scheduled to begin in February 2011, subject to regulatory approvals, and completed in early 2013.

Infrastructure activity in the Middle East is picking up, and we are seeing a strengthening bidding environment. We expect our volumes to be increasing over the next year as -- as a result of some new awards we are expecting in the next several months.

During the quarter, our Power and Industrial Business Unit was awarded a contract to provide engineering and construction management services for the construction of a new ceramic proppant manufacturing line at the CARBO Ceramics plant in Toomsburrow, Georgia. The proppant manufacturing line is designed to produce 250 million pounds per year of product at completion. Construction is expected to be completed before the end of 2011.

For the Services Business Unit, during the third quarter of 2010, Services' Canadian operations was successful in securing pipe fabrication and module assembly work for a shale gas development in British Columbia. This is our first project in the North America shale gas market, which is a specific construction and maintenance target for our Services Business Unit. We see significant opportunities for KBR to participate in the emerging shale gas market in Canada and the US, which complements our recognized strengths in executing natural gas processing and production facilities worldwide.

Also in Canada, we completed the major fall turnaround for Suncor at their Fort McMurray oil sands upgrader facility, which I mentioned during last quarter's call. All major milestones were met, including schedule, cost, and safety. This is the second turnaround successfully completed at Suncor for the same facility in 2010; and as a direct result of our execution, Suncor has again awarded KBR additional turnaround work at this facility in the spring of 2011.

Earlier this month, KBR Canada also successfully completed its first turnaround for Syncrude at their Fort McMurray oil sands upgrader. Additionally, the building group has several projects in the preconstruction phase for which we expect to make awards over the next several quarters.

After Sue's comments, I will comment in more detail in the market outlook for our business before turning the call over to questions.

Thanks, Bill.

I will review KBR's consolidated third quarter 2010 result, which primarily focuses on year-over-year comparisons.

Consolidated KBR revenue totalled $2.5 billion in the third quarter of 2010, a $385 million or 14% decrease from the prior-year third quarter, which -- which includes an expected decrease of $440 million for North American government defense, compared to the prior-year third quarter, substantially related to LogCAP III.

Revenue in our International Government and Defense Business Unit increased 23%, downstream increased 15%, technology increased 11%, Gas Monetization increased 9%, and services increased 3%.

Consolidated operating income was $163 million in the third quarter of 2010, compared to operating income of $131 million in the third quarter of 2009.

Net income attributable to KBR for the third quarter of 2010 was $97 million, or $0.62 per diluted share, compared to $73 million or $0.45 per diluted share for the prior-year third quarter.

Gas Monetization revenue was $698 million in the third quarter of 2010, up $57 million or 9% from the third quarter of 2009. Gas Monetization job income was $59 million in the third quarter of 2010, compared to job income of $40 million in the third quarter of 2009. The increase in job income was also related to increased work on the Gorgon LNG project, partially offset by lower activity on the Pearl GTL and Escravos GTL projects.

A gain related to the final settlement with the commercial agent and a charge related to increased forecasted costs on an LNG project, both of which Bill discussed earlier. The net impact of these two items to hydrocarbon's job income in the third quarter of 2010 was negligible. In addition, the third quarter of 2009 included approximately a $30 million charge on two LNG projects, which are now commercially operational, related to equipment failures subcontractor claims, and schedule delays.

Oil and gas revenue was $107 million in the third quarter of 2010, compared to $95 million in the third quarter of 2009. Oil and gas job income was $24 million in the third quarter of 2010, compared to job income of $20 million in the third quarter of 2009. The increase in job income is primarily related to several new projects and higher progress on existing projects, including the CLOV FPSO, Bigfoot, Jack/St. Malo, and West Nile Delta projects. Partially offsetting the increases was the lower activity on the North Rankin offshore platform project, which is nearing completion.

Downstream revenue was $139 million in the third quarter of 2010, up $18 million or 15% compared to the third quarter of 2009. Downstream job income was $23 million in the third quarter of 2010, compared to job income of $16 million in the third quarter of 2009. The increase in job income was primarily related to increased activity on the Lobito refinery in Angola and several projects in the Middle East, including the Shaybah NGL and Yanbu export refinery projects.

Technology revenue was $30 million in the third quarter of 2010, up 11%, compared to the third quarter of 2009. Job income was $14 million in the third quarter of 2010, flat compared to the third quarter of 2009, which benefited from higher-margin licensing activity on ammonia projects.

North America Government and Defense revenue in the third quarter of 2010 was $753 million, compared to $1.2 billion for the prior-year third quarter. Job income was $73 million in the third quarter of 2010, compared to $82 million in the third quarter of 2009. The third quarter of 2010 included approximately $34 million in LogCAP III award fees, which represents 66% of the available award fee pool. Volume also impacted job income with lower activity on LogCAP III projects in Iraq, partially offset by increased volume on the LogCAP IV contract.

The third quarter of 2009 included approximately $15 million in accrued LogCAP III award fees, compared to no award fees accrued for work performed during the third quarter of 2010, as well as $17 million in income related to the reduction of a previous charge related to the ASCO litigation.

International Government and Defense revenue in the third quarter of 2010 was $87 million, compared to $71 million for the third quarter of 2009. Job income was $22 million in the third quarter of 2010, compared to $17 million in the third quarter of 2009. The increase in job income was primarily related to warranty expirations on the Tier 3 Basra project in Iraq and higher margins on the and Allenby & Connaught project.

Infrastructure and minerals revenue in the third quarter of 2010 was $64 million, compared to $86 million for the prior-year third quarter. Job income was $14 million in the third quarter of 2010, compared to $24 million in the third quarter of 2009. The decrease in job income was related to the overall decrease on several Australian engineering projects. Partially offsetting the decrease was higher volume on the Hope Downs 4 mining project and a water project in Australia.

Power and industrial revenue in the third quarter of 2010 was $79 million, compared to $129 million for the prior-year third quarter. Job income was $6 million in the third quarter of 2010, compared to $22 million in the third quarter of 2009. The decrease in job income was primarily related to completion of the Georgia Power and Proctor & Gamble projects,lower volumes on the Red River project that is nearing completion, as well as a gain in the third quarter of 2009 from the collection of a fully reserved receivable on a completed project.

Services revenue was $480 million in the third quarter of 2010, compared to $464 million in the third quarter of 2009. Job income was $45 million, compared to $39 million for the prior-year third quarter. The increase in job income was driven by increased activity on the multi-site DuPont maintenance project, growing contribution from on-call construction projects and the Hunt refining project in Alabama, as well as favorable change orders on a power project in the southeast.

Ventures job income in the third quarter of 2010 was $7 million, up $2 million compared to the third quarter of 2009, primarily related to improved financial performance at the EBIC Ammonia project as a result of higher sales volume and increased ammonia prices and the consolidation of a heavy equipment transport project for the UK military, effective from January 1st, 2010.

Now let's review other financial items. General and administrative expenses for the third quarter of 2010 were $53 million, down $1 million from the third quarter of 2009. Sequentially, the corporate G&A was down $2 million, primarily related to lower consulting expenses and slightly lower costs associated with our new ERP system. For full-year 2010, our current estimates for corporate G&A are now in the $220 million range.

Our effective tax rate in the third quarter of 2010 was 27%, lower than the statutory rate of 35%, primarily related to tax-planning strategies and utilization of foreign tax credits to reduce the US taxes paid on foreign earnings. The full-year 2010 effective tax rate guidance is now approximately 32% to 33%.

I would like to discuss KBR's backlog in a bit more detail, building on Bill's earlier comments. The backlog as of September 30th, 2010, was $12.3 billion, down 9% from a year ago September 30th and down 0.8%compared to the sequential quarter. Compared to the sequential quarter, the hydrocarbons backlog was up slightly with scope and work releases and Gas Monetization, oil and gas, and downstream essentially offsetting normal project workoff.

IGP's backlog was up $108 million, led by LogCAP III and IV work additions as well as general scope and work expansions in the International Government and Defense business.

Infrastructure and Minerals backlog was up slightly with several new awards announced in the quarter offsetting general workoff. However, the larger Hope Downs 4 mining contract announced in mid-September will be booked into the fourth quarter backlog. Services was down $256 million, primarily related to general project workoff.

Overall, the backlog portfolio mix at the end of the third quarter was 79% cost reimbursable and 21% fixed price, the same mix as the second quarter of 2010.

Next, I'll discuss our liquidity and the balance sheet.

Total cash provided by operating activities for the first nine months of 2010 was $541 million, driven by overall earnings and improvements in cash receipts, primarily in Gas Monetization projects.

North American Government and Defense also contributed to the cash provided by operations, with a decline in LogCAP working capital requirements and the receipt of award fees during the first nine months of 2010. To clarify the impact of award fees on year-to-date cash flow, $60 million has been billed and received prior to September 30th; and $34 million will be billed and is expected to be received in the fourth quarter of 2010.

At the end of September, 2010, our balance sheet remains strong with cash and cash equivalents of approximately $1.2 billion, which net of $253 million of cash, associated with our consolidated joint ventures, was approximately $922 million. The $1.2 billion in cash and equivalents was essentially flat compared to the sequential quarter, which includes returning approximately $160 million to shareholders through the share repurchase program.

For the first nine months of 2010, we returned a total of $217 million through the share repurchase program. As with other repurchase programs, the actual settlement date will differ from the actual purchase date. We completed the repurchase program in the first week of October. Going forward, over time, KBR will repurchase shares to maintain the outstanding shares at approximately 150 million shares.

We also paid $8 million in -- in a quarterly dividend during the third quarter of 2010.

So to sum up, for the first nine months of 2010, we have returned $241 million to shareholders, invested $39 million in capital expenditures, and funded $16 million in acquisitions and $20 million in a licensing agreement.

Before turning the call over to Bill, I would like to recap a few other financial items in the quarter.

Interest expense in 2010 includes the amortization of refinancing fees, fronting fees, and the upsizing of the KBR credit facility completed in 2009, as well as the consolidation of Fastrax Limited, which was previously accounted for under the equity method and included in reported job income. We continue to expect capital expenditures to be in the $70 million to $80 million range for the full-year 2010. Due to the completed share repurchase program, we now expect the full-year 2010 diluted shares outstanding to be approximately 157 million shares. Actual share count on December 31st, 2010, is expected to be approximately 150 million shares outstanding.

Lastly, the KBR full-year earnings per diluted share guidance, given in July, is $1.75 to $2. KBR now expects earnings per diluted share to be in the upper half of that range.

And now I'll turn the call back to Bill for his final remarks.

Bill?

Thanks, Sue.

I would like to provide KBR's outlook for our businesses. For KBR's global hydrocarbons businesses, we continue to see projects moving forward internationally, particularly in the Australia and Middle East markets. We continue to follow several projects in an active Australia LNG market, as well as a number of oil and gas projects in the Caspian, North Sea, West Africa, and Asia-Pacific regions. We also see downstream projects moving forward in the Middle East as well as in certain other African and Asian markets.

This level of activity is supported by increased volumes of work at our Technology Business Unit, which, in many respects, continues to serve as a leading indicator of future downstream activity. For our Government and Defense businesses, KBR believes with the achievement of the military personnel targets in Iraq, our work volume should be relatively stable through the middle of 2011 and possibly beyond. We are also seeing new opportunities for KBR's defense-related service offerings with new customers, including NATO, and with Middle East customers to support their missions and recent hardware purchases.

In our Infrastructure and Minerals Business Unit, we are seeing a resumption of capital spending in the mining industry. We are also seeing an increase in the level of bidding activity in the transportation sector in Australia and in the transportation and logistics markets in the Middle East. However, we are now only just beginning to see evidence of an increase in activity at KBR's transportation operations in the Texas market.

At our Power and Industrial Business Unit, in our industrial business, KBR continues to see a strong volume of early stage prospects and FEEDs, and believes we are well positioned to continue with this work, as our customers take investment decisions on these projects. In the power side of the business, we expect to see an increase in the construction of new gas power generation as a result of the continued low natural gas price environment, which is displacing older coal-fired generation and delaying plans for new nuclear power stations.

In the utility market, uncertainty surrounding future environmental regulation continues to slow the market for environmental control projects.

In our services business, we continue to see an increasing demand for small capital and maintenance projects; and our customers appear more confident in considering larger construction projects. We are also seeing a continued stable demand for the services of KBR's building group in its education and healthcare commercial markets. Also, the bidding activity is also increasing in the Canadian oil sands market area. For KBR, we are expecting the sales environment for the services business group to be much improved in 2011, compared to 2010.

Now we'll take your questions. We ask that you please limit your comments to one question and one follow up.

And the question-and-answer session will be conducted electronically. (Operator Instructions). We'll take our first question from Steven Fisher, UBS.

Hi, good morning.

Morning.

2010 has certainly shaped up to be a great year for cash flow. So as you look out over the next few quarters, I'm wondering what kind of tailwinds and headwinds you foresee. I know there's the -- you mentioned the award fees; and at some point, there's PEMEX. But what else could you have in there? Is there any particular projects that will be major uses of cash?

No, Steve. As -- as we look forward, what we're doing as we propose projects is we're obviously trying to maintain a -- a cash-neutral posture on those. We have all of the businesses very closely watching the working capital requirements on existing projects, and so the -- the big items are really going to be looking out for advance payments, looking for the EPC-1 payment, and staying on top of the overall working capital.

Okay. And I guess, related to that, and I think you mentioned in the past about interest in doing further buybacks, what -- what would it take to push you in that direction to execute another one? Do you have to have the PEMEX cash in hand?

Yes, I think, Steve, we -- we continue to have an active discussion and dialogue with our Board about how we look at the business. We do have the opportunity to deploy the cash in -- in some ventures that we -- we did the Energo acquisition earlier this year and the -- the venture -- technology venture with BP, and we'll continue to look at where we see opportunities to -- to use the highest and best use of that cash over the -- the short to medium term; and -- and honestly, if we can't identify opportunities where it makes sense to utilize that cash and really improve KBR, then -- then we will have further discussion on the buybacks.

Okay. And then just the last question here. There was an absence of legal fees in this quarter. I think you mentioned the $9 million reduction. Wondering how the process of resolving some of the legacy disputes is evolving or how you see legal fees versus settlement costs playing out.

I think the process is -- is a healthy process. We have continued to engage in dialogue this year with our customer. We have had some panels that have helped, perhaps, arbitrate the positions of KBR and -- and the government on some of these matters. We actually have had some favorable outcomes that resulted in a lower net cost to us during the third quarter. We hope that we'll see these panels continue going forward. I -- I don't know today if we've gotten scheduled for the fourth quarter; but certainly, as these panels meet, we continue to gain confidence that the provisions we have on our books related to these matters is correct and -- and are -- are hopeful that we'll be able to continue to successfully manage this process well into 2011 and beyond until we get these issues resolved.

Okay. Thank you.

And we'll take our next question from Will Gabrielski, Gleacher.

Thank you.

Good morning, guys. A couple of things, if you would. Just can you maybe rank order expectations of some of the LNG projects you're involved with right now and -- and how you see that playing out over the next four to six quarters?

Probably not. I don't think it's wise for us to rank order. If you're talking about the timing of them, we could give comment based on what we know.

The -- the Pluto project has been announced to the FID being delayed until second quarter, third quarter, middle of next year. Impacts, we have talked about, has been moved to FID to the late -- late 2011 time frame. The others that are being talked about, I think there's not much more we have in terms of better information than what's out there in the press.

So when you look at the Browse project, do you expect that to be dual FEED between you and Bechtel or is there any -- any conversations you're having on that yet?

Too early to tell. I think they're still evaluating some of the FEED proposals; and when they -- they let us know, I'm sure we'll -- that will get out beyond just the various proposers.

Okay. And one follow-up. Just on the mining opportunity,you had the nice booking in the quarter. Can you just walk through your expectations for what -- how big that can get for you? We saw (Inaudible) today with a pretty big CapEx number, with their earnings release for 2011; and I'm just curious, how big can that get and what impact does that have on your margin trend going forward within that segment?

I don't think we comment specifically on any of these segments and would -- would like to avoid just getting into that kind of microscopic guidance.

Okay. But in terms of the opportunities side, that was a nice booking; but you think there are several more or a few more or -- or any color on what your opportunity set looks like specifically?

Certainly, we -- we believe we're more than a one-trick pony in that sector and hope we'll be able to be successful on other -- other projects we're pursuing.

Thanks for all of the great color, Bill. Talk to you soon.

Okay. Sorry to be black and white, but --

We'll take our next question come from Rob Norfleet, BB&T Capital Markets.

Hi. Good morning. And nice quarter.

Thank you.

Just -- just a quick question. You had mentioned previously that you'd be comfortable with increasing your exposure to -- to fixed-price work going forward. I just wanted to get your thoughts and expectations. Do you think, over the course of the next year, year and a half, that we will see somewhat of a mixed change in the backlog, and how should we view that impacting margins?

I -- our expectation, just talking with the various customer groups out there, I -- and I'll point this more internationally, and probably more hydrocarbon, is that the customers with whom we speak clearly see the reduction in volatility on pricing. We're not back in the -- they don't see us in the 2007 to 2009 time frame, where you had a lot of stress in the supply chain and a lot of changes in -- in the underlying commodity prices for the equipment. And so they've told us that it is -- it's their desire to move towards a -- a greater fixed-price environment than what they've been doing in the -- the last couple of years.

So I would expect, particularly on the international side, that you would see, across the board, anybody involved in the hydrocarbons, oil and gas sector to see an increasing amount of fixed-price work, reflecting the amount of what's being procured out there by the customers.

From our standpoint, yes, we are comfortable doing fixed-price work. I think we -- we do a good job of identifying risks and -- and laying out the executions with a great deal of clarity. I'm comfortable seeing our fixed-price component of work in our portfolio move up; and hopefully, we'll be able to see it. And certainly, as we look at the incremental risks attendant to fixed price, we would hope that margins could move up as well.

Okay. Great.

And my follow-up question, just on the Gulf of Mexico, just trying to get some commentary from you. We've obviously seen Jack/St. Malo and Allabey Commission work continues to go forward on Bigfoot; but, again, we're hearing from a lot of the IFCs that, until they can really understand what their liability exposure is, they're going to have a difficult time actually going forward. What is your thought in timing in terms of when we should actually see some of these projects move forward?

We are seeing the same factors you describe. I think there is some uncertainty regarding limits of liability, and the amount of bonds that people will be asked to -- to put up on their -- on their future drillings. I -- I think when we -- when we look at Jack/St. Malo and Bigfoot, those had already done their initial exploration and production work; and so, as they're moving in -- I think, in prior periods, we had made some comments that the next phase of drilling on those projects was not expected until the 2012 time frame. So those projects are moving forward, but we do see from our oil and gas teams that their customers are having difficulties moving their projects forward for those reasons.

I think, for us, it affects us probably 18 to 30 months done the road because of the -- the initial ENP work; and as people develop their plans, we're kind of a second-order impact there. So we're watching where the rigs are going; and if the rigs are staying in the gulf, being idle, I think we'll see subsequent slowness, perhaps, in our work. But if the rigs start moving out to other areas, then our geographic mix of work should -- should follow where the rigs are. Okay?

And I'll move to our next question. Next question comes from Joe Ritchie, Goldman Sachs.

Good morning, everyone.

Hey, Joe.

My first question's really on that LNG write-down that you gave us some brief details on. It looks like you took a $42 million charge this quarter the project; the project's about 71% complete. Can you provide any more details on the nature of the charge? And I know it's non-cash now. Is it going to turn in to a cash charge moving forward as you complete that project?

Joe, on that -- on that question, It's an LNG project where the customer has seen a significant turnover in -- in its senior management. We have seen other ENP companies as well as oilfield service companies reference the difficulty in doing work with this customer because of the -- the change in personnel and some of the uncertainties surrounding the, perhaps, other consequences to other personnel, not officers in -- in that -- in that NOC.

What we have found was that, in our contract, we have obligations under the contract and -- and our customer has obligations; and our customer has largely been absent for the last several months, in terms of performing its obligations under the contract. And -- and that's why we go back to the words "actions or inactions" by the customer. And as we look at the effect on KBR from these inactions, in a quarterly sense, we're forecasting, now, higher cost to complete. And -- and so we've spent some time trying to get our customer to engage with us; and -- and I'm -- I'm happy to say that we now have a sponsor's meeting set up in November,and I have some subsequent meetings after that.

So the customer does appear to be engaging, and we think the -- the issues and some of the absence of decision-making on the part of our -- on the part of our customer can be resolved through these discussions. And so we're optimistic that, now that they've changed their leadership, the leadership's now engaging in the commitments that have been made by that company; that we'll get back and be able to get back on track on this project, and we -- and we hope to be able to get back to the original schedules that we had on the project. So it's just been a void that we've seen in dealing with the customer, and -- and we now appear to see the customer reengaging in -- in -- participating in their obligations under that contract.

Okay. So is the $42 million, then, a charge that you're taking on liquidated damages provisions that are in the contract because the schedule is slipping; And so, if you actually get back on track, then, obviously, those -- those -- those damages go away?

Well, it's not just liquidated damages. If we are able to get back on track or get relief, we could have -- see some positive news on the liquidated damages. We also have mobilization costs, additional bonding costs outstanding that we had to put into our estimate; and some these second-order effects, we also would hope to be able to, in our best case, mitigate through these discussions. But it's -- it really -- the customers will have to recognize that they haven't provided timely notices under this contract and will grant us the relief that we're seeking to get from them for their, as I said, actions or inactions.

Okay. Great. And, I guess, one -- one followup question for Sue.

On -- this -- this year, it looks like you're -- you're going to generate about $94 million or so in LogCAP fees. At least you have in the last two quarters. Help me understand how that -- the delta between 2010 and 2011, given that some of your work is ramping down in that region, and -- and how -- how should we expect the fees to come through in 2011?

Well, I think, as Bill pointed out in -- in his prepared remarks, the $34 million that we received at the end of the third quarter took us through February of 2010 and -- and May of 2010 on Iraq and Afghanistan, respectively.

So when -- when we look forward, there has now been another award fee board that has met just recently. Our -- our expectation is that we will receive the news from that probably early 2011 so, likely, not a -- a fourth quarter impact as we look at that; and then as we get more caught up, then we're going to get into more of a -- a normalized schedule with -- with the award fees but we're not -- we're not predicting 2011. We're just taking the information and continuing to process the award fees as received, but -- but that's what the next several months looks like anyway.

We can -- we can follow up offline and get some further detail, but thank you for answering my questions.

Sure.

(Operator Instructions). We'll take our next question from Michael Dudas, Jefferies & Company.

Good morning, everybody.

Hi, Mike.

I was intrigued about your commenting about the B&K service business seeing some better opportunities in the commercial, especially commercial, side. Maybe you could elaborate a little bit. Are you seeing any indication that public or private customers or clients of KBR are starting to have some pent-up demand looking to expand and invest in -- in the country over the next couple of years?

We're seeing the activity coming out of mostly institutional players,hospitals, education facilities at universities, and -- but we're also not seeing work coming out of the private developer community. So we draw -- we're drawing a -- a -- a big distinction between institutional spending on hospitals and education facilities, and we also do see some industrial facilities moving forward; and we've talked about the Boeing plant in Charleston previously. But the private developer office buildings aren't moving forward, in general, with services. We are seeing our customers talk about, certainly with greater confidence, doing larger projects and -- and doing more than the small cap and maintenance projects. So I think that's going to pick up as we get into 2011. And that's -- that's supporting a lot of my commentary, both from the building group side as well as the North American construction side, which is more industrial; that we expect a -- a much better environment in the US on the construction side in -- in 2011 than we did in 2010.

So like $5 million to $10 million projects, more like $50 million to $100 million; is that the type of what you're -- the kind of shift you might be talking about?

Oh, I think we're -- yeah, we're seeing customers talk about the $100 million projects now.

Oh, that's good.

And so it is a -- it's a relief for us because I believe KBR is a more differentiated service provider when we get to $100 million or larger, and I think that bodes well for -- for the progress of our services group. I know they're -- they're very excited about this market returning.

I appreciate it.

My follow-up is-- As you look through the opportunities in the energy, Gas Monetization, and oil and gas side, how comfortable do you feel with the capacity for your Company to do the work? Are you staffed well now? Do you think you're going to see an opportunity to increase staffing? Is your capacity to do the work comfortable right nowor does it need some attention?

Thank you.

I would say the -- this is a service business, and our job is to eat backlog. We've done a lot of engineering on Gorgon;but that engineering is moving out of the London operating centers out to the high-value centers we have at various locations around the world. We --and so we're actually hoping we can sell some more front-end work, both in the oil and gas side as well as the Gas Monetization side; otherwise, we'll be coming down staff-wise.

And so I -- we're pretty comfortable about our ability under our present staffing to sell more work; and to -- and -- and we factored that into our work plans, but we do have capacity in 2011 to undertake more work. And we're going to see the -- see the growth in the offices on our high-value centers in 2011, where, in 2010, it has been more -- more the front-end offices in Houston and London.

Excellent. Thank you very much.

We'll take our next question from John Rogers, D.A. Davidson. Davidson.

Hi, good morning.

Morning, John.

Just, if you could maybe elaborate a little bit further. You indicated that your -- the income within your backlog is up about 1% and that backlog should -- I think, if I understand this correctly, should be growing, given your opportunities for bookings over the near-term. So as we roll out over the next number of months and quarters and years, should we see a real -- a real improvement in margins going forward?

I believe so. I think that -- the real big drivers for us, John, are going to be, you know, working through the Escravos --

Uh-huh.

-- working through LogCAP. As LogCAP continues to decline, our margins go up. The challenge for us is to maintain overall revenues where they are because the work we're replacing LogCAP backlog with is -- is -- is higher margin than what we're getting on -- on LogCAP. The (Inaudible) project we took -- and that overall margin was probably below average because we've got such a large reimbursable component running through our books. And -- and as I've said previously, we're happy to take on more work like that at the expense of our job income margin percentage. But as long as it's increasing our job income margin dollars -- and we'll try to be as transparent as we can as to the dollars instead of percentages on these project structures; that we're motivated to grow the job income backlog because, for us, that's what pays the bills. And if we've got to take lower margin, low-risk stuff or no-margin, low-risk stuff like procurement, on, we're happy to do that. So we're trying to drive and talk about the changing complex of our backlog as we add the commentary about job income in addition to the revenues.

Okay. But it sound -- it sounds as if -- we should see some -- I know you'll talk about 2011 later -- but some decent growth then based on -- unless the project timing is a lot longer for some reason.

Absent these one-off, typically large transactions, we show the margins increasing.

Okay.

And we believe that certainly the more profitability backlog would be a contributor to that.

Okay. And then, I guess one other question just for Sue, in terms of the tax rate, you mentioned 32% to 33% this year?

Yes.

What was -- why was the tax rate so much lower? Is it just a mix issue in the quarter, and then it's coming back up again?

No, I think it -- as you think about it --

Yes.

-- in the fourth quarter of 2009, we -- we talked about the execution of some tax strategies around our UK entities. We're -- we're seeing the benefit of those and -- and the ones that benefit in the third quarter of 2010. In addition, we -- we took some actions with a couple of our foreign entities, which benefited the tax in the third quarter. So some discreet items as well as the tax-planning strategies. So what we're signalling to you is that -- as we look at the overall 2010 picture, is that our effective tax rate has now come down to the 32% to 33% type of range; and that's the expectation for -- for going forward.

Okay. That's what I wanted clarity on. Thank you very much. And great quarter.

Thank you.

Thank you.

And our final question comes from Jamie Cook, Credit Suisse.

Hi, good morning. Two -- two quick questions. One, back on Pluto again, there was some news in the press that on -- on Pluto I, there had been some escalated costs; and I wonder how you think about that and whether you think that better positions you for winning Pluto II. And also, I guess, on Pluto II, there was some concern that that might not move forward, so what you're -- you're hearing from the customer on that front.

I think we read the same things about the cost on exist -- on the Pluto; and obviously, it's hard for me to stay unbiased in -- in that sense. But we -- we're still very excited about Pluto, and then from our customer about the future of Pluto II. It's been -- it has been shared with, us as well as publicly, that they are looking to round up the gas that could be used to support the execution of Pluto II, and -- and we -- we haven't heard anything that would deviate from the announcement that Don Voelte made several weeks ago about the delay into -- into midyear next year.

Okay. But -- I'm all set. Thanks.

Thanks, Jamie.

Great quarter.

Thank you.

And we have no further questions at this time. I would like to turn it back over to our speakers for any closing comments.

Great. Thank you for joining us today on the third quarter call. We look forward to talking with you in February, discussing the fourth quarter and full-year 2010 results. And as always, I'm available the rest of today and tomorrow to have any -- or answer any follow-up questions that you may have. Thanks.

That concludes our conference for today, and we thank you for your attendance.