Todd Jacobson
NS&D Monitor 
11/7/2014

Babcock & Wilcox is moving ahead with a plan to separate its power generation business from its government and nuclear operations group, the company said this week as it released its third quarter financial earnings. The split is expected to be completed by mid-2015, and will result in the creation of two companies: Charlotte-headquartered Babcock & Wilcox and Lynchburg, Va.-headquartered BWX Technologies. “After an extensive and thorough evaluation, we concluded that this is the logical next step to enhance the success of our business and create greater value for our shareholders,” Babcock & Wilcox President and CEO Jim Ferland said in a Nov. 5 message to employees. “In operating independently, each organization will be able to increase its focus on their distinct businesses and will have more flexibility to deploy and execute a focused capital structure consistent with the strategic priorities of each business.”

Ferland will be the President and CEO of Babcock & Wilcox, while Sandy Baker will serve as the President and CEO of BWXT, with John Fees serving as BWXT’s executive chairman. BWXT will encompass its nuclear operations, technical services, nuclear energy, and mPower businesses. “Spinning off the Power Generation business will establish two strong independent public companies that will benefit from independent management teams, each equipped with the resources, strategic economy and financial flexibility to create significant long-term value for their respective shareholders,” Fees said in a Nov. 6 conference call with investors.

Fees noted that over the last year B&W has reorganized its nuclear operating group and technical services group under Baker’s authority.  One of B&W’s competitors, Bechtel, made a similar move in creating a Nuclear, Security and Environmental group that combines its government and commercial nuclear work. “The intent there was to really try to get things together that really belong together. They do similar things. They have similar core skill sets,” he said. “And the ability of that talent to work across the product lines is much more evident over there. [The power generation group] is really a very, very stand-alone entity in many respects relative to its markets, its technologies, and really, its opportunities being focused much more on international.”

Separation a Platform for Acquisition?

In a Frequently Asked Questions document distributed to employees, B&W said neither of the businesses is for sale, though analysts have suggested that separating the companies could position both well to be acquired. “We’ve stated in the past and we’ll restate that the businesses are not for sale,” Ferland said.

Fees, however, didn’t completely rule out a potential sale. “It’s a wonderful business,” he said. “It has tremendous stability and great cash flow, and it’s an extremely valuable thing to our shareholders. And we treasure that and our shareholders do, too. That being said, if someone feels that they want to consider that, we’re always open to an idea, but we have nothing planned at this particular point to somehow sell or otherwise disposition the business. We think we can significantly enhance the value to our shareholders from where we will proceed, and that’s our plan.”

Overall 3Q Earnings Up, Income For Technical Services Down

B&W also announced this week its third quarter earnings, revealing that operating income for the period was $85.6 million, with consolidated revenues of $737.9 million. Net income during the quarter was $61.2 million, up from $60.5 million during the same period a year ago. “Our Nuclear Operations Group is continuing to perform at a high level, and the Power Generation Group is turning the corner, with improved revenue and operating margin,” Ferland said. 

B&W’s Technical Services segment reported revenues of $20.2 million in the third quarter of 2014, down $5 million from the same period in 2013, which the company attributed to the termination of the American Centrifuge Manufacturing Program. Operating income also took a massive dip in the quarter, down $13.4 million to $5 million, compared to $18.4 million during the same period in 2013 thanks to the loss of the Y-12 and Pantex management and operating contracts and lower fee income at various sites from the impact of the Waste Isolation Pilot Plant shutdown.

As Technical Services Income Dips, Talk of Rebuilding, Expanding

Ferland said the company was still focused on rebuilding the Technical Services group and was focused on more than half a dozen opportunities in the U.S., Canada and the United Kingdom, including the Chalk River National Laboratory contract in Canada. He said the contract “fits well with our experience managing high-consequence nuclear facilities” and could be awarded as early as mid-2015. “We’re beginning to gain traction on rebuilding of our Technical Services group,” he said.

Fees also noted that the Technical Services group was focused on expanding its reach beyond the Department of Energy, and he said it was pursuing a $1 billion contract to build the missile tubes for the new Ohio-class ballistic missile submarines. “We are currently in some preliminary bid activity and would expect maybe some near-term rewards in there if we’re successful,” he said. “So that’s an example of something that we’re currently not doing in an adjacent market where we could pursue growth. Those are the kind of opportunities that we want to pursue going forward into the future. So it’s just not standing still and looking in the same direction. There are opportunities.”