KBR CEO Discusses Q3 2010 Results - Earnings Call Transcript

| About: KBR, Inc. (KBR)

KBR, Inc (NYSE:KBR)

Q3 2010 Earnings Call

October 28, 2010 11:00 a.m. ET

Executives

Rob Kukla - Director, IR

Bill Utt - President & CEO

Sue Carter - SVP & CFO

Analysts

Steven Fisher - UBS

Will Gabrielski - Gleacher

Rob Norfleet - BB&T Capital Markets

Joe Ritchie - Goldman Sachs

Michael Dudas - Jefferies & Company

John Rogers - DA Davidson

Jamie Cook - Credit Suisse

Operator

Good day and welcome to the KBR Third Quarter 2010 Earnings Call hosted by KBR. (Operator Instructions) For opening remarks and introductions, I'd like to turn the call over to Mr. Rob Kukla, Director of Investor Relations. Please go ahead, sir.

Rob Kukla

Thank you, William. 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 31, 2009, 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 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 III project.

However, KBR’s consolidated business unit income is up 13% and operating income is up 24%. Both figures comparative of third quarter of last year, the earnings per diluted share of $0.62 for third quarter is up 38% compared to the prior year third quarter.

Before making comments on KBR's discrete 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 end of June, we have been focused on creating a more profitable backlog. Compared to the 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 up 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 agents in September 2010 which resulted a non-cash gain in the third quarter. Separately due to actions and inactions on part of the customer we identified increases in the forecasted cost to complete of an LNG project. The estimated cost increases included additional labor, equipment, sub-contractor bonding and other project cost.

We are in a dialogue with our customer to resolve these issues, as a result of the increases in the forecasted project cost. We recognize a non-cash charge to job income in the third quarter of 2010.

The net impact of these two items the Hydrocarbons 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 on the commissioning phase were also positive contributors to this quarter’s results.

The impact Ichthys FEED and the Pluto FEED, as well as the Browse LNG basis of design projects are proceeding as planned and also contributed nominally with quarters results. For our oil and gas business unit, we announced earlier this month that we were awarded a contract to execute the top sides detailed design For Total's CLOV FPSO project which will be used to exploit approximately 500 million barrels of oil from all shore 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 are 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 in Egypt.

This scope of work will be to develop a technical definition package that will process 1000 million standard cubic feet per day of gas and condensate. Our portfolio equity 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 design 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 it was a nice contributor to the quarter’s results. Our responsibilities on the projects have been expanded for additional engineering services. So we look forward to the possibly providing strong execution on this project.

In regards to the Lobito Refinery in Angola the feed is not complete and negotiations continue for the next phase of the EPCM packages. We have 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 discussion with the client to better define our anticipated construction management roll as the project moves to the field. For the last (inaudible) project KBR still providing the PMC as well as the number of detailed design feedbacks for the project. Now we look forward to moving into the next phase of the project when the project successfully achieves FID at the end of 2011 for the first part of 2012.

In the Northern American renewable market, down stream as men awarded the engineering and our negotiations for the EPC for the commercialization of a new technology to produce bio-crude from bio-mass from process technologies which will incorporate features from KBR’s proprietary FCC technology.

The project is in Mississippi and it's charging 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 to the collaboration agreement with BP that I discussed during the first quarter.

During the third quarter we continued to add primarily hydrocarbons based technical personnel with the total add of approximately of 110,000 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 timeframe. 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 for 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 to April 2010 on task orders in Iraq and from September 2009 to May 2010 on task orders in Afghanistan.

For these periods, the Award Fee Determining Official rate in KBR’s performance was 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 recurring LogCAP award fees of 72%. Also during the quarter, legal and unallowable 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 U.K. and the NATO troops in Afghanistan. Building on the three-year contract with NATO troops to provide operations and maintenance services in Kabul we had received earlier this year, we’ve 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 U.K. Government was in the process for preparing a strategic defense review. Last week, this review was complete, indicating a reduction of approximately 25,000 civil servants at approximately 15,000 soldiers, sailors and airmen. We believe this represents an opportunity for KBR to provide additional outsource logistical and training support to the U.K. Ministry of Defense.

For the Infrastructure and Minerals Business Unit, we commented in last quarter that we are seeing a surge in mining activity. In September, KBR announced that 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 schedule 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’re seeing a strengthening bidding environment. We expect our volumes to be increasing over the next year as a result of some new awards we’re expecting in the next several months.

During the quarter, our Power and Industrial business unit was awarded an contract to provide engineering and construction management services for the construction of a new ceramic proppant manufacturing line at the CARBO Ceramics plant in Toomsboro, 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 operation 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 U.S. which complements our recognize 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 upgrade 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 projects in the pre construction phase for which we expect to make awards over the next several quarters.

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

Sue Carter

Thanks Bill. I will review KBR's consolidated third quarter 2010 results which primarily focuses on year-over-year comparisons. Consolidated KBR revenue totaled $2.5 billion in the third quarter of 2010, a $385 million or 14% decrease from the prior year third quarter 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%, down stream 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 dilated 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.

The third quarter of 2010 included two non cash items; a gain related to final settlement with the commercial agent and a charge related to increased forecasted cost 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 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, sub contractor claims and scheduled delays.

Oil & Gas revenue was $107 million in the third quarter of 2010, compared to $95 million in the third quarter of 2009. Oil & 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 Project. Technology revenue was $3 million in the third quarter of 2010 up 11% compared to the third quarter of 2009. Job income to $14 million in the third quarter of 2010 flat compared to the third quarter of 2009 which benefited from higher margin licensing activity ammonia projects.

North America government 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 and 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 III Basra project in Iraq and higher margins on the Allenby and Connaught project.

Infrastructure in 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 of the hope downs four mining project any 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 and Gamble projects. Lower volumes on the Red River project that is nearing completion as well as the 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-side maintenance project growing contribution from on-call construction projects and the Hunt refining project in Alabama as well as favorable change orders at a power project in the South East.

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 ammonium prices and the consolidation of a heavy equipment transport project for the U.K. military effective from January 1 of 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 the 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 U.S. 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 30, 2010 was $12.3 billion, down 9% from a year-ago September 30 and down 0.8% compared to the sequential quarter. Compared to the sequential quarter, the Hydrocarbon’s backlog was up slightly with scope and work releases in Gas Monetization, Oil & Gas, and Downstream, essentially offsetting normal project work-off.

IGP's backlog was up $108 million led by LogCAP III and IV work editions as well as general scope in work expansion in the International Government and Defense Business.

Infrastructure and Mineral’s backlog was up slightly with several new awards announced in the quarter offsetting general work off. However the larger Hope Downs 4 mining contract announced in mid-September will be put in the fourth quarter backlog.

Services backlog was down $256 million, primarily related to general project work-off Overall, the backlog for full-year mix at the end of the third quarter was 79% cost reimbursable and 21% fix price for the same mix as the second quarter of 2010.

Next, I will discuss our liquidity and 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 receives primarily in Gas Monetization projects.

North American Government Defense also contributed to the cash provided by operations with the decline in LogCAP working capital requirement and the receivable 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 build and received prior to September 30 and $34 million will be built 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've returned to a total of $217 million through the share repurchase program. As with other repurchased programs, the actual settlement date will defer from the actual purchasing 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 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 few other financial items in the quarter. Interest expense in 2010 includes the amortization of refinancing fees, sponsoring fees and the upsizing of the KBR credit facility completed in 2009 as well as the consolidation of Fasttrax Ltd. which was previously accounted for under the equity method and included and 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 2010 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 Utt

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 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.

Four our government and defense businesses KBR believes that with the achievement of the military personnel targets in Iraq, our work volume should be relatively stable though 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 for 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 on new gas mark 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 controlled 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 will take your questions and we ask that you please limit your comments for one question and one follow-up.

Question-and-Answer Session

Operator

(Operator Instructions). We’ll take our first question from Steven Fisher, UBS.

Steven Fisher - UBS

Hi. Good morning.

Bill Utt

Steven Fisher - UBS

2010 has certainly shaped up to be a great year for cash flow, so as you look at over the next few quarters. I am wondering what kind of tail winds and head winds you foresee and in others you mentioned the award fees and at some point there is PEMEX but what else could you have in there, is there any particular projects that will be major uses of cash?

Sue Carter

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

Steven Fisher - UBS

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

Bill Utt

I think Steve we continue to have an active discussion and dialogue with our board about how we look at the business. Yeah we do have the opportunity to deploy the cash in some ventures that we did, the Energo acquisition early this year and the technology venture with VP and we will continue to look at where we see opportunities to use and highest and best use of that cash over the short to medium term and obviously if we can identify opportunities where it makes sense to utilize that cash and really improve KBR then we will have further discussion on the buybacks.

Steven Fisher - UBS

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. I am wondering how the process of resolving some of legacy disputes is evolving? Or how you see legal fees versus settlement cost playing out?

Bill Utt

I think the process is a healthy process. We have -- we’ve continue to engage a dialogue this year with our customer. We’ve had some panels that have helped perhaps arbitrate the positions of KBR and the government on some of these matters. We actually have had some of your favorable outcomes that resulted in a lower net cost to us during the third quarter. We hope that we will see this panels continue going forward. I don’t know today if we’ve got a schedule 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 our hope then will be able to continue to successfully manage this process well into 2011 and beyond until we get these issues resolved.

Steven Fisher - UBS

Okay, thank you.

Operator

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

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 are engaged with right now and kind of how you see that playing out over the next four to six quarters?

Bill Utt

Probably not. I don’t think it’s wise for us to rank order. I mean, if you are talking about the timing of them, we could give comment based on what we know. The Pluto project is, it 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 late 2011 timeframe. The others that are being talked about, I think, there is not much more we have in terms of better information of what that’s there in the press.

Will Gabrielski - Gleacher

So, when you look at the Browse projects, do you expect that to be dual FEED between you and (inaudible) or is there any conversations you are having on that yet?

Bill Utt

Too early to tell. I think, they are still valuating some of the FEED proposals and when they let us know, I am sure that that will get out beyond just the various proposals.

Will Gabrielski - Gleacher

Okay. I want a follow up. Just on the mining opportunity, you had a nice booking in the quarter. Could you just walk through your expectations for how do you think that can get for you? I mean, we saw Wily today with a pretty big CapEx number with their earnings release for 2011. I am just curious. How big can they get in and what impact that that have on your margin trying going forward within that segment?

Bill Utt

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

Will Gabrielski - Gleacher

Okay. But in terms of the opportunities, I mean, there was a nice booking. But do you think there are several more or few more or any color on what your opportunities that looks like specifically?

Bill Utt

Certainly, we believe we are more than a one-trip pony in that sector and hope will be able to be successful on other projects we are pursuing.

Will Gabrielski - Gleacher

Thanks for the great color, Bill. I will talk to you soon.

Bill Utt

Okay. Sorry to be black and white.

Operator

We will take our next question from Rob Norfleet, BB&T Capital Markets.

Rob Norfleet - BB&T Capital Markets

Good morning, nice quarter. Just a quick question. You had mentioned previously that you will be comfortable with increasing your exposure to fixed-price work going forward. I just want to get your thoughts and expectations. Do you think over the course of the next year, year-and-half that we will see some of the mix change in the backlog at the release of fixed-price work and how should we view that impact in margins?

Bill Utt

Our expectation, just talking with various customer groups out there, point us 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 and they don’t see us in the '07 to '09 timeframe where you had a lot of stress in the supply chain and a lot of changes in the underlying commodity prices for the equipment. And so they told us that it’s their desire to move towards a greater fixed price environment and what they've been doing in 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 factored 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, we are comfortable doing fixed price work. I think we do a good job of identifying risks and laying out the executions with a great deal of clarity.

I’m comfortable seeing our fixed price component of work in that portfolio move up and hopefully we'll be able to see it and certainly as we look at the incremental risk that get into fixed price we would hope that margins could move up as well.

Rob Norfleet - BB&T Capital Markets

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 commission work continue to go forward in Bigfoot but again we're hearing from a lot of the ISC's that until they could really understand what their liability exposure is, they're having a difficult time actually going forward. What's kind of your thought and timing in terms of when we should actually see some of the projects move forward.

Bill Utt

We are seeing the same factors you described. I think there is some uncertainty regarding limits of why a building and the amount of bonds people will be asked to put up on their future drillings. I think 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 timeframe. 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 effects us probably 18 to 30 months down the road because of the initially and till you 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 some subsequent slowness perhaps in that work but if the rigs start moving out to other areas then our geographic mix of work should follow where the rigs are. Okay.

Operator

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

Joe Ritchie - Goldman Sachs

Good morning everyone.

Bill Utt

Hey Joe.

Joe Ritchie - Goldman Sachs

My first question is -- 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 in projects that's 71% complete. Can you provide any more details on the nature of the charge and I know its non cash now. Is it going to turn into a cash charge moving forward as you complete that project?

Bill Utt

Joe on that questions it's an LNG project where the customer has seen a significant turnover in its senior management. We have seen other EMP companies as well as oil field service companies referenced the difficulty in doing work with this customer because of the change in personnel and some of the uncertainty surrounding the perhaps other consequences to other personnel, non-officers in that NOC.

What we have found was that in our contract, we have obligations to enter the contract and our customer has obligations and our customer has largely been absent for the last several months in terms of performing it's obligations under the contract 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, they get a quarter sense. We forecasting now higher cost to complete and so we have spent some time trying to get our customer to engage with us and I am happy to say that we now have a sponsor meeting setup in November and then we will have some subsequent meetings after that. So the customer does appear to be engaging and we think the issues and some of the absence of decision making on the part of our customer can be resolved through these discussions and so we are optimistic that now that they have changed their leadership, the leadership is now engaging and the commitments that have been made by that company but we will get back and be able to get back on track on this project 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 have seen in dealing with the customer and we now appear to see the customer reengaging and participating and their obligations under that contract.

Joe Ritchie - Goldman Sachs

So, the 42 million and the charge that you are taking on liquidated damages provisions that are in the contract because the schedule is slipping and so if you actually get back on track and obviously this damage will go away.

Bill Utt

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

Joe Ritchie - Goldman Sachs

Okay great and I guess one follow up question for Sue – this year it looks like you are going to generate about $94 million or so in LogCAP fees at least you are having over the last two quarters. Help me understand how that delta between 2010 and 2011 given that some of your work is ramping down in that region and how should we expect let’s see this to come through in 2011.

Sue Carter

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

So, when we looked forward, there has now been another Award Fee Board that has met just recently. Our expectation is that we will receive the news from that probably early 2011. So, like we are in a fourth quarter impact as we look at that and then as we get more caught up and we are going to get into a more normalize schedule with the Award Fees but we are not predicting 2011.

We are just taking the information and continuing the process, you know, the Award Fees as received. But that’s what the next several months looks like anyway.

Joe Ritchie - Goldman Sachs

We can follow up offline and then get some further detail but thank you for answering my question.

Sue Carter

Sure.

Operator

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

Michael Dudas - Jefferies & Company

Good morning everybody.

Bill Utt

Hey Mike.

Michael Dudas - Jefferies & Company

I was intrigued your comments about of being key service business seeing some better opportunities in the commercial, especially commercial side, maybe collaborate 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 the country over the next couple of years?

Bill Utt

We are seeing the activity coming out of mostly institutional players, I mean, hospitals, education facilities at universities and -- but we're also not seeing work coming out of the private developer community. So, we were drawing a big distinction between institutional spending on hospitals and educational facilities and we also do see some industrial facilities moving forward. We talk 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 knowing larger projects and doing more than the small cap and maintenance projects. So, I think that’s going to pick up as we get into a level and that’s supporting a lot of our commentary both from the building group side as well as the North American construction side which is more industrial that we expect a much better environment in the U.S. on the construction side in ‘11 than we did in ‘10.

Michael Dudas - Jefferies & Company

So like 5 million to 10 million prior just more like the 50 to 100, is that type of what the kind of shift you might be talking about?

Bill Utt

I think we are seeing customers talk about the $100 million projects now and so it’s a relief for us because I believe KBR is a more differentiated service provider when we get to a $100 million or larger and I think that bodes well for the progress of our services group. I know they are very excited about this market returning.

Michael Dudas - Jefferies & Company

I appreciate it. My follow up is as you look through the opportunities and the energy gas monetization on the 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 are going to see opportunity to increase staffing? Is you capacity due to work comfortable right now? Does it need some attention? Thank you.

Bill Utt

I would say the – this is a service business and our job to is to eat backlog. We have done a lot of engineering on Gorgon but that engineering is moving out of the London operating centers out to the high value centers that we have at various locations around the world. So, we are 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 we're pretty comfortable about our ability under our present staffing to sell more work and to -- and we factored that into our work plans but we do have capacity in '11 to undertake more work and we're going to see the growth in the offices on our high value centers in 2011 where in 2010 its been more the front end offices in Houston and in London.

Michael Dudas - Jefferies & Company

Excellent, thank you very much.

Operator

And we'll take our next question from John Rogers, DA Davidson.

John Rogers - DA Davidson

Hi, good morning

Bill Utt

Good morning John.

John Rogers - DA Davidson

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

Bill Utt

I believe so. I think the real big drivers for us John are going to be working through Escravos, 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 higher margin than what we're getting on LogCAP.

The state of the 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 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 its increasing our job income margin dollars and we'll try to be as transparent as we can as to the dollars instead of percentages of these project structures that we're motivated to growth the job income backlog because for that’s what pays the bills and if we've got to take lower margin, lower risk or no margin low risk like procurement on, we're happy to do that. So we're trying to drive and talk about the changing complexion of our backlog as we add the commentary about job income in addition to the revenues.

John Rogers - DA Davidson

Okay. But it sounds as if we should see some -- I know you'll talk about '11 later but I mean some decent growth based on -- unless the project timing is a lot longer for some reason?

Bill Utt

As in these one off typically large transactions we should see margins increasing and we believe that you certainly -- the more profitable backlog would be a contributor to that.

John Rogers - DA Davidson

Okay. And then I guess one other question just for Sue, in terms of the tax rate, you mentioned 32% to 33% this year. Why was the tax rate so much lower? Is it just mix issue in the quarter and then its coming back up again?

Sue Carter

No, I think as you think about it, in the fourth quarter of 2009 we talk about the execution of some tax strategies around our UK entities. We're seeing the benefit of those on -- and there was a benefit in the third quarter of 2010. In addition we took some actions with a couple of our foreign entities which benefited the tax in the third quarter. So, some of the discrete items as well as the tax planning strategies. So, what we are signaling to you is that as we look at the overall 2010 picture is that our effective tax rate has come down to the 32 to 33% type of range and that’s the expectation going forward.

John Rogers - DA Davidson

That’s clear. Thank you very much. Great quarter.

Bill Utt

Thank you.

Operator

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

Jamie Cook - Credit Suisse

Hi, good morning. Two quick questions, one back on Pluto again there was some news in the press on Pluto I there had been some escalated cost and I wonder how do you think about that and whether you think better positions you for winning Pluto II and also I guess on Pluto II there was some concern that might not move forward. So, what you are hearing from the customer on that front?

Bill Utt

I think we read the same things about the cost on Pluto and yeah obviously it's hard for me to stay unbiased in that sense but we are still very excited about Pluto and then from our customer about the future of Pluto II. 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 we haven’t heard anything that would deviate from the announcement that Don Maltby made several weeks ago about the delay into mid-year next year.

Jamie Cook - Credit Suisse

Okay I all set. Thanks. Great quarter.

Bill Utt

Thanks Jamie. Thank you.

Operator

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

Bill Utt

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 am available the rest of the day and tomorrow to answer any follow-up questions that you may have. Thanks.

Operator

That does conclude our conference for today. And we thank you for your attendance.

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