Babcock & Wilcox Sees Drop in Demand from Utilities, Expects Stronger Projects in Second Half of 2014

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Researched by Industrial Info Resources (Sugar Land, Texas)--Energy services provider The Babcock & Wilcox Company (NYSE:BWC) (B&W) (Charlotte, North Carolina) reported sharp declines in income and revenue, as U.S. utilities spent less on environmental and service projects when compared with the same period last year. The drop in demand offset improved bookings in the Power Generation segment's international and renewables businesses. Net income was reported to be $26.44 million, compared with $72.87 million in second-quarter 2013.

Industrial Info is tracking more than $8.6 billion in active projects involving B&W, including $575 million in retrofits at Alliant Energy Corporation's (NYSE:LNT) (Madison, Wisconsin) power station in Ottumwa, Iowa. The project involves installing a B&W dry flue-gas desulfurization scrubber and two B&W pulse-jet, fabric-filter baghouses onto Alstom CE dry-bottom, tangential-fired boilers. B&W and Burns & McDonnell Incorporated (Kansas City, Missouri) are performing engineering, procurement and construction (EPC) services. The project is expected to be completed in the fourth quarter of this year.

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Total revenues stood at $686.01 million, a 22.58% decrease from the same period last year. In addition to weaker domestic demand for environmental and service projects, the decline was attributed to the slow startup of key projects that B&W expected to proceed at a faster rate.

In a year-over-year comparison, second-quarter 2013 saw the completion of a large number of projects that overshadowed completions this quarter. The Power Generation segment reported a $70.5 million decline in new build environmental equipment revenue, a $49.5 million decline in aftermarket services revenue, and a $27.5 million decline in new-build steam generation systems year-over-year. The Nuclear Operations segment saw stronger demand from the U.S. government for nuclear components in second-quarter 2013, while the Nuclear Energy segment had benefited from the completion of two large steam generators.

B&W also faced a string of one-time costs during the quarter: $10.4 million for restructuring activities related to cost-reduction efforts, mostly in the Power Generation and Nuclear Energy segments, and $21.3 million related to restructuring of the mPower program.

On the plus side, subsidiary Babcock & Wilcox Nuclear Energy Incorporated was awarded a multi-year fleet services contract from Dominion Generation (NYSE:D) (Richmond, Virginia) to provide comprehensive steam generator inspection, repair and cleaning services for Dominion's three operating nuclear stations: North Anna in Mineral, Virginia; Surry in Surry, Virginia; and Millstone in Waterford, Connecticut. The steam generator services contract is scheduled to begin this fall.

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Capital expenditures were reported to be $16.61 million for the quarter, compared with $14.63 million in second-quarter 2013.

In late June, B&W subsidiary Babcock & Wilcox Power Generation Group Incorporated announced that it had acquired industrial processes solutions provider MEGTEC (De Pere, Wisconsin) for $155 million. MEGTEC, which operates in 10 countries, is now B&W MEGTEC, a subsidiary of the Power Generation segment.

"Our aggressive margin improvement program remains on track, but the drop in [Power Generation Group] revenue during the quarter--and likely for the full year--has likely overshadowed these cost improvements," said E. James Ferland, the president and chief executive officer of B&W, in a conference call. "The primary driver of the revenue decrease was a lack of U.S. coal, environmental and service work, due to continuing regulatory uncertainty and lower capital spending volumes at our utility customers. This is a trend we expect will continue for the balance of the year, and is the primary driver for the change in guidance."

As a result of the drop in U.S. utility spending, B&W executives are narrowing the outlook for full-year 2014 revenues to between $2.9 billion and $3 billion, from an earlier estimate of between $2.9 billion and $3.1 billion.

"We're confident we will see sequential improvement in the third and fourth quarters of 2014, and significant upside in 2015," Ferland said. "In [Power Generation Group], new bookings in the international and renewables markets, together with continued traction in our marginal improvement program, position us well for improvement in the second half of 2014, and will produce much-improved results in 2015. As we move into 2015, we expect [the Nuclear Operations segment] to produce strong and steady results, while reduced spending on mPower will also contribute to overall improvement."

He later added: "Bookings in second-quarter 2014 totaled $591 million, versus $766 million in second-quarter 2013. This decrease is primarily due to the timing of bookings in the Nuclear Operations segment. Year-to-date bookings for both Nuclear Operations and the company as a whole remain ahead of this time last year, and [Power Generation Group] bookings were at their highest level in more than two years, led by the international boiler and renewable projects."

For more information, visit Industrial Info's North American Power Project Database and North American Industrial Manufacturing Project Database.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.