KBR, Inc. Q1 2009 Earnings Call Transcript

May. 1.09 | About: KBR, Inc. (KBR)

KBR, Inc. (NYSE:KBR)

Q1 2009 Earnings Call Transcript

April 30, 2009 11:00 am ET

Executives

Rob Kukla – Director, IR

Bill Utt – President and CEO

Kevin DeNicola – SVP and CFO

Analysts

Barry Bannister – Stifel Nicolaus

Vance Edelson – Morgan Stanley

Jamie Cook – Credit Suisse

Steven Fisher – UBS Investment Research

Michael Dudas – Jefferies & Company

Dan Pickering – Tudor, Pickering, Holt

John Rogers – D.A. Davidson & Co.

Andy Kaplowitz – Barclays Capital

Joe Ritchie – Goldman Sachs

Operator

Good day everyone, and welcome to the KBR 2009 First Quarter Earnings Call, hosted by KBR. This call is being recorded. As a 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 prepared remarks and you will be given 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.

Rob Kukla

Thank you, Jody. Good morning and welcome to KBR's First Quarter 2009 Earnings Conference Call. Today's call is also being webcast and a replay will be available on KBRs Web site for seven days. The press release announcing the first quarter results is also available on KBRs Web site.

Joining me today are Bill Utt, Chairman, President and Chief Executive Officer, and Kevin DeNicola, Senior Vice President and Chief Financial Officer. In today's call, Bill will provide opening remarks and business outlook. Kevin 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 risk are discussed in KBR's Form 10-K for the year-ended December 31st, 2008. KBR's quarterly reports on Forms 10-Q and KBR's current reports on Form 8-K.

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

Bill Utt

Thanks Rob, and good morning, everyone. I am fundamentally pleased with KBR's first quarter 2009 results. Consolidated KBR revenue totaled $3.2 billion, up 27% from the $2.5 billion for the first quarter of 2008 with all business units reporting increased revenue over this time period.

The Services business unit led the revenue increase with a 427% year-over-year improvement, due largely to the BE&K acquisition, followed by 23% increase for Upstream, 13% increase for Downstream, a 5% increase for Technology, and a 3% increase for G&I.

Net income attributable to KBR for the first quarter of 2009 was $77 million or $0.48 per diluted share, compared to $98 million or $0.58 per diluted share for the prior year first quarter, which incidentally included a $51 million pre-tax gain on a favorable arbitration settlement on the EPC 28 project.

Let me take a moment to discuss backlog. Total backlog was $12.8 billion at the end of the March 2009 quarter, down 5% from the first quarter of 2008 and down 9% sequentially from the December 2008 quarter.

The sequential decline was primarily related to lower Middle East backlog and normal project work-off. We had no material project cancellations in the backlog portfolio during the first quarter.

The $575 million reduction in our Middle East backlog was primarily attributable to the timely funding of task order extensions under LOGCAP III. Subsequent to the first quarter close, KBR received approximately $500 million in additional task orders during the month of April.

Now, let me discuss some operational highlights for our KBR business units. With respect to our Upstream business unit, the Skikda LNG project continues to proceed very well and at the end of the first quarter was 44% complete. At the end of the first quarter of 2009, the Tangguh LNG project was 98% complete and the Yemen LNG project was 95% complete.

At the end of February 2009, we received an unfavorable arbitration decision related to the Amenas gas processing facility in Algeria, which adversely impacted KBR's first quarter 2009 results by $15 million. This project was completed in 2006. Although I am disappointed in the arbitration outcome, this was another legacy issue that I'm glad to put behind us.

Upstream was awarded a contract by BP on behalf of the Azerbaijan International Oil company to provide front-end engineering and design or FEED services for the Chirag Oil project in the Azerbaijan sector of the Caspian Sea.

KBR will provide FEED and procurement support services for a single, large drilling platform that ties into the existing Azeri-Chirag-Gunashli oil field development infrastructure.

For government and infrastructure, there have not been any new task orders awarded on the LOGCAP IV contract since my discussion last quarter. Bids have been submitted for the larger Afghanistan task orders and we expect these task orders to be awarded during the second quarter.

I am also pleased that KBR has achieved substantial completion on the U.S. Embassy project in Macedonia. We incurred no further losses on this project during the quarter. And on March 31st, we received notice of substantial completion from our customer and the Embassy is presently occupied by the State department.

All that remains on the project are minor punch list and warranty items, although we could incur additional costs based on these items, I am comfortable with the current cost forecasts and do not expect any further losses to occur.

During the quarter, the G&I business unit announced a $19.2 million contract award from the U.S. Army contracting command to execute bulk fuel farm operations at specific military sites in Kuwait. KBR will provide all services, resources and management necessary to perform bulk fuel farm operations, fuel transfer, inventory management and maintenance for equipment and vehicles.

The G&I business unit was also awarded a job order contract by the Cooperative Purchasing Network to provide construction management services for public entities throughout the entire state of Texas. This one year contract offers five option years for renewal and has an anticipated value of $24 million.

KBR will provide a full range of construction management services that will vary in size and scope and will include facilities repair, renovations and new construction for all public entities throughout the state.

The job order contract is designed to provide a more responsive and cost-effective solution for public schools and private schools, colleges, universities, cities, counties and other government or non-profit entities within the state of Texas.

KBR Services business unit continues to perform well. The Shell Scotford Upgrader's job income was down from the previous year's first quarter due to the project being slowed by the customer to enable engineering and materials supplied by others to catch up with the construction execution. However, we expect the work to ramp-up this summer and still have about a year's worth of work remaining on the project.

The offshore service and maintenance vessels were also a nice contributor to the quarter's results and they continue to achieve high utilization rates building on long-term contracts.

Overall, the Services business unit has been very active in bidding this quarter, especially for power related projects. Services has been successful over the past several months and has been awarded a couple of power projects.

Further, KBR is continuing to build staff in this business, which we acquired as part of the BE&K acquisition last year.

During the first quarter of 2009, Services was awarded $126 million contract by the Solid Waste Authority of Palm Beach County, Florida, to provide engineering, procurement and construction services for the refurbishment of its North County waste to energy resource recovery facility. The scope of work includes the replacement of boiler internals, upgrades to the electrical and control systems, upgrades to pollution control equipment and removal and replacement of electrostatic precipitators with fabric filter bag houses.

For our Downstream business unit, I was disappointed with the air compressor failure during the start-up and commissioning activities of the EBIC ammonia project during the quarter. The failure of the air compressor resulted in delays to the performance test of the facility.

Ammonia is currently being produced at the plant and we expect to start our 60-day reliability test next week. We expect the EBIC ammonia plant to achieve commercial operation in July.

The recent project awards in Africa, first from PetroSA to provide feasibility and FEED services for a proposed 400,000 barrel per day refining facility, and second from Sonangol for FEED and site development work for a 200,000 barrel per day refinery. Each ramped-up in the first quarter and are progressing well. Work on both projects contributed positively to Downstream's first quarter results.

The Ras Tanura and Yanbu export refinery projects in Saudi Arabia also contributed to first quarter results. We are expecting to see an increasing level of activity and contribution from these projects over the remainder of 2009 and beyond.

During the first quarter of 2009, Downstream was awarded a contract by Egypt Hydrocarbon Corporation for a FEED project on a 1,060 metric ton per day ammonium nitrate plant being developed by Carbon Holdings at its proposed Petrochemical Complex near the Red Sea in Egypt. KBR will perform engineering services for both the process units and the utilities and offsites for the plants.

After Kevin's comments, I will comment in more detail on the market outlook for our businesses before turning the call over to questions. Kevin?

Kevin DeNicola

Hey, thanks, Bill. I'll start by reviewing KBR's consolidated first quarter 2009 results, which primarily focuses on year-over-year comparisons. Consolidated KBR revenue for the first quarter of 2009 totaled $3.2 billion compared to $2.5 billion in the first quarter of 2008.

Consolidated operating income was $144 million for the first quarter of 2009 compared to operating income of $154 million for the first quarter of 2008, which included a $51 million pre-tax gain on a favorable arbitration award related to EPC 28.

Upstream revenue was $751 million in the first quarter of 2009, up $140 million or 23% from the first quarter of 2008. Business Unit income was $73 million in the first quarter of 2009 compared to $105 million reported in the first quarter of 2008.

Business Unit income in the first quarter of 2009 included a $15 million pre-tax unfavorable arbitration decision related to the Amenas project and a $16 million gain on the reversal accruals on completed EPC projects at MWKL.

As I mentioned earlier, Business Unit income in the first quarter of 2008 included a $51 million gain on a favorable arbitration award related to EPC 28.

Outside of the items I just mentioned, the Business Unit income decrease was impacted by lower activity on the Pearl GTL project and increased project costs on another LNG project due to scheduled delays.

Partially offsetting this decline was increases on the Skikda LNG project, the Gorgon LNG project and incentive fees on the Escravos GTL project.

Government and infrastructure revenue in the first quarter of 2009 was $1.7 billion compared to $1.7 billion for the prior year first quarter. Business Unit income was $81 million in the first quarter of 2009 compared to $80 million in the first quarter of 2008, which included a $12 million charge related to the U.S. Embassy project in Macedonia.

The slight increase in Business Unit income was primarily related to the Embassy charge in the first quarter of 2008 and increased work on the CENTCOM project, partially offsetting this increase was lower LOGCAP award fee accrual rate and lower activity on several projects including the Allenby & Connaught project and other projects for the UK Ministry of Defense.

Services revenue was $569 million in the first quarter of 2009, up from $108 million in the first quarter of 2008. Business Unit income was $24 million compared to $13 million for the prior first year first quarter.

The first quarter 2009 comparative increase was primarily due to the addition of BE&K projects including power projects in Georgia and Texas. Also contributing to the increase was legacy construction and maintenance work in Texas and our offshore vessels in the Gulf of Mexico.

Downstream revenue was $113 million in the first quarter of 2009 compared to $100 million for the first quarter of 2008. Business Unit income was zero in the first quarter of 2009 compared to $8 million in the first quarter of 2008.

The decrease in Business Unit income was primarily driven by increased costs related to an equipment failure on the EBIC ammonia project in Egypt, and lower work volumes on the Yanbu export refinery project in Saudi Arabia. The decrease was partially offset by progress on the Ras Tanura integrator project, the Saudi Kayan ethylene project and several refining projects.

Technology revenue for the first quarter of 2009 was $20 million compared to $19 million in the first quarter of 2008. Business Unit income for the first quarter of 2009 was $3 million compared to $5 million for the prior first quarter. The decrease primarily relates to completion of several technology projects and slightly higher overhead costs associated with sales incentive initiatives. Partially offsetting this decline were new syngas projects including several ammonia projects in South America.

With respect to the Ventures unit, business unit income for the first quarter of 2009 was $10 million compared to a loss of $4 million for the first quarter of 2008. Business unit income in the first quarter of 2009 included $8 million in income on two road projects related to a favorable UK tax depreciation ruling, a $2 million gain on assets related to the sale of an interest in the UK road project joint ventures.

Improvement was also related to the Allenby & Connaught project and no further losses recorded on the Alice Springs Darwin railroad project, which was partially offset by our share of the start-up costs on the EBIC ammonia project in Egypt.

Now let's review other financial items. General and administrative expenses for the first quarter of 2009 were $49 million, down $6 million from the fourth quarter of 2008, primarily related to increased incentive comp in the fourth quarter of 2008 as well as lower IT spending and other corporate expenditures.

We are continuing to initiate further cost savings and identifying areas for scaling back costs throughout the organization. Based on these cost saving initiatives, we have reduced our full year 2009 corporate general administrative expenses by $20 million from the expectations we gave in February, to approximately $230 million.

Our effective tax rate in the first quarter 2009 was 37% compared to 41% for the fourth quarter 2008. The decrease is primarily related to the $20 million financial penalty to the Department of Justice for the FCPA investigations which were not tax deductible for tax purposes in the fourth quarter of 2008. We continue to expect the full year 2009 effective tax rate to be approximately 38%.

Now I'll add a few additional points from Bill's earlier discussion on backlog. The total backlog at March 31st, 2009 was $12.8 billion compared to $14.1 billion at December 31st 2008. This decrease primarily related to work-off in LOGCAP and gas monetization primarily from the Pearl GTL and Escravos GTL projects.

Overall, the backlog portfolio mix at the end of the first quarter was 78% cost reimbursable, 22% fixed price, slight change from the 80-20 mix reported from the sequential quarter.

Next I will discuss liquidity in the balance sheet. At the end of March 2009, our balance sheet remain strong with no debt and cash and cash equivalents, approximately $921 million, which net of cash associated with our consolidated joint ventures and advance payment related to a contract in progress was approximately $710 million.

Total cash balance declined during the first quarter of 2009 as cash flow from operations used $172 million during this time period, which included a decrease of $21 million related to our consolidated joint ventures, and $122 million decrease in advance payments on a contract in progress.

Also impacting total cash balances in the first quarter 2009 was an increase in Iraq related working capital from $76 million at December 31st, 2008 to $186 million at March 31st, 2009, which reduced cash by an additional $110 million. The primary reason for the increase in working capital was timing on collections.

Now let me discuss the share repurchase program we announced in January of this year. KBR was authorized to initiate a share repurchase program pursuant to which KBR would purchase shares in the open market to reduce and maintain over time, KBR's outstanding shares at approximately 160 million shares.

Since we filed our Form 10-K on February 25, 2009, we repurchased just under 1.2 million shares for approximately $16 million. We will continue to purchase shares periodically in the market to maintain KBR's outstanding share count at 160 million.

Capital expenditures totaled $7 million and depreciation and amortization was $14 million during the first quarter of 2009. We continue to examine ways to prudently reduce cap expenditures during 2009.

Now I'll turn the call back to Bill for his final remarks

Bill Utt

Thanks, Kevin. During last year's conference call I provided KBR's outlook for KBR's three most distinct market segments; North American E&C, Military Services and Global Hydrocarbons. I'd like to take a few minutes to update our outlook for these market segments.

First, we continue to see a general slowing of activity in the North American E&C markets. However, we are seeing reasonably stable levels of activities in several of our product lines or market areas. Power, general industrial services and commercial construction, particularly in education and health care, remain reasonably strong.

We've been successful in a couple of power projects and our overall bidding activity remains strong in these markets. Pre-construction phase work on commercial facilities in health care and education is another area we're seeing good activity. We have a pretty good track record of winning new work in this market which we expect to secure when the overall projects are funded.

In Canada, we're still experiencing a significant slowing of activities in the Alberta oil sands market. However, with the fall in our supply chain cost, coupled with an overall cooling in the construction labor markets, we are seeing some signs of customers beginning to discuss coming out with new work.

The Lobby [ph] acquisition has also helped us to diversify KBR's presence in the Canadian markets to Ontario and to Saskatchewan. And the Mining and Potash business is showing promise. Also, we are examining initiatives to grow our Maintenance Services businesses that we provide in Canada.

In the Military Services area, I have no major updates to the comments I made last quarter. We still see our LOGCAP III volumes remaining reasonably consistent through the end of 2009. We are still anticipating the LOGCAP IV task orders for Afghanistan to be awarded within the next couple of months with the work in Afghanistan expected to be awarded to two of the three LOGCAP IV contractors.

Our other Department of Defense and Ministry of Defense work remains reasonably stable while our infrastructure business in Australia has slowed a bit from last year.

With respect to the global hydrocarbon markets, long lead time LNG and offshore projects appear to be continuing to move forward. For offshore, we continue to expand our capabilities and have been successful on several recent awards including the recent ACG award in Azerbaijan that I mentioned earlier. KBR has now been involved on the ACG project with BP for over 13 years now.

For LNG, we continue to work on several FEED projects for Gorgon and Impax [ph] which we believe will move forward to final investment decisions in the coming months.

In the Downstream area, we have experienced delays on several projects for clients themselves to take advantage of the declining cost environment. We see this as a delay rather than a cancellation of their investment decision processes. However, KBR believes that we will see an increase in volumes on both the Yanbu export refinery and the Ras Tanura integrator project during the second half of 2009.

Overall, we have experienced a slower sales cycle since mid-2008, but continue to expect orders to pick up in the second half of 2009. Although the tougher bidding environment is resulting in margin pressures on our work, we could see our overall margins improve over time as the legacy portfolio of breakeven projects are completed.

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

Question-and-Answer Session

Operator

(Operator instructions). And we'll take our first question from Barry Bannister of Stifel Nicolaus.

Barry Bannister – Stifel Nicolaus

Hi, your LOGCAP III margins deviated from what has been the norm. And I know that LOGCAP IV, when it comes is going to have a different order base fee plus incentive fee structure. So, could you explain why the margin differentiation occurred on LOGCAP III as we start to close out that program?

Bill Utt

Yes, we've looked at the evaluations that we have received over in theater, which historically have been very good to excellent. And we have taken the accruals that we make on the award fee in LOGCAP III, down a bit from what we had seen historically. And so that's affected us in the first quarter and I believe it was also impacting us in the fourth quarter of last year. We also, within that business, we have certain costs that we look at from dining facilities and other matters that we've disclosed and we did make some additions to our accruals during the quarter which also had a negative impact on the margins for LOGCAP III. But I think fundamentally, it was within the range of tolerance that we've come to see on the LOGCAP III project.

On LOGCAP IV, we've commented that the accounting environment that exists for us is different for LOGCAP IV compared to LOGCAP III. And what I referred to there is that the award fees for LOGCAP IV projects will only be recognized upon the receipt of the award and we will not be able to accrue award fees as we have done on LOGCAP III, so that will be a difference. We continue, as we look at the work on LOGCAP IV to believe we'll be able to move margins up from the 1% base fee, 2% award fee that we have on the LOGCAP III project, perhaps more towards the other margins we're seeing on our government work out. So that's kind of the outlook we see for LOGCAP IV.

And I think as far as the awards go and the absence of awards that we've seen to-date on LOGCAP IV, we think there was some effort on the part of the customer to want to stand up the other competitors in theater, so that as we begin looking at the first of the real big awards which could be the Afghan award, they would have a basis with which to compete. And so we really see the Afghan awards as the first opportunity will have to really be in a competitive situation with the other two participants.

Barry Bannister – Stifel Nicolaus

And then when I look at $16 million credit in MWKL, it doesn't come to $0.03 unless the tax rate is greatly different. The $15 million for Amenas, would that tax rate just be the corporate average and that would –?

Kevin DeNicola

Two things going on there too, Barry. The other one is that we don't own 100% of it. So you got –

Bill Utt

MWKL.

Kevin DeNicola

MWKL, so you got an adjustment for the non-controlling interest and you've also got the tax affect. So that's the reason why we gave you the arithmetic, because you wouldn't get there without that. But it was kind of complicated. They had with that many words. So, but that's the answer.

Barry Bannister – Stifel Nicolaus

Okay, great. Alright, and you collected that receivable to push your cash down to negative at the end of the quarter?

Bill Utt

I'm sorry; it was an accrual at MWKL. And as we look at our construction projects, we set up, where appropriate accruals to cover costs that we envision to incur on the project, these are completed projects and we had what we call triggering events that allow us to go back and take a look at the validity of these accruals and we concluded that these accruals were no longer required given the events that occurred on these completed projects during the quarter.

Barry Bannister – Stifel Nicolaus

Okay, thanks.

Operator

And we'll take our next question from Vance Edelson of Morgan Stanley.

Vance Edelson – Morgan Stanley

Hi, thanks a lot. Could you just comment on the progress migrating from fixed to variable contracts. If I heard correctly, it was 22% fixed, up from 20% previously. Is that a trend that's likely to continue or should we view that as more of an aberration? Thanks.

Bill Utt

That's a good question, Vance. When we look at our business, we're looking at what the customers want to buy and we have seen over the past couple of years a decline in the amount of fixed price work in our backlog from, I believe it was 55% or so at the time of the IPO in November of 2006 to where it presently is. And a lot of that is the market responsiveness of the supplier community looking at how do you price the volatility. And we saw lot of issues around our Escravos project and other projects in the industry where people had some surprises about the degree of cost increases. As we look at the market today, we see a lower volatile situation and while we don't have an affirmative plan to increase or decrease the level of fixed price work in our backlog, we are comfortable in the range of 20% to 50% of our backlog being fixed price. And largely, market forces will determine and customer preferences will determine, where we ultimately end up on that. And we feel we've got a pretty good handle in KBR today through a lot of our risk awareness programs in better understanding and pricing the volatility that we see. And that being said, I would expect in the coming months to see that measure move up perhaps a little bit as the customer community will return to some of the buying habits it had in the 2004 to early 2006 timeframe.

Vance Edelson – Morgan Stanley

Okay, that's very helpful. And just a follow-up on the LOGCAP awards expected during the second quarter. Is that the start of an ongoing process such that you'd expect to see similar time of award activity in 3Q or 4Q or is it really the second quarter that's relatively more important? If you could just give us a feel for the time frame there.

Bill Utt

Well, if you're referring to the LOGCAP III, we continue to get our work on a literally, just in time basis. And what we saw was that work that we would have expected late in the third month of the first quarter, rolled over into the first month of the second quarter. And if you think about all the stuff the government's doing, it's not too difficult to construct why they might have been late getting around to getting some stuff move forward.

We still believe that our volumes that we'll be able to push through the P&L will remain reasonably consistent through the balance of 2009. Obviously, it's a very complicated and very large effort going on and with the Afghanistan area of responsibility work, that will take probably well beyond the award date to get the work transitioned and the people put in place. Then you get into what remains on the calendar. Can they do more work in terms of outsourcing or transitioning from LOGCAP III to LOGCAP IV because that's in Iraq is a very integrated effort that we oversee and one that the Army is very keen to avoid creating seams issues or gaps between the coverages of the contractors.

The other thing we'll have to look at too is as the government makes it takes its initiatives to move troops into Afghanistan and part from Iraq you're going to be moving a lot of supplies and equipment and that will be a lot of new work that will take place to support that additional troop ramp-up in Afghanistan.

Vance Edelson – Morgan Stanley

Okay, that's very helpful. I'll leave it there. Thanks.

Operator

(Operator instructions). We go now to Jamie Cook of Credit Suisse.

Jamie Cook – Credit Suisse

Hi, good morning.

Bill Utt

Good morning.

Jamie Cook – Credit Suisse

I guess my first question, Bill, I was interested in your comments on maintaining margins in an environment where there is increased pricing pressure and you can offset some of that with the just better execution as you use the legacy projects write-offs. So can you just give a little more color on that or the magnitude of the pricing compression you're expecting just so we can I guess gauge that going forward?

And then my second question, you still have confidence that orders are going to pick up in the back half of 2009 which seems I guess more optimistic than some of your peers are suggesting. So I guess what gives you confidence? Is that like the big elephant L&G projects we're looking at for you guys or do you think that's more broadly across the energy sector?

Bill Utt

Well, to your first point, Jamie, I think we are seeing a lot of pressure from the customer community regarding margins; that's universal. I think everybody in our peer group would agree that it's a tougher pricing environment. We do think that the steps we've taken to try to attack our non-operational spending, the corporate SG&A, will give us some opportunity to increase our bottom-line margins. We are looking at some alternative structures to create incentives in our contracts that if we perform really well we could share in the benefits of that extraordinary performance with our customers.

And we also believe that as we work through some of these legacy projects and we had about, by our estimate about $300 million of revenues tied to Escravos, Skopje, and some other projects during the quarter that as those work their way through we ought to see our margins lift up a little bit through just the completion of that work going through our P&L.

From a 2009 order book perspective, we clearly are looking at some of the big elephants out there and today, we all saw the positive news coming out of Australia regarding the environmental permitting for the Gorgon project and we're very pleased to see that. We think that from our perspective removes perhaps the last of the significant issues in front of that project going forward so that's a positive force.

We also believe that there's additional L&G work that's out there that we are in a position to provide services to and we see that work moving in to operations in the second half. I've made my comments about the Yanbu project moving forward and you remember back in November they said they wanted to take a six month hiatus to let the supplier cost market come down as well as possibly have A better access to the capital markets.

And so we're certainly looking at the order book in the second half being much more positive and I did make a comment that it's been a relatively quiet period from mid-2008 to present in the order book and you've seen a little bit of that in the fall off in our backlog. We're fortunate that we still are receiving orders on project extensions, particularly, where we've got longstanding relationships such as the ACG project. And while you can accuse me of being an optimist, I feel very strong in saying that I think the second half will be better than the first half, but again that's a relative comment. But we do feel more optimistic about what we see out there and hopefully, we'll be accurate in our prognostication.

Jamie Cook – Credit Suisse

Thank you. I appreciate your color.

Operator

We will take our next question from Steven Fisher of UBS Investment Research.

Steven Fisher – UBS Investment Research

Good morning. Just a couple of questions about margins in the quarter. Just in the services sector they were lower there. Was that because of the slowing of the Scotford Upgrader?

Bill Utt

Well, yes, it was, but it was not necessarily related to the slowing. We did get a nice change order on that project and actually because on that project we're on a cost to cost basis, we actually had to average out the margins from the base project to the new award which caused a small decrease in job income for the services during the quarter. Now we're going to earn all that back over the remaining part of the year, but that did have a first quarter impact. I think it was about $6 million. We also had an insurance gain in the fourth quarter because the Workmen's Compensation claims were lower so as part of our policies we get a give back on those so those are two issues that did drive the margins lower in the first quarter at services compared to the fourth quarter of last year.

Steven Fisher – UBS Investment Research

Okay. And how about in the government Americas side? Looks like that had a nice uptick in the quarter?

Bill Utt

Well, government Americas obviously benefited by the absence of charges we had on Skopje. That rolls into that project, that's not in the Middle East and that's the biggest contributor there. Beyond that there wasn't anything major that we saw or that I recall from that market segment. That's a fairly good CENTCOM business, it does some job order contracting and it should be a fairly consistent performer, but for the recent performances on Skopje.

Steven Fisher – UBS Investment Research

Okay, good. And then on Escravos, it seems like you start to recognize some incentives since you surpassed that 21 million level. What are your expectations and how achievable future incentives are and about what level?

Bill Utt

The incentives run through that we've seen over the last several quarters for another couple quarters into 2010. A large amount of incentives are backend weighted towards the successful commissioning of the project. And so we're hopeful that we'll be able to continue to perform and I believe the incentives do run through the rest of 2009 and part of the way into 2010. But the big opportunity for us and there will be a little bit of a hiatus from mid-2010 maybe until we complete construction and get startup done before we have the dominant share of those incentives are achieved at commercial operation.

Steven Fisher – UBS Investment Research

Okay. Were there any incentives on Tangguh in the quarter?

Bill Utt

No, that contract is a percent complete recognition.

Steven Fisher – UBS Investment Research

Okay. And then just lastly, the African refineries, when do you expect FEED to be done on those? And then would you expect to move right into EPC?

Bill Utt

We've just kicked those off. I think the FEEDs generally run about 18 months so you could look at mid next year for final investment decisions and we would hope to follow through on those to be the EPC contractor.

Steven Fisher – UBS Investment Research

Great. Thanks a lot.

Operator

And we will take our next question from Andy Kaplowitz of Barclays Capital.

Andy Kaplowitz – Barclays Capital

Good morning, guys.

Bill Utt

Morning.

Andy Kaplowitz – Barclays Capital

Bill, what I'm curious about is the level of activity on some of these Middle East projects like Ras Tanura and Yanbu. Have the level of activity gotten a little higher very recently? And what are your customers telling you as we've seen commodity prices start to stabilize here?

Bill Utt

Well, on Yanbu, they were pretty open that they were going to scale back activities for six months and we do see their activities now within Yanbu and Ras Tanura and also Jubail, you got Saudi Aramco being part of three fairly major projects. We're aware that the Jubail refinery has gotten back its first series of EPC bids and that they're under evaluation and we don't know what those bids are, but certainly the expectation was they would be somewhat lower than what they were forecasted to be six months ago. Yanbus kind of right behind that and as they get the Jubail bids in and they feel that they've gotten to an acceptable part of the market from a cost side, we're very comfortable that Yanbu will move forward. We have had some discussions with them about increasing our activities on the Yanbu project to begin getting ready for this type of activity so we see that as a positive side.

On Ras Tanura we're also seeing some real positives evolve there. Candidly it's taken a lot of the FEED packages that were being done by the owners to be completed in the time we thought initially they would be completed, but they are in process and will be turned over to the PMC and FEED teams in the next couple months. We're expecting to see the staffing that we have on the Ras Tanura project begin ramping up starting next month and continue to ramp up to increasingly larger levels through the end of the year. So we're both, we're happy with how these are going to evolve, but we have seen really a void in what we've been able to recognize from those projects probably for the first two quarters of this year. That works not going away, it's just moved to the right.

In terms of what are our customers telling us in the commodity market, I think the example we gave last quarter about the inverted yield curve has held to form that people are expecting prices to come down. We're seeing pricing come down in our supply community. Certainly, the raw commodities, the manufactured equipment which has some lagging, Index pricing is starting to come down, the construction market is cooling off a bit and so, I think the customer community is becoming more comfortable that they can buy EPC services in a $50 per barrel environment and recognize the benefit of earning out at between $70 a barrel to $90 a barrel which are the generally acknowledged long-term trend prices they're projecting. What's that mean? We're still seeing pricing a little more encouragement on the lumpsum side because of the fall off in volatility and with the entire supply chain becoming a little more hungry and that's just not the E&C side, but also the manufactured equipment side. With backlogs coming down we're seeing a more rational market, if you will, that more resembles '04 to '06 for us as opposed to what the very volatile market we saw in 2007 and 2008.

Andy Kaplowitz – Barclays Capital

Bill, clearly there's been an uptick in litigation activity around the company over the last couple months. And I'm just kind of wondering how we should think about it? We've seen in the press sort of the what you guys have said about it and I have my own feelings, but can you give us your view on how we should think about this uptick and if it does impact your ability to win LOGCAP work?

Bill Utt

We haven't seen any issues arising in our LOGCAP work from this litigation, directly as a result of suits being filed against KBR. We are obviously subject to a lot of cases and we've obviously been dealing with a lot of issues here in terms of these past arbitration, the FCPA awards, et cetera, which are behind us, they're largely behind us in the case of the arbitrations. And we're going to spend a little more time talking about what our thoughts are on these litigations. I will tell you there's a lot of stuff we see out there that appears to be opportunistic in terms of people more interested in civil suits than they are against alleged perpetrators. We still are fighting in court on issues regarding Defense Base Act and the broader indemnities and really what is the liability of a contractor in the battlefield compared to what a contractor's responsibility might be in Downtown, Houston, Texas. And we are winning a lot of those issues and we are getting the courts to affirm our positions and our arguments on these. It doesn't get the press coverage like the filings, which are generally more sensational. There is a noise factor with it. We believe that we have good defenses as a result of not only protections provided to us, we work for the Army, the Army gives us direction, the Army tells us what to do, when to do it, often times how to do it, and we're going to fight it.

The good news is it's not taking a lot of our management time here in Houston to deal with this. We've got good counsel putting good arguments forward and I think over time lot of this noise will wane. But until then it's really you have to form your own conclusion about what does this mean but we still believe we are in a very good position regarding our actions and our liability for the events that have happened. But at the end of the day we believe the facts are on our side that will lead us to come through this relatively unscathed.

Andy Kaplowitz – Barclays Capital

I appreciate that. I'll get back in queue.

Operator

We will take the next question from Michael Dudas of Jefferies and Company.

Michael Dudas – Jefferies and Company

Bill, good morning.

Bill Utt

Good morning.

Michael Dudas – Jefferies and Company

Two questions. First, could you share with us maybe your thoughts on BE&K, how it's fit into the KBR culture over its time with the company? Have you seen any indications from their level of marketing or sales activity that southeastern or as much to say the eastern part of the U.S. is kind of stabilizing? Any knock-on effects from stimulus or any public spending opportunities that BE&K get involved in?

Bill Utt

Well, the integration has proceeded very well. We were very fortunate to acquire BE&K which shares a lot of the core values and common traits with KBR and a lot of ex-Brown & Root folks over in BE&K and we've got a few of them over here so, we kind of knew what we were getting into and the ownership group was very cooperative in helping to facilitate a very thoughtful integration. And it has fit in very nicely into our services business unit giving KBR access to the power business and the general industrial businesses that perhaps had waned a little bit in the KBR portfolio over the past couple years and doubled our maintenance business and really firmly cemented our return to the domestic construction site. The business itself does have a little government business that does mostly work with the Navy. The rest of the business tends to be mostly industrial.

So as far as the stimulus bill goes, we're not seeing any really major opportunities coming to either KBR or BE&K. We do see projects in the markets in the southeast, power business, the healthcare and educational businesses have remained strong and have been your bright spots in the organization. We don't see much difference on the general industrial side between the southeast, the east and other KBR markets so, it's still really a submarket specific opportunity. We see power, some general industrial and then the healthcare and educational side.

Michael Dudas – Jefferies and Company

Thank you. My follow-up is the same like on BE&K. Maybe you could share your thoughts on level of corporate activity relative to potential acquisitions? What's the marketplace look like? Has your targets changed over the past few months? Are we seeing expectations change from the seller community? And would you anticipate over the next six months to 12 months to see a BE&K type acquisition?

Bill Utt

Well, lot of questions. I'll try to address them. We continue to have an M&A department that looks at what opportunities are out there. As we sit here at KBR today, we look at very good opportunities for organic growth in all of our businesses. We think all of our businesses are scaleable and we can achieve our growth aspirations that we talk about with our Board and share with our Board through the organic side. We're looking certainly at those acquisitions that bring us new skills or new markets or expanded service offerings, more linear expansions for us. BE&K did that, but it also really gave us a presence in a market we were seeking to rebuild in the maintenance and the construction side. I think the seller expectations have obviously cooled compared to where they were a year ago, but the seller memories are still out there in terms of what they might have been worth a year ago and so you have the inevitable (inaudible) tension. It's hard for me to comment on whether we'll have another BE&K. That's really depends on what's available, what we find, and how it hits us but we're perfectly content to execute this year, and we can have a very successful year in 2009, without any acquisitions just given the positions that we've established and have been able to build organically within KBR.

Michael Dudas – Jefferies and Company

Bill, thank you for your answer.

Operator

We will go next to Dan Pickering of Tudor, Pickering, Holt.

Dan Pickering – Tudor, Pickering, Holt

Good morning.

Bill Utt

Hi, Dan.

Dan Pickering – Tudor, Pickering, Holt

Kevin and Bill, I guess you talked a little bit about or you reiterated the desire to keep the share count constant and you would repurchase shares to do that. I mean any thought as cash builds and the world looks to be a better place, little bit more certainty around the outlook, any thoughts on doing more than just holding share count flat, but actually shrinking it.

Kevin DeNicola

Dan, certainly one option that reminds you again that we're sort of constrained on the revolver. It has a maximum in terms of total amount of shares whether we repurchase shares or pay dividends. And I don't off the top of my mind know how much money we have available. I think we just closed it in the Q just here, I just can't think of it off the top of my head. So, we kind of have a limitation there and unless and until we are able to change that in the revolver. So it's always one option that we need to consider, but as a practical matter this was the best thing we could do at this stage is continue to keep that share count about the level we're talking about 160.

Dan Pickering – Tudor, Pickering, Holt

Thank you. And then Bill, I ask this question basically every quarter which is generally away from the government work, but as you look at your bidding opportunities, how are you thinking about bids outstanding or bid opportunities relative to three months ago? Have they gone up? Are they flat? Are they down?

Bill Utt

Yes, Dan, and I have come to prepare that analysis for you for our questions. The Upstream business if we look at the volume of sales proposals outstanding, 12/31 compared to March 31 is up pretty good amount. We're seeing a lot of opportunities up there and the volume of proposals outstanding has moved up nicely. Our G&I business, we've looked at some opportunities to diversify that business. The AFRICAP and the Antarctic efforts, our bids outstanding in G&I are up a lot. Now there's a couple, two or three really big ones out there that go out over several years, but we're seeing strong volumes outside of LOGCAP.

Our service business is down a little bit as you might expect. We're seeing smaller projects come through and the volumes down a little bit, but it's still a good volume for us and one that I believe we'll be able to continue to make good acquisition percentages out of that bid pot. Technology and Downstream are basically flat from 12/31. So the net KBR, the proposal volume is outstanding is up a pretty good amount, largely in Upstream and G&I.

Dan Pickering – Tudor, Pickering, Holt

And a pretty good amount would be a double-digit amount?

Bill Utt

Yes.

Dan Pickering – Tudor, Pickering, Holt

Okay. Sounds like quite a bit more than that. Last question from me. You said you had 300 million in sort of zero profitability projects in the first quarter. How does that run-off through the remainder of the year?

Bill Utt

Well, I think it will stay pretty much constant through the rest of the year, Dan. Escravos is the big contributor there because we're doing the construction revenues and that's going to stay fairly solid I think through and into the middle of '10. Skopje which was relatively small in terms of revenues will go to zero, but that's going to be less than 5% of that $300 million we talked about. And the other projects are in construction right now and should remain there for the rest of the year. So the $300 million or so of low margin, zero margin projects I say low margin because we do get some incentives on Escravos should stay largely constant through the remainder of '09.

Dan Pickering – Tudor, Pickering, Holt

Thank you, guys.

Operator

And we will go to John Rogers of D.A. Davidson.

John Rogers – D.A. Davidson

Hi, good morning.

Bill Utt

Good morning, John.

John Rogers – D.A. Davidson

Just a couple of follow-ups. First of all, in terms of the LOGCAP for work that you're looking at and mentioned would be coming out in the second quarter, can you give us a sense of how much work there is there that will come to bid or award?

Bill Utt

Well, it's the entirety of the Afghan effort and it's tough to quantify it because the pricing that we were asked to provide them is a matrix. And it's a matrix based on one access troop counts and the other access the duration of the engagement and it can range from a couple hundred million if it's a low troop count and a short timeframe to several billion dollars if it's a high troop count over a long duration. And as with most LOGCAP efforts we're not in control of really where they're going to go with the troop counts.

John Rogers – D.A. Davidson

Okay. And then secondly, in terms of your comments on the power market and the pickup you're seeing there and pursuing more opportunities. Are these gas plants or what are you looking at there?

Bill Utt

Well, we've seen some good volumes that we've been able to achieve on construction of combined cycle plants where we've done, BE&K have done a lot of them in the years before KBR acquiring BE&K, so they've got a good track record there and we're looking to expand that capability beyond maybe their more provincial southeastern perspective. We've also had work on pollution control facilities, scrubbers, bag houses, SCR units. We were really excited about the award for the Palm Beach County Resource Recovery Facility, you're going to see a lot of that work coming out as you may recall in the 80s there was a lot of these trash to cash deals done by Ogden Martin and Wheelabrator and these plants are now 20 years old, they have a fairly rigorous duty cycle and they'll all be coming up for major I think internal replacements and refurbishments. So getting this award is a good step out for us in that market and we hope will be the first of positions us well for future awards in this sector.

John Rogers – D.A. Davidson

Okay. But all three of those areas, the combined cycle pollution control and the trash to cash or alternative is you're seeing growth there, in the market or just expansion in your region?

Bill Utt

I think the trash to cash or the waste to energy markets, resource recovery, that's going to be an expanding market because you got a physical phenomenon happening where these boilers and equipment are getting 20 years old, 25 years old and it's time to do stuff. So I think you'll see more money spent there prospectively than maybe you have in the past. I think the combined cycle business will remain steady. That still is the preferred ways for utilities to meet their incremental capacity requirements. It's certainly benefited by the current commodity environment and gas price outlook in the region. So, I think that will continue and certainly as you get into more people thinking about carbon legislation, cap and trade systems, that the pollution control environment could see a birth of new work taking place as utilities try to meet the reductions in CO2 emissions that may be forthcoming from the Obama administration and participate in the trading market for carbon dioxide much like we saw activities take place for the SO2 and NOX emissions trading that developed some time ago.

John Rogers – D.A. Davidson

Thank you. Appreciate the color.

Operator

And we will go now to Joe Ritchie of Goldman Sachs.

Joe Ritchie – Goldman Sachs

Hi, everyone. A lot of my questions have been answered. I think the only question I have is on BE&K. I saw your margins declined pretty significantly though I calculated 7.2 down from 12 and change. How much of that is seasonality? Or how much of that is pressure that you're seeing in that business right now?

Bill Utt

Remember we talked about the one-time gains on the workman's comp insurance in the fourth quarter and the cost to cost negative impact we took in the first quarter at Shell Scotford that will work itself out over the rest of the year. So those are the two big drivers. We're not seeing anything unusual regarding abnormal pricing pressures in the BE&K markets. So, I think it's just really the one-off items that have driven that variance in the margins of services.

Joe Ritchie – Goldman Sachs

Okay, so if we back out the insurance gain in the fourth quarter and we back out the one-time charge this quarter we should get to kind of a recurring run rate for that business?

Bill Utt

Well, I never want to commit on an absolute, but I think generally you're getting close to it, run rate. I can't think of anything else that was unusual, but I also don't want to say we definitely nail it. The ones that we can think of I think we've done a good job of identifying what they are. Certainly we've had good performance in our maintenance vessels for Pemex with our MMM venture and that should continue on for a while.

Joe Ritchie – Goldman Sachs

Okay, great. Thanks for your help.

Operator

And as we have no further questions, I'll turn the conference back over to our speakers for any additional or closing remarks.

Rob Kukla

Thank you for joining us today on our first quarter call. We look forward to speaking with you next quarter. If you have any follow-ups, don't hesitate to give me a call. Thank you.

Operator

This does conclude today's conference. Thank you for your participation.

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